New Delhi: Indian Prime Minister Narendra Modi is pledging $25 billion to unclog India’s choked transport links, spur power output and build cities. His plans include ferrying cargo on the Ganges and expanding gas pipelines.

The ₹ 4,200 crore, 1,620-kilometer freight route on India’s best-known river was among the most eye-catching projects in Modi’s first budget on 10 July. Others included ₹ 52,300 crore for roads and ₹ 50,000 crore for urban infrastructure funding, part of ₹ 1.48 trillion for everything from highways and ports to housing.

“The measures to boost infrastructure investment amount to a significant down payment on a key policy priority, although they still amount to only a modest step towards meeting India’s enormous needs," Eswar Prasad, who teaches economics at Cornell University in Ithaca, New York, said in an e-mail. “Modi’s task is to channel private domestic and foreign investment into such assets," he said.

The budget cleared the way for dedicated investment trusts and eased infrastructure lending rules toward that goal, steps that Fitch Ratings said may spur long-term capital investment. Modi must now ensure implementation of his agenda following a landslide election victory in May, after gridlock under the previous government stalled about $255 billion of projects.

The more he succeeds, the better the outlook for companies that build and power India, whose infrastructure ranked below China and Indonesia in a World Economic Forum survey.

Financing costs

Specific beneficiaries may include engineering company Larsen & Toubro Ltd, roads specialist IRB Infrastructure Developers Ltd, Tata Power Co. Ltd, Cummins India Ltd and Container Corp. of India," Citigroup Inc. said in a 11 July note.

Finance Minister Arun Jaitley said in the budget speech for the 12 months started 1 April that the government will minimize the amount of reserves that must be set aside for funds earmarked for infrastructure lending.

“That step is significant and the budget categorically prioritized infrastructure development," said R. Shankar Raman, the chief financial officer at Larsen & Toubro in Mumbai. “It will help cut financing costs too," according to SMC Global Securities Ltd.

The lending measure could also bolster earnings at IDFC Ltd., India’s biggest lender to road projects, by as much as 20%, according to Credit Suisse Group AG.

Market optimism

Jaitley boosted plan spending—or expenditure on productive assets—by almost ₹ 20,000 crore, to ₹ 5.75 trillion, compared with the previous government’s interim budget in February. He also plans to ease foreign-direct investment caps in defence and insurance to woo inflows.

Optimism that Modi can revitalize the country’s economy has fuelled an 18% surge in the benchmark S&P BSE Sensex Index this year, more than the rise of about 4% in the MSCI Asia-Pacific Index. The rupee has strengthened almost 3% against the dollar in the same period.

Analysts at banks including Deutsche Bank AG and Nomura Holdings Inc. saw the budget as a missed chance to take tough measures on subsidies. Jaitley estimated higher tax revenues and asset sales will help pare the fiscal deficit to a seven-year low of 4.1% of gross domestic product (GDP).

Modi’s government is trying to control the fiscal shortfall, curb a consumer inflation rate of more than 7% and revive investment. The economy expanded 4.7% in the year ended March, a pace close to a decade low.

Implementation risk

Modi’s Bharatiya Janata Party (BJP) has promised reliable electricity for all households by 2022, 100 new so-called smart cities and bullet trains, among other pledges. The budget allocated an initial ₹ 7060 crore for the cities project.

The proposed cargo route on the Ganges will snake from the eastern coast at Haldia in West Bengal inland to Allahabad in Uttar Pradesh, India’s most populous state, and take six years to complete, the finance minister said.

Jaitley also said the government wants to add 15,000 kilometres of pipelines using public-private partnerships to complete the gas grid, doubling the current length. There were about three dozen mentions of infrastructure in his speech.

A key challenge is to ensure such initiatives are implemented as bureaucrats unnerved by past graft scandals involving government contracts delay approvals. A slow land- buying process, environmental objections and elevated interest rates are among the other impediments.

“There’s lot of investments in the pipeline which need to be moved from the project stage to operating stage, “said Rajiv Agarwal, chief executive officer of Essar Ports Ltd.

“Even so, India’s infrastructure industry is set to receive a multi-year boost from the budget," Fitch said in a 13 July statement.

“The budget signals a desire to create a platform to get back to GDP growth rates of more than 7%," according to Arvind Mahajan, a partner at consultancy KPMG in India.

“Unclogging the infrastructure sector is very critical for that," he said. “The intent of the government is two-pronged: unravel the past and make fresh investments. This will improve sentiment and get the investment cycle back on track." Bloomberg

Subscribe to Mint Newsletters * Enter a valid email * Thank you for subscribing to our newsletter.

Share Via