From allocating funds in boosting the infrastructure sector to promoting green technology in the country, the union budget 2011 has been quite neutral with no major positive declarations put forward. Relin Hedly and Subhajit Roy had a close look on budgetary announcements
It’s that time of the year when there are budget estimates and declarations knocking at the door. However, as the euphoria sinks in, it tells you what lies in store and how it will impact your day-to-day life. Amidst huge speculation, the Union Budget was presented to the country focusing on the growth aspects this year as well. In comparison to the previous budget when the opposition staged a walk out, this year saw them listening to it rather calm and patiently.
Now that the Finance Minister, Pranab Mukherjee has finished declaring the budget for the financial year 2011 – 2012; it’s time to assess its impacts on various sectors.
Bonanza for infrastructure sector
Infrastructure remains a fundamental factor for India’s growth record. Though the government has increased budgetary allocation by 23 per cent to Rs. 2,14,000 crore for infrastructure development, the budget 2011 has been a mix of some positive and some debatable initiatives.
Continuing its focus on highway and transport sector development, the government has announced a budgetary allotment of more than Rs. 10,000 crore for National Highways Development Programmes (NHDP). This 11 per cent increase on road transport and highways is expected to encourage the transportation and logistics sector.
With an objective to attract foreign investment, it has taken a lead with the introduction of special infrastructure bonds. In addition, the Finance Minister also proposed tax free bonds for the enhancement of infrastructure in various verticals including roads, railways, airports etc. Dinesh Kanabar, Deputy CEO and Chairman Tax, KPMG noted, “The proposal for infrastructure bonds of Rs. 30,000 crore and the additional tax incentive to subscriber’s up to Rs. 20,000 is a step in the right direction but a lot more needs to be done if this sector is to develop a thrust”.
There were some generic changes made during the budget that are bound to make an impact on the economy of the coming year. The country is at the threshold of development and expansion in the real estate sector. At this point, the industry was expecting the FM to address several major issues surrounding the sector which was completely ignored during the budget session. Despite relatively low expectations, the budget has been fairly positive for the real estate and construction sector. The finance minister has taken a wise approach with the continued thrust on infrastructure development in the country, both by direct funding and by leveraging mechanisms to enable more foreign capital in the country. Increase in spending on social sector and rural housing, along with the setting up of a mortgage guarantee fund for rural housing and an equity fund for micro finance companies will come as a relief to the rural and urban poor, leading to inclusive development.
Sachin Sandhir, MD & Country Head, RICS India, points out, “Increase in the priority sector, lending and home loan cap for interest subvention will certainly provide some relief to buyers against rising property prices. Unlike apprehensions, the decision to retain service tax at 10% while widening the tax base is indeed welcome. In addition, the reductions in duties for cement, steel and iron ore will provide cushion to the development firms against rising inputs costs. Also, some liberalization of FDI norms was anticipated which has been subdued”.
MAT dilute SEZ lure
The proposal to bring SEZ units under the purview of the Minimum Alternative Tax (MAT) and the non-extension of tax benefits for STPI (Software Technology Parks of India) units is expected to adversely affect the profits of IT players. Mid-sized players would be more affected as a larger proportion of their revenues accrues from STPI units vis-à-vis tier-one players. The MAT has been raised from 18 per cent to 18.5 per cent, whereas the surcharge has been reduced from 7.5 per cent to 5 per cent, keeping the effective MAT rate at the same level. Domestic IT services, which constitute about 20 per cent of the IT services revenues, are expected to get a shot in the arm from the planned government expenditures aimed at improving IT infrastructure and delivery mechanisms. Commenting on the role of SEZs, Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India said, “SEZs have been brought under the purview of MAT, which basically diminishes the benefits that SEZs offer for developers over other commercial real estate asset classes”. Sachin Sandhir expects that levy of MAT on SEZ is likely to hurt the sector.
Cold Chain enters infra family
Inclusion of cold chain logistics as an infrastructure sub-sector is a giant step towards achieving food security. The country loses crop worth Rs. 1 lakh crore annually due to inefficient cold chain facility and lack of capital investment in creation of modern storage capacity. With the proposal to include cold chains and post-harvest storage as an infrastructure sub-sector, increased investments are expected in these areas. It will certainly help in reducing the wastage of agricultural produces and thus strengthening country’s economy. Rakesh Bharti Mittal, Chairman, CII National Council on Agriculture reacted that, “These steps will not only help in reducing wastages and seamlessly integrating the supply chain but at the same time will attract large scale private investments”.
Affordable Housing Regains Focus
To make housing affordable has once again gained significant popularity in the current budget session. “The current scheme of interest subvention of 1 per cent on housing loans is now extended to Rs. 15 lakh where the cost should not exceed 25 lakh”, says Ramesh Sanghvi, Director, Sanghvi Group. The Government has increased the rural housing fund to Rs. 3,000 cr from Rs. 2,000 cr, offering an array of opportunities for real estate development in rural areas. Additionally, the tax exemption from 1.6 lakhs to 1.8 lakhs will surely give an impetus to affordable housing. These measures will provide a boost to affordable housing.
Jitendra Jain, MD & CEO, Neev Group of companies states, “The move to increase the priority housing loan limit to Rs. 25 lakh was a positive one that will lead to increasing the base of home loan takers and thereby will be a major boost for affordable housing”. Moreover, it was disappointing to see that the real estate sector was not given an industry status, crushing the expectations of many. Had the government given it an industry status, bank financing would have become easier for real estate companies. Mr. Jain further added, “Affordable housing should have got some fiscal incentives as this would address affordability issues. The proposal to increase rural housing fund to Rs. 3,000 crore from Rs. 2,000 crore will lead to developments in the rural areas.”
On the other hand, this rise meant nothing to ease the pockets of people living in the metros where real estate prices is showing an upward trend and therefore demand for affordable housing is the highest. Besides, the 1% interest financial support for home loans to Rs. 15 lakh from the previous limit of Rs. 10 lakh provided a major relief to home loan borrowers from the LIG segment.
The Finance Minister has also announced an investment linked deduction for affordable housing through a notified scheme. Kamal Khetan, Chairman & Managing Director, Sunteck Realty said, “Affordable housing is the need of the hour. In fact, we believe, affordable housing should be treated on par with infrastructure and once again the finance minister should provide for benefits not on the basis of the size of the housing units, but on the value of maximum of Rs. 25 lakhs, in line with the priority sector lending norms already announced in this budget”.
According to Pravin Malkani, President, Patel Realty India Ltd., “The Budget 2011-12 has been a mixed bag with very little for both developers and customers to cheer. The extension of interest subvention of 1 percent on housing loans up to 15 lakhs and raising the priority home loan limit from Rs. 20 to Rs. 25 lakh is a welcome move. However, rising rates of interest and cost of property have negated any benefit that the proposed move could bring to home owners”. He further pointed out, “The proposed investment linked deduction to businesses that develop affordable housing should help promote the creation of affordable housing for the middle class. The commitment to developing PPPs is another element that gets a thumbs-up”.
The ‘Green’ Revolution
It won’t be a wrong statement to declare the year 2011 – 2012 as the ‘Year of Green Energy’. Encouraging green technology in India during the 2011 budget session was seen as a sign of change. The Government has made great progress with its initiative to promote sustainability by making a reduction in the excise duty and concessional customs duty in the clean energy sector. Some of the initiatives that would be taken forward include the launch of an ambitious ten year Green India mission and allocating Rs. 200 crore from the National Green Energy Fund, which will be implemented in the year 2011 – 2012.
However, the industry has expressed very lukewarm response. According to Hari Kiran Chereddi, Managing Director, Sujana Energy, “While the concessional customs duty of 5 per cent on machinery, instruments, equipment and appliances etc. required for the initial setting up of solar PV plants and exemption from central excise duty on solar thermal power generating units is a welcome sign, a much higher percentage was being expected. If India has to emerge as a green global leader, the allocated Rs. 1,000 crore may not be sufficient to see all the plans in place and burgeon”.
The reduced excise duty on LED’s will offer several Indian manufacturers incentives and opportunities to make superior products with lowered costs; and the lowered cost of LED’s will bring more access to green conscious, discerning consumers which will help optimize power generation, distribution and consumption.
Power – focus on rural India
Over the past few quarters, the power sector has been going through tough times given the severe liquidity crunch that hit existing as well as new projects. This sector once again saw capacity addition that was way below the targets set out as part of the XI Five Year Plan. While the situation on the funding side has improved considerably since mid – 2008, companies are stepping up on new projects with utmost caution. This is especially given the linkage for fuel (especially coal and gas) which is becoming a tough nut to crack. However, rural electrification continues to get a boost in each passing budget. Budget 2011 was no different, as it allocated higher funds for the development of the power sector with a view of speeding up the expansion of new generation capacities.
As expected, the budget had nothing substantial for the common man and seemed a political gimmick for the forthcoming election in the five states. There was a mention of black money during the budget session but nothing new was revealed. The finance minister only went on to reiterate his commitment to the issue.
The budget was relying heavily on maintaining the trajectory of growth in the economy to provide solutions for inclusive growth that touch the ‘Aam Aadmi’ and gives importance to governance aspects, which hopefully is expected to be covered separately through concrete action plans to deal with the menace of unaccounted wealth. The trend for consolidation is expected to continue. Keeping these issues in mind, the Government also needs to implement better governance, stricter regulations and transparency to tame the government deficit that has crept in lately leading to scams. Further, the fiscal deficit is expected to be within the targeted limit, thanks to the spectrum bounty and resilience in tax revenues. The direction for fiscal consolidation has been set and the fiscal deficit is targeted at 3.5 per cent by 2013-14.
A major initiative towards inclusive growth that stands out in this year’s budget is the proposal for direct transfer of cash subsidy to people below the poverty line. This is a bold step which if properly implemented, would prevent leakages in the system and benefit the common man significantly. On a conclusive note, Pranab Datta, VC & MD, Knight Frank India claims that, “The budget is neutral on fresh tax mobilization and to that extent it will help in curbing inflation”.