Budget Expectations: Infrastructure investments and enablement

22 Jan 2024 , 07:57 AM

INFRASTRUCTURE WILL CONTINUE TO BE THE FOCUS

Whether the bulk of the announcements are made in the interim budget in February or in the actual budget post the elections, is immaterial. The truth is that India just cannot afford to go easy on infrastructure spending. Back in 1997, when the Rakesh Mohan Committee was constituted for assessing the infrastructure outlays, it had projected $200 billion over 10 years to bring Indian infrastructure to South East Asian levels. That never happened, but the momentum has caught on in the last few years. Spending on infrastructure is significant due to the strong externalities and multiplier effects on GDP growth.

Today, it is estimated that India needs close to $1 trillion investment in 10 years to bring Indian infrastructure to global standards. That is already happening with $110-$120 billion infused into infrastructure capex each year. Budget 2024-25 is likely to infuse Rs1 trillion, or $125 billion, into infrastructure capex, which would be 3% of total GDP. The question is what do we mean here by infrastructure. While the definition of infrastructure can include a lot of hard and soft aspects, we shall focus on the four core infrastructure themes of aviation, roadways, railways, and ports. We will also look at emerging green infrastructure.

EXPECTATIONS ON THE AVIATION FRONT

For any growing economy, aviation infrastructure lies at the core of its growth. In the last few quarters, aviation sector has seen numerous challenges. Even as the demand for tourism and hospitality picked up post-pandemic, the aviation sector was besieged by stiff competition, higher ATF (aviation turbine fuel) prices, and higher leasing costs due to the bankruptcy of Go First. In this background, here are key expectations from Budget 2024-25.

• The Indian aviation sector is looking to Budget 2024-25 for financial aid to tide over the financial crisis and also a reduction in levies and taxes to revitalise operations and improve its financial health. Aviation companies rely on the spread between RASK (revenue per average seat kilometre) and CASK (cost per average seat kilometre) for their profitability. That is under stress and so the sector expects rationalisation of duties on ATF and a sharp reduction in airport charges, as well as charges pertaining to parking, landing and navigation charges levied on them. The aviation section also expects financial support to help them tide over the crisis of business cycles and losses on foreign exchange on lease charges payable.

   

• The regional connectivity scheme (RCS) under the UDAN initiative had taken a back-seat for some time. The current budget is likely to revive that in a big way with an allocation that higher by 25% to 30% over last year.  The recent Ayodhya aviation connectivity is a classic example of how events can be leveraged to expand the aviation story to smaller places. The budget is also expected to accelerate focus on setting up new airports and expanding capacities at key airports, so current capacity constraints are avoided.
   
• There is also a tourism angle to the aviation sector and one of the pre-requisites to a good tourism story is good connectivity and infrastructure in such areas of tourist interest. In addition, the aviation sector also expects that the Budget 2024-25 will give a boost to tourism through more direct measures like developing of iconic tourist destinations and expanding the visa on arrival scheme to more countries.

   

• The Indian government has put a major thrust on in-sourcing defence products as part of the Atma Nirbhar Bharat scheme. The aviation sector wants this approach to be extended to the airlines also. For example, one area to start in-sourcing would be in the MRO (maintenance, repairs, operations) of aircraft. That is something that can be managed in India and it would be cost effective and time effective. Budget 2024-25 is expected to focus on incentivising the MRO sector by building the necessary infrastructure for promoting aircraft support operations in India itself.

The aviation sector broadly needs infrastructure support and a permanent fall-back mechanism when the going gets tough. In last 100 years of aviation, airlines may have collectively made a loss, but their contribution to economic growth is beyond question.

BUDGET EXPECTATIONS FOR ROADS AND HIGHWAYS

If there is one ministry that has been consistently setting steeper targets for itself, and also achieving them, it is the Ministry of Road Transport and Highways. Under the leadership of Nitin Gadkari, road connectivity has improved drastically in India. For Union Budget 2024-25, the Ministry of Road Transport has asked for budgetary allocation of Rs3,25,000 crore; 25% higher than last year. It remains to be seen if the demand is acceded to in the interim budget, or we have to wait for the full budget after the elections. One thing is clear that the capex in the road sector has shot up from just Rs51,000 Crore in FY14 to Rs2,40,000 crore in FY23. Here are some of the key expectations of the roads sector from  Budget 2024-25.

• While the roads sector has been getting bulk of the allocation from the government schemes, private sector participation has not been forthcoming. One reason is the absence of clear tax incentives. One of the expectation is that Budget 2024-25 will focus on critical changes in the direct tax regime that will give a fillip to capital expenditure by private players in various road related infrastructure projects.

   

• The construction sector, which is critical to the development of roads infrastructure, has been consistently demanding an employment-linked incentive scheme for construction sector, which can incentivize business based on the jobs they generate. These incentives will not  only reduce the labour costs in the execution of infrastructure projects, but also hit two birds with one stone. It creates infrastructure and also jobs. 

   

• One concern for the government in the past has been the rising trend of road accidents and casualties in road networks. The budget 2024-25 is likely to have a big focus on safety while pushing for timely upgrade of infrastructure in India. The Budget 2024-25 could even extend road safety audits as part of contracts for roads given out, allowing regular audits of maintenance and safety issues. This could also include a mechanism to grade and rate contractors in terms of quality, costs, and adherence to timelines. 

   

• One of the big challenges in the road infrastructure segment is the ongoing disputes, which drag on in the courts for years. One way to encourage more players to participate in the sector is to improve the dispute resolution mechanism, which will also encourage public-private participation in infrastructure projects. Especially, if one looks at the BOT (build, operate, transfer) toll model, such a dispute resolution mechanism is needed to rekindle investor interest and to avoid time and cost overruns.

Building roads is not just about connectivity but also about creation of jobs and an investment in the future. Today road connectivity in India has improved substantially, but there is a lot of room for improvement. Budget 2024-25 can just give that boost.

BUDGET EXPECTATIONS FOR THE RAILWAYS SEGMENT

For a long time, the railway budget was a separate affair and presented a couple of days ahead of the actual Union Budget. Since Budget 2017-18, railway budget has been merged into the Union Budget. Here are some of the key expectations for Indian railways.

• One of the sectors that has seen a lot of farming out of orders to the private sector is the railways sector. Not surprisingly, most of the railway stocks are up sharply in the last one year. The expectation is that the capex by the Indian Railways will be sustained by the Indian government and so will the farming out of orders. That is likely to keep the order books ticking for the private sector and ensure continuous renewal of the railways. The private sector also expects that the National Rail Network plan continues unabated and the 3000 MT mission is kept intact. 

   

• One thing that can make the Indian Railways more efficient and effective is the constant upgradation of the rolling stock. There needs to be continuous modernization of the Indian railways on a fast-track mode so as to ensure improved revenues through efficiency. According to estimates, nearly 45,000 wagons are likely to be overaged in the next 7 years, so it calls for a huge investment in rolling stock to keep up with growth.

   

• Finally, on the passenger front, there are 3 expectations; better services, reasonable fares, and better safety. The three are not always consistent with one another, but the current budget would have to be a lot more innovative on the passenger front. Fares may not drop, but it can upgrade services for the same cost. That would be good enough. The current budget is likely to put a lot of emphasis on women’s safety while travelling in trains, something that has been a long-standing demand for the Indian Railways. Making the Railways more family-friendly could be a start.

For the Indian railways, the focus has to be on the corridor infrastructure, investment in rolling stocks and passenger safety and convenience. The last one is very likely to be a part of the Union Budget 2024-25.

FOCUS ON PORT INFRASTRUCTURE IN BUDGET 2024-25

While capex in shipping and ports has been a part of each budget, it has never been a big focus area. With the focus likely to be a lot more on the promotion of inland waterways and the improvement of ports, we could see a renewed thrust on ports in Budget 2024-25. The Union Budget 2024-25 is likely to place a lot of emphasis on port infrastructure, shipping, and inland waterways. One can expect specific announcements and measures that are in line with the “Maritime Amrit Kaal Vision 2047” launched by Prime Minister Narendra Modi. It is referred to as a document to support and boost India’s Blue Economy.

While private sector investors showing interest in investing in ports and inland waterway docks; the stumbling block appears to be that government is yet to outline a clear policy paper on specific incentives. That would go a long way if included in Budget 2024-25. There are several clear merits of investing in infrastructure for ports and inland waterways. It is estimated that coastal shipping and inland waterways can reduce logistics costs by 4% of GDP. That is a direct boost to profitability. In addition, it would also be a green initiative as it is likely to lower carbon emissions by 33% over next 10 years. Port logistics and warehousing are extremely profitable businesses and with the right policy framework, it can attract private players. The Budget 2024-25 is expected to make substantive progress on this front.

FINAL WORD; DON’T FORGET GREEN INFRASTRUCTURE

When we talk about the infrastructure of today, the infrastructure of tomorrow (green energy infrastructure) cannot be overlooked. Here are some key points to note for Budget 2024-25 on the green infrastructure initiatives.

1. India has set a target of achieving 500 GW of renewable energy capacity by 2030 as part of its commitment to the Paris accord. Currently, the renewable energy capacity stands at 170 GW. The need of the hour is acceleration of growth with viability gap funding, low-cost financing, tax holidays, capital equipment exemptions etc.

    

2. One of the ways to boost MSMEs is to make them green transition ready. Remember, MSMEs account for 30% of GDP and 45% of exports and are the leading job creators. Budget needs to support their green transition as they lack the ability to adopt cleaner, energy efficient technologies of their own accord.

    

3. Finally, there has to be focus on scaling up electric mobility. Transitioning to electric mobility is the key to reducing carbon footprint, and much of the support in terms of green infrastructure and EV support systems has to be triggered by the government. Budget 2024-25 can provide a start by giving monetary incentives for installing public fast charging points and slow charging points; apart from tangible benefits to EV users.

Budget 2024-25 (whether interim or full budget) is likely to be big on infrastructure. While the hard infrastructure will be the focal point, expect big action on green infrastructure as well as in soft infrastructure too.