Budget 2015: Infrastructure bonds to stage a comeback?

Indian economy is on the move and the growth rate is expected to touch more than 6.5% by Financial Year 2015-16. The government has already taken significant steps to improve foreign investments in India in various sectors like defence, insurance, infrastructure etc. However, India still has a long way to go.

We are still ranked 86 amongst 139 countries with regards to quality of overall infrastructure, which is way below other emerging countries such as China (50) and Brazil (62) in the World Economic Forum's 2010-11 global competitiveness index.

Perhaps, this is why the new government has identified infrastructure development as one of its key focus areas. The NaMo Government has a comprehensive agenda intended at taming inflation and giving a boost to investments in manufacturing and infrastructure sectors. Several measures towards creation of a seamless logistics network were indicated in the last Union Budget. These included setting up of new airports, ports, industrial corridors and an institution to support mainstreaming of PPPs. Measures were also taken to provide long-term capital for financing such projects, by introducing Real Estate Investment Trust (‘REIT’) and Infrastructure investment trusts (‘InvITs’).

The Government is also expected to introduce a slew of reforms to improve growth and announce a number of measures to encourage infrastructure financing as part of its plan to improve the infrastructure facilities of India.

Infrastructure sector is short of funds
It’s no secret that big economies that are poised for long-term rapid growth need improved infrastructure. There have been a number of stalled infrastructure projects for developments of roads, railways, ports, power etc. in India. The Indian economy requires more than USD$1 trillion in the next 3-5 years for building our infrastructure, but banks with their balance sheet constraints will not be able to meet this requirement. Banks do not have access to long-term deposits and, therefore, long-term loans are seen as a risky proposition that create asset-liability mismatch. NPAs of state-run banks rose to 4.5% of advances at the end of March from 2.3% in the previous year, largely due to delayed clearances or fuel supply in case of power projects. Also, there is also a restriction on how much banks can lend to an individual project.

Infrastructure bonds offer the way out
One method of raising funds for infrastructure companies is to issue long-term infrastructure bonds to various investors. In the Finance Act 2010, the Government had introduced Section 80CCF in the Income-Tax Act (‘Act’), whereby they allowed a deduction of Rs 20,000 in computing their total income for subscribing to such long-term infrastructure bonds issued by government notified infrastructure companies.

The rationale of providing this deduction was to promote investment in the infrastructure sector. However, the benefit of Section 80CCF of the Act was available only for assessment years beginning April, 2011 and year April, 2012. The long-term infrastructure bonds had a maturity period ranging from 10-15 years and many companies provided a buy back option after 5 years without sacrificing any interest income. The bonds were listed on the stock exchanges and could be traded after the five year lock-in-period. The issuers of such bonds were not allowed to pay more than the yield on government securities of same maturity. This benefit under section 80CCF of the Act was provided to individuals and HUF over and above the deduction provided under section 80C of the Act which is presently at Rs 1.5 lakhs.

With large investments required in building infrastructure in India, the benefit of Section 80CCF should be reintroduced in Budget 2015. It is recommended that benefit of Section 80ccF of the Act be restored and the deduction of Rs 20,000 earlier provided be increased to Rs 50,000. An increase in such deduction would let one save tax up to Rs 16,995 for an assessee in highest tax bracket. Previously, such deduction was allowed on investment in long-term infrastructure bonds issued by government notified infrastructure companies only. It is recommended that such benefit of deduction be also allowed on long-term infrastructure bonds issued by private companies. Reintroduction of infrastructure bonds will serve the objectives of mobilising long-term savings into a financial instrument will also help fund country's growth.

(About the author: This article has been contributed by Rakesh Nangia, Managing Partner, Nangia & Co. He was assisted by Neha Malhotra from Nangia & Co.)