Contrary to the general impression, the Bihar defeat has not really dealt any major blow to the ruling NDA’s reform agenda. Rather, it seems to have proven to be a blessing in disguise instead for the Modi government, which has had to perforce fast-track both legislative and administrative reforms. Particularly the crucial reforms much anticipated and much by the real estate sector, like the GST Act and Real Estate Regulation & Development Act, that are expected to get parliamentary nod in the current winter session. Vinod Behl shares his analysis with readers of NRI Achievers …
Close on the heels of its Bihar debacle, the government showered us with a Diwali bonanza by easing FDI norms in 15 major sectors including the construction sector, raising the FIPB approval limit from INR 3000 Cr to INR 5000 Cr. It removed entry and exit barriers in the construction trade, doing away with area restriction of 20000 Sq.m. and capitalization of US$ 5 million, and allowing foreign investors to exit as well as repatriate investment before a project is completed, but with a lock in period of 3 years.
The government’s sense of the real estate industry is that it should not survive on subsidies but on the strength of the market economy. That’s why it’s focusing on realty reforms aimed at strengthening fundamentals for a sustainable revival of the sector. The delayed reforms had affected the market sentiment and the government has been receiving lot of flak for its inability to check retail inflation and generate employment. It also realises it well that it is imperative to provide momentum to reforms, if it has to leverage strong domestic growth in the form of a healthy 7 percent plus GDP growth in the coming fiscal, besides a pickup in manufacturing activity. The assessment of global rating agencies like Moody’s weigh heavily on government’s mind that reforms delay may hit investment. The Organization for Economic Co-operation & Development (OECD) has also emphasized that growth prospects of India remain relatively robust, provided further progress is made on implementing structural reforms.
So the government is focusing on triggering investment. By exercising tight control over unproductive expenditure, it has greatly increased capital investment by public sector. And to give further push to it, a National Investment & Infrastructure Fund has been set up to leverage public investments. The government also plans to come up with tax-free infra bonds, in order to broaden the corporate bond market with a view to provide long term finance for infrastructure. It is also looking at providing tax incentives to spur investment in housing. FDI has considerably increased and private investment is picking up. The government is also working on simplifying FDI & ECB rules to speed up foreign investment. It plans to put 98 percent sectors for foreign investment under automatic route. In order to help the fund-starved real estate sector to tide-over the current crisis, the government is working on allowing foreign investments in Alternate Investment Funds (AIFs) and in Infra & Realty Trusts via the automatic route.
The most crucial piece of legislation that has big bearing on real estate is the GST Bill, expected to be passed in the current parliament session, especially as the government has now adopted a more collaborative and accommodating approach. The introduction of a single GST tax rate across the country is aimed at dismantling inter-state fiscal barriers and creates a common market within India to boost competitiveness, and make it easier to do business. It will result in simplification and uniformity of taxes, putting an end to tax inefficiency in the form of different state-specific VAT and service tax laws. Though there are two main taxes for home buyers – VAT and service tax, yet multiple taxes in the form of CST, custom duty, excise duty etc, paid by developers result in price escalation by about 25-30 percent. A likely GST rate of about 20 percent (the Congress apropos is demanding a cap on 18 percent), should be quite beneficial for the sector in lowering current tax burdens, in turn resulting in a reduction in home prices. Separately, the government proposes to provide tax relief to real estate sector in the upcoming budget.
The Decks seem to be already cleared for the crucial Real Estate Regulation & Development Bill 2013, in the winter session even as the government accepts changes to it proposed by the Rajya Sabha panel. The passing of this bill will give a major boost to the real estate sector, bringing in fair play and transparency in real estate transactions to safeguard the interests of property buyers and investors.
The government, which has already streamlined environment clearances for improving ease of doing business, is now fast-tracking single window clearance system for multi-storeyed buildings that should come through by early December 2015. The simplified process will considerably cut delays in granting approvals, in turn resulting in cost reductions that will benefit property consumers. This will also provide much-needed relief to debt-ridden developers by way of faster project completions and lesser interest outgo. For its flagship programme – ‘Housing for all’, envisaging the creation of more than 30 million houses, government is readying a plan to provide more funds for constructing rural houses and providing subsidized power and water. Under its AMRUT programme, the Centre has allocated INR 11654 Cr for infrastructure upgrades.
The Bankruptcy Code (providing for easier exits for businesses, safeguarding the interests of lenders and investors) together with proposed new Start-up Policy, will foster new enterprises and fast-track winding up of failed enterprises, with a view to strengthen the ease-of-doing-business. Further, labour reforms are aimed at removing rigidity and encouraging employment. The government’s newfound aggression and resolve to push its reform agenda has already seen reflection on the BSE Realty Index, registering the max rise in the last fortnight, and further reform measures to be unveiled in the budget will certainly serve to speed up the revival of the real estate sector that is facing a slowdown.