Budget 2011 wish-list: The infra sector

CNBC-TV18 special pre-budget presentation “Development Agenda” puts the spotlight the crucial issue of
infrastructure in India — a deficit that perhaps poses the biggest challenge for the economy in its
aspiration to achieve a sustained double-digit economic growth. Capacity constraints, lack of investment,
governance are some of the issues plaguing the sector.
The infrastructure investment is a key factor to attain 9% and higher economic growth. However, there is
a big gap in infrastructure targets and achievements with progress slow in several sectors. A recent
McKinsey study estimates that if current trends continue, India could suffer a GDP loss of USD 200 billion
or 10% of GDP by FY17. The three key reasons for this are shortfalls in awarding projects, time and cost
overruns in construction phase and potential funding shortfalls. The need for funds is enormous with the
requirement pecked at Rs 12,73,557 crore in FY11 and FY12. Of this, Rs 7,07,764 crores are expected
from debt and equity.

If the government is serious about addressing the funding bottlenecks for the infrastructure sector, it will
have to start taking immediate steps starting from this year itself. That would not only involve the creation
of dedicated debt funds, it would also mean a regulatory framework for developing a deep and robust
bond market.
Besides a vibrant corporate bond market, the future roadmap involves reforms and interventions in the
areas of insurance, pension funds, resolution of equity issues asset classification of infrastructure loans,
and strengthening of institutional mechanisms to promote financing initiatives.
Infrastructure development is the most important thing to attain and sustain 9% or perhaps double-digit
economic growth. Yet, the results on the ground show that perhaps progress has been mixed at this
stage.
CNBC-TV18’s Siddharth Zarabi caught up noted infrastructure expert, Vinayak Chatterjee, chairman of
Feedback Ventures to discuss the issue concerning the infra space.
Below is an excerpt of the interview. For complete discussion, watch attached videos.
Q: Let me begin by asking you about your recent article you wrote about the infrastructure sector.
You said that the Union Budget, which is coming shortly, perhaps has a limited ability to finance
infrastructure development, yet it can send out a very important signal and create an enabling
environment in the infrastructure development. So what should Pranab Mukherjee do in the
forthcoming budget for the infrastructure sector?
A: It is true actually. You know the Union Budget, traditionally, has expectations on two fronts. The big
expectation is that it will provide some tax beaks and tax incentives and tax holidays. That is the
traditional notion of the budget. The other is that it will devolve a huge amount of funds towards
infrastructure development. Now increasingly, both these hypothesis are not true.
Q: Why is that?
A: I’ll tell you why. Honestly, there has been a signal from the government saying that as we move
towards the Direct Tax Code and other issues and get tax rates to international standards, the industry
should make less and less demands for tax breaks. I think we respect that point of view. So since you
read my article you realize my point of view by saying we are not asking for tax breaks. Your second point
that the budget cannot finance India’s infrastructure, it is very true. While last year’s budget had 46% of
the allocation devoted to all aspects of infrastructure under various schemes, but the total impact of that
would not be more than financing 7-10% of India’s infrastructure needs.
Q: Annually perhaps we will need USD 100 billion.
A: You need that in the 11th Plan. Now the broad target in the 12th Plan is USD 1000 billions, which
means you need USD 200 billion, right? Now USD 200 billion per annum is not within the scope of the
annual budget. So on both these points, of what I would say tax concessions, as well as making huge
chunks of financing available, the budget is not the vehicle anymore. But, what is it relevant to us for?
Q: That is the key question. What should Pranab Mukherjee be doing? What are the top three
demands so to say of the infrastructure sector that should be addressed in the forthcoming
budget?
A: Let me start with the financing angle first. The top two demands first is that India requires a long-term
debt for infrastructure. All of us have been discussing in the media, in seminars, that there is an asset
liability mismatch from the commercial banks. Therefore, the government appointed a committee headed
by Deepak Parekh, and that committee created the idea of Rs 50,000 crores debt fund.
When president Obama came, that same idea was picked up and the US whole-heartedly supported the
idea and said, “We will participate, we will contribute” and it was called the USD 11 billion debt fund. So,
first thing in this budget, we are expecting that idea to get rolled out.
Q: In what form?
A: By announcing exactly when the developers and promoters can start accessing money from that long-
term debt fund. That is all we want.
Q: But how easy is it going to be? There was a similar sort of fund that was talked about. It was
somehow linked to our foreign currency reserves. The success of that has been very mixed.
A: But it has been implemented. I mean today you can go to the IIFCL office in London and get that long-
term fund, which is based on our USD 5 billion of forex reserves earmarked for it. But they have made it
operational. There may operational difficulties but it was an idea that it was turned into practice.
Q: So why do you need a separate fund?
A: As that one is only for import items that required for foreign exchange. Cement, steel etc are not
imported, so we don’t need a forex fund to fund this in foreign exchange. Now, we require a rupee debt
fund.
Q: And you are saying USD 11 billon?
A: Yes, USD 11 billion was all over the media. You guys reported on it when president Obama was here,
so we want that operationalised. The second point is you must have seen in the last few months, the infra
NBFCs like IDFC, L&T Finance, etc, I think did a very good thing. They picked up this whole challenge of
saying, “We must pick up retail investors, household savings, and channelize it through infrastructure.”
But the bond structure of the whole combination of interest rates, tenure, tax break etc, was not as
attractive as the public wanted to be. So what has the government done? The government has appointed
Dr Rakesh Mohan to do a quick fix and come up with the policy package, that would make channelizing
retail saving through these infra NBFCs into the infrastructure debt market — an easier exercise. So we
are actually waiting to see a new unveiled package that will enable based on Dr Mohan’s report to
actually channelize these household savings into infra bonds. So, on the finance side we are looking at
these two.
But moving on, I think the real expectation is as you right said in your opening demand was the budget of
today signals certain major interventions on what broadly caused the enabling environment. Now, what
are the expectations or what have I written in that article? I think one of the first things that we have asked
for is that define infrastructure. India has 14 official definitions of infrastructure.