This budget has clearly set the right tone for foreign investors and the infrastructure sector. The priority for the government is to encourage greater inflow of foreign investment.
While, a relook at the existent FDI and FII policy would be a first step, easing procedural hurdles and removing uncertainty in the policy environment were crucial.
Increase in FDI limits of both defence and insurance is a welcome move. The insurance sector has been starved for capital and it is hoped that with the increase in the FDI limit and the subsequent passing of the Insurance (Amendment) Bill the sector will find ways to become productive again. This will also mean that FDI limit in the pension sector will rise to 49 per cent. Hopefully, this will incentivise many of the foreign players to enter the India pensions market.
It is also a good sign that the government has not only taken cognizance of the fact the capital requirement for public sector banks according to the Basel III norms is steep. A well thought out road map will help reduce the government’s share in PSU banks and bring about greater autonomy for the banks too. The banking sector has more reasons to cheer. Banks have always faced problems when it came to long-term infrastructure funding. Rising NPAs only made it worse. Banks will certainly cheer the 5/25 structure and the easing of CRR, SLR and PSL when raising long-term funds for infra funding.
The introduction of the new Infrastructure Investment Trusts (InvITs) will help ease infra financing pressures for banks. In India, REITS have not had the success that they have in other countries. Both REITS and InvITs will act as suitable conduits for foreign money to flow in. Investment trusts should be the way forward for channelling foreign and domestic funding into infra.
There have been many positive announcements on capital markets. While many details would have to be worked out with the regulators, the sentiment is clear. Capital raising should be made easier for domestic companies from within and without India and clarifications on many tax issues will send the right signal to foreign investors.
The corporate bond market is a priority for the country and therefore the announcement of a 5 per cent withholding tax for not just infra bonds but all bonds is both a welcome and prudent move. The flip side, however, is the new definition of long term and new tax treatment for debt mutual funds.