Fitch: Infrastructure to be 'tackled' outside budget

(The following statement was released by the ratings agency)

July 6 - Fitch Ratings has today said that given India's ever widening physical and social infrastructure deficit, universally recognised as major bottlenecks to sustained economic growth, the expectations that the Budget for FY10 presented in Parliament today would provide a fillip to the sector were very high.

This was especially so given the current global economic environment and infrastructure's perceived counter-cyclical impact and there was considerable hope that the Budget document would unveil several 'stimulus' measures.

While there were no 'big-bang' policy announcements, some of the proposals - such as increasing the allocation to National Highways Authority of India (NHAI, 'AAA(ind)'/Stable Outlook) for financing the key national highways programme, permitting the India Infrastructure Financial Corporation Limited (IIFCL, 'AAA(ind)(SO)') to refinance 60% of bank loans for public-private partnership projects (PPP) projects besides being mandated to evolve a take-out financing scheme, the enhanced allocation of federal grants under the government's flagship urban infrastructure programme (Jawaharlal National Urban Renewal Mission (JNNURM)) and higher spending on a host of government-sponsored schemes aimed at improving rural infrastructure - should be viewed as steps in the right direction even if they are only incremental measures.

On the fiscal side, the investment-linked tax incentives to be provided to 'cold chain' warehousing facilities and natural gas or crude or petroleum oil pipeline networks should provide some impetus to new asset creation in these areas.

Fitch does not believe that any of the budget proposals would have a material impact on the national ratings that it currently maintains on infrastructure project debt. Also, they are unlikely to affect credit quality of new projects that have yet to receive financial closure.

In Fitch's view, there is a limitation to what can be accomplished by the government through a financial document such as the Budget; the challenges confronting the infrastructure sector extend far beyond merely trying to find adequate capital, albeit an important ingredient.

A simple and transparent, yet flexible, policy framework coupled with strong execution capabilities - for both the government in managing the PPP process and the private sector for undertaking the construction and maintenance of large and complex projects - will be vital. Also essential is ensuring a pipeline of bankable projects in order to sustain investor interest, besides facilitating the development of a long-term bond market.

It is encouraging to note that the Government of India's economic survey released last week recognises these specific issues.