Budget 2012: Will infrastructure bounce back or breakdown?

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This is the government's great Indian infrastructure dream. But the ground reality is a rude awakening. With a slowing economy, high interest rates and more importantly delayed decision making, infra projects and infra companies face an uncertain future.

As Pranab Mukherjee gets ready to present Budget 2012 the message is clear - jump start the investment cycle, focus on accelerating infrastructure spending and break the policy logjam.

But does the government have the political capital to deliver on the infra promise?

Rajiv Lall, chairman, CII National Council on Infrastructure and also the managing director and CEO of IDFC  talks about his budget expectations for 2012.

Below is an edited transcript. Watch the accompanying video for more.

Q: The RBI has said - it is now up to the government to jumpstart the investment cycle, to focus on infrastructure spending and accelerate infrastructure spending. What is your big hope as far as Budget 2012 is concerned for the infrastructure space?

Lall: One of the most important developments in the infrastructure space has been the opening up of the FII debt market. We have been struggling to give depth and breadth to corporate debt market in this country. Few measures taken last year have taken us in that direction. There are a few glitches that remain and one of the glitches is to do with the much talked about infrastructure debt fund. There are issues with respect to withholding taxes that need to be taken care of.

They have only been partially taken care of in the announcement to date. But there are two structures for the infrastructure debt fund. One is the infrastructure debt fund NBFC the other one is the Infrastructure debt fund Mutual Fund. So in the NBFC the withholding tax issues have been more or less taken care of. In the Mutual Fund structure they have not. It would be useful to give a fillip to that initiative if that were addressed.

We have talked about infrastructure bonds in the past. The reality is that the substantial savings in this country are not being appropriately intermediated into the infrastructure sector. The bulk of our household savings are actually highly concentrated in the hands of high net worth individuals (HII).

Q: Do you actually believe that this time around we are going to see some forward movement on these tax issues?

Lall: My gut is telling me, yes, after many attempts, this year we may get some breakthrough on tax policy with respect to tax concessions to investors in infrastructure paper.

Q: What would you like to see happen if we were to see policy action in the Budget?

Agarwal: The infrastructure space is money hungry. You need a lot of money to come into the sector and money will come in only when people who are investing in this field save to invest money. The policies have to be long-term and they can't be changed now and then. Like MAT for example, this is something where we should exempt the infrastructure companies from MAT.

Q: Do you believe that the government is actually going to implement some of those recommendations?

Lall: The most important thing that the Budget could do for the infrastructure sector is to actually deliver a Budget that gives some line of sight towards fiscal consolidation over time. If they are credibly able to give that signal to the markets it will help the RBI in actually managing interest rates downwards, reduce the cost of capital and more than anything else individual tax benefits here or there, more than anything else that would be a huge, huge benefit to the infrastructure sector.

Q: What's your own assessment of the fiscal slippage because the RBI is also pretty constrained that until we see a roadmap as far as fiscal consolidation is concerned, it would be unable to tamper with the monetary cycle?

Lall: That is precisely what I am concerned about that as we approach election season at the national level, gearing up for elections in 2014, it would require extraordinary leadership and discipline for them to credibly show a path to fiscal consolidation and greater fiscal discipline. It's a tough ask and a lot depends on the UP election results. It's for good reason that the Budget date has been postponed.

So if the UP election results are constructive for the UPA, I expect a good Budget. Then there is a prospect that we get into a virtuous cycle. A confident government takes leadership, delivers the proper signals through the Budget and follows through on all the other policy agendas that have been lagging for a while. So actually everything depends on the UP elections.

Q: On getting FDI into India, do you think that we are looking better on that front post what has happened with the 2G judgment or are we looking worse?

Lall: This decision has confused things a little bit. I am trying to put myself in Telenor's position. I suspect I would be quite upset at this point but in a longer-term sense, I have to argue that yesterday's decision was a tough one but on balance probably a right one. I expect that after some amount of certainty the serious players will come back on the table, will bid again in an auction and will be able to resume their operations on the ground so this storm will blow over. I would like to re-emphasize that we will require a confident government to further signal its openness to inviting foreign capital and one of the things that could restore credibility very quickly if the government were able to do it is to approve some form of FDI in multi-brand retail.

Q: The indications are that multi brand retail is not going to happen?

Lall: I go back to the UP elections and see what happens after that.