Views of K. Rajaraman: “The economy, at large, is recovering”

“The economy, at large, is recovering”

K. RajaramanThe Ministry of Finance recently announced a Rs 6 trillion National Monetisation Pipeline (NMP) scheme that will unlock value in infrastructure assets across sectors, ranging from power to road to railways. At a recent India Infrastructure Forum event, K. Rajaraman, additional secretary, Department of Economic Affairs, Ministry of Finance, discussed the impact of the Covid-19 pandemic on the infrastructure sector, and the major reforms initiated by the government in this regard. Excerpts…

Impact of Covid-19 on infrastructure

The impact of the second wave of Covid-19 on the Indian economy has been less severe compared to the first wave, since the government was able to tackle the new wave with more informed strategies. Various indicators such as freight, toll collection and power consumption remained robust during the second wave. Exports and foreign direct investment also performed well during the period. The capital markets witnessed encouraging performance in terms of foreign direct investments and initial public offerings. The banking sector reforms in the past five to six years paid off well in terms of the resilience of banks against shocks. The recapitalisation of banks, the Insolvency and Bankruptcy Code (IBC) and refinements to the IBC contributed to a strong and resilient banking sector. Many large corporates have deleveraged, and there is considerable scope for credit growth in the coming months. Meanwhile, some sectors, such as civil aviation, and hospitality, have been facing issues and they will take some time to get back on track. The economy, at large, has recovered well. Going forward, we a lot of services such as health and education reinventing themselves and going digital. Besides, sustainable investment will be an important feature of the new world.

The pandemic has presented various opportunities, which have been seized by both the government and the regulators to launch reforms that will help in achieving higher growth and lead us into the new world. One of the major reforms in the infrastructure sector is the setting up of the National Bank for Financing Infrastructure and Development with a starting capitalisation of Rs 200 billion, which will go up to Rs 1 trillion. This is expected to strengthen and lower the cost of infrastructure finance, particularly long-term debt finance, in India. In addition, the government has approved a Rs 60 billion equity infusion into the National Investment and Infrastructure Fund debt platform. The Securities and Exchange Board of India has announced reforms for redirecting the debt requirement of large listed entities towards bond markets. These new financial institutions, in combination with the regulatory push towards the bond market, are expected to create a robust debt finance source for the infrastructure sector.

Major reforms

Recently, the regulators announced some key reforms, including norms for declassification of sponsors for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), providing a legal framework to enable debt financing of REITs and InvITs by foreign portfolio investors and domestic investors, and a reduction in the trading lot size for REITs and InvITs to attract more retail investors. The government has also announced tax exemptions for specified infrastructure investments by sovereign wealth funds and pension funds up to March 2024.

So far, more than 20 entities related to sovereign wealth funds and pension funds have been notified by the Central Board of Direct Taxes as being entitled to receive tax exemptions from the government. The NMP and the National Infrastructure Pipeline will offer opportunities for long-term investors. Other types of tax benefits include the abolition of dividend distribution tax, tax deduction on dividend income at lower rates for foreign investors, making infrastructure debt funds eligible for raising funds by issuing tax efficient zero-coupon bonds, and exempting dividend payment to REITs and InvITs from tax deduction at source. In addition to this, the fiscal measures taken by the government include a significant increase in the capex budget, which is about 35 per cent more than the budget estimate of the previous fiscal, amounting to Rs 5.54 trillion for 2021-22. Various other measures have been put in place to incentivise higher capital outlays by state governments and local bodies. The government has also revamped the viability gap funding (VGF) scheme with a budget of Rs 81 billion to enhance the VGF for social infrastructure, health, education, waste water, solid waste management, water supply, etc. A number of applications from various state governments are currently under consideration.

NITI Aayog task forces

There are two task forces currently working under NITI Aayog. The task force on enforcement of contracts will make some recommendations relating to improving the enforcement of contracts in the country, especially in infrastructure, leading to higher investment confidence and lower level of uncertainty. Another task force is working on the dispute resolution and conciliation framework. NITI Aayog is also engaged with various ministries for preparation of sector-specific draft model concession agreements and for improving the existing drafts. The National Highways Authority of India has suggested new models of asset monetisation including the toll-operate-transfer model, the InvIT model and the special purpose vehicle model. The Ministry of Power is working on the design-build-finance-operate-transfer model for smart metering. The ministry is also introducing the Electricity (Amendment) Bill, 2021 to allow for multiple distribution companies to operate in the same area of supply. These measures will help in creating a much more robust electricity market and also enable better terms for consumers. Besides, the Ministry of Railways is working on initiatives such as privatisation of trains and monetisation of the dedicated freight corridors. Such monetisation initiatives across various ministries will enable the raising of necessary funds for financing greenfield infrastructure projects.

Making PPPs successful

Private players have greater appetite for engineering, procurement and construction projects rather than greenfield public-private partnership (PPP) projects. PPP projects involve a competitive bidding process and we expect bidders to avoid aggressive bidding.  Managing costs and choosing the appropriate technology and resources is the responsibility of the private sector. Ministries are working on improving the model concession agreements for PPP projects to ensure balanced and high quality PPP contracts. In order to address the issue of long-term finance, we need an institution that is a significant player in the long-term bond market. Hence, a development financial institution like National Bank for Financing Infrastructure and Development is the need of the hour.

In sum

The government is focusing on ramping up investment in the infrastructure sector to ensure fast-paced growth in the post-Covid world. In order to achieve this, the government has introduced a set of reforms and enhanced its capital outlay for the infrastructure sector. The state governments are also being incentivised to increase their respective capital outlays. The NMP will standardise the structuring of monetisation, besides offering more certainty to investors. Going forward, digitalisation and sustainable investment will be the paradigms of the post-Covid economy.