Great emphasis has been laid on infrastructure in the recent Budget, with allocations being increased by 10.5 per cent from the last financial year to Rs 3.96 lakh crore. With gross domestic product (GDP) growth likely to drop this year, the hope is clearly that increased public spending on infrastructure will spur private investment as well.
There are, however, severe challenges. Three years ago, in May 2014, the road sector alone had run up a staggering Rs 74,088 crore of debt, of which Rs 9,875 crore was at serious risk of turning bad. Since then, Minister of Roads and Highways Nitin Gadkari has evolved a low risk hybrid model by which part of the financial risk of road building is borne by the concerned government organisation - such as the National Highway Authority of India - and only the remaining devolves on the private player. In September last year, Welspun Enterprises Ltd, which is building the Delhi-Meerut Expressway, became the first player to achieve financial closure under the new scheme. Gadkari's initiative has also revived the construction equipment market, which after contracting for three consecutive years, reversed the trend and grew two per cent in 2015/16. It is expected to do even better this fiscal. The biggest project on Gadkari's plate is the ambitious Bharat Mala, which aims to build 6,000 km of highways along the border and coastal roads of North India. Yet another project aims to connect 123 district headquarters and remote tourism destinations such as Badrinath and Gangotri. In rural India, around 15 per cent of the total allocation for the rural sector has gone to the Prime Minister's Gram Sadak Yojna (PMGSY). Gadkari had sought an allocation of Rs 97,000 crore in the current financial year. Though the Budget gives his ministry only Rs 64,900 crore, he has the option of raising more through tax free masala bonds. The new roads are expected to give a big fillip to the cement and steel sectors, since most of them will use concrete rather than bitumen - which reduces both construction cost and fuel consumption. Around 1,000 tonne of cement is required to build a one km long two lane highway, apart from steel, fly ash, sand and water, so the multiplier effect can be imagined.
Track Changes
With the railway budget included in the general budget for the first time, the Ministry of Railways' capital expenditure has been pegged at Rs 1.31 lakh crore, of which Rs 55,000 crore has been allocated in the Budget proposals - eight per cent more than in the last financial year - while the rest will have to be raised by the Railways. Railway Minister Suresh Prabhu had already initiated a number of reforms and the generous funding will enable him to push them further. The Budget also includes a provision to create a safety fund with a corpus of Rs 1 lakh crore over the next five years. With a decision having been taken to buy the best of global equipment to guarantee safety, the likes of GE, Siemens, Toshiba, Hitachi, Alstom, Kawasaki and Mitsubishi are likely to be queuing up to offer their wares. However, it is not the quantity of funding, but that of spending the funds allocated that is a challenge for the ministry. Until December 31 last year, only around Rs 70,000 had been utilised against the annual allocation of Rs 1.21 lakh crore, mainly due to a sluggish economy and expenditure inefficiencies. Among his reforms, Prabhu is keen to introduce accrual-based accounting, create a regulator for the Railways to periodically revise tariffs and set up a new holding company, RailHoldco, which will govern all the 13 public sector units under the ministry. Three of these 13 - CONCOR, IRCTC and IRCON - are also likely to be listed on the bourses this year. Along with Urban Development Minister M. Venkaiah Naidu, Prabhu is also finalising a new policy for metro rail networks across the country, standardising requirements and processes. Prospective investors are delighted. "If there is clarity on order size, it will help us to put together our financial plans effectively," says Mangal Dev, Director and Head of Hitachi's Railway Systems Business Unit for India and the South Asian Region. The expansion of railway capacity to manufacture locomotives and coaches will be yet another spur for the steel industry.
Power and Oil
The Budget has also suggested the merger of state-owned oil companies to create behemoths with greater risk management capacity and more clout in international markets. The merger could not be more opportune at a time when India's oil demand is rising a robust 8.8 per cent annually. Domestic private players like Reliance Industries Ltd. have begun expanding their oil retailing operations. Global players such as Rosneft and Trafigura - which took over Essar Oil last October as part of a consortium - as well as BP and Saudi Aramco, have also been given the go ahead to do the same.
In the power sector, private industry can take comfort from the fact that fears of the coal cess being enhanced further in the Budget have been belied, perhaps because both coal production and electricity demand have been showing a downward trend. This is mainly due to the poor financial health of the state owned discoms, but there is hope that with more than half the states having joined the Ujjwal Discom Assurance Yojna (UDAY) by which the states underwrite their discoms' debts, revival is round the corner. A host of independent power producers (IPPS) are waiting anxiously for the discoms to start buying more power. The Budget also provides 25 per cent additional allocation for the Deen Dayal Upadhyay Gram Jyoti Yojna, which too is an opportunity for IPPS.Renewable energy is also poised to grow, with the Budget supporting the second phase of building solar parks, which will house capacity of another 20 GW.