Budget 2011: Opening the fund tap for infrastructure

While it balances multiple objectives, the budget focuses on infrastructure financing and financial services, which are the critical growth enablers. Rural India remains, as before, a central theme.

Pranab Mukherjee has provided nearly half of the proposed plan expenditure for 2011-12 to the infrastructure sector — at Rs2.14 lakh crore, this represents a significant 23% growth over the current year.

Nodal infrastructure-financing entities have been allowed to raise Rs30,000 crore of tax-free bonds. Progress on a new funding avenue was also announced in the form of takeout financing.

The budget also announces capacity-building efforts to enable public-private partnerships, an important model for infrastructure investments. 

A special effort has been made to attract foreign funds to the infrastructure sector. Measures include a five-fold rise in the FII participation limit for infrastructure companies’ bonds (to $25 billion), and a proposed reduction in the withholding tax to 5% (from the current 20%) for notified infra-debt funds. These announcements will bring much-needed funds into the infrastructure sector, while tilting the composition of foreign inflows towards durable long-term investments.

In the finance sector, the government has committed additional capital to public sector banks (Rs6,000 crore this year, in addition to Rs20,157 crore in 2010-11). I also see a stronger intent to proceed with reforms in the sector: the process for issuing fresh banking licenses seems on track, with RBI expected to issue guidelines by March 2011, and the government proposes to amend several laws relating to banking, insurance, etc.

The housing finance sector should benefit from the increased limit for priority-sector eligibility and the proposed central electronic registry for houses — this should limit the incidence of fraud and multiple lending. 

Agriculture and enabling infrastructure attracted welcome attention. 

The increase in the interest subvention on agriculture loans by one percentage point, the decision to significantly augment the capital base of Nabard, according infrastructure status to cold storage projects and investment in new fertiliser projects, and efforts to enhance crop productivity, are aimed at releasing supply-side bottlenecks in agriculture. 

Mukherjee also showed his continued commitment to reforms.

The change in the delivery mode for subsidies on kerosene, LPG, and fertilisers, if well implemented, can curtail leakages.

Several steps have been announced to use technology to improve efficiency and simplify citizens’ interface with government. The reform intent has also been signalled by setting DTC and GST rollout timelines, the creation of a public debt management agency, and aggressive divestment targets.

Fiscal targets are contingent on achieving 9% GDP growth and controlling conservatively estimated subsidy payments; we expect growth at a moderate 8.3%, and a fiscal deficit around 5% of GDP, in 2011-12.

Roopa Kudva is chairman & managing director, Crisil