Jaitley takes a 360-degree view of infrastructure development

Image: Krishnendu Halder/ Reuters

 
That the finance minister of an emerging economy will emphasise on infrastructure creation is hardly a surprise. But, as Arun Jaitley tabled the Union budget in Parliament on Wednesday, he managed to impress with his holistic approach to infrastructure development as well: Jaitley’s budget speech was a recognition that physical and digital infrastructure needs to go hand in hand.

Allocating Rs 3.91 lakh crore in 2017-18 towards infrastructure development, the finance minister recognised the catalytic effect that government spending in the sector can have on spurring economic growth and creating new jobs. The size of the purse is estimated at around 2.5 percent of the country’s gross domestic product, according to Nomura. Out of this, a proposed investment of Rs 2.41 lakh crore is for the transportation sector—rail, roads and shipping included. The total outlay for infrastructure announced by Jaitley in last year’s budget was Rs 2.21 lakh crore.

“The thrust to sectors like infrastructure was inevitable and the government has allocated as much as 20 percent of the entire budgetary outlay to infrastructure alone,” R Shankar Raman, whole-time director and chief financial officer of engineering conglomerate Larsen and Toubro, told CNBC-TV18 on Wednesday. “But it remains to be seen how the government will fund these projects. Predictably, the funds will come from the government, but the government could have widened bond market participation through concession-laced infrastructure bonds.”

Kiran Mazumdar-Shaw, chairperson of Biocon, India’s largest biopharma company, told Forbes India that the spending announced by the finance minister on infrastructure needed to be examined in granularity to assess how much of the expenditure would be on the creation of physical infrastructure and how much on digital. “While the government has announced a lot of measures in the recent past to enable digital transactions, the country will need the supporting digital infrastructure.”

Touching upon the railways sector first, Jaitley recognised that the sector was facing “stiff competition” from private-operated sectors like aviation and shipping. “Transformative measures have to be undertaken to make Indian Railways competitive and retain their position of pre-eminence,” he observed, announcing that the railways will implement an end-to-end integrated transport solution for select commodities through partnership with logistics players.

In a further digital push, the finance minister withdrew the service charge levied on rail tickets purchased online from the IRCTC (Indian Railway Catering and Tourism Corp Ltd) website. “It will be our continuing endeavour to improve the operating ratios of the railways. Tariffs will be fixed taking into consideration cost, quality of service, social obligations and competition from other modes of transport,” Jaitley said.

In light of the recent spate of rail accidents across the country, he also proposed to create a Rs 1 lakh crore fund over five years, called the Rail Sanraksha Kosh, to improve the safety standards of Indian Railways. Funds from this corpus—comprising seed investment from the central government and additional resources mobilised by the railways on its own—will be utilised for various safety works by leveraging “expert international assistance”, Jaitley said.

Said Biswanath Bhattacharya, partner, infrastructure and government services, KPMG India, “The set of initiatives announced seem to acknowledge the challenge that the railways is losing share in both freight and premium passenger services to alternate modes of transport, and hence an integrated approach to improving safety, cleanliness and passenger comfort, and higher levels of service to freight customers through end-to-end services have been introduced in this budget.”

Jaitley also stated that key public sector undertakings in the railways, including IRCTC and Ircon International, will be taken public to mobilise further funds for developmental work.

“Listing of key railway enterprises on stock exchanges will lead additional sources of funds for the railways and better governance mechanisms,” says Vishwas Udgirkar, partner at Deloitte Touche Tohmatsu India.

Moving on from the railways to civil aviation, Jaitley said select airports in Tier-II cities will be taken up for operations and maintenance through the public-private partnership route. The Airport Authority of India Act will also be amended to enable effective monetisation of land assets and the resources thus generated will be used to upgrade these airports. 

In the roads sector, Jaitley stepped up the budgetary allocation towards the construction of highways from Rs 57,976 crore in 2016-17 to Rs 64,900 crore in 2017-18,. He also said the government had identified 2,000 km of coastal roads that will be built to facilitate better connectivity between ports and remote villages.

Jaitley focussed on augmenting India’s digital infrastructure as well, without which the government’s ambition of converting India into a digital economy can’t be realised. He announced an allocation of Rs 10,000 crore towards the BharatNet project, through which the government aims to connect India’s towns and villages with high-speed internet by laying an extensive network optical fibre cables (OFC). The finance minister stated that around 1.55 lakh km of OFC had already been laid across the country. “By the end of 2017-18, high speed broadband connectivity on optical fibre will be available in more than 1,50,000 gram panchayats, with wi-fi hotspotsand access to digital services at low tariffs,” Jaitley said. “DigiGaon initiative will be launched to provide telemedicine, education and skills through digital technology.”   

The finance minister also brought cheer for a section of developers by according infratsructure status to affordable housing projects. The move would help builders secure institutional funding at competitve interest rates. “This was a long-awaited announcement. While we are yet to read the fine-print, this is indeed an important step to promote access to priority lending thereby spurring supply of low cost housing units across various cities,” says Anshuman Magazine, chairman, India and South East Asia at property consulting firm CBRE India. “Relaxation in area measurement as well as completion timelines to seek tax exemption are welcome steps.”

Added Brotin Banerjee, managing director and chief executive of Tata Housing, “Easy and dedicated access to institutional financing, and higher limit on external commercial borrowings will attract more investments and assure sustained growth of affordable housing in India, making it the core driving segment for real estate. On the other hand, long-term financing at lower rates will reduce costs of construction for developers allowing them to pass on benefits to consumers. The new status will increase the resource allocation for the sector, catalysing housing supply and reducing the supply gap.”

Two other announcements made by the finance minister are expected to boost private sector and foreign investment flowing into the infrastructure sector. The first such provision was allowing Minimum Alternate Tax (MAT) to be carried forward for 15 years, instead of 10 earlier. The second was the proposed abolishment of the Foreign Investment Promotion Board (FIPB) and further streamlining the process through which foreign direct investment is made in the country.

The finance minister also made some significant announcements with respect to the country’s energy infrastructure. Foremost among them was a proposed merging of several state-owned oil and gas companies to create an integrated national outfit that would be a global behemoth. “While the idea is certainly laudable which will strengthen the business and financial risk profile of the combined entity, the key challenge will be integration issues, especially on the human resources side,” said K Ravichandran, group head of corporate ratings at Icra Ltd. “Globally, the concept of stated owned oil majors is a well-established one, which confers several advantages to the stakeholders.”