More than mere announcements

March 25, 2012 09:56 pm | Updated 09:56 pm IST

Infrastructure concerns have always figured prominently in all recent budgets. Budget 2012-13 could hardly have been an exception. The requirement of funds for infrastructure has been mounting year after year. The government has estimated that during the XII Plan infrastructure investment will go up to Rs.50 lakh crore, roughly half of it coming from the private sector. These are huge amounts and call for a substantial step up in public investment as well as concerted action to encourage private capital.

The Finance Minister devoted as many as 18 paragraphs in his budget speech to infrastructure and industrial development. In addition, the several steps to boost the financial sector, especially the capital market and banks, will have the salutary effect of boosting infrastructure funding.

Specific measures to deepen the capital market and encourage investment in the infrastructure sector include:

(a) Qualified foreign institutional investors (QFIs) will be allowed access to the corporate bond market.

(b) The IPO process will be simplified to lower the costs and will be made more accessible to investors even in small towns. And

(c) FII investment limits in long-term infrastructure bonds, corporate bonds and government securities have already been raised during the past year.

The assumption is that the measures, which boost equity markets, can stimulate infrastructure funding even though, strictly speaking, the latter is best served by a vibrant secondary corporate bond market. However, as of now the domestic corporate bond market itself needs to be reformed. It was also announced in the budget speech that certain important pending financial sector bills will be pushed through as soon as possible, many in the budget session itself. When enacted, they will widen the financial sector. That would enable foreign investors, including pension funds, insurance companies and others, with a penchant for long period debt instruments to put their money in India.

Simultaneously, dedicated infrastructure funds from India have been allowed to tap the overseas markets for long tenor pension and insurance funds. The first infrastructure fund with an initial size of Rs.8,000 crore was launched in early March. The quantum of tax-free infrastructure bonds that will be available next year is being increased to Rs.60,000 crore, double that of this year.

Public-private partnership

The emphasis on public-private partnership (PPP) for developing infrastructure projects continues and is evident in a number of budget announcements. The facility of viability gap funding, crucial for attracting private capital, is being extended to a number of new areas including irrigation, terminal markets and common infrastructure in agriculture markets. Governance issues in infrastructure development have been addressed: a harmonised list of the infrastructure sector has been approved by the government to help remove ambiguity in the policy and regulatory domain and encourage investment in the infrastructure sector.

Relaxing ECBs

Important as the above steps are, it is the relaxation in the ECB policy as announced in the budget that is both newsworthy as well as controversial.

The changes proposed seek to do away with a number of end-use restrictions of the funds borrowed from abroad, including use as working capital, repayment of rupee loans and the like. It will now be possible to use the ECB route to (a) part finance rupee debt of power projects; (b) capital expenditure on the maintenance and operations of toll systems for roads and highways, if they are part of the original project; (c) working capital requirement of the airline industry for one year, subject to a total ceiling of $1billion; (d) for low cost housing projects and setting up of a credit guarantee trust fund and the like.

Incentivise foreign lending

In a related move, it is proposed to incentivise foreign lending in select sectors including power and airlines. The budget has a proposal to reduce withholding tax on interest payments on ECBs from 20 to 5 per cent for three years.

These proposals have been welcomed by large sections of industry. The cost of borrowing through ECBs should be significantly lower than borrowing from banks in India.

The relaxation on the end-use of foreign currency borrowing is also considered positive as it gives the borrowing companies greater operational flexibility.

Yet, the ECB route is not the magic wand, providing Indian corporates to borrow cheaply without the rigmarole of having to comply with a number of covenants. It is a route, which, many times before, the government has frowned upon, not the least because it saddles the country with short-term debt. The budget relaxations may be intended to shore up external reserves but the debt that the ECBs create can make the external sector vulnerable.

For corporates, the biggest danger is that they carry a huge forex risk. The natural propensity of many borrowing foreign currency loans is not to hedge, even if it is available. With foreign exchange movements being so volatile, many corporates have come to grief.

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