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Innovative Financing Solutions Needed in Budget: Ajay Bagga

Ajay Bagga, Chairman of OPC Asset Solutions

Market veteran Ajay Bagga says Finance Minister Arun Jaitley has to look for "innovative" solutions in the budget to raise resources given the "very poor" state of the government finances and the limited room to cut subsidies.

"In the budget arithmetic, we have revenues of Rs 11 lakh crore and expenditure of around Rs 17 lakh crore," says Mr Bagga, who is now the chairman of OPC Asset Solutions. (Watch video)

Mr Bagga says the finance minister has very limited headroom to cut subsidies, which was pegged at nearly Rs 2.5 lakh crore in the 2014 interim budget. "Subsidies you can't touch, except diesel which you can keep hiking. Others like food and fertiliser really are very difficult with assembly elections round the corner," he added.

However, a lot can be done with little legislation and no road blocks, Mr Bagga said.

Mr Jaitley can look for some innovative financing options like the recently mooted financial corporation for the road sector, Mr Bagga said.

New reports quoting sources said the government plans to set up a finance corporation for road projects, with a capital of Rs 1 lakh crore. Japanese investors would be roped in as partners and highway tolls would be securitised to raise money, the reports added.

Mr Jaitley can also look to at giving "proper tax treatment" to infra bonds for raising long-term resources for the sector, Mr Bagga says.

The industry had raised Rs 45,000 crore last year and it can go up to Rs 1 lakh year this year with "proper tax treatment", he adds.

Mr Bagga suggests the finance minister can save nearly Rs 29,000 crore by allowing Railways to raise funds through one of its financing arms, instead of giving a budgetary support to the national transporter.

In the interim budget tabled in February, former finance minister P. Chidambaram pegged budgetary support to Railways at Rs 29,000 crore in 2014-15.

"Take out the amount from the Railways and allow it to issue bonds at attractive rates to retail investors at attractive rates for 20-30 years," Mr Bagga suggests.

Mr Bagga says the finance minister can tap a lot of global liquidity for infra funding, especially Japanese pension funds, "if we give then financial assets that run concurrently to the infra assets."

"The Japanese pension funds have got a mandate to sell out the local bonds and get into global bonds. They have invested $200 billion into high grade Asian bonds," he says.

Besides, "Canadian pension funds and cash-rich Middle East funds are buying direct assets. Give them also financial assets to invest," Mr Bagga adds.

Recently, Canada Pension Plan Investment Board (CPPIB) agreed to invest over Rs 2,000 crore in its infrastructure company L&T IDPL, the first direct private investment by a Canadian pension fund in a domestic infra development company.

Mr Bagga says Finance Minister Arun Jaitley can help free up some money invested in real estate sector if he announces guidelines for real estate investment trusts (REITs).

REITs are listed entities that invest mainly in leased office and retail assets and distribute most of their income to shareholders as dividends. It gives developers a new avenue to raise funds by allowing them to sell finished commercial buildings to investors and list them as a trust. India issued draft regulations for REITs in 2008, but was forced to shelve the plans after the global financial crisis dried up investor interest and an economic downturn dimmed the outlook for real estate investments.

"REITs can replace some bank lending with publicly listed lending. There are about Rs 100,000 crore worth of rental discounts in the market, Mr Bagga says.