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Infrastructure gets big focus

P Chidambaram’s first full budget after taking over the ministry last August is a savings-investment budget. The finance minister took note of the fact that investment level had gone down sharply and his thrust has been to push up the level of investment. The finance minister has chosen the infrastructure for giving this push to infrastructure investment and addressed one very real problem of infrastructure – and for that matter industrial investment – which had been faced by Indian industry and investors for a long time. That is the problem of access to reasonably priced long term debts.

Few will today remember the Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI) and the Industrial Finance Corporation of India (IFCI). The last of these was allowed to go moribund and the first two converted into retail commercial banks by their acronyms. But when conceived they were the development finance institutions which used to lend long-term for industrial investment.

Ever since their transformation, there was a total vacuum in debt lines for Indian industry. This year’s budget strives to resuscitate the debt market for India’s infrastructure sector at least. The natural course should be for the finance minister to create the debt markets for industrial investment in manufacturing and other activities as well.

In his budget speech, the fiancé minister had mentioned that infrastructure will call for investment amounting to $1 trillion during the 12th Plan period. No less than 47 per cent of this investment is stipulated to come from the private sector. Tying up such humongous funds for infrastructure investment is no mean effort. More so, as typically infrastructure needs long term low interest funds since the gestation period for such investments are long and high interest rates would make these projects financially unviable.

The finance minister has observed ‘we need new and innovative instruments to mobilise funds for this order of investment.’  He has made several proposals for making available debt funds for infrastructure projects at low interest rates. This should give a push to infrastructure investments. He has mooted six initiatives for this purpose. He is seeking to encourage the newly started Infrastructure Debt Funds (IDF). These funds will raise resources and, through take-out finance, credit enhancement and other innovative means, provide long-term low-cost debt for infrastructure projects.

India Infrastructure Finance Corporation will offer credit enhancement to infrastructure companies to help them access the bond market to tap long term funds. This will be done in collaboration with the Asian Development Bank. The limit for raising tax free bonds by those institutions who have the capability to do so has been increased to Rs 50,000 crore for the next year. This year (2012-2013) an aggregate amount of Rs 25,000 crore of tax free bonds were collected.

In his pursuit of fresh investment for infrastructure creation, the finance minister has also addressed a very critical shortfall in the economy – the absence of adequate food storage back-end facilities. It is well know how much perishable food is wasted for want of farm to table storage chains. When the farmers are producing ever rising quantities of food grains these are being eaten away from rats or rotting away in open-air food storages under tarpaulin covers. The finance minister is giving a special credit line to NABARD to finance construction of warehouses, godowns, silos and cold storage units designed to store agricultural produce, both in the public and the private sectors. He is extending such facilities for funding to even the panchayats to enable farmers to store their produce. Chidambaram has met a demand of Indian industry for revival of investment allowance to encourage investment. Finance minister has proposed to allow a company investing Rs 100 crore investments. A company investing Rs 100 crore or more in plant and machinery to deduct an investment allowance of 15 per cent next year in addition to the current rates of depreciation. Minister claims there will be enormous spill-over benefits to small and medium enterprises. Investment cannot happen without savings. The minister has sought to encourage savings by taking care of a major worry of the savers. With inflation rates going high, the saver was in effect cheated of his money as his savings accounted for less with every rise in prices. The finance minister has proposed a inflation-indexed savings instrument which will ensure that the saver retains his net worth when prices are rising. The details of these inflation indexed savings instruments like tenor and structure will be finalised in consultation with the Reserve Bank. The savings of the household sector forms the backbone of the economy. Hence he has focussed attention on the savings by the household sector.

Secondly, he has announced concessions for takers of home loans which should encourage middle class borrowers to for home ownership with loans. This will have an effect of pump priming since a jump in house construction will have multiplier effect on related industries and help push up the pace of the economy.

Hopefully, some of these steps, although might appear baby steps in isolation, have the potential to restart the growth engine. The minister has noted that growth rate has fallen and this means the basic objectives of job creation and inclusive growth become all the more difficult to achieve. If these are properly launched, the investment cycle can be resumed. The question however lies elsewhere should we be able to get the land or other clearances for starting large infrastructure projects and industrial investments even though funds were available? The Cabinet committee on investment should be helpful, probably. (IPA)
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