World-class infrastructure has emerged as one of the most important necessities for unleashing high and sustained growth and alleviation of poverty in any economy. And with poor infrastructure to support other growth initiatives, the Indian economy continues to be a laggard when compared to its developing peers. From a policy perspective, however, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in.

This makes the future of the Indian engineering sector extremely bright. Apart from highway development and construction and modernisation of airports, the potential for the sector lies in the oil and gas space, where high global demand has led to increased action in exploration and production activities. However, scale and execution capabilities remain the mantras for success.

Industry Wish List

FICCI's wishlist

• Abolition of dividend distribution tax
• Abolition of MAT or reduction in the same
• Rationalisation of fringe benefit tax

Budget over the years

Budget 2005-2006

• A special purpose vehicle (SPV) to be launched to finance infrastructure projects that are financially viable. Investment limit for 2005-06 is fixed at Rs 100 bn.
• NHDP-III to be launched in FY06 to target selected high density highways not forming part of the GQ or the N-S, E-W corridor; Rs 14 bn provided in FY06 to four-lane 4,000 kms.
• Excise duty on A/Cs has been reduced from 24% to 16%.

Budget 2006-2007

• Estimated outlay for Jawaharlal Nehru National Urban Renewal Mission to be Rs 62.5 bn during 2006-07, including a grant component of Rs 45.9 bn. Through this mission, the government intends to promote establishment of new towns, preferably focused on a specific industry (IT) or a specific theme (education or health).
• Budget support for National Highway Development Programme (NHDP) enhanced from Rs 93.2 bn to Rs 99.5 bn in 2006-07.
• Special accelerated road development programme for the North Eastern region proposed at an estimated cost of Rs 46.2 bn approved with allocation of Rs 5.5 bn in 2006-07
• 1,000 kms of access-controlled Expressways to be developed on the Design, Build, Finance and Operate (DBFO) model.
• Capital expenditure on defense proposed at Rs 375 bn.
• Peak rate of customs duty on non-agricultural products has been reduced from 15% to 12.5% with a few exceptions.
• Exemption to specified goods for making capital goods for setting up a unit with an investment of Rs 50 m or more withdrawn.
• Resin binders used for manufacture of rotor blades for wind operated electricity generators exempted from excise duty.
• Under NELP VI, 55 blocks and area of 355,000 sq kms offered. Investment of Rs 220 bn expected in the refinery sector in the next few years.
• Five ultra mega power projects of 4,000 MW each to be awarded before December 31, 2006

Budget 2007-2008

• Hike in corpus of Rural Infrastructure Development Fund-XIII and Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY)
• Private sector participation in transmission projects and hike in budgetary support for APDRP
• Reduction in customs duty on imports of medical equipments from 12.5% to 7.5%
• Increase in allocation to defense to Rs 960 bn, including Rs 420 bn for capital expenditure
• Concessions under section 80IA for infrastructure facilities extended to cross country natural gas distribution network, including gas pipeline and storage facilities integrated to the network
• Customs duty on sprinklers and drip irrigation systems for agricultural & horticultural purposes is reduced from 7.5% to 5%
• Concessional customs duty of 5% on specified plantation machinery extended by two years to April 2009
• Customs duty on food processing machinery and parts reduced from 7.5% to 5%
• Dividend distribution tax to be hiked from 12.5% to 15%
• Additional education cess of 1% to fund secondary and higher education

Key Positives

Power play: Since power utilities are one of the biggest consumers (generation, transmission and distribution) for engineering companies, reforms introduced in the power sector like privatisation of SEBs will help in strengthening the order book size. Huge addition in power generation capacity, in order to meet the demand supply gap will be a big positive for the sector.

Infrastructure development: The government is focusing on development of infrastructure like housing, airports, roads and ports. This will be big positive for engineering and construction companies.

Industrial 'act': Industrial divisions of engineering companies are likely to benefit from the increased focus on automation and capacity addition plans drawn by the India Inc.

Key Negatives

Captive competition: Duty free import of T&D equipments by captive power generation units, if allowed by government, can have some impact on margins of the T&D majors because of competition.

People problem: Engineering companies, across the board, are facing troubled times retaining key employees. This is due to increased levels of competition for talent from MNCs, who have deep pockets and thus better paying capabilities. As a result of increasing levels of attrition, some companies are facing execution issues.