Budget 2016: Top infra cos discuss their expectations in Ideas for India

Optimists have been hoping the Budget will pump up the economy by increasing infrastructure spending. CNBC-TV18 spoke with the management of three infrastructure companies— Larsen & Toubro, Tata Power and Thermax on their Budget wishlist—in its pre-Budget series 'Ideas for India'.Below is the verbatim transcript of Shankar Raman, Anil Sardana and MS Unnikrishnan’s interview with Latha Venkatesh on CNBC-TV18.Q: What is the big expectation you have from the Budget. We know finances are a problem. Last year if I counted the capital expenditure (capex) both plan and non plan it came to about Rs 2.6 lakh crore or thereabout. In any case it is less than two percent of the total Budget. Is this enough to give any push at all, two percent of the Gross Domestic Product (GDP)?Raman: India is in a very interesting space now. It is very important that we find space within the budgetary framework to push investment. India is a large market waiting to consume, completely under serviced. This is all well known fact and documented. What is the missing piece is the ability to infuse capital in the most productive manner possible.According to me very clearly this Rs 1.2 lakh crore spread over three or four sectors is highly inadequate and if I were to look for what the Budget can do for the country and leave aside the interest of the corporates which could benefit alongside what India needs badly is confidence in its ability to invest right and the sustainability of those investments over a period of time. We are talking about possibly USD 100 billion every year and if you talk about a five year period we are really talking about half trillion.We have to make a start somewhere and the best place to start would be an indication in the Budget where the government take some bold steps, just double the kind of investments that they can have and have a mechanism to lever the investment so you have a multiplier effect coming through.Q: That point is well taken, double the investment in infrastructure but where from? The crude advantage is there but it was there this year as well and we still didn’t find too much of money for investment. It is not as if tax revenues will go through the roof. Then you have the 7th Pay Commission obligations as well. The ability to err on the fiscal profligacy side is simply not given by the bond markets. Bond markets are at 7.95 percent in a year when you are sticking to the fiscal discipline. If you were to err on the side of profligacy bond markets will go to 8 percent plus. So, where will the money come from?Raman: You will have to create it out of the asset side of the balance sheet than the liability side of the balance sheet. If you look at the country, if you take all the public sector undertakings (PSUs), in my assessment they have close to Rs 90000 crore to Rs 100000 crore as cash, cash equivalents. It is very important, at least a third of that needs to be spent on capacity enhancements of the kind that will trigger infrastructure investment.Secondly, we have, fortunately, oil likely to stay soft for some time and that has a potential to generate about Rs 30,000-40,000 crore.The third important piece is we have been planning about divestment. Divestment in a broader sense, not only equity, even assets. Should the government own as much of physical and financial assets that they own today to generate a return on equity (RoE) which is sub standard? So, even if you go and let the government play investor to see which are RoE accretive, which are not RoE accretive some amount of lightening the balance sheet would be necessary. It is important to monetize these assets to generate another Rs 30,000-40,000 crore. Even if you put these three pieces together, we are talking about an additional Rs 1 lakh crore.If you are able to get this in a form and National Investment and Infrastructure Fund (NIIF) was one such, you could lever may be once, twice the investment. Even if I am conservative and say that another Rs 1 lakh crore gets levered we are talking about Rs 2 lakh crore on top of Rs 1 lakh crore which is residing in the balance sheet.Now this might be inadequate but for a start it makes a bold statement, that the government is willing to focus on a point in the asset side and then drive it.Q: Let me come to another prickly area which the Kelkar Committee addressed. The private public partnership (PPP), all said and done this Rs 2 lakh crore can become Rs 3 lakh crore from the government. That is still 2 percent or 2.5 percent of the gross domestic product (GDP). Ultimately the private sector will have to be drawn, do you think that the Budget could concentrate on this PPP regime and improve it in some substantial way?Sardana: Fortunately recommendation of Kelkar Committee is there with the government now and one is hoping that in this Budget they will have the announcement of acceptance of that committee recommendations. It is important that we have more and more of PPP projects but as Shankar Raman rightly mentioned, if one was to build confidence that the PPP projects would be taken up now, it is important that the past PPP projects which are kind of stranded and a lot of equity as well as the debt portion is unproductive is made productive very quickly. If you take power sector as an example, I think similar is the case with many other sectors which is there in the committee report.There has to be a concerted effort of the government to make sure that project-by-project resolutions are immediately put in place and those equities and debts are made productive. Once you do that then you see that the power sector will be bullish to participate in the future investments as also the banks will then have better situation to fund new projects. So, it is an all round important aspect that the recommendation of Kelkar Committee are adapted and implemented in the current year.Q: Is there anything specific, one or two things that you might say in the power sector that might de-bottleneck the stock of stuck projects?   Sardana: You have to do exactly what the road sector saw the ministry doing. There wasn’t sort of one solution fits all adapted. They very clearly sat with individual road projects and saw what was ailing that project and why was it not moving and what will it take to correct that. As you said in some cases the original promoter was replaced , equity was taken over at Rs 1 and the new promoters were brought in.In many cases NHAI came in and pulled in with the incremental requirement. The objective being that the projects are now well on its way and the projects were de-bottlenecked.In power sector also it is important to pickup each project, in some cases it will be the fuel allocation that has to be done, in some cases it is the issue of power purchase agreement (PPA) that needs to be resolved. Project by project one has to see and that is exactly the recommendation if you go through the Kelkar Committee recommendations. It states that there should be a forum wherein respective each individual project problems or issues need to be dealt with and resolved because it is unlikely that over a period of 25 years somebody will be able to hold all that was there at the original point of bidding or original point of allocation to remain same.Q: What would be your top expectation or even urge, request to Finance Minister?Unnikrishnan: First of all be prudent in fiscal level, no freebies. I would believe that the government has got to be really announcing mega projects like the way Shankar Raman mentioned about and not to be shy about upping the size of projects - USD 100 billion worth of projects in the infra sector which would certainly ensure that even the private sector will want to participate and also will take cue from and will announce their own projects. Government has to be very bold enough in announcing and following through the projects. Just take last year, in the Budget the Finance Minister mentioned about four ultra mega power projects (UMPPs) to be brought in but nothing has happened so far on that. So, let him not make any announcements which are going to be remaining on paper. What can be executed is what we are expecting.The worry we have is about even if one were to be announcing projects, whether private or public sector, only 20-25 percent will come as equity from the investor. 75-80 percent has got to come from the bankers. Do they have money to be bringing in along with the investor that is the biggest worry? So bank recapitalisation or whatever needs to be done to ensure that banks do have enough of money available with them to invest along with the investors in the coming year will be another requirement that we look forward to.Q: Budget is all about taxes so I wanted to ask you whether any of these tax recommendations that have come from India Inc are very important, something which the government can give. Relief from minimum alternate tax (MAT) for infrastructure companies, extension of the 80-IA 10-year tax holiday at a time when actually government is thinking of removing exemption but is this something that they should do, exemption of customs duty on capital goods at least where the duty structure is inverted, allowing infrastructure companies to file consolidated returns and special purpose vehicles (SPVs) to be exempt from dividend distribution tax (DDT). Are any of these something so important that exemption idea can be set aside and the government can think of tax giveaways?Raman: I think it is a question of thinking out of the box. If you begin to approach these as tax concessions or giveaway, the answer is a clear no. We cannot afford it. However, if we begin to look at them as investments that you are making to generate funds which the government badly needs, then it makes the investee entity more viable.(Interview transcribed by Swapnil Deshpande & Binu Panicker)