Budget 2015: The chinks and the missing links

From the ramparts of the Red Fort, the Prime Minister had appealed to the world, ´Come, Make in India´ and the Finance Minister in his Budget has set the tone for this flagship initiative. The current budgetary provision for infra is Rs 3 lakh crore, but where is the money going to come from? And has the Centre neglected infra finance schemes initiated by former dispensations, which have lost their way? We crunch the numbers and unearth a few surprises.

Budget 2015 echoes the need to foster the infrastructure ecosystem and outlines the policies and reforms which are expected to revive the growth of infrastructure which has remained tepid.

India´s economy advanced 7.5 per cent year-on-year in the last quarter of 2014, following a revised 8.2 per cent rise in the previous period as the way the gross domestic product (GDP) has calculated changed. Now, India´s GDP measured in market prices instead of factor cost and the base year was changed to 2011/12 from 2004/05. Revised figures indicate the economy advanced 6.5 per cent in the June quarter (5.7 per cent under the older methodology) and 8.2 per cent in the September quarter (5.3 per cent was initially reported).

The new numbers indicate in the last three months of 2014, the highest growth rates were reported for services: electricity, gas, water supply and other utility (10.1 per cent); trade, hotels, transport, communication and services related to broadcasting (7.2 per cent); financial, real estate and professional (15.9 per cent) and public administration, defence and other services (20 per cent). The manufacturing sector expanded 4.2 per cent; mining & quarrying went up 2.9 per cent and construction rose 1.7 per cent. The government estimates annual growth at 7.4 per cent in the fiscal year ending in March 2015 from a revised 6.9 per cent expansion a year earlier. Now here is the catch. With an aim to attract investment of Rs 60 lakh crore in infrastructure sector, and to achieve a GDP growth of 9 per cent by the end of the 12th Five-Year Plan, every year, starting from 2012, the investment in infrastructure sector should be in the range of 7 to 9 per cent of GDP. On top of it, the government is expecting private players to take the lion´s share by contributing around Rs 26 lakh crore, to which, the government is required to bid out bankable projects. In terms of percentage-wise achievement, India has managed to achieve an all-time high investment in the infrastructure sector only in the year 2010-11 which was 8.41 per cent of GDP, and, thereafter witnessed a projected downfall to 7 per cent. Most importantly, in the entire exercise of investments, the States were required to invest around Rs 13 lakh crore in infrastructure.

Funding infra
Now, with the government making a budgetary provision of more than Rs 3 lakh crore for the infrastructure sector, the prime question is where is the money going to come from to fill the fund requirement for a double digit GDP growth, not only in this year´s Budget, but in subsequent ones too?

Let´s take stock of how the previous government fared on raising funds for the infrastructure sector.

In the year 2011-12, the government announced the setting up of the India Infrastructure Finance Company Limited (IIFCL), to provide long term financial assistance to infrastructure projects. It was expected to achieve a cumulative disbursement target of Rs 20,000 crore by March 31, 2011 and Rs 25,000 crore by March 31, 2012. However, IIFCL has achieved cumulative disbursement target of only Rs 19,396 crore by December 2011.

Meanwhile in the same Budget, it was decided to raise Rs 30,000 crore through tax-free bondsùthis includes Indian Railway Finance Corporation (Rs 10,000 crore), National Highways Authority of India (Rs 10,000 crore), HUDCO (Rs 5,000 crore) and Ports (Rs 5,000 crore). By the end of FY12, IIFCL, REC, Power Finance Corporation, National Housing Board, IRFC, HUDCO, JNPT, Ennore Port and Dredging Corporation of India, together, have managed to garner only Rs 1,500 crore, with the majority of the bond issues remaining under-subscribed. In Budgets 2012-13 and 2013-14, cumulative fund raising plans through tax-free bonds were increased to a total of Rs 1 lakh crore. But by the end of FY14, the previous government managed to raise only Rs 30,000 crore. This was, according to company officials, due to the ill-timed announce¡ment and lower coupon rates.

Now with the NDA regime pumping some oxygen into tax-free infra bonds again, with the setting up of National Investment and Infrastructure Fund (NIIF), will the story be very different this time?

Is the government spending?
Consider this: in the year 2008-09, India achieved a growth rate of 9 per cent, almost touching 10 per cent. This was mainly because the country´s domestic saving reached its peak level of 37 per cent and foreign investment of 39 per cent, which is 2 per cent of GDP of the country. The UPA government had decided to invest in infrastructure assets, instead of putting more money into the people´s pocket. A close look at the Budget suggests that most of the expenditure on infrastructure sector is likely to be done by States and PSUs-not the most efficient agents of expenditure-of the country.

A case in point would be the actual spending on the infrastructure sector by respective departments for the period of 2012-14. These figures fall well short of the revised Budget estimates. For example, provisions for various ministries/departments for the year 2012-13 was Rs 2.23 lakh crore; however, the ministries/departments´ expenditure was Rs 2.18 lakh crore, falling well short of amount allotted to them. Importantly, in the year that followed, the ministries/departments again fell well short of achieving 100 per cent expenditure on the infrastructure sector. The trend is likely to be the same for 2014-15 and 2015-16 as provisional expenditure for the year 20141-15 is likely to be on a lower side. (see table: Actual budgetary spending on various sector by ministries/departments).

Resultantly, though huge amounts have been provisioned for the infrastructure sector in the past, these have not been utilised. A high-level committee on financing of infra¡structure headed by Deepak Parekh had said last year that India is set to miss its infrastructure target of $1 trillion for the 12th Five-Year Plan. The committee scaled down infrastructure investment projections for the 12th Plan by nearly 40 per cent, to Rs 30.90 lakh crore, from the Rs 51.46 lakh crore that it had projected in 2012.

Meanwhile, although the government departments were unable to spend the entire amount allocated to them, they managed to increase spends on a year-on-year basis. Consider this: for the year 2012-13, the actual expenditure was Rs 2.18 lakh crore on infra, which was gradually increased to Rs 2.23 lakh crore in 2013-14, an increase of 2 per cent. But, as compared to previous Budgets (12-13 and 13-14), with the revised budgetary allocation of Rs 1.59 lakh in 2014-15, as compared to Rs 2.27 lakh in 2013-14 and Rs 2.23 lakh crore in 2012-13, the actual spending is likely to be below expectations.

Noting the decline in the savings rate in the economy from 37 per cent (as a proportion of GDP) a few years ago to less than 30 per cent at present, Yashwant Sinha, former Finance Minister expressed hope that this budget would encourage savings. ´The increase in savings would consequently lead to a rise in investment rate to 39 per cent and lead to overall economic growth rate of 9-10 per cent,ö he says.

Larger onus on CPSUs to raise money
The budget also envisages a sharp 34.1 per cent increase in investments by central public sector enterprises (CPSUs) compared with a 10 per cent drop last fiscal. Their share in total central plan outlay is thus budgeted at nearly 55 per cent. To fund this, CPSUs will have to raise resources from the bond market.

Of the total estimated to be raised in 2015-16, nearly 37.1 per cent is to come from accruals (down to 49 per cent from last year), 37 per cent from capital market (up from 26 per cent) and 26 per cent from external commercial borrowings and other sources. From the bond markets, PSUs in the roads and railways sector are together slated to borrow Rs 803 billion in 2015-16 compared with Rs 208 billion last year. The budget allows for a large part of this borrowing to be in the form of tax-free bonds. However, there is a growing concern of Reserve Bank of India on PSUs higher borrowings to meet their capital expenditure targets. As many as 42 listed PSUs cash balances of the companies stand at Rs 172,476 crore as of as of September 2014, with top 10 accounting for Rs 147,283 crore. Moreover, net cash to total assets ratio of these 42 companies has been steadily falling over the last five years. In 2009-10, the ratio on an average stood at 47.2 per cent which sharply fell to 29.5 percent in March 2014. As of September 2014, the ratio has further declined to 25.2 per cent. This was mainly because of heavy outflow of dividends to the share holders.

Sectoral allocations
At present, the current budgetary allocation for sectors such as power, renewable energy, petroleum and gas, transport, rural and urban development stands at Rs 3.59 lakh crore. This was increased by 9 per cent from 2014-15. Now, when examines the figuresclosely, it appears that the NDA regime has straightaway slashed the allocations for some of the important sectors. (See table: Planned outlay of last three years). But at the end, it´s a Budget, and some may gain and some may lose, at the end.

The major blow was taken by iron and steel, petroleum, heavy industries, civil aviation, rural housing, urban development and irrigation. In the meantime, the budgetary allocation for some of the sectors has been increased by two-folds. For example, the roads sector witnessed an incremental allocation of Rs 43,000 crore for 2015-16 against Rs 26,000 crore in 2014-15. The roads sector has particularly been slow in its development in recent years due to many roadblocks. As per the latest Economic Survey, out of the total 54,478 km under development Under the National Highways Development Project, only 22,609 km were completed while more than half of the highway development work is yet to be completed or started. One of the major reasons has been the lower uptake of BOT / PPP projects. Due to lower revenue realisation and high debt defaults, the private sector has been unable to garner enough capital based solely on equity for such projects. With the Finance Minister keen to develop the buoyancy in the sector again, a revisit of the PPP framework has been suggested by him, whereby majority of the risk will be borne by the sovereign guarantor. The FM has also reinforced infrastructure spending on railways by increasing the budgetary support.

Says Piyush Patodia, Executive Director, Grant Thornton India LLP, ôThe economic survey has clearly shown the comparison of investments made by China and India to develop the rail network, with the former outstripping India´s investments manifold.ö

Conclusion
Basic resources, amenities, funding, regulatory approvals, operations and incentives are key parameters to build sustained and long-term business partnerships in any economy. The announcements indicate that the government has taken note of the expectations and outlined the roadmap for easing the fund flow and streamlining regulatory approvals. The´Plug & Play´ concept for UMPPs is a welcome move and the government must look at creating a pipeline of projects on the same principles for acceleration in infrastructure spending and execution.

Dispute resolution in public contracts and setting up of commercial divisions in various Courts reflects the government´s commitment to ensure timely completion of projects and revival of stalled projects. The government has, in fact, identified the States as ´equal partners´ in the process of economic growth as State participation is imperative for implementation of the agenda on infrastructure, which acts as a catalyst for other sectors.

While the policy-related initiatives for the infra¡structure sector have been substantial, the indirect tax related developments have been limited. Impetus to infrastructure based asset creation through certain indirect tax related exemptions was expected. This appears to be based on the reasoning that this sector needed reforms in the areas of financing and policy (and its implementation) rather than tax elements.

The government, however, has retained the service tax exemption on construction of roads, railways and Metro rail, while the exemption to ports and airports has been removed. This would have a substantial impact on the costing for airports currently being developed as well as projects in the pipeline; and would also require contractors for such projects to put CENVAT credit related processes in place. This may potentially also be an indicator that the current exemption could be further pared in coming years.

Budget 2015 has clearly recognized the impediments to economic growth. With the infrastructure sector featuring high on the agenda, the sector has received attention in terms of laying out a roadmap over a period of 2-3 years with the stated objective to enhance investor confidence for achieving the vision called´Team India´ and positioning India as a global power.

The government has proposed to increase the total capital expenditure to Rs 2.41 lakh crore in the latest Budget-about a 25 per cent increase over the revised estimate of FY2015. It indicates a big hope on growth in FY2016 through acceleration of investments, especially in the infrastructure space with the help of public sector enterprises (PSEs).

The PSEs are expected to increase their capital expenditures by a whopping 34 per cent in FY2016.

Suggestions
Where will the money come from?
Direct spending from Budget:
The relaxation of the fiscal deficit target for 2015-16 by 30 basis points directly releases Rs 423 billion for funding projects. So, while total central plan outlay is budgeted higher next fiscal, much of it is due to an increase in budgetary support, which is 37.3 per cent higher on a weak base.
Road cess and taxes on petroleum products – The budget raised additional excise duty on petrol and diesel to Rs 6 per litre from Rs 2 per litre, which is levied as road cess. This raises available funds for roads and railways to Rs 431 billion in 2015-16 from Rs 232 billion in 2014-15. In addition, to fund infrastructure development (particularly roads), the government had increased the basic excise duty on petrol and diesel by around Rs 7 to 8 per litre between October and January. Incremental revenues accruing from this is estimated at Rs 780 billion in 2015-16.
Govt´s revenue collections – In 2015-16, the budget plans to collect divestment revenues of Rs 695 billion on account of stake sales and spectrum sale revenues of Rs 431 billion which can be utilized towards infrastructure development. However the shortfall in tax revenues has already been substantial this year and with a projection of a 16% growth for next year, the tax revenues will remain a challenge.
An expeditious dispute resolution and arbitration mechanism needs to be introduced which can allow existing disputed debts to be settled and cleared. This money can help ease tied up funds.
The newly created NIIF should buy the incomplete projects from debt stressed BOT companies and offer them to new bidders on transparent auction basis.
– Rahul Kamat