An assessment of the Union Budget is best done with reference to the set of expectations from the Budget. For the infrastructure sector, these expectations had crystallised sufficiently by mid-February 2016. These related to betting on a 0.2 per cent relaxation of the fiscal deficit target to create space for more public expenditure, with a marked tilt towards rural infrastructure. A PPP revival strategy was also expected through the implementation of the key recommendations of the Kelkar Committee Report. A thrust on off-budget funding mechanisms, a rejuvenation package for SEZs and the capitalisation of a slew of new PSUs announced earlier in emerging areas like inland waterways, coastal shipping and renewables were in the expectations basket.
It now emerges that the Union Budget has met the expectations on ‘rural infra’ and ‘PPP resetting’. It also appears to rely heavily on off-budget resource-raising.
Watch video: The Big Picture Of Arun Jaitley’s Budget 2016
The fiscal deficit relaxation to around 3.7 per cent has not been done by the Finance Minister and he has been lauded for sticking to the fiscal deficit roadmap of 3.5 per cent. In spite of this, the outlays for rural infrastructure are transformational in nature —- encompassing irrigation, watershed management, village electrification, rural roads and “rurban” market clusters. This is over and above the government’s big push on railways and roads together at Rs 2.18 lakh crore (Rs 1.21 lakh crore of the railway capex budget plus Rs 0.97 lakh crore for the roads sector).
The Finance Minister has also paid heed to the private sector’s request for ameliorating the pain points of PPP (Private Public Partnership) and private participation in the country’s infrastructure development. He has pressed five buttons to get a PPP revival process under way.
The first relates to the proposed Public Utilities Resolution of Disputes Bill, which is expected to address the issue of stuck liquidity of private construction companies in government projects.
The second is finally taking on board the acceptance of the principle of renegotiation of PPP projects when ‘black-swan’ events strike across the life of any concession period. The Finance Minister has announced the publication of guidelines for renegotiation of PPP contracts.
Third, he has pushed for a new credit-rating mechanism for private infrastructure projects which will hopefully recognise the decreasing risk levels as projects move from development to construction to operational stages. Hopefully, a new credit-rating architecture will make both the availability of long-term capital and its cost much easier.
Fourth, he has removed a significant irritant in the operationalisation of REITS (Real Estate Investment Trusts) and InvITs (Infra Investment Trusts) by stipulating that dividends will no longer be taxed in the hands of the recipients.
Fifth, he has proposed a far more practical structure for Asset Reconstruction Companies.
The scepticism prevalent among analysts is how the Finance Minister will achieve these large social and core infrastructure outlays in the context of the 3.5 per cent fiscal deficit discipline. The answer that suggests itself is that a large portion of the infrastructure outlays have been planned from off-budget resource raising initiatives. These include infrastructure funds leveraged with seed capital from the Budget (like National Investment and Infrastructure Fund), tax-free infrastructure bonds, international institutional and developmental funds and private capital under a friendlier PPP regime.
All this bodes well for the infrastructure sector, and for pump-priming the economy.