The initiatives announced in the Budget and the measures taken outside it together will impact the demand for construction equipment. DK Vyas trains his thoughts on the likely impact of the recent Budget on the CE sector.
To Analyse the likely impact of the Union Budget 2013-14 on the construction equipment (CE) industry, we need to understand what initiatives have been taken on the infrastructure front in the Budget. The Finance Minister's emphasis on countering economic slowdown by stepping up and encouraging investments in infrastructure is sound economics and this augurs well for the long-term growth of the country.
Under plan allocation, total spending on infrastructure for FY14 is almost 35 per cent hike over FY13. Budget made the customary enhancements in corpus for government programmes like MGNREGA, PMGSY, RIDF, Indira Awas Yojana, along with increased funds for NABARD so that refinancing can be extended to projects pertaining to warehousing, cold storage, etc. These are expected to address the supply bottlenecks that have been instrumental in keeping food inflation at double-digit level persistently. Projects aimed at improving connectivity were also announced like the 3,000 km of new road projects to be awarded in the next six months, two new ports (in West Bengal and Andhra Pradesh), one outer harbour (in Tamil Nadu), a grid combining ports, inland waterways and roadways, and dedicated rail freight corridors. In addition, first time home buyers taking home loan up to Rs 25 lakh will be allowed to avail additional deduction of interest up to Rs 1 lakh. This is likely to provide a stimulus for housing especially in the non-metros. All these steps will cumulatively increase demand for CE.
Infrastructure creation in India has witnessed a gradual rise in private sector participation. Towards promoting this trend, the Finance Minister has done well in announcing steps like adoption of a PPP approach to step up domestic coal production, moving from a profit sharing to a revenue sharing arrangement in terms of oil and gas production, encouragement to Infrastructure Debt Funds (IDFs), formulation of credit guarantee schemes to raise bond ratings, promoting PPP in agri-storage, etc. The announcement of forming a regulator for the road sector is also good news for private players. Budget also assured that several NELP blocks, which were awarded but got stalled, would be cleared. This year's Budget seems to have allowed private infrastructure firms to mobilise resources by floating interest-free bonds, an avenue which was earlier reserved for select public institutions. The Finance Minister, in his speech, mentioned that companies, after getting government approval, can raise funds by issuing tax-free bonds.
The fillip that these steps are likely to provide private sector participation in infrastructure will obviously translate into higher demand for CE. In the coming days, I feel as the onus of infrastructure creation shifts gradually from government domain to private sector, leasing will take off in a big way in India. Private players, unlike government, are more aware of the cost-effectiveness and benefits of leasing. The investment allowance of 15 per cent for investment in plant and machinery made in the Budget is likely to provide an impetus to capacity creation and OEMs stand to benefit from this.
Providing support to IDFs at this stage is imperative as the banks are constrained and unable to increase their exposure to infrastructure projects. I hope the IDFs will be able to mobilise resources from a diverse cross section of investors with government's support.
The Finance Minister deserves kudos for proposing a carrot-and-stick approach for skill development programmes. For a nation hungry to reap its demographic dividend, our skill sets are woefully below standard. The skill-gap is one major area of concern for the infrastructure industry. The financial incentive planned for successful completion of training courses offered by National Skill Development Centre would go a long way in upgrading skill sets of many. Infrastructure creation is becoming more and more mechanised, and thus operation of CE calls for specific skill sets. Today we need more technically qualified and competent manpower to ensure speedy project implementation.
Of course, the Union Budget should not be viewed in isolation. The government has, of late, taken several steps aimed at expediting infrastructure growth. The Cabinet Committee on Investment, which is a watered down version of the National Investment Board, deserves special mention as the intention is to clear regulatory hurdles for large-sized infrastructure projects. Intent is definitely good, especially when the economy is in the middle of a slowdown. RBI has cut policy rates by 50 basis points and the CRR by 25 basis points in 2013 so far, indicating that it is ready to complement the fiscal efforts to re-start growth. From here on, the Finance Ministry and RBI are expected to work in tandem to take the economy to a higher growth trajectory while keeping a lid on inflation. Some of the factors that are becoming major stumbling blocks for infrastructure projects are land acquisition and clearances relating to environment. Government needs to address these fast.
Overall, this year's Budget has several positives for the CE industry. The initiatives announced in the Budget and the measures taken outside it together will impact the demand for construction equipment. However, it remains to be seen whether government has the appetite for the more difficult reforms because those will ultimately determine the course of developments in the infrastructure sector and, in turn, the demand for CE.
The initiatives announced in the Budget and the measures taken outside it together will impact the demand for construction equipment.