On the road to growth

The Budget has tried to address infrastructure financing issues by announcing deepening of the corporate bond market and allocation of Rs.25,000 crore towards recapitalization of public sector banks.

I would not hesitate in terming the Budget as focused on re-igniting ¨growth¨ with emphasis on fiscal discipline. Infrastructure remains a focus area with an attempt to unleash the capital expenditure cycle. The total outlay allocated for infrastructure in budgeted expenditure for financial year (FY) 2016-17 is Rs.2.21 trillion.

In addition to providing high budgetary allocations to infrastructure, the Budget has also tried to address its financing issues by announcing deepening of the corporate bond market and allocation of Rs.25,000 crore towards recapitalization of public sector banks. However, given the huge NPAs already disclosed by them in the last two quarters and continued high degree of stress expected on their balance sheets, one was expecting a larger corpus allocation for recapitalization. This may adversely affect companies in infrastructure and other core sectors committed to undertake capital expenditure in the near future.

Further, the budget speech also included initiation of the Public Utility Dispute Resolution Bill and guidelines on renegotiation of public private partnership (PPP) concession agreements.

While the dispute resolution initiative is aligned to the Kelkar Committee Report and was expected, I believe allowing renegotiation of terms in PPP contracts is a rather bold step with a positive intent. Initiating renegotiation of contracts is a sensitive issue and may certainly need to be rationally calibrated in a well-defined framework to avoid any undue advantage being passed on to stakeholders.

Apart from the above, it has been proposed to provide an investment linked deduction to Indian companies or their consortium engaged in the business of developing or operating and maintaining of a new infrastructure facility. The specific infrastructure facilities include roads and highways and water projects. This will incentivise cash rich companies to invest in infrastructure and thus, industry participation is expected to increase.

Roads & Highways
Together with the capital expenditure announced for the Railways, the total capex outlay for roads and railways in 2016-17 will be Rs.2.18 trillion. The government plans to develop road projects spanning 50,000 km and entailing investments of about $250 billion over the next five to six years. It has allocated Rs.55,000 crore to roads, topped by Rs.15,000 crore raised by the National Highways Authority of India (NHAI) through bonds. The total investment in roads including the rural Pradhan Mantri Gram Sadak Yojana allocation would be Rs.97,000 crore during FY 2016-17. This will certainly increase the pace of completion of road projects which would be closer to the proposed construction rate of 30 km per day rate in next 12-18 months. The strategy to push the stranded road projects is being vigorously pursued by the Ministry of Road Transport & Highways. The FM claimed that 85 per cent of these stranded projects have been already put back on track. While these figures seem to be too good to believe, the approach and the relentless efforts certainly needs to be lauded. NHAI has a target of awarding 10,000 km of projects this fiscal year, out of which 6,353 km of projects had already been awarded. The remaining are also expected to be awarded soon. An approval of nearly 10,000 km of national highways in FY 2016-17 is expected. I would tend to believe that most of these projects are likely to be awarded on the EPC and annuity model and hence may be a big positive, particularly for EPC companies focused on roads.

Road transport in passenger segment is to be opened up to the private sector by amending the Motor Vehicles Act to remove/reduce permit raj and allow more private participation.

Power

Key Budget announcement 

• Achievement of 100 per cent village electrification, i.e., 13,000 more villages to be electrified by May 1, 2018 – Rs.8,500 crore is allocated to Deen Dayal Upadhyaya Grameen Vidyutikaran Yojana (DDUGVY) and Integrated Power Development Schemes (IDPS) for FY 2016-17.
• Plans spanning 15 to 20 years to increase investment in nuclear power generation. Budgetary allocation up to Rs.3,000 crore per annum, together with public sector investments, will be leveraged to facilitate the required investment for this purpose.
• Clean Energy Cess levied on coal, lignite and peat has been renamed as Clean Environment Cess and increased to Rs.400 per tonne from Rs.200 per tonne earlier. While the 100 per cent village electrification by May 2018 is an ambitious target, it would certainly encourage investments in the next couple of years. This is also aligned to the government´s vision of providing power to all by 2019 and is essentially positive for transmission companies.

One of the biggest challenge which the Indian power sector is facing is access to reasonable means of finance. The twofold increase announced in the clean energy cess would be marginally denting the confidence of stakeholders in conventional power generation.

The capacity addition in the solar segment has briskly picked up over the last two years and is expected to dominate the capacity addition in the RE sector for the next few. However, the capping of Accelerated Depreciation benefit to 40 per cent will have a marginally retarding effect on the capacity addition. Power procurement would remain the biggest challenge to watch out for which the government has sought to address through the UDAY scheme.

Aviation
The government is working on the National Civil Aviation Policy 2015, which deals with a number of aspects such as safety, bilateral traffic rights, regional air connectivity, aeronautical Make in India, 5/20 Rule, etc., to create an ecosystem with a mission to provide safe, secure, affordable and sustainable air travel with access to various parts of India and the world. The major budget announcements were:

• Government to partner with state government to revive unserved and underserved airports, in order to boost regional connectivity.
• 10 of the 25 non-functional air strips with the Airports Authority of India also to be developed. Other recent policy updates.

FDI norms in certain segments in the civil aviation sector has been raised to 100 per cent from 74 per cent, thus allowing foreign general aviation charter operators and large ground handling companies to set up their own bases in India. These initiatives seem to be a firmed up step forward to lead a major push to the government´s regional connectivity plan. However, the overall corpus of investments towards airports might be on the lower end and may need to be revisited.

Ports

Key Budget announcement
The FM said that major ports have handled the highest ever quality of cargo and added their highest ever capacity. He also shared that a series of measures for modernising the ports and increasing their efficiency have been initiated. Citing plans for improving port infrastructure, the FM said that the Sagarmala project has already been rolled out and announced plans to develop new greenfield ports in the eastern and western coasts of the country. Approximately Rs.800 crore was allocated towards investment in waterways projects.

While the ports sector has a definite potential to be a game changer with fillip from the vibrant logistics sector, unfortunately, it remains grossly under-serviced (vis-a-vis other segments such as roads, railways, etc.) from an investment viewpoint. This concern should be addressed sooner than later to unlock the full potential of development along India´s huge coastline.

This article has been authored by Sandeep Upadhyay, MD&CEO, Centrum Infrastructure Advisory.