Opinion | Infrastructure needs to be funded by domestic and offshore capital pools

The budget has taken a number of steps to incentivize capex, particularly in infrastructure

A day prior to Budget 2019, the 2018-19 Economic Survey had forecast FY20 GDP growth at 7%, after a 6.8% growth the previous year. This conservative growth view factored in a weak export environment and the possibility of poor rains having an adverse impact on agriculture output.

However, to ramp up growth to the required 8% per annum to reach the Prime Minister’s aspirational $5 trillion economy by FY2025, India will have to grow at 8% annually for the next five years. The Budget is the implementation plan for operationalizing this vision.

The core engine to drive growth of this magnitude will be investment. The budget has taken a number of steps to incentivize capex, particularly in infrastructure. Infrastructure spends of 100 trillion over the next five years are proposed. The government had already initiated an ambitious infrastructure roadmap in the past five years, and the scope will be expanded.

Affordable housing is another. Expansion of the scope of tax benefits on investments in affordable housing helps construction and increases disposable incomes of beneficiary households. The phased reduction in corporate tax rates continues, with the cap on companies eligible for the lower 25% rate increase.

Financing these higher spends will have to be arranged. Even as innovative frameworks for private sector participation for new projects are being explored, one set of measures is monetizing existing assets through investment trusts (InvITs), real estate investment trusts (Reits), TOTs (toll-operate-transfer), CPSE ETFs (exchange-traded funds), etc., and continuing disinvestment. The Credit Guarantee Enhancement Corp. will also facilitate access to lower-cost capital. In addition, there are a couple of path-breaking proposals to raise additional resources. One, the effective dilution of the 51% floor in government holdings in CPSEs by including the stake of government-controlled institutions. Two, considering India’s low sovereign debt-to-GDP ratio, part of its borrowing would be in external markets in foreign currencies. With appropriate risk mitigation, this will reduce pressure on domestic market borrowings.

Despite the higher spends envisaged, exploring access to these alternative sources of funds has allowed the fiscal deficit to be marginally reduced to 3.3% of the GDP from the earlier 3.4% in the Interim Budget.

The budget also initiated steps to improve foreign fund flows, by easing access to non-resident Indians (NRIs), further opening up off foreign direct investment (FDI), onshoring insurance, carrying out part of the borrowing programme in foreign currencies, and tax incentives for certain investments. Apart from this, increase in FPI (foreign portfolio investor) limit from 24% to the sectoral foreign investment limit, opening up of InvITs and Reits, and tweaking of KYC (know your customer) norms for FPIs will also improve the environment for external flows. One implication is that these will increase availability of funds for investment domestically, leading to lower costs of capital. At the same time, inflows of foreign currency can increase the Reserve Bank of India (RBI) reserves and liquidity in both rupees and foreign currency. FDI flows especially are likely to help onshore skills required for manufacturing initiatives, especially the mega investment in sunrise and advanced technology areas, boosting growth and moving India up on the value-added logistics chain.

Credit and finance is an important component for reviving investment. Recapitalisation of public sector banks (PSBs) is an important step in boosting bank credit flows. The partial credit guarantee to PSBs for buying high-rated pooled assets on NBFCs will enable liquidity for sound intermediaries. Allowing all NBFCs to participate on TReDS (trade receivables discounting system) will enable reduction of working capital costs for micro, small and medium enterprises (MSMEs). In addition, keeping the borrowing programme in check will enable sovereign interest rates to gradually come down. Entrepreneurial activity in the startup community through resolution of the “angel tax" issue and other incentives has been encouraged.

The budget recognizes that India needs to become more competitive. One component of this is lowering the cost of capital, which India’s easing monetary policy is already beginning to enable. The continuing commitment to fiscal consolidation will open up further space for monetary policy authorities to cut interest rates and inject liquidity.

Rajiv Anand is executive director, wholesale banking, Axis Bank