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Construction sector cautious on infrastructure allocations

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Amit Mitra

Mumbai, March 1

THE domestic engineering and construction industry virtually gasped as the Finance Minister, Mr P. Chidambaram, while presenting the Budget on Monday, began to reel out the increased allocations to the infrastructure sector, including roads, housing and water projects.

But later, the overall reaction of the industry seemed to have mellowed down to one of cautious optimism.

"We are definitely bullish about the amount of work we will be getting. But allocations seldom translate into actual orders. And moreover, the Budget did not adequately focus on ways to enhance the capability of the domestic industry by way of incentives to cater to this market expansion," says a senior representative of the industry.

Indeed, the allocation of over Rs 20,000 crore for infrastructure projects, including Rs 4,700 crore for water supply schemes, Rs 450 crore for highway development projects in the North-East and Rs 9,320 crore for National Highways means a significant opening up of the market for the domestic companies.

But, faced with shrinking margins in the wake of a steep rise in prices of inputs, the industry was looking for some incentives to enhance its preparedness to handle the market expansion.

"For example, we have been seeking lowering of the import duties on construction equipment and also seeking some cushion against the recent abnormal increases in steel prices.

Also, policies in terms of depreciation and tax incentives have not been clearly defined by the Budget. We would have appreciated a fast rate of depreciation or investment allowance in terms of capacity building. Some incentives for project exports are also necessary," Mr Amitabh Mundhra, Director of Simplex Concrete Piles India Ltd, told Business Line.

Added Mr Arup Roy Choudhury, CMD of National Buildings and Construction Corporation Ltd: "Allocations are fine, but these should actually be converted into execution of projects. Also, we have been seeking some cushion against the abnormal increase in steel prices, which constitute about 35 per cent of the project cost."

The industry was, however, bullish over the amount of work that will be emerging in this sector in the wake of the increased allocations.

Mr Mundhra pointed out: "As of now, we (Simplex) have orders worth Rs 3,500 crore. I am sure with the increased allocations, there will be enough work for all of us (in this sector)".

While generally appreciating the announcement of creating a special purpose vehicle (SPV) to finance infrastructure projects, industry players are cautious in their reaction.

"The much-awaited use of forex reserves for funding infrastructure through financial SPV has been announced. But, what is more important is how this funding mechanism will be effectively operationalised. The other challenge is for the mechanism to stay inflation-neutral," points out Mr Y.M. Deosthalee, Chief Financial Officer of Larsen & Toubro Ltd.

(This article was published in the Business Line print edition dated March 2, 2005)
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