Money & Banking

Three point-agenda for the upcoming Budget

Keki Mistry | Updated on January 17, 2021

Emphasis will likely be on healthcare and livelihood-creating sectors such as infrastructure and housing

The Union Budget 2021-22 will be one of the most anticipated events in recent history. As the dust is settling after the torrid health catastrophe that affected millions and which has threatened to leave a permanent emotional scar, we are finally seeing the light at the end of the tunnel. India has had a faster than expected economic recovery and a low fatality rate from Covid-19. The distribution of the vaccines has also commenced.

The policies that will be introduced in the upcoming Budget are expected to set the tone for what steps the government takes next, and how quickly India is able to shrug off the crisis. The priority of the government will likely be measures on policies which will lead to sustained growth, boost consumption and encourage private investments. The Budget emphasis will probably lay on healthcare and livelihood creating sectors such as infrastructure and housing.

Job creation

Focus on jobs could be one of the main agendas of the Budget. The pandemic and the resultant job losses in some sectors is expected to have far-reaching implications on the Indian economy. For that reforms in sectors that create large-scale employment, such as housing and real estate, infrastructure, construction and manufacturing, will be required.

According to India’s Economic Survey 2017-18, nearly 90 per cent of the workforce employed in the real estate sector are engaged in the construction of buildings. Further, the sector is expected to require over 66 million people by 2022.

Housing is one of the largest employment generators in the economy with linkages to nearly 300 industries – both in terms of direct jobs and the jobs it creates in ancillary industries such as cement, steel, power etc.

It has been rightly said: “Don’t worry too much about GDP growth, worry about jobs. If we focus on jobs, GDP will take care of itself.”

Focus on housing

The government and the regulators have recognised the critical role housing and real estate plays in the Indian economy. In recent years, affordable housing has been at the forefront. For a rapidly growing country like India with a large young population that needs more homes at affordable price points, the following incentives could be considered:

1) Interest deduction on housing loans could be raised from ₹2 lakh to ₹5 lakh. The deduction could be reviewed on a periodic basis and linked to inflation.

2) The real estate sector has been facing challenges since 2017, and the demand for under-construction properties has slowed down significantly. Whilst SWAMIH (Special Window for Affordable & Mid-Income Housing Fund) is an excellent initiative, it is not practical for a single fund to resolve all the last mile funding issues.

Historically, some part of the funding for a project used to come from sale of under-construction properties. However, due to GST and other factors, the demand for under-construction properties has come down, resulting in projects that are 60-80 per cent complete, unable to receive last-mile funding.

Lenders are reluctant to lend to stressed projects as any fresh funding will be classified as a NPL on day one in the books of the new lender. The regulators may want to consider changing the regulations such that any secured fresh funding should be ring-fenced.

3) An additional option is to allow External Commercial Borrowings (ECBs) for real estate projects. Further, investment by foreign owned/controlled SEBI regulated investment vehicles up to 100 per cent under automatic route should be permitted in entities that acquire completed and under-construction residential projects.

4) The Credit Linked Subsidy Scheme (a component of PMAY) has been a major success. There is a need to extend PMAY benefits to more locations and extend the deadline for the Middle Income Group till March 2022.

5) There is a need to promote the rental market. Currently, the setoff and carry forward of losses from house property is restricted to ₹2 lakh. The earlier law which did not have such restrictions could be restored. Alternately, the limit should be increased to ₹5 lakh.

Personal tax reforms

Personal tax rates need to be further reduced. Surcharge on high taxpayers also needs to be rationalised as these are the people who have the capacity to spend the most and spur demand. Global data show that lower tax rates result in higher tax collections as compliance improves.

In fact, we just witnessed this example in Maharashtra when the State government lowered that stamp duty to 2 per cent for properties registered before December 31. Mumbai recorded historic registrations of house sale deeds in November and December.

As a result, the State government’s treasury collection from registrations increased, inferring that strong home sales have more than compensated for the lower stamp duty.

The Budget could also consider removing the long-term capital gains tax for investments in equity shares or by raising the period from one to two years. Additionally, doing away with taxing dividend income could be considered. Such steps will put more disposable income into the hands of the individual.

Continual reforms have been a priority for the current government. It is often said that India performs best in a crisis. The pandemic may just become a catalyst to bring in further reforms in ease of doing business, development, jobs, growth and a stable tax regime to ensure India’s sustained long term growth.

The writer is VC & CEO at HDFC Ltd

Published on January 17, 2021

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