Just as 2019 drew to a close, the Central Government unveiled the Rs 102-trillion National Infrastructure Pipeline (NIP) to boost annual investment in the sector. "This first-of-its-kind exercise is expected to be followed up by a periodical review process. NIP will enable a forward outlook on infrastructure projects which is expected to create jobs, improve ease of living, and provide equitable access to infrastructure for all, thereby making growth more inclusive. The NIP pipeline includes both economic and social infrastructure projects," pointed out Finance Minister Nirmala Sitharaman.
The Indian infrastructure sector will play a pivotal role in the country's march towards becoming a $5 trillion economy. Despite tremendous interest being shown by investors like sovereign wealth funds (SWF)s, funding of projects has remained problematic over concerns on return on investment while, on the other hand, sustainability is a big challenge for some finished projects.
With Prime Minister Narendra Modi-led National Democratic Alliance (NDA) government returning with a stronger mandate in the general elections held in May 2019, more affirmative action was expected. In her maiden budget for FY2019-20, Nirmala Sitharaman, Minister of Finance & Corporate Affairs, sought to provide a further push to infrastructure creation, encourage entrepreneurship and incentivise wider adoption of electric mobility or electric vehicles (EV)s. During the course of the year, the country not only became the world's fifth-largest economy in terms of nominal GDP after overtaking the UK. However, growth has slowed down considerably on the back of global headwinds and a host of domestic factors.
India's economy grew at its slowest pace in over six years in the September quarter mainly on account of a weak manufacturing sector and a drop in exports. GDP grew 4.5 per cent in the second quarter of FY2020, which was the slowest expansion in 26 quarters. In terms of gross value-added (GVA) - which is GDP minus taxes - the economy grew at 4.3 per cent compared to 4.9 per cent in the previous quarter. In the current GDP series, the lowest growth rate recorded by far was 4.3 per cent in the fourth quarter of FY2012-13.
With several sectors like FMCG and automobiles sector sputtering, the Indian industry demanded a stimulus package resulting in the government announcing a slew of economic boosters from August to September.
In an interview published in the 16th Anniversary Edition of INFRASTRUCTURE TODAY, Sanjiv Sanyal, Principal Economic Adviser, Ministry of Finance observed, "We have introduced several new measures. The pace at which they will feed through the economy will depend on several other extraneous factors. It is difficult to project the trajectory of the economy, especially given the disruptions in global trade, spike in oil prices and, internally, the transmission of Reserve Bank's monetary easing to bank lending."
Sanyal expected the economic numbers to start improving towards the close of the current fiscal.
NATIONAL INFRASTRUCTURE PIPELINE To achieve the target of $5 trillion by 2024-25, India needs to spend about Rs 140 trillion on infrastructure over the next five years. To achieve this objective, a high-level task force was constituted to draw up NIP for each of the years from FY 2019-20 to FY 2024-25 with the approval of the finance minister. Since September 2019, the task force held several meetings with various departments and ministries, companies, financial institutions, private equity funds and industry associations to seek information as well as suggestions on reforms required in the infrastructure sector.
Just as 2019 drew to a close, the Central Government unveiled the Rs 102 trillion National Infrastructure Pipeline (NIP) to boost annual investment in the sector.
Speaking on the occasion, Sitharaman said, "This first-of-its-kind exercise is expected to be followed up by a periodical review process. NIP will enable a forward outlook on infrastructure projects which is expected to create jobs, improve ease of living, and provide equitable access to infrastructure for all, thereby making growth more inclusive. The NIP pipeline includes both economic and social infrastructure projects."
As per the data compiled by the Ministry of Finance, the total capital expenditure in the infrastructure sector from the fiscals 2020-25 is projected at over Rs 102 trillion. During the fiscals 2020-25, sectors such as energy (24 per cent), roads (19 per cent), urban (16 per cent), and railways (13 per cent) will likely amount to around 70 per cent of the projected capital expenditure on infrastructure in the country. Sitharaman indicated that the government will examine the recommendations of the task force for expeditious action.
ONUS ON STATES According to experts, other than the recent stimulus measures to increase exports, cut taxes and provide support to certain stressed sectors such as automobiles by the Central government, the states also needed to increase their spending on infrastructure by up to three times.
Such investments by states would need to rise to nearly Rs 110 trillion over the next decade (fiscals 2021-30) if the country is to achieve its mammoth infrastructure build-out targets, analysts at CRISIL have projected.
"Unless states contribute nearly 50 per cent of infrastructure investments, India's build-out momentum could taper sharply. With private investments tepid in recent years, and fiscal limitations on central spending, states have been keeping public spending going. They will need to strengthen fiscal health and build institutional capacity to sustain far higher levels of Capex," stated Sameer Bhatia, President, CRISIL Infrastructure Advisory, during the launch of the CRISIL Infrastructure Yearbook 2019 in late November.
Country-wide infrastructure spending required over the next decade would be about Rs 235 trillion, CRISIL said and called for average GDP growth of 7.5 per cent and infrastructure spending of above 6.0 per cent of GDP to help achieve this. States already account for 41 per cent of the overall infrastructure spending of Rs 77 trillion in the present decade. The five sectors that accounted for two-thirds of states' spending, included transport, irrigation, energy, urban & housing, and water & sanitation. Some of these sectors, which come under the purview of states, have burgeoning infrastructure deficits and will need big investment leaps to plug the gaps. The spending trajectory of 15 large states, which accounted for 83 per cent of infrastructure Capex during fiscals 2015-19, would be crucial to the overall goal. Bucketing these states into three categories of frontrunners, middle of the pack and climbers CRISIL recommended customised strategies and action sequences to maximise investments.
Frontrunner states such as Gujarat, Maharashtra and Karnataka, which saw a moderation in Capex growth on a higher base, need to crowd in private investments and find new triggers to grow Capex sharply from current levels. Middle-of-the-pack states such as Haryana, Andhra Pradesh and Telangana can be growth leaders by sustaining their current spending. However, climbers such as Rajasthan and Uttar Pradesh, which have been high spenders in recent years, could be constrained by their surging debt burden.
CRISIL has identified fiscal deterioration, institutional weaknesses and the inability to scale-up commercial financing and public-private partnerships (PPP)s as the key structural constraints to address for a sustained increase in spending.
Anand Madhavan, Director, CRISIL Infrastructure Advisory, said that this could be facilitated by three vectors. "One, expanding fiscal space by unlocking asset monetisation potential and moving to merit-based directed subsidies; two, nurturing robust counter-party institutions that can own up infrastructure development, including driving viable PPPs; and three, ironing out sectoral creases and rolling out policies that lift the investment momentum."
NEED FOR A DFI
Even while welcoming NIP, a section of the industry felt that more concerted action was needed in areas such as financing of infrastructure projects.
Addressing on the role of infrastructure in the country's $5 trillion target, Sanyal remarked, "Importantly, that also implies a significant increase in our savings rate because in every country that witnessed such high rates of growth most of the investment effort was financed domestically, though foreign investment played a very important role as the icing on the cake. Having said that, the key driver is going to bring down the cost of capital domestically."Lowering the cost of borrowings for businesses and entrepreneurs was, therefore, going to be an important driving force of the government's economic strategy.
Vinayak Chatterjee, Co-Founder & Chairman, Feedback Infra, felt that the creation of a development financial institution (DFI) was essential."You not only require a large pipeline of projects but also a new burst of energy to create projects such as bullet trains, airports, ports, roads & highways, bridges, irrigation canals, river-linking system, etc. All of us are very comfortable talking about finance, but what about the hard stuff of the project pipeline? So, Rs 80 trillion worth of projects need to be created at the central, state, municipal and rural levels," he said.
This would not only help sustain infrastructure creation in the long term but also keep capital costs low.
So, what does the industry expect the finance minister to pull out from the four-cornered traditional red cloth or bahi khatha?
"I would look at the budget announcement this time to outline some very bold measures, including the DFI, resetting of the stage for PPP and a major package for infrastructure. And while all this will take time to unfold, it will sustain the momentum on public expenditure. One must not expect anything more!," declared Chatterjee.
Kshitish Nadgauda, Managing Director Asia, Louis Berger, felt, "Major investment is required towards ensuring sanitation facilities in every town and village across the country, and the supply of potable water. The quality of life of the average citizen must be improved by leaps and bounds."
Anil Agarwal, Founder & Chairman of the $3 billion Vedanta Resources, however, told the magazine, "This Budget is going to be a game-changer. The government has already undertaken a series of reforms including a reduction in taxes. I would now like the rate of taxation to come down for the salaried class as well!"
Rajeev Vijay, Executive Director, Govt & Infrastructure Advisory, Knight Frank India There need to be enhanced focus on urban infrastructure as that has a financial and economic impact. The big plus of Smart City Mission is that it has brought the city improvement and urban governance to the fore. It directly impacts India's future growth and aspirations of younger generation and increasing urban population. It will be better if Smart City Mission also focuses to build institutional capacity simultaneously with Capex or rehab works. This will help to have faster and better implementation. As the urban sector needs continuous funding, allocation for it must be increased. Adequate funds must be provisioned for asset maintenance. Most Importantly budget to provide any new plan for lower cost capital for infrastructure projects.
Kshitish Nadgauda, Managing Director Asia, Louis Berger There needs to be significant investment in the further development of top-quality highways and expressways, bridges, mass transit facilities such as metro rail networks, and high-speed rail to provide safe, fast and seamless connectivity between cities. In addition, there needs to be investment in the development of new townships so that the continued migration into existing cities bursting at the seams will slow down. Major investment is required towards ensuring sanitation facilities in every town and village across the country, and the supply of potable water. The quality of life of the average citizen must be improved by leaps and bounds. The second reason for investing heavily in infrastructure is to boost the economy. Economic parameters over the past year have been disappointing. Investment in infrastructure will revive flagging businesses, generate employment, and provide a solid impetus to the economy.
Harsh Pati Singhania, JK Group, Vice Chairman & Managing Director, JK Paper Ltd Among other things, we need to look at the demand side of the equation. It is important to put money in the hands of consumers to somehow stimulate demand. That may involve policy measures to be taken in terms of rationalising or reducing income tax rates. Secondly, given our current economic situation, there is no doubt that the government will have to continue to spend more money. Although due to the concerns around checking the fiscal deficit, the space to do that is limited. Perhaps, the government might have to loosen or relax those targets a little bit. At the same time, the money can be raised by the government - and it is trying to do that - through privatisation of the public sector units or flotation of those units in the market. There is also room for rationalising several subsidies as that will give the government more fiscal space. Lastly, there is a need for better compliance and simplification of GST. GST is a very major reform and if we can simplify it after taking into consideration the ground realities that are being encountered, particularly by the smaller businesses, that may lead to better revenues. I remain optimistic that appropriate measures will be announced in the Budget as the government is well seized of some of the major issues that have come up.
Rajan Bharti Mittal, Vice Chairman & Managing Director, Bharti Enterprises On the one hand, we want India to become a digital superpower and on the other, the telecom sector is burdened by so many taxes. We believe that when you levy GST of 18 per cent at the lower end it adds to our costs. We also believe that the rate of GST needs to be far more realistic as mobile telephony is entirely a utility product today. We had even suggested that there should be lower GST for the lower segment of consumers. Besides, spectrum usage charges should not be levied after an auction as the rule dates back to the time when there were no auctions. Now, it's like a case of my having to pay monthly instalments on a property even after having paid its full cost upfront! That's just not fair. The government must, therefore, reduce the number of levies and instead realise a fair administrative charge as is the practice globally to ensure the Indian telecom industry's competitiveness.
Sandeep Sabharwal, CEO, SLCM Group
It is distressing to note that every year an enormous amount of food grains gets wasted due to archaic procurement, storage and inefficient warehousing methods. Typical storage losses for agri produce in India account for approximately 10 per cent only for the dry food grains of the entire production, which works at a staggering Rs 1 trillion! This results in a huge burden on the economy because, firstly, it leads to inflation as additional supplies could have helped cool down prices and, secondly, this production could have provided subsidised food to the poor. Scientific warehousing can address this problem to a large extent and, as a pioneer of in the segment in India, we expect the government to rationalise indirect taxes on agri warehousing by encouraging organised players to take warehouses on lease where they have to pay GST. Such commercial leasing should be exempt from GST as collateral management companies cannot get input credit on the tax they pay on rent because the commodities which they deal in are agri commodities and they do not attract GST.
The waiver of the 18 per cent GST will motivate farmers to store their produce and prevent distress sale. Also, cheaper credit must be provisioned for agri facilitation companies like non-banking financial companies (NBFC)s that provide warehouse receipt financing.