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Budget impact: Should you invest in infrastructure stocks and funds now?
March, 26th 2012

Once touted as the sunrise sector, infrastructure is currently facing a logjam. Several factors, such as the slowing economic growth, policy inaction, high inflation and interest rates, and poor investment climate, have brought the sector to a virtual standstill.

During the economic boom of 2003-7, big-ticket investments were made by large corporate houses, investors lapped up infrastructure stocks, and mutual fund houses launched a wave of infra funds. Today, though, most investors and lenders are sceptical about investment in this space and infra funds have earned peanuts over the past five years.

The government has now attempted to bring the sector back on track by making it a thrust area in its recent annual budget. Increased spend on infrastructure, duty and tax concessions, enabling external financing, etc, are some of the proposals that are expected to bring respite to the sector. But will it be enough to snap infrastructure out of its inertia?

A pro-infrastructure budget

Lack of adequate infrastructure is one of the main reasons for the floundering economic growth of the country. So, the government has considerably ramped up the planned investment in the sector. During the 12th Five Year Plan (2012-17), investment in infrastructure is slated to touch Rs 50 lakh crore, half of which is expected to come from the private sector.

While the government has doubled the limit for issuing tax-free infrastructure bonds to enhance the financing capabilities for the sector, it remains to be seen how much of this will be actually raised by companies.

The power sector, which currently finds itself in the doldrums, has been given special attention. Allowing companies to raise ECBs, along with the lowering of TDS rates for interest payouts on these from 20% to 5%, will reduce the effective cost of borrowing. The government has also exempted fuels, such as natural gas and LNG, used by power generation companies, from basic customs duty and reduced the countervailing duty from 5% to 1% on steam coal. This will bring down the input cost for power sector firms.

Problems persist

While the proposals are sound, implementation is still a challenge. Recently, international credit rating agency, Fitch Ratings, issued a negative rating outlook for Indian infrastructure projects. The report states, "Key reforms are needed before corporates' capital expenditure can increase significantly. Many companies have lower capex than they would like as projects have been delayed because they have not been able to acquire land in time." Though the government has proposed reforms for the land acquisition rules, it may be a while before these are passed in light of the current political deadlock. Besides, India has been facing a deficiency in power generation due to project execution delays, difficulty in establishing coal linkages and shortage of fuel.

 
 
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