Budget 2011: Lowering the cost of finance

The budget proposals deliver on an aggregated basis an important message of support, albeit subdued, for the development of infrastructure. 

The allocation is an impressive $50 billion, reflecting an increase of 23%, and aggregating nearly half the total plan allocation.

The policy thrust and tax incentives have been focused on financing of infrastructure. This is reflected by the increase in the FII limits for corporate bonds and tax-free bonds of $7 billion complemented by tax exemptions for notified debt funds.

The deduction for individual taxpayers for purchase of long-term infrastructure bonds has been retained for another year. The message is clear that regulatory and fiscal support will be available to deliver lower cost of finance and opening of multiple channels of funding for the building of the infrastructure in India.

Traditionally, the fiscal support for infrastructure has been the rollout of tax holidays.  This approach is now at the sunset point, with the proposals of the budget imposing minimum alternate tax and dividend distribution tax to developers and units in special economic zones (SEZs) and denial of tax holiday for the ongoing road show of the new exploration licensing policy.

Fortunately, this applies only to contracts that are concluded post March 2011. The investors in SEZs will worry on the lack of fiscal stability. The fiscal thrust for fertilisers and low-cost housing has also been limited to providing accelerated capital write-off and not income-tax holiday. The area of concern continues to be the under-recovery by oil companies.  Unless diesel price de-control happens, the proposed petroleum subsidy could be inadequate. 

The proposed direct cash transfer of subsidy proposed in 2012 could help bring market driven mechanism for the downstream industry in the next year and enable private investment. The energy and infrastructure sectors require stable fiscal policies and supportive policy framework for financial closure - budget 2011 is a mixed bag.

Gokul Chaudhri is partner & leader, energy & infrastructure practice, BMR Advisors