The Indian prime minister Narendra Modi is pledging US$25 billion to unclog India’s choked transport links, spur power output and build cities. His plans include ferrying cargo on the Ganges and expanding gas pipelines.
The 42 billion-rupee (Dh2.56bn), 1,620-kilometre freight route on India’s best-known river was among the most eye-catching projects in Mr Modi’s first budget, released on Thursday. Others included 523bn rupees for roads and 500bn rupees for urban infrastructure funding, part of 1.48 trillion rupees for everything from highways and ports to housing.
“The measures to boost infrastructure investment amount to a significant down payment on a key policy priority, although they still amount to only a modest step towards meeting India’s enormous needs,” said Eswar Prasad, who teaches economics at Cornell University in Ithaca, New York. Mr Modi’s task is to channel private domestic and foreign investment into such assets, he said.
The budget cleared the way for dedicated investment trusts and eased infrastructure lending rules toward that goal, steps that Fitch Ratings said may spur long-term capital investment. Mr Modi must now ensure implementation of his agenda following a landslide election victory in May, after gridlock under the previous government stalled about $255bn of projects.
The more he succeeds, the better the outlook for companies that build and power India, whose infrastructure ranked below that of China and Indonesia in a World Economic Forum survey.
Specific beneficiaries may include the engineering company Larsen & Toubro, the roads specialist IRB Infrastructure Developers, Tata Power, Cummins India and Container Corp of India, Citigroup said in a note on Friday.
The finance minister Arun Jaitley said in the budget speech for the 12 months started April 1 that the government would minimise the amount of reserves that must be set aside for funds earmarked for infrastructure lending.
That step was “significant” and the budget “categorically prioritised infrastructure development”, said R Shankar Raman, the chief financial officer at Larsen & Toubro in Mumbai. It will help to cut financing costs too, according to SMC Global Securities.
The lending measure could also bolster earnings at IDFC, India’s biggest lender to road projects, by as much as 20 per cent, according to Credit Suisse Group.
Mr Jaitley boosted plan spending — or expenditure on productive assets — by almost 200bn rupees, to 5.75tn rupees, compared with the previous government’s interim budget in February. He also plans to ease foreign-direct investment caps in defence and insurance to woo inflows.
Optimism that Mr Modi can revitalise Asia’s No 3 economy has fuelled a 19 per cent surge in the benchmark S&P BSE Sensex Index this year, more than the rise of about 4 per cent in the MSCI Asia-Pacific Index. The rupee has strengthened 2.6 per cent against the dollar in the same period.
Analysts at banks including Deutsche Bank and Nomura Holdings saw the budget as a missed chance to take tough measures on subsidies. Mr Jaitley estimated higher tax revenues and asset sales will help to pare the fiscal deficit to a seven-year low of 4.1 per cent of GDP.
Mr Modi’s government is trying to control the fiscal shortfall, curb a consumer inflation rate of more than 7 per cent and revive investment. The economy expanded 4.7 per cent in the year ended March, a pace close to a decade low.
The proposed cargo route on the Ganges will snake from the eastern coast at Haldia in West Bengal inland to Allahabad in Uttar Pradesh, India’s most populous state, and take six years to complete, the finance minister said.
Mr Jaitley also said the government wants to add 15,000km of pipelines using public-private partnerships to complete the gas grid, doubling the current length.
A key challenge is to ensure such initiatives are implemented as bureaucrats unnerved by past graft scandals involving government contracts delay approvals. A slow land-buying process, environmental objections and elevated interest rates are among the other impediments.
“There’s a lot of investments in the pipeline which need to be moved from the project stage to operating stage,” said Rajiv Agarwal, the managing director of Essar Ports.
The budget signals a desire to create a platform to get back to GDP growth rates of more than 7 per cent, according to Arvind Mahajan, a partner at consultancy KPMG in India.
“Unclogging the infrastructure sector is very critical for that,” he said. “The intent of the government is two-pronged: unravel the past and make fresh investments. This will improve sentiment and get the investment cycle back on track.”
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