The Union Budget 2021-22 is being coined as the ‘Infrastructure Budget’ by many experts including Dinesh Kumar Khara, Chairman, State Bank of India. The most striking feature of the Budget has been an increase of 34.5% in capital expenditure which has been pegged at `5.54 lakh crore. The Budget speech of the Union Finance Minister Nirmala Sitharaman started with health proposals - with the announcement of the launch of the ‘PM Atmanirbhar Swastha Bima Yojna’. The Budget also committed financial allocation to develop infrastructure under the Bharatmala Pariyojana and the National Rail Plan for India-2030 that focuses on metro rails in tier 1 and tier 2 cities. Additionally, there has also been a proposal for operational management of 12 major ports in the PPP mode. There is also a space for power distribution companies.
Special measures for financing infrastructure
The financing of such tall infrastructural projects is not a simple task. The FM addressed it in a new way along with the allocation of funds from the Budget. She focused on the debt component, selling of public sector units (PSUs) and foreign participation through the Infrastructure Development Trust (InvITs)and Real Estate Investment Trust (REITs) routes. Another important proposal for infrastructure financing has been the issuance of zero-coupon bonds by notified IDFs eligible for tax benefit. The FM also mentioned the issue of creating a pan-India development financial institution to address the debt component of infrastructure financing. The Budget has also proposed financing in road and on power distribution of the PSUs. The government owned infrastructure builders such as the National Highways Authority of India (NHAI) and the Power Grid Corporation of India Ltd (PGCIL) would pool their assets and sell units to investors - raising money for future spending.
Incentives for foreign investment
The Budget 2021-22 depends heavily upon flow of foreign funds. It has eased taxes on dividends of overseas investors and upcoming instruments like (REITs) and (InvITs). The Budget proposes to allow foreign portfolio investors (FPI) to avail treaty rates for tax deduction at source (TDS). It is expected to cut TDS rates for offshore funds by as much as 50%. As of now, TDS were subject to TDS of upto 22% of dividend earned in India. Now the TDS will be equal to the dividend tax rates proposed in the tax treaty through which the foreign investors enter India. Most of the treaties have a tax rate as low as 10%.
The Budget has allocated `1,10,055 to the Indian Railways for FY22. Of this, the budgetary support would be `1,07,100 crore. The total capital expenditure proposal in FY22 has been `2,15,058 crore. The operating ratio of Railways has been pegged at 96.15% - according to the Budget. So, in other words, the Indian Railways would earn `100 by spending `96.15. This shows only a marginal improvement of the performance of Railways in FY22 as compared to the operating ratio of 96.96% in FY21. The freight receipts in FY21 is expected to be around `1, 24,184 crore and the passenger receipts is expected to be around 15,000 crore in the revised estimates of the Budget. In FY22, the railway freight is expected to be around `1,37,810 crore. The Budget proposed that the eastern and western freight corridors - which are expected to be completed by June 22 - and freight corridors assets would be monetised for operations and maintenance after commissioning.
The banking sector has a big role to play in India's infrastructural development. The FM has allocated `20,000 crore for infusion of money in the PSBs. She has also proposed to privatise two banks. But she has not mentioned the names of the banks which are to be privatised.
Proposal for setting up a Bad Bank
The FM has also proposed to set up a bad bank in her Budget speech. The role of the bad bank would be to clean up bad or toxic loans. It would involve the segregation of unhealthy loan assets or non-performing assets (NPA) from the existing banks’ books. Such bad loans would be brought under a special institution which would deal with these bad assets.
What may be the structure of the bad Bank
It is known that the government would not be a party in the bad bank and it would not infuse any money or invest in any equity in the bad bank. Commercial banks - both PSBs and private banks - will have to create and manage it on their own.
Debashis Panda, Secretary, Financial Services, Government of India has reportedly said that more than `2.25 trillion worth of bad loans remain unresolved. Bad loan accounts of more than `500 crore would be eligible for transfer to the newly created bad bank. The bank would purchase toxic assets of the lenders at 15% of the loan value. The remaining 85% would be paid as securitised receipts.
But the entire plan is yet to be decided. The bankers are not sure about the future of the bad bank. How the assets would be identified for resolution under this plan remains a question. There is also uncertainty regarding the formation of an organisation where private and public sector banks come together separately without government involvement. The difference of the resolution approaches of private and public sector banks is also a concern.
First, P Chidambaram, Congress leader and MP and former finance minister, Government of India, has stated that the higher allocation in capital expenditure is a good thing. But if one considers the perspective, then it is clear to him that the government needs to boost private consumption and private investment which have been at very low levels. With a bigger emphasis on capital expenditure, these two sectors have lesser share in the total size of the Budget. The present budget size is `34,83,236 crore. But the revised estimate of the total budget size of FY21 has been `34,50,305 crore. In this situation, demand generation may be delayed.
Economist Indira Natarajan has stated that the enhancement of the capital expenditure is not actually 34.5%. Considering the revised estimate of FY 21, the actual enhancement would be 26%. According to her, the main problem has been that about 70% of the investment projects are incomplete. These need to be completed first as that would be less time consuming. Out of these large incomplete projects, many are incomplete as the government has not paid money to the developers.
Professor Anup Sinha, Non-Executive Chairman, Bandhan Bank and former professor, IIM, Calcutta, said, “Last year, the capital expenditure was high. This year also allocation in capital expenditure is high. It will work well if it is implemented properly. But huge cut in allocation in important sectors like agriculture, education and research has been worrisome.”