With the union budget around the corner, infra, real estate and power sector players are expecting a slew of measures to meet the growing requirements of the country. Anil Mathew and Subhajit Roy take a close look
What infra needs
• Higher allocation for development
• Measures to ease the constrains in financing
• Policy initiatives that can address the issue of crumbling infrastructure
• Steps to encourage participation of private players
How much will be enough’, should be the question doing rounds in the minds of people, to boost the country’s sagging economy, as the finance minister Pranab Mukherjee is set to present the budget for 2011-2012, on 26 of this month. This question is all the more important, when it comes to the construction, infrastructure, real estate and power sectors, as any progress in these areas can positively (and directly) impact the economic prosperity of the country.
No doubt that the recent spate of scams, political issues, high inflation and rise in base rates has dented the growth prospects of these sectors. If the available information is anything to go by, the project award activity and the execution of major infra projects have been very slow, recently. Also, various sources indicate that the spending on infrastructure projects has come down considerably, in the last couple of months or so. So, it would be interesting to watch out how far Mukherjee will be able to address the pertinent issues related to these sectors and project UPA as a ‘power’ that supports ‘integrated’ infra development.
A close look at the previous budget allocations by the UPA government will reveal how focused it is in building the country’s infrastructure. It had increased fund allocation across sectors even in its last budget, in a bid to increase spending on infrastructure. However, it was not enough to meet the growing requirement. So, while allocating funds, it is important to lay stress on the growing requirement, rather than on the existing requirement. Only such a measure can boost the infra related developments in a developing country like India, point out the players in the construction/infrastructure sector. “Last budget had a clear thrust on infrastructure development and it should continue to be a focus area. Another important, but largely ignored area is the issue of rising urbanisation,” says, Pranab Dutta, VC and MD, Knight Frank India.
According to a recent McKinsey report, 590 million people will be living in cities by 2030 and 68 cities will have a population of more than one million. “Such a large scale of urbanisation calls for a corresponding initiative of developing new cities. Policy initiatives that can address the issue of crumbling infrastructure in the existing cities and serve as a guiding light to create new cities will relieve burdened metro and tier I cities. It is, therefore, essential to formulate budgetary policies with a vision and a plan for next 10-15 years, to cope up with the demand for increasing urbanisation,” maintains Dutta.
If the growing infrastructure development needs has to be met, it is imperative to considerably hike the allocation for infrastructure development, in the present budget. In 2010-11, the UPA had provided only Rs. 1.7 lakh crore for infra development. Besides higher allocation of funds, Mukherjee also needs to bring in some measures to ease constrains in infrastructure financing. Though infra bonds and take-out financing were introduced in the last year, they alone could not solve the problems related to the infrastructure financing. It is also vital to encourage participation of private players in building the country’s infrastructure, since the government’s spending on infrastructure alone would not address the issue of sustainable development across the sectors.
When it comes to the real estate sector, things are not different. As is the case with construction/infrastructure sectors, the growth has been stagnant for quite some time in the realty sector. The sale of residential and commercial spaces is expected to dip further in the days to come, largely due to the increasing property prices and interest rates. With the cost of cement and other building materials going up, realty players are also finding it difficult to turn the corner in favour of them. So, expectations are high from the budget. “We need to recognise real estate sector, as a critical component in capital formation. Fiscal incentives, input costs and interest costs should work in unison, to bring the cost of homes within the reach of citizens. I expect the budget to address these critical issues,” says, Harresh N Mehta, MD and CEO of Rohan Lifescapes.
Real estate players also feel that the government should do something to bridge the demand and supply gap in the affordable and mid-housing segments. “Budget 2011 should bring some differentiation among affordable housing, mid-housing and high luxury segments. Such a move will encourage developers to bridge the demand and supply gap in the affordable and mid-housing segment,” voices Uday Dharmadhikari, CEO, Usha Breco Realty. “Also, the government should provide subsidy or aid the infrastructure requirements by providing water, electricity, road and rail infrastructure facilities for affordable housing projects in emerging locations. When it comes to home loans, steps to reduce the prevailing interest rates and encourage standard operating procedures are welcome,” he adds.
According to Kamal Khetan, chairman and MD, Suntech Realty, value and affordable housing remains a segment, where government should continue to provide developers with tax sops, which was available earlier. “Rather than restricting the tax benefits to unit sizes of 1,000/1,500 sq. ft. per housing unit as in the past, the government could instead have a maximum per unit value of say Rs. 15 lakh for units near tier I cities, Rs. 10 lakh for tier II cities, etc. This would enable mass housing projects to take off across the country and benefit the currently large scale unplanned urbanisation to be better planned, in line with social and arterial infrastructure,” he says.
“Government should also propose to have credit enhancement mechanisms/guarantees, to micro housing finance companies which are just taking off. So that they can raise lower longer term and lower cost funds for mortgage on-lending,” stresses Khetan.
However, Sarang Wadhawan, MD of Housing Development and Infrastructure Ltd., wants affordable housing to be defined as unit size less than 1,000 sq. ft. of saleable area or apartment that costs less than Rs. 50 lakh. “Steps should be taken to create urban infrastructure fund for affordable housing, slum rehabilitation and redevelopment projects. Also, slum rehabilitation and redevelopment of old buildings should be classified as urban infrastructure, for facilitating external commercial borrowing,” he lists out some of his expectations from the budget.
Among other things, real estate fraternity want the government to set up a single window clearance system for all applicable approvals and sanctions for real estate development, circumventing the existing tedious procedures that escalate project overhead costs. Also, a section of the builders like to see tax benefits for the projects that stick to green practices. “Even though a lot has been said about, the government does not have specific tax benefits or policies for green buildings. It is important to have a sustainable green building policy and a structured approach through higher levels of depreciation and tax breaks, for certified green buildings,” says Khetan.
Though some ambitious steps were taken to power the power sector in the country, its power generation capacity is still far below the required levels. India’s energy deficit is pegged at eight per cent and the cause for the deficit is attributed to several challenges at the execution level. Besides, shortage of coal and deteriorating financial health of the distributing companies are likely to further cloud the growth prospects of power sector. So, expectations are high that the government would take steps to improve the financial health of the State Electricity Boards (SEBs), with higher subsidy and allocation.
“Despite demand, some of the SEBs have backed off from buying power, due to current weak financial position. Hence, with higher subsidy and allocation, SEBs could bring more power to consumers and improve the supply chain of power in the country,” says Gaurav Dua, head – research at Sharekhan, India’s leading broking house.
Also, players are expecting extension of fiscal benefits under section 80IA to power projects, from March 2010, to 2015. The extension of time limit is expected to be beneficial for the ultra-mega power projects that are coming up in the near future. Since the resources for power generation are fast depleting worldwide, players are also expecting steps to encourage investment in the renewable energy sector. “As the country is moving towards significant coal-based power generation, India will face environmental challenges. Hence, the government needs to promote renewable energy, especially when power generation economics highly favours coal,” Dua emphasises.
In 2010-11, the government had allocated Rs. 1,000 crore, in a bid to encourage new projects in the renewable energy sector. Besides, the government also offers five per cent concession of customs duty on solar power equipment and excise duty benefits on rotor blade of wind generators. Looking forward, players like to have more incentives and higher allocation for renewable sources of energy. “The customs duty can be further reduced or even done away with, as a measure to promote growth in the renewable energy space,” maintain a section of the players in the sector.
“The government has identified renewable energy as one of the focus areas. This year should see more incentives for private players and companies trying to get a foothold in the clean energy space,” they sign off in a positive note.
Realty wish list
• Affordable housing, slum rehabilitation and redevelopment of old buildings for metro cities to be categorised within urban infrastructure
• Tax benefits for affordable housing
• Creation of urban infrastructure fund for affordable housing
• Reduction of excise duty on cement and steel, to lower the cost of construction
• Single window clearance for approvals
• Reduce stamp duty registration fees
• Facilitate availability of government land
Power sector: key expectations
• Extension of fiscal benefits available under section 80IA to 2015
• Higher subsidy and allocation to improve the financial health of SEBs
• Incentives and higher plan allocation for renewable sources of energy
• Tax rebates for companies that are into renewable energy business