Ambitious infra agenda to boost construction
MACROECONOMIC stability and fiscal prudence were the basic principles in the FY21 Budget design. The Budget proposed measures are natural extensions of the progressive liberalisation and reform measures announced in late 2019. The notable aspects of the proposals are as follows:
First, the macroeconomic projections, including nominal GDP growth assumed at 10 per cent, are realistic and the consequent revenue growth projections seem to be based on a modest recovery in FY21 and hence achievable. Revenue projections rely on privatisation and asset monetisation, together with use of bond ETFS for mobilising retail savings.
Second, the most visible reason behind the current slowdown was the slowdown in capex. The National Infrastructure Pipeline proposes to spend ~103 lakh crore over the next 5 years on 6,500 projects across multiple sectors, both conventional and some softer ones like the crucial logistics and warehousing. Financing such an ambitious program will need innovative and out-of-thebox thinking. The Budget proposes disinvestment and privatisation on a large scale over the next year. Based on the rising number of revenue generating highways projects, NHAI is expected to monetise large sections of its roads projects portfolios. The government has already allocated ~22,000 crore as equity into IIFCL and a NIIF subsidiary. But there are limits to the extent of direct government funding.
The Budget proposes an expansion of various Public Private Partnership programs in many segments, e.g., a Viability Gap Funding (VGF) mechanism for building hospitals for implementing the Ayushman Bharat scheme in aspirational districts.
There is also significant proposed access to foreign funds for funding the ambitious capex programs. The modified Dividend Distribution Tax mechanism will make investments in Indian equity markets more attractive for foreign investors. Sovereign Wealth Funds of foreign governments have become an important source of finance in recent years. The 100 per cent tax exemptions on interest, dividend and capital gains incomes of SWFS, subject to certain conditions, is expected to lead to higher capital flows. Extension of the lower 5 per cent withholding tax till 2023 for non-residents, FPIS and Qualified investors is expected to help foreign capital inflows. Increasing the limits for FPIS in corporate bonds, together with recent RBI relaxations on shorter term holding, are also likely to be preparatory steps on the path of being included in global bond indices.
The domestic financial sector, including banks, will have a crucial role in financing the envisaged capex. Although there is only limited direct support, eg. for recapitalising public sector banks, these have to be seen as part of the ongoing initiatives for consolidation. Other than governance reforms, the government is also encouraging some of these banks to directly access markets for raising capital.
Addressing investor confidence is as important as the hard reforms advanced in the Budget, as much for long gestation infrastructure and project finance as for new entrepreneurial startups. Assuring domestic and global sponsors, investors and financiers of the intent of the government in further improving the ease of doing business, policy stability and tax certainty is crucial. A significant announcement is the proposed amendments in the Companies Act on removing criminal liability for acts which are civil in nature.
India is gearing up for sustained growth in the future. Achieving the goal of a $5 -trillion economy in the next five years requires planning for implementation in a systematic and orderly manner. The Budget has moved this process forward.