As a matter of fact, the Budget proposals combine the imperatives of fiscal consolidation with a growth stimulus on one hand and on the other it provides boost to domestic investment through infrastructure spending and also to consumption through higher purchasing power, especially in the rural sector. Alongside, by steadfastly staying committed to the fiscal deficit target of 3.5% of GDP for the next fiscal, the Budget has sent a signal of fiscal prudence to domestic and foreign investors. Moreover, the incentives provided for startups will encourage entrepreneurial skills and further the Budget will explicitly cover the issue of monitoring the prices of essential commodities. This will address the problem of abrupt increase in prices, which add to inflationary pressures in the economy threatening the growth targets. Moreover, the multiple initiatives can then again set the stage for the RBI to cut interest rates, spur industrial investment, encourage foreign inflows, stabilize the currency and again keep inflation under control and this is not just a fiscal prudence but also a perfect macroeconomic strategy to bring the economy back on its targeted growth trajectory.
Dynamics
In the given economic scenario, Central Plan shows that for the highways sector, the total outlay for 2016-17 is Rs.103,286cr, of which the budget support is Rs.44,007cr, with the remaining Rs.59,279-cr expected to flow from intra and extra budgetary resources (IEBR). In totality, allocation in the road sector, including PMGSY will be Rs.97,000-cr during fiscal and that the public spending on infrastructure has been hiked over 22%, with sharp increase for roads - the Centre hopes to build 10,000 km of national highways in the coming fiscal and upgrade a staggering 50,000 km of State highways including rail networks and power. The Budget pledged to double farmers' incomes in five years, and hiked the target for farm credit from Rs.8.5 lakh-cr to Rs.9 lakh-cr.Headline corporate tax, which the Budget promised to reduce to 25% over four years, while simultaneously cutting back on exemptions has been left largely untouched. For small companies with turnovers of less than Rs.5 crore, the tax rate has been reduced to 29%. Salaried class taxpayers who don't get a house rent allowance saw their deduction on house rent raised to Rs.60,000 a year from the current Rs.24,000; and those earning less than Rs.5 lakh a year saw their rebate scaled up from Rs.2,000 to Rs.5,000. But 60% of withdrawals from provident fund accounts - the only social security for most salaried persons - were made taxable. There is an optimism when it comes to non-tax revenue projections: against the Rs.2,58,576-cr realized in 2015-16, they are estimated to grow to a whopping Rs.3,22,921cr, mainly on the back of about Rs.1 lakh-cr from spectrum auctions and Rs.56,500-cr from disinvestment in public sector undertakings and that this is more than double the Rs.25,313-cr that the Centre actually got from disinvestments in 2015-16.
Power plants, roads and railways will lead the infrastructure charge, with big-ticket projects adding up to more than Rs.3.5 lakh-cr and spurring demand in the economy. The government will also enact a law to speed up dispute resolution in public-private partnership projects and renegotiate contracts to account for uncertainties without compromising on transparency, a move that should help many stranded projects get going again. The power sector will see auction of ultra mega power projects worth Rs.1.5 lakh-cr. About Rs.90,000-cr of this relates to projects in Tamil Nadu, Odisha, and Bihar this fiscal. Bids for projects at Deoghar and Tilaiya in Jharkhand will be sought in the next fiscal after going through due process, which will attract investment worth Rs.60,000cr.
Infrastructure and Construction
Budget proposals apart, multiple measures are currently under way at various levels including projects under the Sagarmala port development program, financing of Smart Cities and Atal Mission for Rejuvenation and Urban Transformation (AMRUT), and the Hybrid Annuity Model for National Highways and that the budget announcements are likely to benefit different infrastructure stakeholders in different degrees. Construction & infra companies already witnessing an upswing in their order books, and the increased spending on roads, railways and irrigation will further push this trend. Similarly, for infrastructure players, addressing stressed assets remains a priority over pursuing new projects. Towards this, the proposals to announce guidelines for renegotiation of public-private partnerships (PPPs) and the Resolution of Disputed Bill are very encouraging and that the report of former finance secretary Vijay Kelkar contains detailed recommendations on the constitution of the Infrastructure PPP Review Committee, as also proposed scope and considerations for renegotiations and an early formalization of these will help infra players. On this score, several other recommendations are going to be critical to address concerns of private investors including measures like PPP Project SPVs (Special Purpose Vehicles) to not be audited by the Comptroller and Auditor General of India, amendments in Prevention of Corruption Act and setting up of a National Facilitation Committee. Yet another proposal in the budget, with respect to private investment in public works projects, is to formulate a new credit rating system for infrastructure. Projects in early stages of construction are normally considered high risk by rating agencies, and the government's resolve to address this will increase bankability of early-stage projects. If this translates to much better prepared projects (in terms of plug-and-play readiness of land acquisition and clearances), that would obviously be a very positive. Moreover, the credit enhancement mechanism, which would help the infra players in a big way as the Budget has proposed a legislation to resolve disputes and issue guidelines for renegotiations in PPP projects. On the financing side, the recapitalization of banks will enable them to start lending to new PPPs. It has also proposed a new credit rating system and also suggested doing away with dividend distribution tax (DDT) in infrastructure investment trusts. There are important lessons to be learnt from the over-leveraging experience of PPP investors. In addition to use of lower-risk models like hybrid annuity, the more innovative ones could sell/securitize existing assets and cash-flows. In the airport sector, the model proposed in the budget, of the centre and state governments developing regional airports will become more effective by bringing private sector capabilities into the operations phase.Commenting on the Budget, CMD, IRB, infrastructure, Virendndra D Mhaiskar, said that doing away with the dividend distribution tax for infra investment trust is a positive move as the FM spoke about developing a new credit rating system for infra projects with emphasis on inbuilt credit enhancement structure instead of relying on a standard perception of risk, which often leads to mispriced loans.
Echoing his viewpoint, Chairman Feedback infra, Vinayak Chertjee explained that this would help infrastructure projects that are essentially for long-term in nature and needed a different kind of credit rating assessment than the normal template being followed by rating agencies.
While Hemant Kanoria Chairman and MD Seri Infra Finance, sought a timeline for announcement of new credit rating scheme.
Road and Highways
In the Budget proposals, higher allocation has been provided for roads sector leading to higher public spending. In totality, a total outlay for 2016-17 for road and highway sector is Rs.103,286cr, of which the budget support is Rs.44,007cr, with the remaining Rs.59,279-cr expected to come from intra and extra budgetary resources. The allocation for the road sector, including PMGSY will be Rs.97,000-cr during 2016-17 fiscal. Budgetary support for the highways sector for 2015-16 was Rs.42,694-cr at the revised estimates stage, marginally higher than the budget estimates. But the IEBR for the highways sector, which includes toll revenues, bonds and private investments, has been slashed to Rs.28,000-cr at the revised estimates level for 2015-16, from the budgeted Rs.41,422-cr and that budgetary support for the rural development department has been increased to Rs.7,615-cr for the next fiscal, up from the current Rs.6,161cr. India's highest ever number of kms of new highways were awarded in 2015 and has now set a target to approve nearly 10,000 km of National Highways in the coming fiscal. The Budget has allocated Rs.55,000-cr for roads and an additional Rs.15,000-cr will be raised by NHAI through bonds, part of which will be through Inland Waterways Authority of India. Transportation and logistics companies have welcomed the budgetary announcement of upgrading 50,000 km of state highways into national highways and they believe that better roads will lead to a reduction in operational costs, which will have a positive impact on net earnings. Currently, the country commands a road network of 48.7 lakh km; the national highways constitute only two per cent of this network but carry 40% of the traffic load.The Centre's plan would help bring trucking costs down significantly and improved fuel efficiency and reduced maintenance cost for trucking companies would reduce prices for long distance transportation, Chief Executive Officer of Vamaship, an integrated logistics company, Bhavik Chinai, said.
These apart, the home ministry has secured a 10.4% hike in its Budget outlay standing at Rs.77,383-cr as compared to Rs.70,108.95-cr allocated last fiscal and this will strengthen border road infrastructure and management. Central paramilitary forces got Rs.50,086 crore and that an outlay of Rs.3,777.4 crore has been made towards border infrastructure and management.
Construction and Real Estate
In order to extend the much-needed relief to the badly bettered real estate sector to lift buyers' sentiments and also to realize the Centre's flagship mission 'Housing for all by 2022', the finance minister, announced a 100% deduction on profits to an undertaking from a housing project for flats up to 30 sqm in four metro cities and 60 sqm in other cities, approved during June 2016 and March 2019 and completed within three years of the approval. However, Minimum Alternate Tax will apply to these undertakings. For first-time home buyers, the Budget proposed a tax deduction on additional interest of Rs.50,000 per annum for loans up to Rs.35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs.50 lakh. This is expected to encourage low-end buyers to invest in property.The move would sharpen the focus of affordable housing developers on the largely ignored segment, said Managing Director, Cushman & Wakefield, India, Sanjay Dutt, adding that the caveat of housing space limits should have been equitable, and the three-year window for project completion could have been longer as approvals and construction typically take a long time. Echoing this viewpoint, Chairman & Managing Director, Knight Frank India, Shishir Baijal, said that in effect, it will reduce the cost of loans, which will boost demand for housing in the budget to mid-range segments. However, the developers are also looking forward to credit breaks and single-window clearances for projects, which the government has failed to announce as yet, he said.
Apart from this, clearing the main hurdle for listing of Real Estate Investment Trusts in India, the finance minister announced that any distribution made out of the income of special purpose vehicles to REITs and Infrastructure Investment Trusts (InvITs), the specified shareholdings will not be subjected to Dividend Distribution Tax. The Budget also extended the excise duty exemption, currently available to concrete mix manufactured at site, to ready-mix concrete and this is expected to reduce the cost of housing construction. Homes are set to become more affordable with the government announcing sops, including exempting the construction of houses less than 60 sq metres from service tax and this initiative will increase the disposable income in the hands of the tax payers.
President-CIO, Shapoorji Pallonji Real Estate, Venkatesh Gopalkrishnan, said that the exemptions provided on housing loan interest for first-time home buyers and affordable housing will provide a boost to the stressed residential sector and is likely to spur supply of affordable homes. While President – CREDAI National, Getamber Anand, said that there is a timeline fixed for delivery of such affordable houses. All that the sector asks for now is speeding up of the approval process as the whole project needs to be delivered in a time frame of about three years. Also the Rs.2,18,000-cr allotted for the construction of new roads and railways will have a direct impact on the housing sector and that an increase in tax deduction from Rs.24,000 to Rs.60,000 for those living in rented houses will also benefit the rented flat-holder, thereby complementing indirectly the housing sector.
Green Energy, Coal, Oil & Gas
'Renewable Energy' has managed to secure an allocation of Rs.5,036-cr and Rs.262-cr by way of 'gross budgetary support' and another Rs.4,200-cr from the National Clean Energy Fund, Joint Secretary in-charge of solar in MNRE, Tarun Kapoor, said adding that the ministry would get more allocation from NCEF. Industry captains see scope for more transfers out of the fund to the sector because the budget has doubled the coal cess to Rs.400 for every tonne of coal mined or imported as the funds collected go into NCEF. Chairman and Managing Director, Gamesa India, Ramesh Kymal, said he hoped the wind sector would not be overlooked during allocations. The wind industry is less sanguine about the budget as the finance ministry speaks of reducing the Accelerated Depreciation benefit to 40% from April 1, 2017. This will have some adverse impact on the 'AD market' that is made up of companies in non-energy businesses putting up windmills to save tax. CEO and Executive Director, Hero Future Energies, Sunil Jain, said the huge allocations to irrigation would give a boost to solar pumps. Moreover, basic Customs duty on industrial solar water heaters has been raised to 10%, to help domestic manufacturers and that Customs duty on glass used in manufacture of solar panels has been raised to 5 per cent. Coal India, which currently earns Rs.610 against the ex-mine price of Rs.1,034 for G13 variety, after the latest round of increase, taxes will constitute nearly 51% of the ex-mine price of domestic coal as cess is also applicable on imported coal. Considering FOB price from $20 to $26 for 3800 kcal to 4200 kcal Indonesian fuel, there will be significant increase in prices of imported coal. The spiraling of taxes and duties on coal over the last two years is leaving a negative impact on consumer industries, said President Coal Consumers' Association of India, Subhasri Chaudhuri, adding that the association represents both large and medium industries.Steel & Cement
Ready-mix concrete (RMC) players cheered the Budget proposals as they believed that their long-pending demand for exemption of excise duty on RMC plants has finally been addressed but it is applicable only to dedicated RMC plants on site, the percentage of which is almost negligible. President, Cement Manufacturers' Association, and whole-time director, JK Lakshmi Cement, Shailendra Chouksey, said that cement prices would rise by Rs.3-4 a bag just on account of the clean environment cess. The total tax incidence on cement is over 60% of the ex-factory realization. The Krishi Kalyan Cess at 0.5 per cent on all taxable services from June 1 will push up production costs further, he argued.For the steel sector, the doubling of the Clean Environment Cess on coking coal to Rs.400 a tonne is expected to hit steel and cement companies hard and weigh heavily on consumers, particularly when the Government is focusing on sprucing up infrastructure and pushing investors to 'Make in India', Managing Director, Tata Steel India, TV Narendran, adding that The domestic steel industry plays an important role in 'Make in India' and the 'Smart Cities' initiative as it is a key material supplier to allied industries raw material costs for steel and ferro alloy companies, said an expert.
