Pre-budget expectations: Script India’s growth story with clear, time-bound milestones

It is quite natural for expectations to be high, given the fact that the NDA government had been voted to power with an overwhelming majority. During the eight months in power, Prime Minister Narendra Modi and his key ministers have displayed a clear intent to take forward reforms, and they have also sent out the right signals to the investor community.

The ‘India story’ is again under global spotlight. The Budget now has to set the right vision for the economy and lay out a plan with clear, time-bound milestones. I am quite confident that Finance Minister Arun Jaitley will be able to lay out such a roadmap. Of late, the PM’s assurance towards removing tax uncertainties seems to have been successful to some extent in soothing investors’ nerves. I expect more announcements on the direct tax front in the forthcoming Budget which will put to rest issues on the ill-famed ‘tax terrorism.’

Tax collections have been slow, but going by the media interactions of the finance minister and his key team members, it seems they are quite confident that they would be able to adhere to the fiscal deficit targets that they have set for themselves. The fall in crude prices has definitely helped. I guess the finance minister and his team are also banking on the revenue that would be generated from the proposed disinvestments and the spectrum auction in order to get their fiscal arithmetic correct.

Tax-related issues

The government needs to remove the hurdles in implementation and simplify tax laws. It will also help to increase tax revenue if the tax base is expanded, coupled with reduction in tax administration expenses. The infrastructure sector, undoubtedly, needs the requisite boost, which will meet the expectations of both the industry as well as people. The interest rate needs to come down by about 200 basis points this year, and both direct and indirect taxes need streamlining and rationalisation.

Till the private investment sentiment revives, I think it would be good if the government can set the ball rolling by raising public investments, especially in infrastructure projects. I stress on infrastructure projects because of the multiplier impact they have on the economy in terms of creating jobs, generating domestic demand and enhancing the competitiveness in the economy.

The government has to explore avenues regarding how to mobilise the requisite resources. Apart from foreign funds, the government must now seriously work out a mechanism on how to channelise the long-term funds lying with insurance and pension funds into infrastructure financing. Infrastructure projects have long gestation periods and these long-term funds ideally suit the asset-liability profile of infrastructure projects.

First and foremost, direct taxes need to be rationalised and the tax net needs to be spread. Compared to our peers, the effective tax rates, both income and corporate taxes continue to remain high – in fact, the tax rates in India are among the highest in Asia. On the indirect tax front, we have been already told that GST will be rolled out from 1st April 2016. Its roll-out has got deferred on multiple occasions earlier, let us hope it does not get delayed any further, and let us hope that the Centre and the states are able to arrive at a consensus on implementing a unified GST rate. That would go a long way in creating a seamless unified market and bring in certainty in terms of tax incidence.

Infrastructure financing and refinancing must be put in place to fast-track infrastructure creation. In the last budget, Infrastructure Investment Trusts (InvITs) were announced on the lines of Real Estate Investment Trusts. However, the tax incidence needs to be fine-tuned in order to make the InvITs more effective. Also, mobilising resources from abroad should be eased for all the infrastructure financing vehicles. Recently, RBI has permitted resident entities/companies in India, authorised by the government, to issue tax-free, secured, redeemable, non-convertible bonds in rupees to persons residing outside India to use such borrowed funds for on lending/re-lending to the infrastructure sector and for keeping in fixed deposits with banks in India, pending utilisation by them for permissible end-uses. This implies that eligible entities will be only the companies controlled and owned by the Government of India, such as Power Finance Corporation, Rural Electrification Corporation, National Housing Bank, etc. Ideally, government should expand the list of such eligible entities beyond PSUs and include Public Financial Institutions (PFIs) also for issuing overseas bonds.

Keeping in mind the lending constraints of the banks, the government should ensure that the infrastructure financing NBFCs, namely the asset financing companies (NBFC-AFCs) and the infrastructure finance companies (NBFC-IFCs) are given the maximum policy support so that they are able to carry out their functions seamlessly.

It is imperative to design long tenure financial instruments with attractive returns so that domestic savings can be channelised into infrastructure creation, instead of being invested in unproductive assets like gold. Inflation-linked bonds need to be tried out as well. Ideally any financial institution which has been accorded public financial institution (PFI) status should be allowed to mobilise resource by using these instruments.

Infrastructure sector

In Indian infrastructure, some of the major problems faced by infrastructure project developers (especially roads, power and mining) relate to green clearances, land acquisition or absence of fuel linkages. These pertain to the quality of governance and the pace of official decision-making processes, rather than financing per se. Indeed, it is the inability to secure statutory approvals in time that has led to many infrastructure projects ending up as stressed loans for banks. To make our PPP model successful, it is essential that the government plays its part in the partnership by getting all the necessary approvals within some time frame. If the responsibility of getting all these clearances is also left to the private player, time and cost overruns are bound to make many a project commercially unviable. I do not think it will be possible for the finance minister to address problems like these in a single Budget, but ideally on matters related to land and environment, I feel state governments should get greater say in deciding which norms need to be adhered to and which clearances are compulsory. State governments have better knowledge of ground realities, and thus, should have a greater say in deciding what is good and not good for their states. State autonomy in such matters will ultimately usher in a healthy inter-state competition that will augur well for the economy as a whole. The finance minister must address this aspect outside the Budget exercise.

In the infrastructure space, I feel the major focus areas should be the power and road sectors. Let me briefly share my thoughts on how to improve the scenario in these two sectors.

100% fuel linkage to all power plants must be ensured. This calls for reforms on the coal-mining front by allowing the entry of private sector for mining development. Inducting state-of-the-art technology through private sector participation will augment production and control pollution levels. The government has to ensure that the right quality of coal is available to the user from the nearest possible source in order to keep transportation costs under control. This has to be supplemented with distribution sector reforms by revisiting tariff-setting norms, which should adopt a principle of not passing through the aggregate technical and commercial (AT&C) losses beyond a certain percentage. The concept of different feeder lines for different user groups will also help in arresting leakage. Reforms across the entire value chain can help in keeping the cost of power production under control, and thus, help in making power available to user groups at reasonable tariffs while maintaining the commercial viability of investments in power sector.

On the road front, government is now inclining towards engineering, procurement and construction (EPC) rather than build-operate-transfer (BOT). I feel both EPC and BOT must co-exist. EPC approach will limit the government’s ability to spend on more number of projects. Also, the government needs to explore new financing techniques which can address the mismatch between loan tenure and concession period (the former much shorter than the latter, thus leading to problems in servicing loans). For BOT projects, a financing structure can be thought of where the repayment schedule is such that 50% of the total debt is repaid during the loan period and balance 50% is to be repaid by way of bullet payment at the end of the loan period. The bullet payment shall be made by arranging refinancing of the balance 50% debt, repayable over the remaining concession period. This would enable practically spreading out the repayment of the debt over the entire concession period. Steps like these can help in improving the investment sentiment quickly.
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