Indian infrastructure presents opportunity

Investment in the sector equalled 6% of GDP last year, compared with 8.5% in China

"There are thousands of challenges, challenges in project implementation, funding them, getting the clearances. These have always been there," said Archana Hingorani, chief executive of private equity firm IL&FS Investment Managers, which along with Standard Chartered runs the $600 million (Rs2,910 crore) Standard Chartered ILFS Asia Infrastructure Growth Fund. "If one thinks just because the government is better these will go away, I don't think so. Having said that, is that a major deterrent? Certainly not. Opportunities continue."

The demand for infrastructure investment is obvious in India. With an economy that grew at least 9% annually in the three years through March 2008, India is choking on overcrowded roads and railway lines, with businesses large and small forced to self-generate power in order to ensure supply.

Difficulties with land acquisition, long-term financing, red tape and a dearth of attractive projects have curbed development of infrastructure in the world's second most populous country

While stock prices of Indian companies poised to capitalize on a wave of infrastructure investment have rallied, valuations of companies and individual projects remain lower than during the rally that peaked in early 2008.

For example, Larsen and Toubro Ltd, one of the country's top infrastructure-linked companies, now trades at about 29 times trailing earnings compared with the 52-week high of 37 times.

"There is no doubt that one of the key themes for India for years to come will be infrastructure spending," said Binay Chandgothia, chief investment officer at Principal Asset Management in Hong Kong, adding that appropriate valuations will depend on government policies and incentives for foreign capital.

Banks seek tax relief on infrastructure lending

Indian banks have sought tax relief on interest earned on infrastructure lending in the federal budget for FY10, to enable them to lend more to the sector.

"We are in favour of exemption of interest income from lending to infrastructure sector, to help lend more to the sector," B A Prabhakar, executive director at Bank of India , said.

The relief was withdrawn by the federal government in 2007.

Finance Minister Pranab Mukherjee will present the federal budget on July 6.

The sector expects several positive measures as banks play a key role as intermediates for demand and supply of funds with the economy showing signs of a revival, resulting in a pick-up in the investment cycle, bankers said.

Bankers have also sought rebate for long-term deposits, which are necessary for infrastructure funding. This will help pay high rate of interests for such deposits, Prabhakar said.

"Tax relief on earnings in infrastructure lending will boost growth in the economy as a whole," M.D.Mallya, chairman and managing director at state-run Bank of Baroda , said.

"More lending to the sector will help growth in sectors like steel and cement. It will also help rural growth," Mallya, also the newly elected deputy chairman of Indian Banks Association , said.

The IBA has also sought reduction of lock-in period of deposits that attract tax deduction to three years, from five years now.

This will help bring it at par with equity-linked savings schemes that get tax deduction for three-year lock-in period.

"Our wishlist is growth oriented and will help in faster financial inclusion," said M.V. Nair, chairman and managing director, Union Bank of India , and chairman of IBA.

Banks should also be keeping a watch on announcements of government borrowing plan in the federal budget, apart from its demands on infrastructure lending, said Anando Bhowmick, analyst at Fitch Ratings.