Monetary Policy Committee needs to back over average Interim Budget with measures to infuse liquidity: Shishir Baijal


MPC needs to back over average Interim Budget with measures to infuse liquidity

The real estate industry has been facing rough weather given the hardening demand environment which got aggravated further with the recent liquidity crisis in the NBFC sector. There are limited signals of any demand revival in the horizon, apart from the one observed in the affordable housing segment. Unless the real demand for housing revives, it will be difficult for the sector to come out of doldrums and as a result, any crisis affecting supply side will continue to inflict damage on the industry. The real estate sector is one of the biggest employers in the country after agriculture and a plethora of ancillary industries are dependent on it. Thus, it is of paramount importance that these issues plaguing the sector must be addressed on priority. Any revival in real estate industry will bode well for the overall economic growth of the country. There have been several measures undertaken by the developers to revive demand in the form of – price cuts, launching compact homes, absorbing GST impact, flexi-financing schemes, etc. However, a concerted effort is required from all policy makers to revive demand and bring the industry to inflection point.

After several consecutive years of declining sales, for the first time in this decade we witnessed All-India sales across the top 8 cities grow by 6% YoY in 2018. Sales in the latest period was majorly in the affordable housing segment. A number of initiatives undertaken by the Government to promote affordable housing has yielded fruitful results. The initiatives are; lower rate of GST of 8%, interest subsidy under the Credit-linked subsidy scheme (CLSS) for homebuyers and the tax holiday for developers on profit for such projects. However, impetus similar to those in affordable segment, is required for the sales momentum in other housing segments. Moreover, the pace of creation of new jobs in the economy and the income growth in existing jobs over the past few years has been slow. Unless that picks up it is difficult to anticipate an uptick in residential sales.

The interim budget 2019 – 20 was a landmark event for real estate sector which went on to address some of the important issues plaguing the real sector. The measures proposed in the budget will have a positive bearing on the demand side as well as supply side. To propel demand, the budget exempted self-occupied second house from tax on deemed rent and allowed the benefit of rollover of capital gains increased from investment in one residential house to two residential houses. For the supply side, the budget extended the period for charging tax on deemed rent on unsold inventory to 2 years from 1 year, extended the tax benefits for affordable housing projects by one more year and most importantly the Finance Minister acknowledged that GST rates have been a dampener for apartment sales in under-construction projects and assured that the rates would be revisited in the GST council meet of Empowered Group of Ministers.

While the interim budget did all that it could to aid the ailing sector, the ball is now in the Monetary Policy Committee’s (MPC) court to do their bit. Inflation has come down over the past few months and has been on the lower side of RBI’s target of 4% (+/-) 2%. Further, the GDP growth has slowed down to 7.1% in the September quarter. This makes a strong case for a reduction in rates. The reduction in rates will not just give a fillip to buyer sentiments but it would help the cause of economic growth, job creation and income growth as the change in direction of interest rates would send a positive signal to companies which had postponed/slowed down expansion plans anticipating hardening interest rate cycle and lower demand.

While this is the expectation on the reduction of interest rates, we believe that the MPC can address one of the biggest issues plaguing real estate sector – the liquidity crisis in the NBFC sector. 12% GST on under-construction apartments has been one of the major deterrents for buyers purchasing apartments in under-construction projects and has pushed buyers towards Occupancy Certificate (OC) received projects. This was not the case in the pre-GST regime as the tax incidence on under-construction apartments was lower. Advance from customers has been an important source of financing for developers, with that drying up developers had increasingly become reliant on NBFCs for finance. However, the NBFC crisis has exacerbated the funding environment for them and has also raised the cost of finance and risk perception of the sector.

The liquidity crisis has affected both the real estate demand and supply adversely. Many developers are complaining of NBFCs of delaying disbursals, not honoring sanctioned lines of credit let alone give any new construction finance. Even homebuyers are not able to get loans from these NBFCs. The MPC must take measures to increase the liquidity in the system in the form of CRR or SLR cut and allow banks to increase the limits of bank’s exposures to NBFCs. This will help bring the liquidity levels with NBFCs back to normal and will certainly help revive the demand as well the supply.

The Government through the interim budget has done its bit, we believe that if the GST council and the MPC also would also act in tandem, together such concerted efforts would go a long way in bringing the sector back on to its feet and have a multiplier effect on the economic growth and prosperity of the nation.

[This is an authored article by Shishir Baijal, Chairman & Managing Director, Knight Frank India. All views, opinions and expressions are personal and limited to the author.]