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Real estate needs infrastructure development to support growth

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While India continues to be one of the world’s fastest growing economies, this pace of growth is unlikely to sustain unless it is supported by an equally robust development of its infrastructure. Key requirements in order to achieve a GDP growth rate exceeding 8-9% include roads, power, ports as well as urban infrastructure.

Given the rapid pace at which this sector needs to be developed, investment has been encouraged both by way of long term debt funding and equity participation, including FDI with minimal or no restrictions. The last couple of budgets have taken steps in the right direction for growth of the sector.

Realising that lack of adequate infrastructure is a major constraint on growth; Budget 2012 continues to give the necessary thrust to the infrastructure sector. In the Twelfth Plan period, investment in infrastructure is expected to go up to INR 50,000 billion, with half of this coming from private investment. The Finance Minister has made it clear that Budget 2012 shall pave the way for the roll out of the Direct Taxes Code Bill, 2010. Real estate construction development, a sector which significantly contributes towards the Indian economy in terms of allied sector growth and employment was given a mixed bag of benefits and restraints this time around.

Taking forward policy reform in real estate sector, the Budget proposes to permit ECB for low cost affordable housing projects, continuing the interest subvention scheme of 1% (announced in Budget 2011) and enhancing provisions under Rural Housing Fund from INR 30 billion to INR 40 billion. The Budget also proposes setting up Credit Guarantee Trust Fund to ensure better flow of institutional credit for housing loans and an extension of interest subvention scheme for home loans upto Rs 15 lakh.

On the tax front, increase in tax exemption limit for individuals would increase the disposable cash at hand. Enhancement of investment linked deduction from 100% to 150% of capital expenditure incurred in affordable housing projects is a welcome move. However, the Government has not notified the scheme for this deduction even for the last year ie 2011-12. The industry hopes that the scheme would now be notified within the next 15 days to assess its benefits and impact.

On indirect tax front, increase in effective service tax rate 10.30% to 12.36% would result in increase in effective service tax rate under composition scheme (provided for works contract service) from 4.12% to 4.944%, further adding to the overall cost. There has been increase in peak excise duty rate from 10.30% to 12.36% and peak customs duty rate from 26.85% to 28.85%, which would result in increase input cost for the industry players.

Besides this setback, the budget also leaves a few critical issues untouched, namely, enhancement of interest deduction on home loans and more importantly granting of infrastructure status to SEZs, IT Parks and Townships. No doubt there are still some announcements in this budget which would aid the Real Estate sector but with no measures to address the credit crunch being faced by the sector, the impact of such policy announcements may not yield the required outcome.





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