Union Budget 2012
Union Budget 2012
The latest national budget has given India?s realty sector a short shrift, despite its stated objective to create conditions for growth, focusing on domestic-driven growth recovery. It has sadly even ignored the prescription given by the Economic Survey for 1011-12 that has projected the share of the country’s realty industry to grow from 5 percent to 6 percent soon.

What is really disappointing is that barring some window dressing, the budget has not taken any concrete measures to address the twin crucial issues of increasing supply and boosting demand. This was the primary requirement given that the industry has been reeling under high property prices, liquidity crunch, costly debt, muted foreign capital inflows, increasing inflation coupled with low business sentiment.

Today, residential properties, principal demand driver for real estate remains restrained with key indicators like sales and absorption hit by high prices, spurred by increasing inputs and debt costs. This is clearly evident from the industry statistics showing almost 50 percent of unsold inventory in top cities like the National Capital Region, Mumbai and Bangalore. So much so that even affordable housing has been facing a slow down.

In this backdrop, the real estate sector that is under stress required a booster dose in terms of fiscal incentives supported by enabling development and regulatory environment. But that has clearly not happened in the budget.

Liquidity crunch has been the bane of real estate but budget has not addressed this serious issue of low bank credit flow and high funding cost. The long pending demand of the sector for granting industry status and giving infrastructure status to big township projects has been ignored, denying easy credit access at cheaper rates.

High property valuations are having negative impact on flow of foreign capital especially as investors abroad are already wary of ambiguous policies and lack of transparency in real estate transactions in the absence of a regulator. And the budget has done nothing to liberalise such investment and exit norms. The brakes on foreign equity in multi-brand retail will further retard the growth of retail real estate.

The budget does not hold much hope with high home loan rates contributing significantly to slow down in housing demand. The recent cut in cash reserve ratio by the Reserve Bank of India (RBI) does not mean anything unless interest rates are cut ? by at least 1 percentage point in home loan rates to boost demand. Also no attempt has been made to increase loan to value ratio or housing loans, especially when the recent RBI directive has excluded stamp duty, registration fee and other levies for total home cost, thereby bringing down the value from 80 percent to 70-75 percent.

Moreover the much expected increase in the Rs.1.5 lakh cap on interest payment and Rs.1 lakh cap on principal home loan amount has not happened in the budget, thereby dampening the spirit of home buyers. Though the budget has a proposal to set up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loan may be useful in the long run, it will however have no immediate impact on the housing loan scenario.

There is a major hurdle to the growth of real estate due to high taxation structure, which in the residential segment, amounts to 30 percent of the total cost of the home. This calls for a viable tax structure by way of rationalisation of goods and service tax, stamp duty, service tax and local levies. Even 1 percent tax deducted at source has been imposed on property sellers on transactions worth Rs.50 lakh in big cities and Rs.20 lakh in smaller cities.

But instead of providing any relief, the budget has further hiked the service tax which together with increase in excise duty, will further push up property prices, thereby dampening demand. The exemption on capital gains tax on property, if proceeds are invested in small and medium enterprises may be of little use. No tax benefit or incentive has been given in the budget to cover up high cost of green buildings with a view to give fillip to green realty. Nor has it looked at duty structures to ensure that middle and lower income housing is not a revenue source.

With housing for all a tall order for the government in view of about 25 million shortage of low cost housing, the government has rightly put focus on affordable housing in the budget. Allowing borrowings from overseas for low cost housing, extension of interest subvention for one more year for loans up to Rs.15 lakh on property cost up to Rs.25 lakh, service tax exemption on low cost mass housing up to 60 sq mt and Rs.4,000 crore fund for rural housing are the steps that will give a boost to affordable housing.

Even on the infrastructure front, budgetary provisions like external commercial borrowings for road, power projects, Rs.60,000 crore allocation for infrastructure projects, Rs.5,000 crore for creating warehousing facilities and one year extension of sunset clause on tax incentives for infra projects are growth-oriented moves.

However there is no policy initiative to boost rental housing. Also in view of rise in affordable housing cost, property price cap of Rs 25 lakh should have been increased to benefit homebuyers in Tier I and II cities. Moreover, the budgetary provision to bring affordable housing under priority sector lending would have gone a long way in giving much needed push to affordable housing.

All in all, with marginal increase in income tax limit and with additional burden of service tax and excise duty further bringing down disposable and investable income, it may well prove to be a setback to demand, with budget bringing hardly any cheers to realty.

By Vinod Behl (Source: IANS)