Budget 2015: IDFC' Lall sees boost in infra spending by Rs 3 lk cr

Below is the verbatim transcript of Rajiv Lall & Sheshagiri Rao's interview with Latha Venkatesh on CNBC-TV18.

Q: What has investment got from the government? Deficit has not got what we were expecting but the plan expense actually is the same as what it was last year or rather this year – Rs 4.65 lakh crore was what the actual number was for FY15. One lakh crore less than the budgeted which was Rs 5.75 but next year is also 4.65. How are we better-off in terms of investment?

Rao: Everybody expected in the beginning that it will be a pro-growth and also with fiscal prudence – that is what everybody expected in this Budget. I think fiscal prudence – more focus has been given in this Budget that is why even though it is not 3.6 percent, he was able to contain it at 3.9 percent, which is an appreciable measure.

At the same time, the entire industry and the entire country is expecting that they will pump prime the economy and the government starts spending on the overall economy thereby the investment cycle will come back.

However, what we are seeing in the Budget even though there is close to Rs 2 lakh crore of incremental revenues and out of that Rs 175,000 crore have been transferred to the states by way of devolution of the revenues. So , the net amount that is available with the government, most of it is spent on the revenue expenditure – that is why we are not seeing a big increase in the overall plan expenditure.

Q: Short point – investment has not been pump primed?

Rao: I am not seeing a big additional amount that is coming into the economy in this Budget. If you look at all the allocations, but if you see the total amount available to the states, whatever is transferred plus the grants together, there is Rs 1 lakh crore additional amount which would be available with the states that could be spent on various central plan and also with the state plans.

Q: We are not able to see any money that has been given to the plan kitty but is there anything else in the Budget that is going to give industry a space to invest. I do not see that either?

Lall: You are seeing this all wrong. There is a huge investment stimulus that is going to come from this Budget. I do not know why people are not clear about that. He has in his speech said that there is Rs 70,000 crore increases in total development capital spending.

First of all, it is not useful to look at the Budget in terms of planned and unplanned. Half or more of the planned expenditure is nothing but revenue expenditure. It is much more interesting to look at the Budget from the point of view of revenue spending and receipts and capital spending and non-tax receipts. If one looks at it from that point of view, on the capital Budget, he is spending additional Rs 70,000 crore which is essentially gone to infrastructure and that is Budgetary expenditure on infrastructure which is funded partly through non-tax revenues including disinvestment and so on.

However, part of that Rs 70,000 crore is then channeled into extra budgetary structures. He announced national infrastructure fund (NIF) worth Rs 20,000 crore. There are some other amounts that have been allocated to balance sheets that sit outside the government Budget.

Those balance sheets and the fund can themselves now be leveled up several times. Therefore, my back of the envelop calculation is that this Rs 70,000 crore of incremental capital spending could translate into upwards of Rs 3 lakh crore of additional spending on infrastructure across the country. I haven’t event talked about the one lakh crore that is already been announced by Suresh Prabhu in the Rail Budget – that would also be leveled up a few times. So, net-net as a result of the Rail Budget in the Budget, I am seeing an increased spending on infrastructure catalysed by the Budget to the tune of Rs 3-3.5 lakh crore – that’s more than 2 percent gross domestic product (GDP).

Q: When it gets leveled up we will see, at the moment I am not sure, this is just the seed capital that has been given for the infra fund and we will have to see how it is getting leveled up. We are also confusing infrastructure financing with infrastructure building. Actually what has been given for infrastructure building – Rs 14,000 crore has been given for roads and Rs 10,000 crore has been given for railways – that is the concrete money that has been given. When it gets leveled up and it will pick projects in the SPVs – that’s a long way off, isn’t it? We do not know whether those structures will be bought into?

Lall: How long does it take to level up fund? It is like saying that balance sheet like IDFC cannot raise Rs 20,000 crore-30,000 crore of debt in the next three months. Of course we can. Infrastructure financing and infrastructure spending is a same thing. The government is not going to do all the spending.

Latha: If I looked at the numbers, what has investment got from the government? Deficit has not got what we were expecting but the plan expense actually is the same as what it was last year or rather this year, 4.65 lakh crore was what the actual number was for FY15. One lakh crore less than the budgeted which was 5.75 but next year is also 4.65 so, how are we better off in terms of investment?

Rao: Everybody expected in the beginning that it will be a pro-growth and also with fiscal prudence; that is what everybody expected in this Budget. Fiscal prudence more focus has been given in this Budget that is why even though it is not 3.6 percent, he was able to contain it at 3.9 percent which is an appreciable measure. The same time the entire industry and the entire country is expecting that they will pump prime the economy and government starts spending on the overall economy, thereby the investment cycle will come back. But what we are seeing in the Budget even though there is close to two lakh crore of incremental revenues, out of those two lakh incremental revenues Rs 1,75,000 crore have been transferred to the states by way of devolution of the revenues. So, the net amount that is available with the government most of it is spent on revenue expenditure. So, that I why we are not seeing a big increase in the overall plan expenditure.

Latha: Short point investment has not been pump primed.

Rao: I am not seeing a big additional amount that is coming into the economy. In this Budget if you look at all the allocations but if you see the total amount available to the states, whatever is transferred plus the grants together there is a one lakh crore additional amount which would be available with the states that could be spent on variable central plans and also with the state plans.

Latha: So, now we study state budgets hereafter to check whether they are able to pump prime but coming on that we are not able to see any money that has been given to the plan kitty itself but is there anything else in the Budget that is going to give industry a space to invest? I do not see that either.Lall: You are seeing this all wrong, there is a huge investment stimulus that is going to come from this Budget, I do not know why people are not clear about that. He has in his speech said that there is a Rs 70,000 crore increase in total development capital spending.

First of all it is not useful to look at the Budget in terms of plan and non-plan, half or more of the plan expenditure is basically nothing but revenue expenditure. It is much more interesting to look at the Budget from the point of view of revenue spending and receipts and capital spending and non-tax receipts. So, if you are looking it from that point of view on the Capital Budget, he is spending an additional Rs 70,000 crore which is essentially gone to infrastructure and that is budgetary expenditure on infrastructure which is funded partly through non-tax revenues including disinvestment and so on so forth. Now, part of that Rs 70,000 crore is actually then channelled into extra budgetary structures; he announced this national infrastructure fund, Rs 20,000 crore has gone to the national infrastructure fund. There are some other amounts that have been allocated to balance sheets that sit outside the government Budget. Now, those balance sheets and the fund can themselves now be levered up several times so my back of the envelope calculation is that this Rs 70,000 crore of incremental capital spending actually could translate into upwards of Rs three lakh crore of additional spending on infrastructure across the country. I have not even talked about the one lakh crore that has already been announced by Mr. Prabhu in the Rail Budget yesterday, that would also be levered up a few times so net-net as a result of Rail Budget and today’s Budget, I am seeing an increase in infrastructure catalysed by the Budget to the tune of three and half lakh crore, that is more than two percent of GDP.

Latha: When it gets levered up we will see, at the moment I am not sure. This is just the seed capital that has been given for the infra fund and we will have to see how it is getting levered up. We are also confusing infrastructure financing with infrastructure building. Actually what has been given for infrastructure building; Rs 14,000 crore has been given for roads and Rs 10,000 crore has been given for Railways. That is the concrete money that has been given. When it gets levered up and it will pick projects in the special purpose vehicle (SPV), that is a long way off isn’t it and we do not know whether those structures will be bought into?

Lall: How long does it to take to lever up a fund? It is like saying that balance sheet like IDFC cannot raise Rs 20-30,000 crore of debt in the next three months; of course we can so it is a issue infrastructure financing and infrastructure spending is the same thing, the government is not going to do all this mending?

Latha: Do you buy that ?

Rao: Only one issue that I am seeing is that even Railway Budget is talking about total Rs 8,56,000 crore spending over a period of five years out of which one lakh crore is to be spent in the next financial year. Out of that one lakh crore, again a huge amount is to be levered in the market so if every governmental undertaking or a PSU comes to the market and wants to lever, that is also one issue that we need to see the total amount how they will be able to raise that type of money and the major problem which we are seeing in infrastructure sector is not that government continue to raise money to raise the infrastructure, the PPP model which is also touched in the Budget, the issue which are there, the risks that are not shared properly today; how do we correct that PPP model? That is what is addressed in order to pump prime the economy.

Latha: But he did say that he is going to in future accept more risk for the government and less for the private sector. That was mentioned in the Budget. Would you worry that if everybody came to raise money, it would be a problem raising money?

Lall: Of course not. Today what is the problem in the financial sector? There is n demand, credit growth has slowed down dramatically. You want to kick-start the investment cycle, somebody needs to borrow. The private sector is not able to borrow, it does not have the appetite nor does it have the balance sheet strength to do so. So, if you ask a public sector bank or any financial institution and some railway finance company, IRFC or PSU wants to raise money, you do not think the banks will lend to them? Of course they will. So, let’s be clear, the government is not going to rely on the private sector to invest and kick-start this infrastructure investment cycle’ it is going to rely much more on PSUs to do that. So, NTPC, BHEL, IRFC, RITES, IRCOM; these are the entities that are going to carry the burden of this investment.

Latha: Well, I am less confident about the PSUs, they have been sitting on a lot of cash and they have not rendered a great account for themselves but probably better execution after all, we did see Coal India’s output which was languishing at four percent for the better part of the last ten years has managed to do seven and a half percent this year. So, maybe better execution will help, I do not know but the jury is still out on that. Do you think there is some light at the end of that tunnel for growth, in what quarter do you see, how do you see FY16 for growth itself for infrastructure?

Rao: What we are expecting in the next financial year majorly the demand which is today is very subdued, that will be revived in the next financial year, at least in the second half of next financial year as we are expecting that whatever funds that are being made available in the Budget or through PSUs; of they can lever and start spending money , we can see some revival in the demand in the next second half of the financial year. Hopefully that should bring back the growth. That is what the government was expecting total nominal growth of 11.5 percent and the GDP growth of 8-8.5 percent. So, based on that we are also hopeful that growth will be revived in the next year and in the following year the private sector will come in to participate in this growth.

Latha: Your thoughts on that? You were more emphatic that growth will pick up?

Lall: I am indeed more emphatic and I do not share your skepticism about government’s ability to spend the money using off-balance sheet mechanisms so I need to convince you how the investment cycle can be kick-started by PSUs leading the way using off balance sheet financing. 

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