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Feb 29, 2012, 06.42 PM IST | Source: CNBC-TV18

Budget Expectations: Infra Budget must have incentives, tax breaks: Feedback Ven

Vinayak Chatterjee, chairman, Feedback Ventures hopes the FY13 Budget for infrastructure has incentives and tax breaks for this laggard to start performing again.

I hope in this budget we will get to see greater traction on the USD 11 billion national infrastructure debt fund

Vinayak Chatterjee

Chairman

Feedback Ventures

Union Budget 2012 is just a couple of weeks away. There are heavy expectations in the form of tax sops for the beleaguered infrastructure space. In order to sustain a healthy GDP growth rate, equivalent investment in infrastructure is required.

Vinayak Chatterjee, chairman, Feedback Ventures hopes the FY13 Budget for infrastructure has incentives and tax breaks for this laggard to start performing again. “I hope the government finalises plans on the USD 11 billion infra debt fund soon as well.”

The Budget is expected to be positive for infrastructure as the government attempts to push private investment. He tells CNC-TV18 that issues surrounding the State Electricity Boards (SEBs) and fuel policy need clarity.

With individual ministries appearing incompetent about handling complex cases, he says institutional mechanisms should be in place for sector's like infrastructure to get back on its feet.

The government’s move of imposing 19% customs duty on power equipment is seen as pushing up electricity costs and hurting the centre’s efforts to quickly ramp up generation capacity. However, Chatterjee says the duty on power equipment is justified. “Chinese players are given heavy incentives. There is need for a level playing ground.”

Below is an edited transcript. s for more.

Q: There has been a lot of talk about the finance minister actually looking at expanding avenues to channelize savings into the infrastructure space through either extending the tax breaks or coming in with new or innovative kind of products. What's your expectation in that regard?

A: The sure shot expectation if I can use the term, is that there will be a bunch of incentives and tax breaks for greater financial intermediation of channelizing retail and household and institutional savings into the infrastructure sector. The market is speculating that the tax breaks will be increased from the current limit of Rs 20,000 to 50,000 or even Rs 100,000.

Over and above that the government had when president Obama was here, announced a USD 11 billion national infrastructure debt fund. A lot of background work has happened so I hope that in this budget we will get to see greater traction on that one.

There are certain restrictive clauses that prevent insurance companies and pension funds from investing in infrastructure because the condition stipulated to them about a certain quality of rating and other conditions are pretty strict. Therefore, much of these long-term funds which should rightfully be finding channels into the infrastructure sector are today blocked. We are looking for some relaxations in that sector also.

Q: Do you expect any significant outlays directly on the budget for infrastructure given the government’s severely constrained fiscal situation or on that score should expectations be higher?

A: No, I think the expectation should be muted on that score. The government’s ability to really ramp up further outlays, what I possibly see is that they may shift outlays from more populist schemes to sectors where there is genuine action and traction on the ground. For example, I suspect that roads and highways are going to get greater allocations.

The power sector is going to get greater allocations whereas some of the very long winded politically sound schemes that have to do with provision of irrigation, water supply, sanitation etc may actually see a cut down not because they don’t impact the common people but because the delivery systems are so inefficient. So it will be an interplay of allocation rather than total subtractive allocation.

Q: Do you think he will get into the power sector whether it is in terms of outlays or other sops because it seems like that entire space is being shifted to the PMO where weekly meetings are happening? Has some kind of headway been made in terms of decisions?

A: The power sectors’ problems have such a huge shadow on economic growth that I find it inconceivable that the finance minister’s budget speech will not contain a reference to the power sector. So what are the three major references that one can expect?

One has to do with some degree of convergence and a promise on the fuel policy. The second has to do with addressing once and for all the issue of the decade long problems of bankrupt distribution companies or discoms and the third has to do with a certain import duty stand that the government has to finally decide on what it is going to do with imports of equipment of power plants particularly from one country. Today's newspapers are full of various options that 12-19-25%. The budget is going to take a final position on raising import duties for imported power equipments.

If you see the infrastructure sector, time and time again we find that individual ministries charged with a particular sector are incapable of handling the complexities and the interconnections of that sector. For everything you require an Empowered Group of Ministers or you need Pulok Chatterji – the Prime Ministers office (PMO) or you need the matter referred to the Planning Commission or you need it referred to the Cabinet Committee on Infrastructure.

This country has reached a situation where an individual ministry charged with a particular sector be it coal or energy or telecom or whatever, finds itself professionally incapable of addressing the issues. If the writing is clear on the wall that we require an inter-ministerial group then one of the things we are telling the government from various chambers particularly the CII is that look it's about time that we had an infrastructure ministry that does this work on an institutional basis and not on every case by case with some kind of group that is cobbled together.

We need an institutional response to clear this infrastructure business in the long-term. I hope that one of the points mentioned in the budget speech which would certainly be in the policy regime would be to talk about one institutional mechanism for this country that weaves together all inter-ministerial and centre-state issues on infrastructure.

Q: On this issue of import duty you are certain that some kind of hike is definitely coming? In our interaction with the power association that has been speaking to the PMO they indicated that they weren’t too happy about it. It's good news for BHEL but they didn’t see it as making the best economic sense for power companies?

A: It is good news for BHEL and L&T and a few others who are in the business of making big power equipment. But honestly like everything else in economics, there are two points of view on this. One of course is that we require a level playing field and I will be blatant about it, we require a level playing field with China. Across various dimensions, between domestic producers and Chinese suppliers, the playing field is not level. That is something that everybody knows. Therefore, there is a case for protecting or creating domestic jobs to encourage domestic investments, domestic R&D and technology absorption.

On the other hand power producers will argue - look the end delivery is cheap power to the people and therefore the issue is you should allow us to shop anywhere in the world and allow us to get the best deals that are possible for us as purchasers of equipments. Why should you handcuff us to that extent?

To be honest both points of view are correct. You cannot deny the economic logic of both of these but somewhere the government has to make up its mind. If I were to arbitrate on the matter I would certainly put a certain amount of import duty on a specific country of origin imports where it is well established across various committees including the Arun Maira Committee from the planning commission that argued for a 14% import duty.

It is well established that the playing field is very askew and when you recognise that reality, the recognition of that reality is that a certain import duty needs to be put on imported power equipments.

Q: Do you expect land acquisition and environmental clearances to find any mention in the budget speech or do you think it's not strictly a budget subject and we should not expect too much?

A: For the infrastructure sector and for the budget in general it has become a one time exercise where people certainly do expect policy pronouncements on key issues that affect economic growth. Now obviously land and environment along with power are three critical areas that are affecting India's GDP. So not to mention the fate of the Land Acquisition Bill that has been hanging around in Parliament for two sessions now needs to be mentioned more importantly.

On both occasions where I have had the opportunity to present views as well as from the Confederation of Indian Industry (CII) we have actually told the government to consider setting up a new generation of institutions. I don’t have time to argue the merits of the case but broadly the State’s intervention in acquisition of large chunks of land for economic activity allied to appropriate R&R as well as providing all the infrastructure linkages for an industrial area or power plant like power, water, roads are a role of the state.

It is the sovereign responsibility to make a factor of production land available. So we have strongly argued for the creation of a land bank operation. This has been told to the Ministry Of Finance, it has been told to the Planning Commission. It is up to them now whether they see the merit of this suggestion and whether it finds any mention in the Budget speech.

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