The progressive and forward looking budget demonstrating pro-growth and pro-investment theme scores high on revitalizing the Indian economy, but falls short of expectations from the realty sector, asw it is really a little low on much needed steps effect a revival of the real estate sector, which has become a mere indirect beneficiary.  Vinod Behl analyses the fine print …


There was not much on the platter for real estate and housing in the Modi government’s first full-fledged budget presented the 28th February this year, especially as their interim budget last year was quite promising and real estate friendly, raising high hopes for the sector in this budget.  Seen in retrospect, there is total lack of thrust on real estate, despite its significant contribution to GDP with its multiplier effect. Fiscal sops to housing would have helped revive the real estate sector reeling under stress for a long due to liquidity crunch coupled with low demand and weak sales.

A sound economy is important to boost real estate and housing, and this budget has attempted to create institutional and regulatory frameworks for the future insofar as speedy growth of the economy is concerned, especially by laying grounds for a predictable and competitive tax regime.  The clear road map for GST introduction from next financial year will have a positive impact on logistics real estate.  Also, keeping in mind infrastructure’s capacity to boost real estate and revive the economy, the budget has provided massive thrust.  The decision to set up a National Investment and Infrastructure Fund (NIIF), intr4oducing tax-free infra-bonds and reforming the regulatory architecture around infrastructure will flag-off big ticket investments.  Public spending of INR 1.25 trillion, the Public Procurement and Dispute Resolution Bills, and the Bankruptcy Law are triggers for making the infrastructure sector attractive to investors.  The major boost to infra development with a investment hike of over INR 70,000 crore for the coming fiscal, along with an allocation of INR 22,000 crore for housing and urban development will help spur realty growth.

Lack of easy and cheap funding for home buyers and developers (especially those engaged in affordable housing) has been the biggest bane of real estate, and the budget has not done much for it, though it has taken some measures.  Though the government has shown its seriousness about its flagship mission, “Housing for All by 2022”, by proposing to build 6 crore houses, it has not spelt out any concrete financing plan to achieve this high goal, especially as it has not addressed the core issue of increasing affordability and supply of housing.  And considering that the maximum requirement is to build homes under low-cost and affordable category, this massive task can not be accomplished without the active participation of private builders.  But no incentivised policy for them to take up low–margin affordable housing has been announced.  However,in a reform-oriented approach, the budget has made Real Estate Investment Trusts (REITs) viable in the Indian context, with the provision of pass-through tax for investments in REITs and rationalisation of capital gains tax, paving the way for effectively channelising domestic and foreign funding for real estate.

There is another major initiative by way of allowing foreign investments in Alternate Investment Funds (AIF) and doing away with the distinction between various kinds of foreign funding.  The promised predictability for easy tax regime bodes well for the Private Equity (PE) industry. And government by permitting foreign investment in AIF, has increased PE’s capability to tap foreign money.  The provision in the budget to give 100 percent tax rebate in CSR activity, in order to utilise finances to decongest large cities and connect towns and cities is welcome.  Also, it has been announced that slum development will be added to the list of CSR activities, with 100 percent tax deduction.  The 22.7 percent hike in Delhi Metro budget to INR  4,258.61 crore will provide a connectivity boost to real estate.  But the budget should have laid out a clear-cut financing plan for Smart Cities, though the 42 percent devolution of capital tax revenues to states, taken together with the capital outlay of INR 1,00,000 crore for renewable energy, will come handy for achieving this goal.

Talking of reformist policy initiatives, lack of transparency in real estate transactions has been a major deterrent for foreign investors who prefer to invest in overseas markets, which though offering much lesser returns, have greater safety of investments and ease compared to India.  One major reason for this is the rampant use of black money in real estate transactions.  The budget has shown the government’s intent to curb this menace through the “Benaami Transaction Prohibition Bill”, together with steps taken to check influx and circulation of black money.  This will improve investor sentiment and make real estate an attractive asset class for investment by foreign investors.  It will also streamline the land investment process.  The stamping out of black money will make real estate transactions transparent and weed out fly-by-night operators, encouraging developers with good corporate governance.  The budget announcement to set up an expert committee to fast-track project approvals is a welcome move in the backdrop of large-scale project delays leading to price escalation and deterring investments in real estate.  The move will check project delays and cost over-runs, resulting in a desirable fall in property prices.  Timely completion will also restore the confidence of investors.

 But the flip side of the budget is worrying indeed.  At a time when the housing sector is experiencing weak demand in view of unaffordability of homes, the budget has not responded to long-pending demands for granting industry status to the real estate sector, to access cheap funding.  Rather, it has presented a double whammy.  Instead of meeting industry demand to remove service tax on affordable housing, the budget has hiked it from 12.36 to 14 percent.  Not just that, excise duty has also been raised marginally.  Together with this, the freight-hike will result in an increase in the costs of cement, sand, steel and iron, making homes more expensive.  What is more, the FM did not resort to reformative policy initiatives on mortgage to spur residential real estate, like increase in the exemption limit for interest on housing loans and extension of interest subvention on affordable housing.  The only relief to home buyers has come through hike in wealth tax exemption limit  from 30 lakh to one crore for houses.

There is no relief for SEZs either.  Despite a flawed  SEZ policy, the budget has not effected any cut in MAT for SEZ units that are into manufacturing, along with reduction in MAT for SEZ developers.  There was no policy prescription to boost rental housing to tackle housing shortage and reinvestment of capital gains for sale of single residential unit into multiple units.

But then the government can and should take up some reformative policy initiatives outside of the budget to boost real estate.  These include incentivised policy on affordable housing and home mortgage tax breaks.  Going forward, RBI is expected to  reduce home loan rates that will help accelerate realty revival.  The Real Estate Regulatory Bill that is pending for a long time needs to be implemented soon to ensure fair and transparent transactions, thereby making real estate an attractive asset class for investors, particularly foreign investors.  Also, at a time when India ranks quite low in the global index for ease of doing business, early passage of an easy and less cumbersome ‘Land Acquisition Law’ holds the real key to real estate and infrastructure development.  However, in the absence of any immediate booster dose, real estate, especially residential real estate revival will be slow and ‘achhe din’ for the real estate sector may take a little longer to dawn on it.


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