To understand the "expectation- fulfilment" reaction to the Budget, one has to understand the prevalent mood in the infra sector.
Frankly, it is downbeat.
The sector has been battling the triple-whammy effects of depleting order books, broken cash cycles and high debt-leveraging for almost a year and a half. Infra assets are on sale, private equity firms are disillusioned and a few corporations have gone in for corporate debt restructuring. Shareholders have taken a beating with the market value of about 70 infra stocks having fallen by some two-fifths since March, 2011. Fresh investments are at a five-year low. Credit disbursement by the banking sector is only 60 per cent that of the previous April-December period, and banks themselves are battling huge infra non-performing assets (NPAs).
It is into this arid infra landscape that moisture-laden Budget winds were expected to blow in.
The expectation was that the Budget would bite the bullet in terms of clear steps to shift gear from stimulating consumption to stimulating investment. It is also the first year of the 12th Five-Year Plan and the anticipation was that the Budget would make some path-breaking announcements that would support, institutionally and otherwise, putting on the ground $200 billion of infra every year for the next five years - double the current run rate.
How was the Union Budget expected to do this?
First, with a greater thrust towards increasing intermediation of retail savings into infra debt. As the Economic Survey observed: "There is a need for introducing more innovative schemes to attract large-scale investment into infrastructure." The Economic Survey also suggested that the government would need to give guarantees more liberally for projects than it does now. The survey highlighted the need for strengthening domestic financial institutions and developing a long-term bond market. There was media speculation of enhancement of the exemption limit in infrastructure bonds for retail investors from Rs 20,000 to levels of Rs 50,000 or even Rs 100,000. Linked to this was also the speeding up of the implementation of the $11-billion national infra debt fund and revisiting the strict credit-rating and associated conditionalities that limit pension and insurance funds from channeling savings towards infra debt.
Second, institutional strengthening to address implementation issues (read decision paralysis) was a big expectation. It was expected that the government would announce an appropriate body to handle the infra sector holistically on an ongoing basis. The expectation was that a new infra ministry would be announced, or at the least an Infra Fast Tracking Board with visionary political leadership, effective powers and live-wire officers. This would handle the "logjam-removal" task institutionally rather than dumping it on the shoulders of the principal secretary in the Prime Minister's Office, or numerous one-off Empowered Group of Ministers.
Third, the biggest national embarrassment is our power sector. There was no way the Union Budget could choose not to have a point of view on the matter. There were three clear interventions expected to resuscitate this sector in the interest of overall GDP growth:
- Settling the issue of bankrupt state-owned distribution companies that together have about Rs 150, 000 crore of accumulated losses.
- An emergency Red Paper on fuels, rather than a White Paper on black money, to unlock close to 60,000 Mw of stuck projects in a sector tottering on the brink of emergency coal stocks and missing gas.
- Improving the fate of domestic power-equipment manufacturers (private and public) vis-a-vis the clearly unequal playing-fields of China.
On all these three major expectations, the finance minister has chosen to look away.
On finances, there is no fresh idea other than opening up some external commercial borrowing windows, providing, thereby, a lifeline to cash-strapped power and aviation companies. On institutional intervention, there is nothing. On power, there is a deafening silence, other than reducing import duty on imported fuels (that has an impact of roughly 8 paisa a unit), additional depreciation of 20 per cent for new power projects in the first year, and Section 80A exemption for one more year. As an industry representative quipped: "FM is putting small band-aid strips in a body suffering from multiple fractures."
Without a clear action-agenda on these three fronts, how is the investment sentiment expected to turn positive?
Nevertheless, on "business-as-usual" mode, FM has indeed tried to stretch to the utmost as the table shows.
As Bidisha Ganguly – head of Economic Research at the Confederation of Indian Industry – points out, on a Plan outlay growth of 22 per cent, infra outlays have increased by 32 per cent.
|BUDGET OUTLAYS FOR INFRASTRUCTURE UNDER PLAN ALLOCATION (Rs CRORE)|
| ||2007-08 |
|Central Plan outlay (Budget support) on infrastructure (A)||42,523||50,299||61,871||72,406||79,240||101,107|
|Ministry of Road Transport and Highways||12,499||13,075||13,780||17,871||20,119||23,000|
|Ministry of Railways||8,121||9,545||16,911||18,385||23,000||24,000|
|Ministry of Drinking Water and Sanitation||7,460||8,492||9,196||10,565||10,000||14,000|
|Ministry of Power||4,350||5,961||6,504||8,296||6,051||9,642|
|Ministry of Urban Development||3,008||4,597||5,477||5,909||6,127||6,908|
|Department of Atomic Energy||2,876||4,077||4,492||3,289||4,615||5,600|
|Ministry of New and Renewable Energy||484||431||539||974||1,200||1,385|
|Ministry of Shipping||580||315||506||572||454||817|
|Ministry of Civil Aviation||160||166||958||1,576||1,500||4,500|
|Ministry of Communication and Information Technology||1,935||2,523||2,451||3,627||4,554||8,600|
|Ministry of Housing and Urban Poverty Alleviation||500||664||565||821||1,000||1,155|
|Ministry of Water Resources||550||453||492||520||620||1,500|
|Central assistance for state and UTs (on infrastructure) (B)||21,180||30,001||27,509||28,963||32,416||46,287|
|MPs Local Area Development Scheme||1,580||1,580||1,532||1533||2,950||3,955|
|Accelerated Irrigation Benefit Programme and |
other water source programmes
|Roads and bridges||1,512||2,073||1,716||1,936||2,159||2,267|
|Accelerated Power Development Programme||400||436||156||0||0||0|
|Backward Regions Grant Fund||4,730||5,019||4,799||8,680||10,997||12,040|
|Jawaharlal Nehru National Urban Renewal Mission||5,488||10,448||6,124||5,285||7,450||12,522|
|Other miscellaneous projects||1,890||1,943||4,658||2,772||1,400||1,261|
|Total spending on infrastructure (A+B)||63,703||80,300||89,380||101,369||111,657||147,394|
|Infra spending as % of Plan outlay||31||29||29||27||26||28|
|[Compilation: CII Economic Research] [RE: Revised estimates; BE: Budget estimates]|
There is also no denying that a slew of other interventions has been received favourably by the infra sector. These include:
- Incentives for affordable housing.
- Increase in the scope of viability gap funding in new areas like irrigation, oil and gas pipelines, agricultural market terminals and so on.
- Increasing space for infra public sector undertakings (PSUs) to raise tax-free bonds of Rs 60,000 crore vis-a-vis the earlier Rs 30,000 crore.
- Creation of a new PSU - the Irrigation and Water Resource Finance Co. Hopefully, this will energise action in irrigation, flood control, river-linking, drought mitigation and emerge as a significant catalyst for programmatic, large-ticket investments.
- A slew of import duty exemptions for equipment imports in solar power, energy-saving devices, safety equipment for railways, aircraft maintenance needs, specified road construction equipment and coal-mining machinery.
- Increased allocation for rural infra.
So, it is not a disappointing Budget for the infra sector - only an unexciting one. A good box of matches that did not light a fire.