Giving the much needed push to the infrastructure sector in the buget on Friday, Finance Minister, Pranab Mukherjee announced a slew of measures including allowing financial institutions to raise about Rs. 60,000 crore from tax-free bonds and opening decks for larger private participation.

Presenting the budget in Parliament, Mr. Mukherjee said investment in the sector during the 12th Five-Year Plan (2012-17) will go up to Rs. 50 lakh crore, about half of which is expected to flow from the private sector.

“Lack of adequate infrastructure is a major constraint on our growth. The strategy we have followed so far is to increase investment. For the year 2011-12, tax free bonds for Rs. 30,000 crore were announced for financing infrastructure projects. I propose to double it to raise Rs. 60,000 crore,” he said.

This would include Rs. 10,000 crore each for NHAI, IRFC, IIFCL and power sector, besides Rs. 5,000 crore each for HUDCO, National Housing Bank, SIDBI and ports. Increase in investment in the sector has been envisaged through a combination of public investment and public private partnerships (PPP).

To attract private investment, more sectors like irrigation, oil and gas storage facilities and telecommunication have been made eligible for viability gap funding under the scheme ‘Support to PPP in Infrastructure’. Also, the government has approved guidelines for establishing joint venture companies by Defence Public sector undertakings in PPP mode.

To encourage PPP in road construction projects, he announced allowing external commercial borrowings (ECB) for capital expenditure on the maintenance and operations of toll systems for highways. The allocation to the highways sector has also been enhanced by 14 per cent to Rs. 25,360 crore in 2012-13 and the government has set a target of covering a length of 8,800 km roads under NHDP next fiscal.

Ernst and Young partner, Ajit Krishnan termed the budget as positive for the infrastructure sector. “The impetus that the Finance Minister has put on investment in this sector will further strengthen the involvement of private sector to ensure an overall improvement in the current state of infrastructure in our country,” he said. 

From an income tax perspective, given the current power shortage, the Finance Ministry has rightfully extended the current provisions of tax holiday for power generation and distribution companies by one year to 31 March 2013. Additionally, to accelerate fresh investments in the power sector an additional depreciation of 20 percent has been allowed in the year of investment. To further facilitate borrowings in the infrastructure sector, the tax rate on interest on such borrowings has been reduced. Relaxation in the external borrowing provisions for the aviation sector will help in stabilization of this sector, which is otherwise bleeding profusely.