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Indian budget may sweeten infrastructure tax break

NEW DELHI: India could widen the scope of tax concessions to boost infrastructure in next week's budget, but the question of where private funding can be found for desperately needed projects may remain unanswered.

Analysts said that, nine years into its economic reform programme, India has still not cracked problems which deter investors -- among them the muscle of unions in state-run facilities and what they can charge users.

India has a five-year income tax holiday to aid companies that build power plants, roads, telecom facilities and ports.

However, this provides little comfort in an industry where early risks are high and market-determined consumer payments are still a controversial matter.

Finance Minister Yashwant Sinha, who is scheduled to present the budget for fiscal 2000/01 (April-March) on Monday, could make the deal sweeter by allowing infrastructure firms more flexibility on when they can take the tax break.

"You might see the beginning of a more rational approach to infrastructure concessions," said a senior industry official, who asked not to be identified. "There may be a different approach to infrastructure taxation than in the past."

There is now a broad political consensus in favour of private funding for infrastructure, but financing is still often held up by state-level red tape and problems over user charges.

"Until the budget gives a signal of making people pay...you won't get financial closures," Rakesh Mohan, director-general of the National Council for Applied Economic Research, told Reuters.

Mohan headed a government panel which estimated around four years ago that India needed infrastructure investment of over $272 billion at 1995/96 prices over the next decade to sustain an annual gross domestic product (GDP) growth rate of seven percent.

Lobbies of well-to-do farmers, which carry political clout, have forced state governments to retain subsidies on power. Plans to restructure loss-making state electricity boards (SEBs) have also run into heavy opposition from unions.

Last month, 87,000 power workers blacked out parts of the country's most populous state, Uttar Pradesh, with a strike over plans to turn the local SEB into a company.

The unions' resolve buckled after 11 days as the government stood firm. But the writing was on the wall for other states planning SEB corporatisation as a first step to privatisation: opposition will be fierce.

Power unions are not the only reactionaries.

Last year lawmakers forced the government to whittle down a hike in phone charges, and truckers in Delhi howled at a toll tax, a worrying signal for would-be investors in private roads.

However, several developments to aid Indian infrastructure in the long term have gained ground, analysts say.

Parliament has passed a bill to allow foreign and private investors into the insurance sector, paving the way for huge long-term savings which could be funnelled into infrastructure.

Many expect budgetary steps which would pressure state governments to abolish or simplify stamp duties on the transfer of debt instruments, and they are eyeing measures to facilitate turning loans into liquid debt, which would reduce lending risks.

"Rationalisation of stamp duties across states is an area that requires immediate attenion to promote the secondary debt market," the Confederation of Indian Industry and consultants PricewaterhouseCoopers said in a recent report.

"Creating an appropriate legal framework for securitisation of transactions is another step that is long overdue," they said.

While still some barriers need to be surmounted, analysts note significant progress on other fronts.

Last year the government moved forward with a model concession agreement which has been widely accepted as a blueprint for road contracts which would help bankers lend to private builders.

It also imposed a one-rupee-per-litre tax on petrol and diesel, the proceeds of which would be spent on highways.

After years of courtroom wrangling, the government has set up a disputes settlement panel on telecoms regulation and an official group is exploring a convergence law to help information technology, media and telecommunciations to work together.

Private port facilities are also progressing well, with regulation regimes in place to aid viable economic tariffs.-Reuters