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The budget seeks to raise resources for infrastructure via new institutional structures, large-scale monetisation of built-up assets and stepped-up capital expenditure. The multiplier effect of infrastructure investment in India is a high 2.5, in the year it takes place, so the sharp increase in budgeted capital funding, at Rs 5.54 lakh crore, would smartly boost growth. The way forward is to streamline project implementation and follow through.
Raising the foreign direct investment limit in insurance will allow the sector to grow, commensurately increasing the pool of savings available for long-term investment of the kind needed by infrastructure.
Setting up a development finance institution for focused funding of infrastructural projects is clearly a step in the right direction, at a time when the corporate bond market is as yet still maturing, and its capital base of Rs 20,000 crore can be leveraged for at least Rs 5 lakh crore in project funding. In tandem, the move to set up an institution for market-making in the corporate bonds market makes perfect sense.
It would help build an active and vibrant corporate bond market, essential for modern, arm’s-length finance for long-gestation projects. An asset reconstruction company and an asset management company to take bad loans off bank books and recapitalisation of the banks are welcome steps to ease the flow of credit. However, the Centre must not lose interest in the Credit Guarantee Enhancement Corporation, announced in 2019.
Infrastructure is prone to a panoply of project and construction risks, and we do need institutional arrangements to partially guarantee bond payments so as to make infrastructural bonds suitably attractive for long-term investors such as pension funds and insurance companies.
The budget proposes to ease cross-border institutional funds flow for long-term projects. The move to exempt dividend payments of real estate and infrastructural investment trusts from tax deduction at source is sound, as are zero-coupon bonds for infrastructure. Implementation holds the key now.
This piece appeared as an editorial opinion in the print edition of The Economic Times.