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Budget 2011: Construction

India is on the verge of witnessing a sustained growth in infrastructure buildup. With a slew of announcements in housing, road, port and airport development, we are seemingly on a path of sustained recovery in infrastructure construction in the country. As infrastructure plays a vital role in the Indian economy, many experts believe that in order to go to a double digit growth path in the future, investments in the infrastructure sector should be increased. Given Rs 2,140 bn earmarked for the infrastructure development, we believe this a step in the right direction. However, despite earmarking huge amount of sum each year, the state of infrastructure continues to remain dismal as execution issues (due to political and bureaucratic delays) continue to plague the sector. Even the tight monetary environment due to high inflationary expectations has stemmed the credit flow into the sector.

However, the slew of measures announced in the budget like raising the FII limit for investment in infrastructure bonds and lowering the with-holding tax for notified infra funds should ease the credit flow into the sector.

 Budget Expectations
  • Better funding mechanism for infrastructure projects.

  • Lowering provisioning norms for bank lending to construction/real estate companies. This will infuse liquidity and re-instill confidence in the battered down sectors.

  • Extension of interest rate subsidy for affordable housing.

  • MAT to remain stable at current levels - An increase in MAT rate when the industry is struggling for profitability will not be well received.

  • Taking concrete steps in developing infrastructure debt fund which can attract long term capital from overseas countries into Indian markets.

  • Providing additional tax breaks in order to encourage private sector participation in the infrastructure sector.

  • Allowing access to ECBs for funding construction cost of real estate projects. This will not only reduce the cost of borrowing but also reduce reliance on banks which have been a bit hesitant in lending to the real estate players.

     Budget Measures
  • Government earmarks Rs 2140 bn for infrastructure development

  • In order to boost infrastructure spend, tax free bonds of Rs 300 bn to be issued by government undertakings.

  • IIFCL to achieve a disbursement target of Rs 250 bn by 2012.

  • Low with-holding tax of 5% for notified infra funds.

  • In order to enable fund flow into the infrastructure sector, FII limit for investment in corporate infrastructure bonds has been raised by US$25 bn. Now the total limit available to FIIs for investment in corporate bonds stands at US$ 40 bn.

  • Interest rate subsidy on affordable housing extended by another year. However, the definition of low cost housing has been modified. Interest subvention of 1% will be provided for loans up to Rs 1.5 m, provided the cost of home does not exceed Rs 2.5 m (Earlier the cost of home was pegged at Rs 2m)

  • Setting up a rural infrastructure development fund of Rs 180 bn

  • Additional tax relief for investing in infrastructure bonds is extended by another year.

  • MAT raised from 18% to 18.5%

     Budget Impact
  • Raising the FII limit for investment in corporate infrastructure bonds will enable the flow of credit into the sector

  • Raising the disbursement target by IIFCL will improve the source of liquidity in an environment where credit is hard to come by.

  • Extension of interest rate subsidy will boost the demand for affordable housing

  • Providing additional tax relief for investment in infrastructure bonds will further encourage retail participation in the sector

     Company Impact
  • Raising FII limit for investment in infrastructure bonds will benefit the entire sector per se thereby presenting another vital source of liquidity in cash starved environment.

  • Extension of interest rate subsidy to benefit companies like Parsvnath and HDIL as they cater to low income housing group.

  • Raising of MAT to have minimal impact on the profitability as the increase is miniscule and will be partially compensated by reduction in surcharge.

    Budget Impact: Construction Sector Analysis for 2010 
    Latest: Performance Of Construction Stocks | Construction Sector Report

  • Complete coverage Budget 2011

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