Mukherjee proposes to address infrastructure deficit - Quoted in the Mint

To address deficits in India's infras­truc­ture, finance min­is­ter Pranab Mukherjee on Friday proposed measures, including exten­sion of grants giv­en by the govern­ment to make unprof­itable projects viable for private compa­nies to new sectors, increas­ing the lim­it on over­seas borrowing and reduc­ing with­holding tax on for­eign invest­ments. This comes at a time when the govern­ment has dou­bled the infras­truc­ture invest­ment tar­get in the 12th Five-Year Plan (2012-17) from the $500 billion ('25 trillion today) fixed for the 11th Plan that ends this month. Re­inforc­ing infras­truc­ture is key to achieving the govern­ment's tar­get of 9% annual growth for Asia's third largest econ­o­my. The grant, also known as viability gap funding (VGF), has been ex­tended to ir­rigation (including dams, channels and embank­ments), agri­cul­ture mar­ket infras­truc­ture, fertilizer, oil and gas (including liqui­fied nat­ural gas, or LNG) stor­age fa­cilities and pipe­lines, and the telecom sector.

VGF is at the centre of India's infras­truc­ture-cre­ation plans through public-private partner­ships and will help in meeting India's infras­truc­ture tar­get of '50 trillion for the 12th Plan as half of this funding is expected to come from private sector compa­nies. "Lack of adequate infras­truc­ture is a major constraint on our growth," Mukherjee said in his bud­get speech.

The bud­get focused on pro­viding respite to the cri­sis-hit Indian power and civ­il aviation sector. To bail out the fu­el short­age-hit power sector, the bud­get proposed scrapping the import duties on coal and LNG, enhance­ment of external commercial borrowing (ECB) lim­its to part-finance rupee debt of exis­t­ing power projects and reduc­ing with­holding tax on for­eign invest­ments.


Scrapping import lev­ies on coal will help meet the growing de­mand for the fu­el in a country where 70% of electricity is generated from it. In addition, a con­ces­sion­al counter­vailing duty of 1% on thermal coal till March 2014 was also an­nounced in the bud­get, along with customs duty exemption for coal mining projects. "The import duty waiv­er is likely to bring re­lief to power projects, partic­ularly those which are case II tariff-based com­pet­itively-bid projects where the bid clauses re­strict pass-through of high imported coal costs to the power pro­curers," said Dipesh Dipu, di­rector (consul­ting and mining) at consul­ting firm De­loitte Touche Tohmatsu India Pvt. Ltd.


While such exemptions will increase the de­mand for imported coal and help utilities such as Tata Power Co. Ltd and Re­liance Power Ltd that are setting up imported coal-based plants, they will also help state-owned Coal India Ltd's mining plans. An­a­lysts said reduc­ing the with­holding tax to 5% from 20% will boost over­seas invest­ment in the sector. This tax is charged on the repa­triation of income from eq­ui­ty or debt. "Abo­lition of customs duty on coal, coupled with reduction in CVD (counter­vailing duty) on coal imports, will reduce electricity cost for consumers and is a strong pos­itive," said Gautam Adani, chairman of Adani Group, which is among the largest coal importers in the country. "The waiv­er for thermal power compa­nies will be ben­e­ficial for upcom­ing projects. The re­moval of customs duty on imported coal, nat­ural gas, LNG, and the in­centives for the mining sector will marginally improve coal supply, but is still a far cry from achieving adequate fu­el secu­rity," said Anil Sardana, man­aging di­rector of Tata Power.


In addition, the bud­get also proposed ex­tending a tax hol­iday under section 80-IA of the Income-Tax Act for power projects, which ends on 31 March, by an­oth­er year. The law al­lows a devel­op­er to claim tax exemption of up to 10 years with­in the first 15 years of a project's op­erations. An additional de­preciation of 20% in the initial year, which has been ex­tended to newly acquired projects, will help consol­idation in the sector. In addition, the bud­get also an­nounced in­centives to promote the use of energy-ef­ficient appli­ances and light-emitting diodes. These an­nounce­ments were likely to be made in the bud­get, reported on 1 March.

Mukherjee al­lowed air­lines to access ECBs for working cap­ital require­ments for the year starting 1 April. Such a dispen­sa­tion, with a ceiling of $1 billion, will help financially stretched air­lines such as Kingfish­er Air­lines Ltd, Jet Airways (India) Ltd, SpiceJet Ltd and Air India Ltd. In addition, the finance min­is­ter also scrapped customs duty on aircraft parts and test­ing equip­ment for promoting third-party main­tenance, re­pair and overhaul indus­try.

Howev­er, Ajit Kr­ishnan, tax partner and lead­er of infras­truc­ture practice for consultancy firm Ernst and Young Pvt. Ltd, said the govern­ment had focused more on the power sector, where­as in the oth­er sectors, it did not make too many an­nounce­ments.
To boost the hous­ing sector, the bud­get al­lowed ECBs for low-cost affordable hous­ing projects and set up a cred­it guar­antee trust fund to pro­vide in­stitution­al cred­it for hous­ing loans. It also ex­tended the scheme that sub­si­dized inter­est on low-cost hous­ing by 1% by an­oth­er year. This will help compa­nies such as Tata Hous­ing Devel­op­ment Co. Ltd, Usha Breco Re­alty Ltd, Raheja Devel­op­ers Ltd and Val­ue and Bud­get Hous­ing Corp. "Op­erationalization of cred­it guar­antee trust fund could help lenders mobi­lize long-term funds and, therefore, reduce as­set liability mis­matches; diversify their funding sources and improve access to cap­ital mar­kets," said consul­ting firm Icra Ltd.

In addition to power and air­lines, Mukherjee acknowl­edged that sectors such as roads, bridges, ports, shipyards, hous­ing, fertilizer and dams were "stressed", and an­nounced a reduction in the with­holding tax to 5% from 20% for three years for the same.

In addition, the invest­ment re­strictions on ven­ture cap­ital funds will also be re­moved and full exemption be pro­vided to certain construction equip­ment such as tunnel bor­ing mach­ines that will aid in road-building. The bud­get also al­lowed over­seas borrowing for main­tenance and op­erations of toll systems for roads and high­ways. To enable access of cheap finance for infras­truc­ture projects, Mukherjee also an­nounced dou­bling the mon­ey to be raised through tax-free bonds next fiscal to '60,000 crore. In what will af­fect the financials of oil explorers such as Oil and Nat­ural Gas Corp. Ltd, Oil India Ltd and Cairn India Ltd, which has been acquired by Vedanta Resources Plc, the cess on crude oil under the Oil Indus­tries Devel­op­ment Act was increased by 80% to '4,500 per tonne. "The excise duty struc­ture for most petroleum prod­ucts has been ratio­nalized, with an ad val­orem levy of duty at the rate of 14% on most prod­ucts, while diesel, light diesel oil, etc., con­tinue to have a spe­cif­ic levy per litre in addition to the ad val­orem levy," Sa­loni Roy, tax partner at Ernst and Young.
The finance min­is­ter also al­lowed fertilizer compa­nies to raise mon­ey through ECBs.