At a 5.7% estimated GDP growth for
FY2013, the Indian economy will grow at the slowest pace as compared to the
last 10 years. There have been several factors that have contributed to
bringing the economy to such a standstill. Albeit, the primary reason remains
the hiatus on the government’s decision making during the last couple of years, says Knight Frank's March real estate research report.
Although, the reform measures announced
during the second half of the current financial year breaks the hiatus, its
translation in to revival of investment and consumer demand will take some
time. As a result, amidst this faltering economic growth the industry’s voice
for state support has increased, the report said.
The report further goes into details that how government funded housing schemes function and measures taken to benefit the end-users.
In line with its role, the government has also
time and again taken steps to rescue businesses in particularly difficult
times. In the past, the government has taken measures to support the ailing
industries even if it meant throwing government finances out of gear. However,
with a high fiscal
deficit of 5.2% estimated for FY2013, the state finances are constrained and hands
tied up. As a result, there has been a clear shift in the choice of
alternatives that the government has been taking recently.
With
respect to the real estate industry, the measures announced during the last two
quarters highlight the change in the way the government looks at the industry
and the manner in which it intends to reach out to the beneficiary. The
budgetary allocation for the corporate sector in general and real estate in
particular remained muted this time.
From the
choice of decisions that the government has been taking over the last few
occasions including budget, two signals emerge. First, the government will
single out housing from the overall real estate industry and second, in terms
of providing incentives it would focus directly on the intended beneficiary
i.e. the consumer rather than the producer. A close look at the decisions
related to the real estate industry over the last few occasions will
substantiate this new mind set.
External Commercial Borrowings (ECB) for low cost affordable
housing projects
In December 2012, the Reserve Bank of
India (RBI) allowed ECB for low cost affordable housing projects. Projects
providing at least 60% of the permissible FSI for units having a maximum carpet
area up to 60 sq. mtrs. (646 sq.ft.) have been made eligible for this
provision. Additionally, slum rehabilitation projects have also been allowed to
utilize this financing window.
Considering the finance crunch in the
real estate sector and the large housing shortage in the country, this move
will certainly benefit the cause of creating housing stock in the country. At
the same time categorical disallowance for acquisition of land has been made so
that the money does not flow in to land speculation.
The biggest advantage of this finance
window is the low cost, which will be London Interbank Offered Rate (less than
1%) plus a maximum of 500 bps translating in to a total financing cost of
around 6%. If the borrower can address the exchange rate risk associated with
such overseas borrowings, the cost advantage in comparison to the domestic
borrowings will provide a huge capital advantage to affordable housing
projects.
Interest deduction for consumers of affordable housing
In the union budget for 2013-14, the government has
allowed additional deduction for housing loan interest. The amount of such
interest deduction will be ` 1,00,000 for the first-home buyer who takes a loan
for an amount not exceeding ` 25,00,000 and can be claimed in a maximum of two
years beginning FY 2013- 14. Further, this deduction will be over and above the
deduction of ` 150,000 allowed for self-occupied properties under Section 24 of
the Income-tax Act.
The housing loan limit of ` 25,00,000 has been devised keeping in
mind the lower and middle income segment of the population, which also accounts
for the largest chunk of housing shortage in the country. The step provides a
clear message that although government finances are constrained, as reflected
in the high fiscal deficit numbers, it wants to provide the benefit to the
section of population which requires it the most. Indirectly, a boost to the
housing sector would provide a fillip to a number of industries like steel,
cement, brick, wood and glass besides jobs to thousands of construction workers
on account of linkages of the housing sector with these industries.
Increased financial assistance for Rural Housing
The government has entrusted National
Housing Bank (NHB) with the responsibility of managing the Rural Housing Fund
to serve the cause of increasing the housing stock in rural India. Through this
fund, the NHB refinances lending institutions that extend loans for rural
housing. In the latest budget, the government increased the allocation to this
fund by 50%. As a result, the corpus of refinancing for rural housing has
increased from ` 40 billion in the last year to ` 60 billion in 2013-14.
The impact of this fund can be assessed from the fact that until
now 4,00,000 rural families have taken loans and purchased a house with this
assistance. With the allocation to the fund increasing by a handsome 50% in the
latest budget despite the fears of fiscal imbalance, there is clearly a message
from the government to support the tenet of housing.
Setting up a fund for creation of housing stock in urban centres
Akin to the Rural Housing Fund and taking cues from its success in
rural India, the government has announced the setting up of a fund with an
objective to enhance financing for housing projects in the urban centres in the
country. The fund will fall under the ambit of the National Housing Bank (NHB)
and will have a corpus of ` 20 billion in 2013-14.
National Housing Bank (NHB), a wholly
owned subsidiary of RBI, has a mandate to promote a sound, healthy, viable and
cost effective housing finance system to cater to all segments of the
population and to integrate the housing finance system with the overall
financial system. With the setting up of this fund, financing for urban housing
will get a renewed focus. At ` 20 billion, although this fund for urban housing
is just a third in size of the rural fund, it should be construed as the first
step in the direction of focus for urban housing.
What should the real estate industry expect from government?
To a great extent, the choice of alternatives by the government is
now being guided by past experience. In the past, incentives intended for the
consumer but routed through developers did not reach the intended beneficiary.
For example, the deduction under Section 80 IB (10) provided for affordable
housing projects was intended to benefit buyers of houses that do not exceed
1000 sq.ft.
Supporting such affordable housing projects through income tax
deduction to the developer was intended to translate into lower cost of housing
for the middle and lower income sections of the population. The scheme was
applicable for a long period and successive budgets focused on tightening the
boundary conditions of this provision to curb misuse and diversions. However,
the benefit did not reach the intended beneficiary and the scheme has been
discontinued now.
Further, the strengthening of this belief is also guided by the
visibility on potential benefits in other areas of government intervention. For
instance, in the case of pricing of fuels like petrol and diesel, the government
has demonstrated a resolute determination to cut down on subsidy and allow
market forces to determine prices. Similarly for domestic fuel like LPG, the
government has acted in a similar manner.
Now, the frequent price changes of these items do not create a
hullabaloo in either the political circle or public at large. The move is
expected to have a far reaching positive impact on the country’s finances.
Firstly, allowing market forces in determining the price would limit the
government’s subsidy burden and improve fiscal position. Secondly, a lot of
illicit activity arising out of this pricing gap is also expected to reduce.
Another step in this direction, the ambitious Direct Cash Transfer
(DCT) Scheme of the Government is also gaining ground with every passing day.
With the scheme already being rolled out in more than 20 districts of the
country, the government has a target of covering the entire country by the end
of 2013. The scheme aims to provide the subsidy amount through direct bank transfer
to the eligible beneficiary thereby cutting down delays and diversions.
The choice of alternatives by the
government, in the backdrop of high fiscal deficit and slowing growth that
fuelled concerns of sovereign downgrade, clearly highlight the new mindset.
From the above instances of government intervention it is clear that besides a
few paltry measures here and there, meaningful intervention will be guided by
the new mindset.
This approach isolates housing from the
overall real estate sector and aims to provide the benefit of government
intervention directly to the intended beneficiary i.e. the consumer rather than
the developer.
