Each year, the announcement of the Union Budget sets the pace for the following year, as it charts out the government’s action plan for the economy, includes crucial policy proposals, and gives a fair idea of the key areas of government focus. On February 1, 2017, Finance Minister Arun Jaitley presented Union Budget 2017-18. The budget announcement itself was a major departure from the trend that has been witnessed in the past years – its presentation was advanced to February 1 (end-February or early March in previous years), it was merged with the Railway Budget, and the classification of plan and non-plan expenditure was done away with. The exercise clearly mirrored the government’s thrust on reforms, so as to develop an enabling environment to facilitate greater economic activity.
The finance minister announced that the country’s current account deficit declined from about 1 per cent of GDP in 2015-16 to 0.3 per cent of GDP in the first half of 2016-17. Foreign direct investment (FDI) grew 36 per cent in the first half of 2016-17 over the same period in 2015-16. The fiscal deficit for 2017-18 is targeted at 3.2 per cent of GDP and 3 per cent for 2018-19. For infrastructure as a whole, the higher budgetary allocation reiterated the government’s commitment towards the space. The total allocation for the sector for the year 2017-18 stands at Rs 3.96 trillion, a significant increase from Rs 2.21 trillion in 2015-16. The budget prioritised infrastructure as one of its 10 distinct themes to improve efficiency, productivity and quality of life.
Indian Infrastructure gives a snapshot of key budget proposals across infrastructure sectors…
Infrastructure financing
- With regard to the much-awaited goods and services tax (GST), it was announced that the GST Council has finalised its recommendations on almost all the pending issues, based on consensus over the course of nine meetings that it held. Besides, the preparation of an information technology system for GST is also on schedule. Extensive efforts to reach out to trade and industry players will start from April 1, 2017, to make them aware of the new taxation system.
- Meanwhile, affordable housing has been accorded infrastructure status. This will provide cheaper sources of finance and will also open up additional avenues for developers to raise funds. The segment will now be given priority lending status. There has also been an increase in allocation for the Pradhan Mantri Awaas Yojana – Gramin, from Rs 150 billion in 2016-17 to Rs 230 billion in 2017-18.
- It is proposed that the Foreign Investment Promotion Board (FIPB) will be abolished in 2017-18 and further liberalisation of the FDI policy is under consideration. There is also a proposal to introduce a mechanism to streamline institutional arrangements for dispute resolution in infrastructure-related construction contracts, public-private partnerships (PPPs) and public utility contracts, as an amendment to the Arbitration and Conciliation Act, 1996.
- A concessional withholding rate of 5 per cent charged on interest earned by foreign entities on external commercial borrowings or on bonds and government securities has been extended to June 30, 2020. This benefit is also extended to rupee-denominated (masala) bonds. The move is likely to ratchet up fund-raising activity through these routes.
- It has also been proposed to exempt foreign portfolio investors (Category I and II investors) from the indirect transfer provision, a move that is expected to correct the net outflow of equity financing, which has been occurring since 2015-16.
- Minimum alternate tax credit is allowed to be carried forward up to a period of 15 years instead of the 10 years at present.
- It has been proposed to allow systemically important non-banking financial companies (NBFCs) regulated by the Reserve Bank of India (RBI) and above a certain net worth, to be categorised as qualified institutional buyers. This will provide them with a greater number of platforms to raise funds, which, in turn, is expected to increase their on-lending activities to sectors such as infrastructure.
- Listing and trading of security receipts issued by a securitisation company or a reconstruction company under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 will be permitted in Securities and Exchange Board of India-registered stock exchanges. This will enhance capital flows towards the securitisation industry and will be particularly helpful in dealing with the banking sector’s problem of non-performing assets.
Railways
Each year, the railways have been one of the key investment areas of the government. For 2017-18, the total capital and development expenditure of the railway sector has been pegged at
Rs 1.31 billion. A noteworthy announcement has been the proposal for floating equity of public sector units (PSUs) in the sector, in a bid to bring in greater accountability and unlock the full potential of these entities.
The government will put in place a revised mechanism and procedure to ensure the time-bound listing of identified central public sector enterprises on the stock exchanges. The shares of railway PSUs such as the Indian Railway Catering and Tourism Corporation, Indian Railway Finance Corporation Limited and IRCON will be listed.
Some of the targets for infrastructure creation have been 3,500 km of railway lines to be commissioned in 2017-18, the award of at least 25 stations for redevelopment, and the elimination of unmanned level crossings on broad gauge by 2020. In the next three years, the throughput is proposed to be enhanced by 10 per cent. This will be done through the modernisation and upgradation of identified corridors. For passenger safety, the Rashtriya Rail Sanraksha Kosh will be set up with a corpus of Rs 1 trillion created over a period of five years.
Roads
The central government has allocated Rs 649 billion to the Ministry of Road Transport and Highways (MoRTH), an increase from Rs 579.76 billion (budget estimates) and even higher than the revised estimate of Rs 524.47 billion allocated during 2016-17.
A total of Rs 647.71 billion has been allocated for central sector schemes/projects of which Rs 238.91 billion has been allocated to the National Highways Authority of India (NHAI). The government has increased its financial support to NHAI to Rs 831.7 billion for 2017-18, as against Rs 742.55 billion in 2016-17 (revised estimates).
About 2,000 km of roads to enhance coastal connectivity have been identified for construction and development. This will facilitate better connectivity with ports and remote villages on the coasts. It was announced that the pace of road construction under the Pradhan Mantri Gram Sadak Yojana (PMGSY) accelerated to 133 km of roads per day in 2016-17, against an average of 73 km during 2011-14. The government has taken up the task of connecting habitations with more than 100 persons in the left-wing extremism-affected blocks under the PMGSY. These habitations are expected to be covered by 2019 and the total allocation for the PMGSY (including the states’ share) is Rs 270 billion for 2017-18.
Power
The government has allocated funds amounting to Rs 138.81 billion to the Ministry of Power, an increase of 32.5 per cent over the
Rs 104.76 billion (revised estimate) allocated during 2016-17. The allocations for central sector schemes stood at Rs 122.78 billion, marking an increase of 31.2 per cent over the Rs 93.58 billion in the previous year.
Of the allocations under central schemes, the Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) has been allocated Rs 48.14 billion (an increase of 43.7 per cent over the previous year) and the Integrated Power Development Scheme has been allocated Rs 58.21 (an increase of 28.67 per cent over the previous year).
Given the progress towards achieving the 100 per cent rural electrification target by May 2018, which will be sustained by higher funding support under the DDUGJY, energy demand is expected to rise. Higher allocation for infrastructure too bodes well for generation companies, as it will lead to higher demand for power. However, the capacity of discoms to play their part in bridging the demand-supply gap will be a crucial determinant.
Renewable energy
- Funds to the tune of Rs 54.73 billion have been allocated to the Ministry of New and Renewable Energy (an increase of 25.52 per cent over the previous year). A key budget announcement has been support for the second phase of solar park development for an additional capacity of 20,000 MW and the powering of 7,000 railway stations with solar power. In order to boost the Clean Energy Programme, some significant announcements have been made:
- The government has proposed zero basic customs duty (BCD) (from the current 5 per cent) on solar tempered glass for use in the manufacture of solar cells/panels/modules. It has been further proposed to reduce the countervailing duty (CVD) on parts/raw materials for the manufacture of solar tempered glass to be used in solar photovoltaic cells/modules, solar power generating equipment or systems, flat plate solar collectors, solar photovoltaic modules and panels for water pumping and other applications, to 6 per cent from the existing 12.5 per cent.
- There is a proposal to reduce BCD, CVD and special additional duty (SAD) of 24 per cent on resin and catalysts for the manufacture of cast components for wind-operated energy generators to 5 per cent. Zero excise duty on these materials from the existing 12.5 per cent has also been proposed.
- There is also a proposal to levy 6 per cent excise duty on solar tempered glass. At present there is no excise duty.
- The reduction of BCD, CVD and SAD of 30 per cent on all items of machinery required for balance of systems operating on biogas/biomethane/by-product hydrogen to 11 per cent is also proposed. Further, excise duty on these materials is to be reduced to 6 per cent from 12.5 per cent. There is another proposal to levy 5 per cent BCD on all parts and inputs used in manufacturing LED lights.
Overall, there are still a number of areas that require government support which remain unaddressed. The allocation of funds to mitigate financial risks plaguing the segment by developing and institutionalising innovative government-backed financial instruments could have been a potential game changer.
Aviation
The aviation sector has been allocated Rs 27.02 billion as the central outlay (to the Ministry of Civil Aviation) marking a nearly 22 per cent fall over the Rs 34.52 billion (revised estimate) allocated for 2016-17. The original budget allocation for 2016-17 was Rs 25.91 billion.
Budgetary support of Rs 18 billion has been provided for equity infusion in Air India Limited and the Airports Authority of India (AAI) has been provided Rs 1 billion. Some key proposals have been the exemption of service tax on viability gap funding payable to airline operators under the Regional Connectivity Scheme (RCS), for a period of one year. The government has also focused on the upgradation of airports in Tier II cities through the PPP route as well as through resources raised via the effective monetisation of land assets.
The overall impact of the budget on the aviation sector has been neutral, with no major announcements made. The focus on enhancing regional connectivity through the PPP route bodes well for private sector participation, which is lacking at present owing to several issues and challenges.
Oil and gas
The government has proposed an expenditure of Rs 291.58 billion (budget estimate) for the Ministry of Petroleum and Natural Gas (MoPNG)
during fiscal year 2017-18, with no change from the Rs 291.6 billion (budget estimate) that was proposed for the preceding fiscal year. The revised estimate for 2016-17 stands at Rs 302.42 billion.
The establishment of an integrated oil and gas PSU has been proposed. The new entity will be an “oil major” that will be able to match the performance of international and domestic private sector oil and gas companies. Often discussed and voted against several times in the past, the proposal has received some encouragement from the industry.
A key move has been halving the customs duty on liquefied natural gas (LNG) from 5 per cent to 2.5 per cent, in line with the government’s vision of becoming a more gas-based economy. The customs duty cut will lower the input cost for petrochemical manufacturers such as GAIL (India) Limited and Reliance Infrastructure Limited, which are dependent on imported LNG for feedstock and fuel requirements.
Two more strategic oil reserves have been proposed to be set up at Chandikhole (Odisha) and Bikaner (Rajasthan) that will increase the strategic reserve capacity to 15.33 million metric tonnes. Meanwhile, in a major relief to foreign players, it has been stated that in the case of foreign companies, sale of the leftover stock of crude oil (in the case of strategic petroleum reserves) after the expiry of the agreement or the arrangement, subject to fulfilment of certain conditions, will not be liable to tax in India.
Urban infrastructure
The government has announced a central plan outlay of Rs 342.12 billion for the Ministry of Urban Development (MoUD), significantly higher than the previous year’s budget outlay of Rs 166.05 billion.
The centre has made specific allocations to three of its major urban infrastructure development programmes – the Swachh Bharat Mission, the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and the Smart Cities Mission. For the Swachh Bharat Mission (Urban), allocations to the tune of Rs 23 billion have been made, which is the same as the budget and revised estimates for 2016-17. Besides, Rs 90 billion has been set aside under the MoUD’s Urban Rejuvenation Mission, lower than the 2016-17 revised estimates of Rs 95.59 billion. For the upcoming fiscal year, about 55 per cent of this allocation (or Rs 50 billion) has been made towards AMRUT. The remaining Rs 40 billion has been allocated towards the Smart Cities Mission. The government has also allocated Rs 22.5 billion to the Namami Gange programme, marginally higher than the budgeted outlay of Rs 21.5 billion in 2016-17.
Meanwhile, in the urban transport segment, a new Metro Rail Policy will be announced with a focus on innovative models of implementation and financing, as well as standardisation and indigenisation of hardware and software. Further, a new Metro Rail Act will be enacted by rationalising existing laws. This will facilitate greater private participation and investment in construction and operation. The new metro act could result in greater private sector participation in the sector going forward.
Telecom
For 2017-18, the government has allocated Rs 100 billion for the BharatNet project, which aims at providing high speed broadband connectivity on optic fibre to over 150,000 gram panchayats. A DigiGaon initiative will be launched to provide telemedicine, education and skill enhancement through digital technology.
In a major step that is likely to impact the mobile handset industry, the government has proposed the levy of a 2 per cent SAD on populated printed circuit boards used in mobile phones. It has also announced incentives worth Rs 7.45 billion for electronic manufacturing in the country. Further, it has encouraged banks to install 2 million Aadhaar-based points of sale and has proposed the introduction of an Aadhaar-enabled payment system to encourage digital payments.
The overall impact on the sector is positive, as the government is seeking to increase the penetration of digitisation and improve broadband connectivity in the country. The move will increase overall data use by the population, which, in turn, is likely to give some buoyancy to telecom companies’ revenues.
Ports and shipping
The Ministry of Shipping has received an allocation of Rs 17.73 billion (budget estimates), higher than the budget estimate of Rs 15.31 billion and revised estimate of Rs 14.54 billion for 2016-17. Of the total allocation in 2017-18, Rs 6 billion has been allocated for the Sagarmala programme, Rs 3.51 billion for inland water transport, Rs 2.33 billion for the development of ports, Rs 120 million for shipping and shipbuilding, among others.
Meanwhile, the announcement of a specific programme to implement the development of multimodal logistics parks, together with multimodal transport facilities, is likely to improve port connectivity and benefit the port logistics segment. The expected reduction in transit time and overall costs will benefit exporters and importers. Ports will benefit by way of faster evacuation of cargo and increased trade volumes. Overall, while the focus of the government on the inland waterways segment and the Sagarmala project continues, the budgetary allocation seems insufficient vis-à-vis the investment required in the sector.
In sum
While there were very high expectations from Union Budget 2017-18, only some have been met. GST is yet again a cliffhanger. For infrastructure, the overall increase in budgetary allocation is a cause for cheer; however, institutional reforms have been missed out.
Net, net, the impact is fairly positive, especially in sectors such as railways, where some prudence and tough decisions are reflected. The proposal to introduce a mechanism to streamline institutional arrangements for the resolution of disputes in infrastructure has brought much relief. However, it remains to be seen how noteworthy announcements such as the Metro Rail Policy will take shape.
