Infra Gets A Leg-up

It was a difficult job that the FM had; barely two months into his job, he had to fashion a Budget for one of the world´s biggest economies. And the FM came out with all guns blazing… and he has provided the infrastructure sector a great roadmap for growth. Much thought has been given to the funds that this sector requires. Providing exemptions to banks from their CRR and SLR requirements and tying these up to long-term infrastructure funds will go a long way in ensuring that finances finally start flowing to this beleaguered sector again. Infrastructure Investment Funds should also gain some traction. The boost given to development of Smart Cities will help in easing the crushing burden that our metros currently suffer from, as these cities will come up as satellite townships.

Manufacturing
The Finance Minister emphasised on the need to revive growth in the manufacturing sector. While allocating Rs 10,000 crore for start-up MSMEs, the Government has shown its commitment for financing this sector as it accounts for a big chunk of industrial output and employment. This has led to the Government announcing the set up of a committee to look into financing of SMEs, with a deadline of three months to submit its report. Meanwhile, with an investment allowance of 15 per cent to companies on investment of over Rs 25 crore in the manufacturing sector, the Finance Minister has provided a much-needed boost to the sector. Here, even foreign institutional investors will get tax-breaks to entice them to move back from Mauritius. Their incomes will be treated as capital gains – which is 15 per cent for short-term gains and zero tax for long-term gains.

Policy announcements:

• To revive SEZ projects in India
• Investment allowance of 15 per cent on investment of over Rs 25 crore in manufacturing.

DEFENCE
With the increased defence budget of 12 per cent and the Finance Minister´s guidance towards streamlining and fast tracking the procurement programs one can hope that the large deals in the pipeline may now get a green signal. However, increase of FDI cap to 49 per cent with ´Indian ownership and control´ is a dampener as this shall not offer any additional comfort to the OEMs to transfer technology with a minority control. Introduction of a restrictive FDI policy and no express tax benefits for the sector, the Budget fails to deliver on the expectations of the sector players.

Policy announcements:

• Proposed allocation for the defence sector for the current financial year is Rs 2,29,000 crore ($38.38 billion), an increase of12.4 per cent over last year´s allocation of Rs 203,672 crore (USD 34.13 billion)
• FDI cap (inclusive of FII investment) for defence sector increased to 49 per cent from 26 per cent
• The management and control of the venture receiving foreign investment should be in the hands of resident Indian citizens
• Ban on FII investment in Indian defence sector imposed by previous Government has been revoked. The overall FDI cap of 49 per cent covers FDI and FII investment.

OIL & GAS
The Budget seems to have laid a major stress on usage of Piped Natural Gas (PNG) and proposed a plan to build 15,000 km of gas pipelines using PPP models. There has also been a mention of accelerating production of Coal Based Methane gas as well.However, it failed to address the core issues around unavailability of domestic gas, uncertainty on gas pricing, issue of stranded gas based power projects and unrealistic bidding mechanism of pipeline. There has also been no mention of promoting Regasified -LNG in other segments such as power, fertilizer or large industries which could have encouraged viability of pipelines and Regasified -LNG terminal for investors to come in. Further, no incentives have been announced to encourage investments in the upstream sector despite lack of response from earlier NELP rounds.

Policy announcement:

• India has at present about 15,000 km of gas pipeline systems.
• In order to complete the gas grid across the country, an additional 15,000 km of pipelines are required. It is proposed to develop these pipelines using appropriate PPP models.

SMART CITIES
The smart city lies at the heart of the Union Budget of the new Government. The allocations and the measures announced now gives shape to Narendra Modi´s initial idea of 100 smart cities. The Government has made an allocation of Rs 7060 crore – an enabling factor that will boost the planning and development of smart cities. And to compliment it, the Government has incisively identified 7 corridors. Overall, these are a very promising preamble to the realisation of the smart city concept. It now needs to be seen how the details are worked out by the Government.

An outlay of Rs 7,060 crore will definitely enthuse several stakeholders including urban planners, city administrators and developers to come forward and give shape to sustainable models for new cities. Since the smart city concept on the whole is a nascent development, it will be prudent for all stakeholders to take insights from the planners of a few smart city initiatives such as the Gujarat International Finance Tech (GIFT) city, Delhi Mumbai Industrial Corridor (DMIC) and Naya Raipur. Conceptualising and developing new cities is a time consuming process; this announcement will give the required thrust to fast track more such new cities.

Policy announcement:

• Rs 7,060 crore for 100 smart cities.

POWER
The Budget has attempted to address the short term challenges for the Power sector, and at the same time laid a roadmap for more comprehensive measures over the medium to long term as well. Assurance to ensure availability of adequate coal for projects that would come up or have already come up by 31 March 2015 is a positive move. Investors were given assurance that mining issues shall be resolved even if it means revisiting the law, which is an important statement of intent. Rationalisation of coal linkages would ensure more coal availability as also substantial reduction in the logistics costs for the country (KPMG has estimated such savings to be about Rs 5,000 crore p.a. few years back). 10 year tax holiday under 80 IA extended till 31 March 2017 that will provide long term clarity for investment decisions as against the practice of yearly extension. Given the long term energy needs of the country, clear focus on Renewable Energy, especially solar was heartening to note. Ultra Mega Sola Projects, focus on washed & crushed coal, looking at Ultra-modern supercritical technology based coal projects were very positive measures announced in the Budget 2014.

Policy announcements:

• The Government would launch Deen Dayal Upadhyaya Gram Jyoti Yojana for feeder separation to augment power supply to the rural areas and for strengthening sub-transmission and distribution systems
• The Government proposes to take up Ultra Mega Solar Power Projects in Rajasthan, Gujarat, Tamil Nadu, and Ladakh in Jammu and Kashmir
• The Government will launch a scheme for solar power driven agricultural pump sets and water pumping stations for energising one lakh pumps
• The Government will start preparatory work for a new scheme ´Ultra-Modern Super Critical Coal Based Thermal Power Technology´ to promote cleaner and more efficient thermal power and has allocated funds to this end.

Finance
The announcement to set up an infrastructure investment trust to securitise projects and long term infra funds that will not be subject to regulatory needs of SLR and CRR have brought cheers to private infrastructure developers. These coupled with an allocation of Rs 12,000 crore for NHB and proposed infusion of Rs 2.4 lakh crore in PSU banks, the infrastructure sector will get the much-needed momentum. This move is positive for sectors such as roads, power and housing as PSU banks were going slow on funding projects. Meanwhile, not so good news for debt mutual fund investors, as they will now have to hold on to their investments for three years instead of one year, to be able to qualify for nil long term capital gains tax. However, the Finance Minister has hiked rate of tax from 10 per cent to 20 per cent for long-term gains. Banks will now gain at expense of mutual funds from the elimination of this arbitrage opportunity.

Policy announcements:

• Sops to banks against long-term infra loans
• Uniform KYC norms for the entire financial sector
• To set up infra investment trust to securitise infra projects
• FDI in insurance increased from 26 per cent to 49 per cent
• Recapitalization of public sector banks to be implemented through sale of shares to retail investors.
• Infra lending to be kept out of SLR, CRR and priority lending.

urban infra
The Government has encouraged further momentum in Metro projects, by setting aside Rs 100 crore for Lucknow and Ahmedabad. This should lead to less congestion while commuting to work in cities. It will be a win-win scenario for the two million plus cities as these start planning for Metro rail. Besides, it brings a range of opportunities not only for EPC contractors but also for international vendors. The Government has also set aside Rs 50,000 crore for municipal debt management in urban infrastructure and Rs 3,600 crore for drinking water programme. All these offer more opportunities for EPC contractors and pipe manufacturers.

Policy announcements:

• Plan Rs 50,000 cr for municipal debt management for Urban Infra
• To allocate Rs 100 crore for Metro projects for Lucknow & Ahmedabad
• Propose Rs 3,600 cr for drinking water programme.

Rural infra
The need for a push for rural infrastructure was on the cards when PM Narendra Modi took over the reins of the country. This was fulfilled by the Finance Minister while giving impetus to the sector. To start with, an allocation of Rs 14,389 crore towards PMGSY will solve the connectivity issue in rural areas. This was the pet project of the earlier NDA regime, which was under-performing on several fronts. This amount will help small-time contractors focus on rural road projects rather than eye for State or National Highway projects. In addition, a sum of Rs 3,600 crore will boost rural water supplies which will solve water issues for water starved States.

Meanwhile, with allocation of Rs 8,000 crore for rural housing, the Finance Minister has deliver a bonanza for the real estate sector which is now shifting focus from Tier I cities to rural areas. Since the Government has partially solved the problem related to roads, housing and water, the allocation of Rs 500 crore for rural power plan is an added advantage for solar and wind power developers.

Policy announcements:

• Rs 14,389 crore for rural roads development
• Rs 8,000 crore for rural housing
• Rs 500 crore for rural power plan

ROAD
The ailing road sector was in dire need of a real push and the Finance Minister, while impressing his boss, kept the promise. With an allocation of Rs 37,800 crore for National Highways and State Highways, that includes Rs 3,000 crore for the North Eastern region, the Finance Minister has won the confidence of private infrastructure developers. NHAI will target 8,000 km of road projects in FY15. Analysts believe that most of this will come through the EPC model.

Policy announcements:

REAL ESTATE
The Budget 2014-15 is right on intent and quite right on content. The policy announcements are expected to stimulate housing demand and address the liquidity issue hampering the development of affordable housing. Major demands such as relaxation of foreign direct investment norms and pass through status for REITs and INVITs have been accepted. Individual income-tax relaxations, development of smart cities, new industrialcorridors are steps in the right direction.

Policy announcements:

• A sum of Rs 7,060 crore allocated in 2014-15 for development of 100 smart cities
• Built up area and minimum capitalisation requirements for FDI in real estate sector proposed to be reduced from 50,000 square metres to 20,000 square metres and from $10 million to $5 million respectively
• To promote FDI in affordable housing, projects committing at least 30 per cent of the total project cost for affordable housing to be exempted from minimum built up area and capitalisation requirements, though three year lock-in condition will be applicable
• REITs and InvITs to be set up shortly to improve liquidity in the real estate and infrastructure sector
• Effective steps to revive SEZs to be taken to help drive industrial production, economic growth, employment and exports
• Rs 100 crore allocated for setting up National Industrial Corridor Authority, along with expediting master planning of several industrial corridor and smart cities.

TRANSPoRT
Allocation of funds for road-development via NHAI is a step towards decongesting hinterland connectivity, especially as road is the most significant mode of cargo transport in India. Multimodal thrust on river transport through Jal Marg Vikas, new airports through PPP, setting up new ports & decongesting existing ports, and a proposed ship building policy are steps in the right direction. Metro rail in newer cities will facilitate public transportation; however the funds currently proposed would need to be significantly enhanced to make a significant impact. Thrust on augmenting warehousing capacity by allocating additional funds would lead to reduction of wastage, especially for perishables. While taking a medium term view, adequate thrust has been provided to improve the transportation and logistics sector in a comprehensive manner.

Policy announcements:

• Shipping: A policy for encouraging the growth of Indian controlled tonnage will be formulated to ensure increase in employment of the Indian seafarers. Moreover, a comprehensive policy will also be announced to promote Indian shipbuilding industry in the current financial year
• Warehousing: Warehouse Development and Regulatory Authority (WDRA) has begun a transformation plan to invigorate the warehousing sector and significantly improve post-harvest lending to farmers against negotiable warehouse receipts.
• Railways: The Railway Budget has laid stress on resource mobilization through PSU surplus, FDI and PPP
• Airports: Schemes to develop new airports in Tier I and Tier II cities will be launched for implementation through Airports Authority of India or PPP mode.
• Roads: The Government has allocated Rs 37,880 crore for the development of national highways via National Highways Authority of India (NHAI) and State roads
• Ports: The Government announced 16 new port projects in FY15 and has allocated Rs 11,635 crore for development of existing ports and harbours.

Coats

The Budget´s focus on infrastructure sector, encouraging banks to lend long term funds to infrastructure sector, extending the benefit of investment allowance to Small and Medium Enterprises and emphasis on manufacturing growth should help revive the capital goods sector.
– Vipin Sondhi, MD & CEO, JCB India Ltd

We congratulate the Government on its decision to ensure speedy resolution of pending issues on iron ore mining and the introduction of an amended MMDR Act, 1957 to facilitate the resolution. This will help provide much needed clarity around mining policies.
– TV Narendran, Managing Director of Tata Steel (India and South East Asia)

Coal linkage rationalisation and provision of coal for standing projects and easier mining laws is key for reviving the sector, but steps on the ground are more important. Extension of 80 (ia) is positive though MAT relief would have been useful for the sector which is going through financial stress.
– KVB Reddy, Executive Director, Essar Power

The Budget did not disappoint and for the first time we saw several industry level announcements for the logistics sector. The fact that the Finance Minister used the word ´warehouse´ more than 10 times indicates the focus on logistics.
– Vineet Agarwal, Managing Director, Transport Corporation of India

At a time when the economy has bottomed out, reincentivising Special Economic Zones (SEZs) will significantly boost India´s exports. Plans for sectors like Ports, Airports, Railways, Oil & Gas are also in place and Public-Private Partnership (PPP) will be preferred here.
– Hemant Kanoria, Chairman and Managing Director, Srei Infrastructure Finance Ltd

In the Union Budget for 2014-15, the Indian Government has proposed a tax pass-through for real estate investment trusts (REITs). Other positive developments from the Budget include lowering of built-up area for FDI norms and tax relief for homeowners with mortgages.
– Jackbastian Nazareth, Group CEO, Puravankara Projects Ltd

The allocation of Rs 1,000 crore for the solar power sector is much needed as is the intent to construct ultra mega solar power projects in key radiation rich States. The implementation of the Green Energy Corridor project is much needed as it will help maximise the utilisation of renewable power.
– Sumant Sinha, Chairman and CEO, ReNew Power

For the oil & gas sector, there were no major announcements. Over the coming days, we look forward to a policy on Coal Bed Methane (CBM) and Petroleum Natural Gas (PNG), as has been hinted by the Government.
– LK Gupta, MD & CEO, Essar Oil