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Bar set high for FM

29 February, 2016

To say that the infrastructure sector ought to be an area of focus for the government is perhaps an understatement. Reforms in the infrastructure sector, reviving of stalled projects, ensuring adequate supply of coal for power generation and restructuring debt of public utility companies have attained paramount importance considering the significant underinvestment in the ramp up of infrastructure over the past several decades. More importantly in light of the ever ambitious flagship schemes, such as Make in India, which are dependent on availability of quality infrastructure in the form of roads, ports, airports, power and so on.

The Economic Survey 2016 tabled in the parliament on Friday states that the Indian economy has emerged as the fastest growing economy in the world with a high growth rate of over 7% and attributes the growth rate to policy measures taken by the government for creating enabling environment for industrial growth which has resulted in increased foreign direct investment inflows and better performance of the infrastructure sector.

The Survey paints a fairly rosy picture of the performance of the power sector.  The survey points out several steps undertaken for increasing power generation, and strengthening of transmission and distribution network. While the progress on the power sector is encouraging, the situation on the ground is far from ideal and the sector still requires urgent and immediate attention especially in areas such as development of transmissions corridors, financial restructuring of distribution companies and tariff rationalisation. The survey also points out various initiatives taken by the government on other sectors such as coal, railways, road and the like. While the infrastructure sector as such is heavily regulated and the policy reforms required by each of the sub segments within the umbrella of infrastructure are extremely specific, a common set of problems plague each of these sub segments within the infrastructure space.

One of the key challenges plaguing the infrastructure projects is the availability of affordable long-term funding. With the balance sheets of banks under increasing stress due to non-performing assets coupled with loss of investor appetite on account of litigation and long gestation periods, several key infrastructure projects are starved for want of equity and leverage.  This area definitely requires urgent attention. An early kick-start to the proposed National Investment and Infrastructure Fund along with further relaxation in the external commercial borrowings regulations would be a welcome relief. Similarly, infrastructure investment trusts (InvITs) hold a significant promise to bring in large-scale institutional investments. While the regulatory policy around InvITs is largely in place, the tax policy is still far from ideal.  Infrastructure developers should be provided exemptions to directly transfer assets into InvITS. Also, the tax laws need to provide exemption from dividend distribution tax for profits distributed by infrastructure holding special purpose vehicles to InvITS.

Sticking with the theme of taxes, recently, the central government in its endeavour to keep up with the proposal of reducing the peak tax rate from 30% to 25% has proposed phase out of exemptions provided under the Income-tax Act, 1961. This could adversely impact investments as taking away of the tax holiday for power producers and distributors would adversely impact returns and consequently investor sentiments.

The government should also come up with a legislative framework for implementation of proposed industrial corridors, manufacturing zones, multi-modal logistic hubs and incubators for eligible start-ups.

The infrastructure sector in general is highly regulated and infrastructure developers often have to deal with multiplicity of laws administered by state governments, central governments and other regulatory bodies.  As a result, ease of doing business is a significant pain point with approvals often taking years and sometimes decades to come by. While efforts have been made to address this concern, ideas such as single window clearances, inventory of pre-approved projects, speedy and time-bound clearance mechanism on e-platforms have long been the demand of the industry and it is hoped that amid the big announcement of multi-billion dollar allocations, this ask of the industry finds some real attention.

In summary, the expectations are high as usual and it is now up to the finance minister to stand up and deliver.

Kalpesh Maroo is partner, BMR & Associates LLP. Raghunath Rao, director, BMR & Associates LLP contributed to this column.


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Bar set high for FM

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