Budget Snapshot: India’s strategy for infrastructure development

India’s strategy for infrastructure development

The government, in its new avatar, has come out with an interesting yet ambitious budget. The finance minister has set the ball rolling to make India a $5 trillion economy, to be driven largely by a virtuous cycle of investment. With the country targeted to become a $3 trillion economy in 2019-20, the government has clearly stated its intent to outperform the achievements of the past five years. As always, infrastructure has attracted much attention. While the government already boasts of many big reforms in the areas of indirect taxation, bankruptcy and real estate, it now plans to enhance focus on affordable housing and rural connectivity.

Indian Infrastructure takes a look at some interesting announcements for the infrastructure sectors…

Decoding the budget

One of the core elements of the finance minister’s maiden budget speech was the development of physical and social infrastructure. The government has announced its intention to invest Rs 100 trillion in infrastructure over the next five years. In a bid to boost connectivity, it will continue to focus on key programmes/projects such as the Pradhan Mantri Gram Sadak Yojana (PMGSY), industrial corridors, dedicated freight corridors, Bharatmala, Sagarmala, the Jal Marg Vikas Project (JMVP) and the Regional Connectivity Scheme.

Power: The new government has proposed a package for the power sector and has announced plans to launch tariff and structural reforms in the sector in Union Budget 2019-20. Accordingly, the government will work with state governments to remove barriers such as cross-subsidy surcharges and undesirable duties on open access sales and captive generation for industrial and other bulk power consumers. The government will also build on the One Nation, One Grid model to ensure power availability to states at affordable rates. In addition, the government is examining the performance of the Ujwal Discom Assurance Yojana to improve it further.

Further, the government will launch a scheme to invite global companies through competitive bidding to set up mega-manufacturing plants in advanced technology areas such as solar photovoltaic cells, lithium storage batteries and solar electric charging infrastructure, among others. In addition, the goods and services tax on e-vehicles has been reduced from 12 per cent to 5 per cent to promote e-mobility. Customs duty on all forms of uranium ores and concentrates for nuclear power generation has been removed. Customs duty for all goods required for setting up nuclear power plants has also been removed.

Roads: In the road sector, plans are afoot to launch Bharatmala 2.0 to help states develop their road networks. The government will also carry out a comprehensive restructuring of the National Highways Development Programme to ensure that the national highway grid of the desired length and capacity is created using a financeable model.

The government has given a major push to rural connectivity through the PMGSY. PMGSY III has been envisaged to upgrade 125,000 km of road length over the next five years, at an estimated cost of Rs 802 billion.

Railways: The railway sector will require an investment of about Rs 50 trillion towards infrastructure development between 2018 and 2030. The government has proposed that public-private parternships (PPPs) be used to promote faster development and delivery of passenger freight services for railway projects to boost connectivity. Meanwhile, Indian Railways (IR) will also be encouraged to increase investments in suburban railways through special purpose vehicle structures such as the rapid regional transport system proposed on the Delhi-Meerut route. The government will also launch a massive railway station modernisation programme.

Aviation: As the world’s third largest domestic aviation market, the time is ripe for India to explore aircraft financing and leasing activities from its shores. This is critical for developing a self-reliant aviation industry and creating aspirational jobs in aviation finance, besides leveraging business opportunities available in India’s financial special economic zones, of which, the International Financial Services Centre is an example. The government will implement the essential elements of the regulatory roadmap for making India a hub for such activities.

For providing an enabling ecosystem for the growth of the maintenance, repair and overhaul (MRO) industry, it is proposed to leverage India’s engineering advantage and potential to achieve self-reliance in this vital aviation segment. There will be suitable policy interventions to create a conducive atmosphere for the development of the MRO segment.

Oil and gas: In the oil and gas sector, the government has proposed the provision of another 80 million free liquefied petroleum gas connections under the Pradhan Mantri Ujjwala Yojana. So far, nearly 70 million free connections have been given. Under the scheme, the government gives the security deposit for a cylinder and regulator to the oil companies on behalf of the customer. However, the consumer still has to pay for the gas.

The 2019-20 budget also proposes the imposition of additional excise duty and road cess of Re 1 per litre each on petrol and diesel. In addition, an amount of Rs 15.52 billion has been earmarked for GAIL (India) Limited’s Phulpur Dhamra-Haldia pipeline project.

Ports and shipping: In this sector too, the government has proposed several initiatives to ramp up infrastructure development across all segments, including seaways. There is a need to develop inland waterways to shift a significant portion of inland cargo movement from road and rail. As part of the JMVP, to enhance the navigational capacity of the Ganga river, a multimodal terminal at Varanasi was operationalised in November 2018, and another two such terminals at Sahibganj and Haldia and a navigational lock at Farakka are expected to be completed during 2019-20. The movement of cargo volumes on the river is estimated to increase nearly fourfold in the next four years. This will make the movement of freight and passengers cheaper and help reduce the fuel import bill as well.

Urban infrastructure: The Ministry of Drinking Water and Sanitation and the Ministry of Water Resources and Ganga Rejuvenation have been merged to form the Ministry of Jal Shakti. The ministry, which is executing the government’s mission of providing clean and piped drinking water to every household in the country, has been allocated Rs 287 billion in the budget. The Ministry of Housing and Urban Affairs has been allocated Rs 480 billion against Rs 430 billion in 2018-19, with distinct allocations for the Swachh Bharat Mission, the Atal Mission for Rejuvenation and Urban Transformation and the Smart Cities Mission.

Telecom: In the telecom sector, the government has announced its plans to use the Universal Service Obligation Fund corpus to speed up the BharatNet programme to boost rural broadband penetration under the PPP model. Further, the government has announced a hike in basic customs duty on optic fibre. The government has also stated that it is planning to ease local sourcing norms for the single-brand retail sector. The move is aimed at attracting higher foreign investment into the country. For the telecom industry, the move is likely to help all foreign handset companies such as Apple, OnePlus and Oppo in expanding their retail operations.

Money matters

A number of enabling financial reforms have also been announced. As per the budget announcements, the transfer of foreign institutional investment and foreign portfolio investment in debt securities issued by infrastructure debt fund non-banking financial companies to domestic investors will be allowed.

Further, the minimum public shareholding in listed companies can now be increased from 25 per cent to 35 per cent. The credit guarantee enhancement corporation is also likely to be set up in 2019-20. An action plan to deepen markets for long-term bonds with specific focus on infrastructure sectors will also be put in place.

To deepen the corporate tri-party repo market in corporate debt securities, the government will work with regulators to enable stock exchanges to allow AA-rated bonds as collateral. Besides, liberalisation of foreign direct investment in aviation has also been announced.

The government has also set an enhanced target of Rs 1.05 trillion of disinvestment receipts for 2019-20 and the process of strategic disinvestment of Air India will be reinitiated.

Long-term growth envisioned

The target to make India a $5 trillion economy in the next five years is not easy to achieve. While the government has reiterated its focus on the development of physical and social infrastructure, creating adequate financial comfort is a much-needed step. There has been substantial growth in the past five years without much private participation in infrastructure projects. This, however, is not a sustainable model for an economy as large as India. The positive is that sectors such as airports and roads are starting to attract private investment through the recent rounds of privatisation and asset monetisation respectively. However, railway modernisation is one area where there is enormous potential for private investment and involvement. Several experts and industry veterans have repeatedly argued in favour of the government’s involvement being restricted to building infrastructure and then handing it over to the private sector for operations and maintenance. This strategy will aid in faster infrastructure creation in the near to medium term.