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Budget Analysis: Thumbs up … well, almost

Budget Analysis: Thumbs up … well, almost

Experts at PricewaterhouseCoopers use the discerning glass to decipher what Budget 2011-12 means to the infrastructure industries.

Infra finance

The infrastructure investment will reach 8.37 per cent of GDP in the terminal year of the 11th Plan (2011-12). Net bank credit to infrastructure has increased by 59 per cent over previous year. However, total FDI inflows during April-November 2010 were 26.67 per cent lower compared to the inflows during the same period in the previous year. The lower FDI flows is an area of concern which has to be addressed by reinitiating reforms in the financial sector.
The budget was expected to ease the flow of domestic and international funds into the infrastructure sector. Revitalising the corporate bond market, liberalisation of investment norms for pension funds and operationalisation of infrastructure debt fund were some of the expectations.

With a Rs 214,000 crore outlay, measures to boost infr­a­str­ucture financing have been intro­duced:

  • A comprehensive policy on PPP will be announced
  • The allocation to IIFCL for take-out financing has been increased to Rs 5,000 crore. This will help reduce the cost of debt for projects that are in operations phase, and address banks' asset liability mis­match (ALM).
  • The additional deduction of Rs 20,000 for investment in long-term infra­structure bonds has been continued NHAI and IRFC have been allowed to raise tax-free bonds of Rs 10,000 each while HUDCO and port trusts can raise an additional Rs 5,000 crore.

The limit for FII investment in corporate bonds issued by infrastructure companies has been increased by $20 billion. FIIs can invest in unlisted bonds of infrastructure SPVs with a mini­mum lock-in period and also trade within themselves during this period. These mea­sures will improve the scope for PPP pro­jects to attract debt funds from foreign sources. New infrastructure debt funds and withholding tax on interest pay­ment by such funds at five per cent against 20 per cent with tax-free income will make foreign investment into such debt funds attractive.

The economic survey states that aro­und 52 per cent of ongoing infrastructure projects are running behind the schedule. Land acquisition is one of the major causes of delay in projects. The budget could have at least announced the intent to reform the land acquisition process to ease the availability of land for infrastructure. However, we hope that such important policy pronouncements will be made dur­ing the year adopting a trend of delinking major policy announcements with the budget statements.
– Amrit Pandurangi, India Leader for Transportation and Infrastructure Practice.


Indian ports handled about 849.9 million tonne (mt) of cargo during FY 2009-10 and out of that, the share of major ports was 561 mt. Whereas major port's traffic has increased at CAGR of merely seven per cent since 2005-06, minor ports have shown imp­ressive growth rate of 18 per cent during the same year. Also, share of minor ports has increased significantly from 26 per cent (FY 2005-06) to 34 per cent during FY 2009-10 showing signifi­cance of minor ports in Indian maritime sector. The share of container traffic has been consistently increasing at major ports and has reached 18 per cent during FY 2009-10. Growth in container traffic has been imp­ressive with year on year growth of 18 per cent since FY 2005-06.

Indian shipping industry is about 10 million GT in terms of fleet size and constitutes just over one per cent of global fleet. Notably, seaborne trade has been gro­w­­ing at the rate of 12.25 per cent, but the share of Indian ships in carriage of overseas trade of country has been declining over the years (from 40 per cent during late – 80s to 8.4 per cent during FY 2008-09).

Budgetary Allocations

The gross budgetary allocation (plan and non-plan) for India's maritime organ­isations has increased at the annual rate of eight per cent since FY 2006-07, but inte­restingly, allocation for FY 2011-12 has act­ually decreased to Rs 1,806 crore from Rs 1,936 crore last year. One of the reasons could be that actual expenditure has been con­­sistently below bud­getary allocation.

However, investment in major port trusts has been proposed to increase in FY 2011-12 to Rs 1,522 crore from Rs 1,372 crore as proposed for FY 2010-11. Mumbai Port Trust is proposed to get maximum share with Rs 285 crore followed by Visak­hapatnam Port Trust (Rs 240 crore) and others.

Budget Expectation

Especially after the release of Maritime Agenda 2020 in January 2011, Maritime industry was expecting some announcement on (i) policy to handle huge investment requirement as envisaged in the Maritime Agenda (ii) corporatisation of major port trusts (iii) Major Port Regulatory Authority Act (iv) subsidy for shipbuilding sector.

Though the FM did not allude to any of the above, he did mention that ports would be allowed to issue bonds for Rs 5,000 crore for devel­opment. Implement­ation, though, would be a challenge.

Issues and Challenges

Indian Maritime Agenda 2020 has env­i­­s­aged the investment of about Rs 274,500 crore. However, it would be a challenge to create the shelf of projects to attract it. Delay in award of PPP projects due to litigation has adversely affected developers due to increase in expected cost for the project. The latest example is JNPT's fourth Container Terminal where the financial bid opening has been stalled due to a court case.

Electronic Data Interchange (EDI) has not been implemented effectively on a common platform in the major ports. This inevitably leads to delay in transfer of data amongst ports, customs, shipping lines and the users. Upfront tariff setting guideline needs to be rationalised and should be made more practical. The private players are concerned that the current guidelines do not provide for a level playing field.
– Vikash Sharda, Senior Manager-Infrastructure.

Roads and Highways

Time and cost overruns

The gross bud­getary support to the road transportation sector has grown at an annual compounded growth rate of 12 per cent from Rs 13,735 crore in 2006-07 to Rs 24,190 crore in 2011-12. However, the sector reported a decline in Apr-Nov 2010 in the wake of execution delays.

Funds vs expectations

While the expectations from Budget 2011-12 in terms of specific aids for the road transportation sector were modest, the government did increase the allocation for the sector by a modest rate of nine per cent over the previous year. The gov­ernment did not come up with major policy level announcements con­cerning the road transportation sector; it has announced the exemption from basic customs duty for bio-asphalt and specified machinery used in the construction of national highways. The ceiling for FII inv­estment in corporate bonds by infra­stru­cture companies has been increased. The government has allowed NHAI to issue tax free bonds of Rs 10,000 crore to boost development of highways.

The most imp­ortant announ­cement by the Finance Min­ister is with respect to long pending infra­stru­cture debt fund where it has been proposed to create SPVs in the form noti­fied infrastructure debt funds which would help the developers to access long term fund for their projects. These mea­sures, if imple­mented properly, are likely to increase the availability of fund for infra­structure dev­elopment and would reduce pressure on commercial banks which have been major source of infrastructure finance so far.

Channelisation is challenge

The exe­mption from customs duty is expected to contain the cost burden for road con­struction comp­anies. NHAI is setting up 192 Special Land Acquisition Units (SLA's) for speeding the land acquisition process. However, the increase in MAT rates is expected to impact the profitability of all the developers falling in the MAT tax net.

The slowdown in the highways sector is possibly not only linked to the flow of credit but also to sluggishness in award of projects. With significant announcements to make funds available for deve­lopment, the ball is firmly in the NHAI's court to fast track road development.
– Vikash Sharda, Senior Manager and Ruchi S Gupta, Senior Consultant-Infrastructure Practice.

Urban Infrastructure

Burgeoning requirements

Surging growth and employment opp­ortunities have led to rapid migration from rural areas to the cities. In 2001, just 28 per cent of India's population lived in urban areas. This figure is expected to rise to 38 per cent by 2026. The rapid pace of urban­isation has accentuated the demand for urban services and posed an unpre­cedented challenge.

Almost 95 per cent of the Additional Central Assistance (ACA) of Rs 31,500 crore for JNNURM has already been committed to projects. It was expected that more fu­nds would be allocated to the Mission. However, the actual progress on the ground has been somewhat sluggish with only Rs 13,000 crore of ACA having been released. It is possible that with the Mission officially expected to end by 2012, the government may have decided that they would fundamentally reo­rient the mission in its new avatar post 2012.

Transport, housing get fillip

The budget has provided financial assistance to specific Metro rail projects in Delhi, Chennai, Kolkata and Bangalore. The budget does not highlight any policy measures for strengthening imple­mentation of such projects. In particular, transfer of additional funds to local gov­ernments and strengthening their cap­acity to under­take PPP projects through spe­cial grants could have been provided.

A major positive step is the extension of interest subvention of one per cent on housing loans upto Rs 15 lakh where the cost of the house does not exceed Rs 25 lakh. This will ease the interest servicing burden on LIG/MIG households. This subvention should be extended to existing loans too and not just for new ones.

Further reforms NEEDED

Measures such as ext­ension of FII limit for investment in cor­porate infrastructure bonds and additional refinancing by IIFCL are unlikely to benefit projects in urban development. Projects in water sup­ply, sew­e­­rage and solid waste management will be less attractive and will need a dedicated window for debt financing.

The economic survey touched upon many important areas such as improvement in land use and capturing value from land, improved user charges and innovative ins­truments for urban financing. It also men­tions the need for adopting a programmatic approach to funds transfer. The budget has been deliberately low on policy pronoun­cements that could take away the hype.

– B Rajesh, Senior Manager, and Neeti Katoch, Consultant, Government Reforms and Infrastructure Development.


Currently there are seven Central government SEZs and 12 state or private-sector SEZs, set up before the enactment of the SEZ Act 2005 whereas formal approval has been accorded to 580 proposals out of which 374 SEZs have been notified. Exports are taking place from 130 SEZs.

The share of SEZ in India's exports has increased consistently from 4.7 per cent in 2003-04 to 26.1 per cent in 2009-10 and 29.7 per cent in the first three quarters of 2010-11.

Contrary to popular belief exports from new SEZs notified under the SEZ Act 2005, have grown rapidly over the years resulting in the highest share of 53.4 per cent for this category in 2009-10 compared to central government SEZs and state-private SEZs established prior to SEZ Act 2005. The total investment in SEZs till 31 December 2010, was approximately Rs 195,348 crore including Rs 191,313 crore in newly notified zones and is pro­viding employment to 644,073 persons.

The industry was expecting some fav­ourable announcements in the budget but the budget provided a shocker of a levy of Minimum Alternate Tax (MAT) of 18.5 per cent on the book profits of Special Economic Zone dev­elopers as well as units operating in SEZs. This will reduce the benefits that SEZs offer for developers over other types of commercial real estate assets as well as to companies operating from a SEZ.

The government has also proposed to impose dividend distribution tax on SEZ dev­elopers, which would take effect from June 2011. This would have an adverse im­p­act on the industry and would discourage investments in SEZs. Further, this amounts to changing the rules once the game has begun as investors would not have budgeted for this tax in their business plans or while getting approval for SEZs. These measures could also be legally challenged. To provide some relief, a new scheme is also being introduced by which units in SEZs will be able to obtain tax-free receipt of services wholly consumed within the zone and get their refunds in a much easier manner. Further, Finance Ministry has also called for disinvestment of the state-run special economic zones (SEZs) to make them more efficient and to collect for funding social-sector schemes.

However the issues of land acquisition, generation and distribution of power by the SEZ developers or units and increasing the deadline for profit linked deductions and coordination issues between Departments especially with respect to IT SEZ which have been left untouched.
– B Rajesh, Senior Manager, and Neeti Katoch, Consultant, Government Reforms and Infrastructure Development.
Rural Infrastructure

Inclusive Development

With inclusive development as a key focus area, Budget 2011-12 had much to offer to the rural infrastructure sector. The Government of India has accorded highest priority to building rural infra­structure so as to facilitate higher rural urban inte­gration and achieve an even pat­tern of growth for less privileged sec­tions of society.

The major initiatives in this regard include PMGSY, Bharat Nirman (covering rural housing, irrigation pote­ntial, drinking water, rural roads, electri­fication, and rural telephony), Total Sanitation Campaign and NRHM.

Enhancing liquidity, strengthening development…

Given the thrust on greater inclu­siveness in the previous budgets, there was an expectation of increase in allocation to MGNREGA as well as an increase in wages to compensate for higher inflation. In addition, it was expected that support to Bharat Nirman program, financial inc­lusion and strengthening of micro finance would be announced.

The budget has largely been able to deliver upon the expectations by taking dedicated steps with regards to wage corr­ection under MGNREGA, support to Bharat Nirman program, aids to rural ba­nks and micro finance institutions. Bud­get 2011-12 proposed increased pro­vision under Rural Housing Fund, creation of Micro Finance Equity Fund of Rs 100 crore with SIDBI and creation of a Rs 500 crore strong Women's SHG's Development Fund. The said steps would enable stren­gthening of rural livelihood by providing for affordable housing and means of growth.

Sustaining consumption…

The wage rates under MGNREGA have been linked to Consumer Price Index for agricultural labour, a move which may help rural workers in maintaining their real consumption at desired levels amidst inflationary pressures.

Another positive step in Budget 2011-12 has been the form­ulation of plan to provide Rural Broadband Connectivity to all 250,000 Panchayats in the country in over a three year horizon. The move is definitely heartening; however the success level of implementation re­mains to be seen given the quantum of fund requirement and scope of the project. The real benefit of this infrastructure would be visible if this connectivity is used for delivery of services as well as for tran­sferring funds under various programmes.


The plan outlay for Department of Agriculture and Cooperation at Rs 17,523 crore in 2011-12 (four per cent of the total plan outlay) was 14 per cent higher than the budget estimates for 2010-11. However, owing to government's push to the sector, the actual planned expenditure in 2010-11 will be 15 per cent higher than the budget estimates.

The food grain stock in central pool reached 470 lakh mt on 1 January 2011, 2.7 times higher than 1 January 2007 levels nece­ssitating augmentation of capacities. Additionally, the need to enhance cold storage capacities continued given the government's focus on keeping a tab
on losses due to inadequate cold chain faci­lities.

During 2010-11, 24 cold storage projects with a capacity of 1.4 lakh metric tonne were sanctioned under National Horticulture Mission and 107 cold storage projects with a capacity of over five lakh metric tonne were approved by the National Horticulture Board.

Attract Private Participation; incentivise existing players…

Budget 2011-12 attempted to further the path of improving warehousing facil­ities and incentivising food processing, as laid down in the previous budget. Herein, the finance minister proposed the reco­gnition of cold chains and post harvest storage as infrastructure sub sector in order to enhance capacities to complement the growth in procurement and processing. Further, the FM announced capital inve­stment in the creation of mod­ern storage capacity eligible for viability gap funding scheme of the Finance Ministry. Besides extending support to warehousing infra­structure, Budget 2011-12 extended full exemption from excise duty to air-con­ditioning equipment and refrigeration pan­els for cold chain infra­structure and con­veyor belts used in cold storages, mandis and warehouses. The FM also appealed to the states to review the APMC Act.

Stronger food supply chains, stronger investments

This would provide a much needed fillip to private investment in cold chain and post harvest storage. In the long term, this would be would be one of the best ways of improving food supply chain and also minimise food wastage.

Moreover, the exemption from excise duty is expected to curtail the cost burden for industry players and have a positive impact on their profit­ability. Going forward, the govern­ment is expected to tread the path that was laid down in the previous budgets in order to bring the agricultural infrastructure at par with inter­national levels.
– B Rajesh, Senior Manager and Neeti Katoch, Consultant-Govt Reforms and Infrastructure Development

Oil and Gas

Oil and Gas contributes about 45 per cent to the India's total primary energy consumption, and contributes significantly to the national GDP. Crude oil and natural gas are projected to register healthy annual growth rates during the year 2010-11 of 12.67 per cent and 12.8 per cent resp­ectively. Refining capacity is 196 mmtpa as of October 2010 and expected to grow 30 per cent to 241 mmtpa by end 2011-12. Import dependence continues at 80 per cent of total crude oil requirement, and is expected to grow further.

This year Oil and Gas (O&G) industry reported developments across the segments of business. The ninth round under the NELP was rolled out. Third round of bidding for CGD licensing, for eight cities City Gas Distribution segment, concluded in February 2011 and the fourth round is expected to conclude in March 2011. In the Unconventional Hydrocarbon segment drilling of first Shale Gas well was com­pleted and discovery rep­orted near Durgapur in January 2011.
Budget wishlist of oil and gas industry was long. Some of the expectations were-confirmation of tax holiday under Section 80IB (9) on the gas produced from all the blocks awarded under NELP/CBM or in any other manner by Central or State Government, exemption from MAT to the companies eligible u/s 80IB(9), grant of profit linked tax holiday to business of laying and operating cross-country pipe­lines for natural gas, crude and petroleum oil, extension of depreciation benefit to capital investments made by refineries for producing fuels in acco­rdance with stri­ngent emission norms similar to pol­lution control equipment.

Industry wishlist further included enlargement of the list of goods that could be imported, duty free by E&P sector by amendment of List 12 and List 13 of customs notification no 21/2002 dated 1 March 2002, zero customs duty on capital goods imported for setting up new petroleum refinery, pipelines or green fuel projects, customs duty concession for pipeline projects, exemption from service tax on services consumed in relation to E&P activities.
Budget 2011 did not propose the oil and gas sector specific concessions. To the contrary, tax holiday for E&P was proposed to be withdrawn; the industry may still welcome this proposal since ambiguity of availability of tax hol­iday for gas is now clearly removed. To make up, bid­ders could factor this in the bid. The Budget also proposed that targeted subsidy on domestic Kerosene and LPG will be dispensed at the consumers' end by ambitious March 2012 timeline to reduce under-recoveries and help narrowing down the fiscal deficit, arrest subsidy leakage and adulteration.
– Deepak Mahurkar, Associate Director-Oil and Gas Practice.


The current status

Power sector has picked up a certain momentum in the last four years of the current Five Year Plan. We have added around 10 GW of capacity this year. As the 11th Five Year will come to end next year, the focus will be more on achieving the targets.

Notable milestone in con­ventional power sector was the com­missioning of the first Supercritical Plant of 660 MW. The renewable energy front has seen a lot of activity during the year. Wind energy capacity also grew by about 10 per cent in a year to cumulative installed capacity of 13 GW.

Then, there was the launch of Jaw­aharlal Nehru National Solar Mission by the Ministry of New and Renewable Energy (MNRE) and similar state level Solar Park initiatives by various State Governments. Transmission and Distrib­ution sector also witnessed signi­ficant pro­gress with award of three 765 kV transmission projects and two distribution franchisee contracts on PPP basis.

The desired or expected changes

In order to sustain the growth of the economy, it is important that the power sector grows at the same rate if not more and does not create hurdles on the way. One of main hurdles in the power sector growth is issues of land acquisition and environmental concerns in new power and mining project development. It has impacted negatively on two UMPPs and numerous power/mining projects. There is an urgent need to find a way out of these issues quickly in order to keep the growth momentum going.

Similarly, the growth in renewable energy sector in India will get boost if the issues in financing new projects based on new technologies, ie, solar are addressed. The sector was expecting that the budget would provide the direction and will incentivise the renewables.

DOES the new budget provide for that change?

Budget 2011 has very few features that address the industry concerns and have a positive impact on the power sector. Environmental issues of power and mining projects will be referred to Group of Ministers to resolve. Industry is expecting that the issues will be resolved quickly and amicably by this new mechanism.

Domestic power equipment manuf­acturers are demanding a level playing field against imported Chinese equipment for a long time, by asking to levy customs duty on them.

Finance Minister has tried to bring in parity by removing the excise duty on capital goods required for Mega and Ultra Mega Power Plants. The reduction of 10 per cent excise duty will definitely help both domestic manufacturers and mega power project developers.

The implications

Finance Minister announced a few policy initiatives, ie, comprehensive policy on public private partnership and Group of Ministers to resolve environmental issues of power and mining projects. Now, it needs to see the effectiveness of these measures to resolve the critical issues, ie, the environmental concerns of power and mining projects.

Ministry of Power and Ministry of New and Renewable Energy (MNRE) has received marginally higher budgetary outlay of Rs 66,383 crore and Rs 2,150 crores respectively.  
However, the increase in the outlay in terms of percentage is lesser than that in the previous year's budget. Also, the renewable energy sector did not receive any new incentives which would give boost to the sector. Overall Union Budget 2011which was announced on 28 Feb has very few encouraging features that will have a long-term positive impact on the power sector.
– Charudatta Palekar, Principal Consultant-Energy, Utilities and Mining Practice.

Mining, Cement, Steel

Current Status

India has the world's fourth largest coal reserves, the fifth largest iron ore reserves, and a significant proportion of reserves of bauxite and several other minerals.

During FY 04-09, while the GDP in India grew at a CAGR of 8.5 per cent, the mining industry registered a slower growth at 5.7 per cent.

In 2010-11, the coal and cement sectors have grown at comparatively lower rates at 0.6 per cent and 4.1 per cent as compared to the previous year's eight per cent and 10 per cent respectively. The steel sector performed relatively better growing at 6.7 per cent as compared to previous year's 3.2 per cent.

The major challenges before the Central Government are multi-layered spanning delays in regulatory approvals, and local permissions; the uncertainty involved in the administration, inter­pretation and enforcement of the rules and regulations; infrastructure constraints for evacuation; absence of fiscal and tax inc­entives to invest in larger and efficient technologies, disparity between the gro­wing mining industry and poor state of local economy and environmental con­cerns, among others.

Desired Changes


The policy needs to foster an invest­ment friendly environment, for which the National Mineral Policy 2008 and draft Mining and Minerals (Development and Regulation) Bill Act 2010 (MMDR 2010) have set the direction. Fiscal incentives should make exploration a viable business. Competitive bidding process for mineral block allocations also is expected to add transparency, objectivity and credibility to the mineral concessions. Clarity over the proposed profit sharing with the host population is also required apart from implementing the sustainable devel­opment framework.


The duty structure on cement should be rationalised, to enhance affordability and to provide a level playing field with international competitors.

To further enh­ance competitiveness, the duties on raw materials like coal, gypsum and pet coke may be lowered or eliminated. The budget may also provide a direction in the pricing of fly ash to streamline benefits between power generations and cement players.


The budget needs to encourage com­petitiveness of the domestic steel sector as well as protect the interests of the industry through appropriate safeguards and anti-dumping duties.

Budget may facilitate coking coal assets to ensure raw material security, a key industry concern.

Announcement and Impact


There has been no significant anno­uncement related to coal in the Union Budget.

However, export duty rates on iron ore lumps and fines have been increased to a unified 20 per cent ad valorem from 15 per cent and five per cent respectively. This would significantly impact the operating margins of exporters, but may also improve input availability to steel industry.

Further the export duty on iron ore pallets has been withdrawn, which are in line with National Steel Policy for promoting value addition.

There has been no significant anno­unce­ment for non ferrous sectors. However, the basic customs duty on pet coke and gypsum is to be reduced from five to 2.5 per cent which will have negligible impact on the operating margins of Aluminium smelters. The value of gold and silver in copper concentrate have been exempt from excise duty, this will have an insi­gnificant impact in India, due to presence of lower quantities of gold and silver in copper concentrate.  
A group of ministers on consolidation of environmental issues is expected to bring clarity on the Go-No Go areas leading to increase production supply.

The excise duty rates for cement have been replaced with 10 per cent ad valorem and an additional Rs 160 per tonne.

This will have an impact of two to three per cent increase in the total excise duty. Union budget also announced a reduction in basic customs duty on pet coke and gypsum from five to
2.5 per cent.

Gypsum accounts for two to three per cent of the total cost and pet coke is used only by few manufactures and may not lead to changes in prices of cement.

The increase in export duty on fines from five to 20 per cent and withdrawal of export duty from pallets may lead to increased investment in palletisation acti­vities in country.

Also, the steel producers with captive mines would be imapcted way lesser as compared to other players with no captive mines given that there is almost a 30 per cent increase in coking coal prices in international market.

What the Budget should have provided

The Government may have announced fiscal measures for exploration activities, duty cut for import of equipment for technologies for various usages namely coal mine methane, syngas production and coal beneficiation.

Clarity over profit sharing with host population should have been provided. Key policy initiative on implementation of MMDR Act, setting up a coal regulator and modalities on coal block bidding could have improved the investments in the sector.

The excise duty rates for cement have been reduced and basic customs duty on pet coke and gypsum should have been further brought down.

Import duty on raw material such as coking coal, manganese, chrome ore needed to have been reduced. Policy initiatives for coking coal resource acq­uisition needed to be announced.
– Dilip Kumar Jena, Consultant and Knowledge Manager-Energy, Utilities and Mining Practice.

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