Budget 2016 – The Big Push for Infrastructure

The first report on infrastructure shortfall prepared by the Rakesh Mohan Committee in 1997 had estimated the shortfall in infrastructure investment at $200 billion over 5 years. Despite investment in infrastructure over the last many years, the gap has only widened. According to current estimates, the government needs to spend nearly $1 trillion over the next five years or nearly $200 billion per year. Obviously, the government had to plunge head-on into infrastructure creation and this budget has rightly made the right noises and taken the right steps. Here are a few of them.

Roads will once again be the lifeline of Indian infrastructure…

The budget envisages a total investment of Rs.97,000 crore in roads during the fiscal year 2016-17. The government proposes nearly 10,000 kilometres of national highways during the coming fiscal, the highest ever. Nearly 60% of this funds requirement has already come in the form of budgetary allocation and the balance will have to be met with infrastructure bonds and through private participation. For long the monopoly of the state governments in running passenger transport has been questioned. That has been changed and the budget has envisaged the entry of private players into the passenger transport services in a much bigger way.

Focusing on allied areas of infrastructure…

The budget 2016 has gone beyond road infrastructure. We have already seen a massive allocation to the infrastructure of Indian railways in the Railway Budget. There are three additional areas that this budget has focused on with a view to making Indian infrastructure globally competitive. Firstly, the government has planned a massive drive to revive un-served and under-served airports across India. This will be done in public-private partnership. If the airports are developed in a big way, then the cost of flying can be reduced substantially and a vast market awaits the airlines. Secondly, the government has given special incentives for deep-sea drilling of oil and gas. This was essential due to the cheap price of crude and the low probability of finding oil and gas in this space. Thirdly, the government is also drawing up a massive plan to expand nuclear power capacity substantially in India over the next five years to address the issue of power shortage and also the issue of clean power.

Giving a boost to the PPP model…

The success of infrastructure development in many countries has largely depended on the success of a public-private-partnership (PPP) model. In India, this model has got stuck due to a plethora of legal, procedural and risk-related issues. The government has taken a few concrete steps on these lines. Firstly, a separate bill called the Public Utility (Resolution of Disputes) Bill will be introduced in this fiscal year. This will broadly cover all probable disputes that may arise in the course of a PPP contract. Secondly, the government also plans to issue the much-awaited guidelines on the terms of renegotiation of the PPP Concession Agreement. This will put a lot of disputes to rest. More importantly the government proposes to launch a new credit rating mechanism for infrastructure projects so that there can be a documented and scientific method of measuring the risks and payoffs of every infrastructure project.

Getting the bigger picture right…

The importance of quality infrastructure in the form of better roads, better connectivity, quality ports with low turnaround times and seamless connectivity cannot be overestimated. We have seen the case study of China; how quality infrastructure has propelled the economy. Remember, in 1990, Indian economy was as large as China. Today, if Chinese economy is 5 times the size of India, it largely owes this growth to the quality of infrastructure in place.

According to conservative estimates, quality infrastructure is likely to add nearly 2% to India’s annual GDP growth. That is an additional boost of $40 billion of output per year with massive ramifications for employment and incomes. The time to start the big focus is now. The budget 2016 has done exactly that!

Read more about Union Budget 2016 highlights at Religare Online.

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