Active government support will help infrastructure growth

Avinash Narvekar, Tax Partner, EY India

The first-full-year budget of the Modi government was inevitably expected to emerge as a key platform for announcing specific initiatives to walk the talk and to cut through the growth bottlenecks. There have been major slippages on the infrastructure front with projects being delayed, significantly reducing the growth potential of the country. The infrastructure sector has multiple effects on the economy. With this backdrop, the finance minister presented the budget on Saturday, amidst the expectations, the budget proposals seek to assist in addressing the funding requirements as well as addressing the fundamental impediments in the infrastructure sector.

In respect of the funding requirements, the FM proposes to significantly increase the public investment by increasing the Central government allocation for infrastructure sector by Rs70,000 crores, an increase of more than 30 per cent. A National Investment and Infrastructure Fund is also sought to be set up with annual contribution of Rs20,000 crores, which with leveraging at the fund level, would result in significant additional public equity available for investment in infrastructure finance companies.

These companies would then further leverage at their level resulting in significantly higher levels of funding being available for the infrastructure sector. Additionally, tax free infrastructure bonds would be permitted in the rail, road and irrigation sectors.

While multiple level leveraging has its benefits in terms of additional funds becoming available, it becomes even more important to ensure that projects risks are managed appropriately and reside with parties who are best able to manage them. A key reason for delay in infrastructure projects has been inability of private parties to effectively manage risks as there are several areas which require active government support. The FM has proposed that in public private partnership (PPP) projects the government will bear a major part of the risk. Active government support would also be required for private projects to ensure revitalisation of the sector.

The other key concern for the sector is the multiple approvals and clearances required for setting up a project. The government proposes to utilise the digital platform for stream lining the clearances. While this may not result in the much asked for 'single window clearance', it is a significant step, much though depends on the implementation.

For partly addressing the power requirements the government proposes setting up of 5 ultra mega power projects of 4,000 MW each, in the 'plug and play' mode, where all clearances and linkages will be in place before the project is awarded by a transparent auction system. This model will be applied in other infrastructure projects such as roads, ports, rail lines, airports, etc.

The issues which hinder the infrastructure sector are well known. While funding is an impediment it is more because of the underlying issues rather than the availability of finance. It is also clear that public sector investment is nowhere near sufficient to meet the investment requirements to support higher growth levels of the economy. If the underlying issues in the sector are addressed, there would not be a shortage of availability of private investments in the sector. Unfortunately, in the past, the required government support has not come through because of various factors.

With the right intent, these issues are not unsurmountable. However, it requires consistent and effective implementation of stated intent with the government playing a pro-active role. As in everything else, success would be dependent upon the details of implementation and hopefully, it would not be found to be lacking.

Himanshu Doshi and Jayesh Agrawal, Senior Tax Professional at EY contributed The views expressed in this article are personal to the author