Budget Impact on Construction Sector

By Akshay Chaudhury

Challenges faced by the Industry:

  • Low-cost finance via FDI, ECB, and domestic banking assistance: Both the Centre and state must work together to remove bottlenecks for faster implementation of the reform measures in order to promote FDI in real estate. The ECB route should be opened for developers and FDI must be permitted in limited liability partnership (LLP) realty firms
  • A little clarity on land titles: Cross purchase shouldn’t suffer tax. So if the proceeds from the sale of commercial property are used to buy residential property or vice versa, capital gains tax shouldn’t apply. This exemption should be extended to cases where properties in both categories, residential and commercial, are from the proceeds of a single property.
  • The tedious process of getting project approvals: The red tape and time involved to approve real estate projects has caused the sector much grief. This issue can be addressed by a single-window clearance mechanism that will not only reduce the gestation period of projects but will also insulate them from cost escalations and delays in handing over possession.

Expectations from the Budget:

  • Industry status to the sector which contributes almost 15% to the Indian GDP
  • Clarity on GST and a raise in HRA deduction allowance
  • Single-window clearance mechanism which would ramp up supply and help rationalize prices and ensuring construction quality norms are not compromised
  • Clarity on entry and exit norms of FDI and reduce the lock-in period
  • Digitize all land records
  • Confidence-boosting measures to put more money in people’s hands in order to bring back the sales to pre-demonetisation levels

Budget Announcements:

  • 64,000 crore allocated for highways
  • A total allocation of Rs. 39,61,354 crore has been made for infrastructure
  • ‘Infrastructure’ status for Affordable housing aligned with the government’s agenda of ‘Housing for All by 2022’
  • PM Awas Yojana allocation raised from Rs. 15,000 crore to Rs. 23,000 crore
  • 27,000 crore on to be spent on PMGSY; 1 crore houses to be completed by 2017-18 for homeless
  • PM Kaushal Kendras will be extended to 600 districts; 100 international skill centers to be opened to help people get jobs abroad
  • National Housing Bank will refinance individual loans worth Rs 20,000 crore in 2017-18
  • Dispute resolution in infrastructure projects in PPP mode will be institutionalized
  • Trade Infrastructure Export Scheme to be launched in 2017-18; total allocation for infra at record Rs 3.96 lakh crore
  • Holding period for immovable assets reduced from 3 years to 2 years and indexation to be shifted from 1.4.1981 to 1.4.2001
  • Abolition of Foreign Investment Promotion Board (FIPB)
  • Dairy processing infrastructure fund to be set up

Trends after Announcements:

  • The BSE Realty index gained 4.7%, the highest among sectoral indices for the day.
  • Realty stocks such as Godrej Properties Ltd, Housing Development and Infrastructure Ltd and Prestige Estates Projects Ltd rose by around 6% on easier access to low-cost funds.
  • DLF rose by 6.7%, although it has little exposure to the affordable housing category.
  • Construction firms with a greater exposure to roads, such as IRB Infrastructure Developers Ltd, rose by 2.5%.
  • GMR Infrastructure Ltd gained due to the sops for roads and airports.
  • Larsen and Toubro Ltd gained as it is the largest player in infrastructure.

Conclusion:

Overall, it was a positive budget for the sector and the government has done well to create awareness for the need to increase tax compliance. Demonetisation was a temporary setback and the economy must bounce back. In particular, we look forward to the gains once GST is rolled out later this year.

BUDGET IMPACT ON TEXTILE SECTOR

By Abhishek Kwatra

Expectations:

  • Increased allocation from the budget spending towards the textile sector.
  • Budgetary allocation towards Amended Technology Upgradation Fund Scheme (ATUFS) was expected to increase.Under ATUFS, the garment manufacturing units get a subsidy of 25% for capital expenditures which was increased from 15% in Jan ’17 recently. Its budget allocation was reduced to Rs. 2013 Cr. from Rs. 2610 Cr.
  • An export incentive scheme reducing duty costs, specifically for cotton products as cotton makes up for 90% of export demand.

Budget announcements

  • Allocation to textile sector decreased marginally. It was reduced from Rs 6290 Cr. in 2016-17 to 6230 Cr. in 2017-18. Most of the spending on any other components of the budget was reduced due to overall lesser allocation of the budget which went against the industry expectation. This could be attributed to Rs. 6000 Cr. special package announced for textile sector in June ’16.
  • Tax rate for SMEs (of annual turnover up to Rs 50 Cr. in 2015-16) has been reduced from 30 to 25%. Since more than 60% of the sector is unorganized, this will help improve the bottom line of the companies.
  • The provision for textile infrastructure has been increased to Rs 1,860 Cr. in 2017-18 from Rs 506 Cr. in FY17. It will give a major boost to textile infrastructure by increasing the allocation for building textile parks, incubation facilities, processing and development centers.
  • Lesser allocation of the budget towards Amended Technology Upgradation Fund Scheme(ATUFS). The allocation was reduced to Rs. 2013 Cr. in 2017-18 from Rs. 2610 Cr in 2016-17. This has been one of the major government schemes helping the manufacturing units to remain competitive upgrading their production facilities.
  • Sharp reduction in allocation to price support scheme (Rs 0.01 Cr. in 2017-18 as against Rs 610 Cr. in 2016-17) under the Cotton Corporation of India (CCI) It may lead to greater volatility in cotton prices in next fiscal for the domestic companies. Cotton prices increased 66.6% in July’16 which forced many firms to reduce production. Firms have maintained a need for higher subsidies for cotton from CCI. This would greatly impact the bottom line of the companies.
  • announced plans to launch a scheme for labor-intensive leather and footwear industry to boost employment generation. This announcement was in line with the special package of 6000 Cr. announced for textile sector in June’16 with an aim of increasing exports by $30 billion and help attract investment worth 74,000 Cr.  in three years.
  • Basic Custom Duty on Nylon mono filament yarn (for use in long line system for Tuna fishing only) reduced to 5% (from earlier 7.5%)
  • The objective of doubling farmers’ income, skilling of youth, and development of Infrastructure. This would provide end to end solution by integrating rail, road, air and sea which in turn would greatly benefit the textile industry that is spread across the nation.

Market movement:

Companies have more or less maintained their price on Feb 3 since the announcement of budget on Feb 1. Companies such as Page industries, Arvind Ltd. and Raymonds Ltd. Were some of these. However, Vardhman Textiles defied the trend as it rallied by about 5% of its value.

Conclusion:

The budget did not meet the expectations of the textile industry. It ignored many important issues such as an export incentive scheme and raw material subsidies, specifically Cotton.

With already strong competition from Bangladesh and Vietnam, an export incentive scheme was the push that the sector needed as many firms had been able to cover their losses from domestic market owing to demonetization only due to stable export demand. Though the domestic demand would improve eventually, GST implementation needs to be implemented as soon as possible bringing in cost savings (outbound taxes) from the supply chain.

Feasibility Of Export Led Growth In Time Of Global Slow-Down

By- Apoorv Srivastav

The engine of the global economy has started to stagnate. One of the biggest arguments that favors this statement is that the export led growth is no more feasible. The export led growth pioneered by Germany and Japan in 50’s and 60’s was further adopted by the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan, before finally getting implemented by China in early 90’s. The export-led growth rose to eminence in the late 70s, replacing the import-substitution model and was a prominent global economic factor for the following four decades.

The fall of export led growth

Currently, US economy is debt saturated and still struggling to recover from the crash of 2008, and Europe is also constrained by fiscal austerity and Brexit. Export has lost its feasibility as buyers themselves are struggling. And the impact of which can be seen from Bank of Japan adopting negative interest rates & European Central Bank (ECB) implementing Quantitative Easing (QE) to increase the domestic consumption by reducing its lending rate 10 basis points to -0.4%.

Secondly, Emerging Market (EM) economies have become a larger share of the global economy, increasing from 39.1 percent in 1980 to 57 percent in 2014 and their collective export is not letting the industrialized economies recover, leading to the economic tension between EM and Industrialized nations.

For EM country, export led growth would have been a safe bet, but the recessionary condition of the US and Euro market is making hard to find buyers. This proves export led model is critically dependent on the global economy, and any global crisis will affect the economy directly.

The competition has increased with many EM countries following the same model. One of such methods is ‘Currency devaluation’ which countries like China and Japan are using to boost their exports and seeking trade advantage over other countries.

Though export led growth proved to be a sound strategy for Asian countries, but it was not the case everywhere. Mexico, whose GDP growth was 6.4% during 1950-80, reducing to 2.6% for 1980-2008 and finally 1.1% in 2013 because of export led growth model.

To conclude, we can say that the export led economy has lost its feasibility for EM and is posing a risk to the global economy. Countries need to recalibrate and shift from the export led growth to the demand led growth, with a greater role of domestic and regional demand.

IS THE AGEING DRAGON A BLESSING IN DISGUISE FOR INDIAN ECONOMY?

By Shulin V K Satoskar

Edited by Madhu Veeraraghavan

Introduction

China’s devaluation of Yuan, last week, represented the largest depreciation of the currency for 20 years and sent tremors down the Dalal Street. The “Kiss of the Dragon” was felt across already subdued economic conditions throughout the world. Notably, Nobel Laureate and renowned economist Paul Krugman described the decision as “the first bite of the cherry” envisaging that more could follow. The World’s largest economy could be weaker than the 7% a year growth that official figures suggest.

In my attempt to explain the slowdown in Chinese economy and a great opportunity for India to bank upon, I have used the concept of business cycles and its impact on economies.

Business Cycle

A business cycle is defined by the fluctuations in an economic activity over a period and covers expansion/recession in any economy. An expansion phase is marked by rising indicators like income, employment, industrial output.

Cyclical fluctuations in economic activity are features of most economies. One of the reasons why nations fail to achieve a sustainable economic growth rate is because the policy makers underestimate economic cycles. Hence, an improved understanding of the economic cycles and policies interaction is imperative in formulating forward looking monetary policy.

Economists are often puzzled by the Growth-Inflation paradox. Most agree

that sustained growth rate cannot be achieved above a threshold rate of inflation; there are no models that accurately estimate on what constitutes the “Threshold”. Figure 1 captures an economic cycle in Indian economy from 2005-10. Inflation rate (depicted by the Green line) and Business Cycle (depicted by blue) further help identify the counter-cyclical nature of Growth-Inflation tradeoff with inflation rate almost mirroring the business cycle at identical turning points. Such an economic cycle (typically over a period of 6 years) is known as a Juglar Cycle or J-Cycle. Indian economy currently finds itself at its peak as indicated by the rising trend of the Juglar cycle in 2015, with lower inflation levels, tailor made for a super normal growth stage. However, Juglar peaks are often short lived (1-2 year, see period 2005-07 and 2009-10) and troughs are relatively lengthier (2-3 years, 2010-13).

I1A2D1

There is also a pattern of symmetry around which the cyclical trend oscillates over a period. This is termed as Kondratieff cycle or K-Cycle and usually extends over a period of 42 years. Hence, a K-Cycle typically has 7 J-Cycles. Figure 2 captures a K- cycle in the Indian economy and the breakout started around 1974. A rising trend is indicated by the green trendline below. Such a trend is typical of a robust economy.

I1A2D2

Chinese economy, on the contrary, has experienced a slowdown in consumption in the recent years. The J-cycle from 2010 to 2015 accurately captures this falling trend in Figure 3. Chinese economic cycle has not picked up significantly, in spite of recording a lower inflation rate. Recent RMB devaluation and interest rate cuts further confirm the ineffectiveness of policies introduced during the ‘troughs’. Also, the ‘trough’ looks abnormally extended with little signs of recovery.

I1A2D3

Summary of Findings

From the CRISIL research reports and World Bank data, it can be inferred that:

• Domestic investment in China has shown signs of saturation and there is little room for stimulus (Investment accounted for 47.2% of GDP in 2010 and 46% in 2014). India has huge room for public investment and can absorb trillions of dollars in infrastructure alone.

• A very popular argument among economists is that China has an ageing population which is expected to drive the labor costs up further by 2020.

• Going by IMF figures of 2013, consumption expenditure 70.4% of GDP in India compared to that of 49.6% in China.

• Chinese debts have risen to alarming levels (101% from 2007 to 2014). India on the contrary is relatively safe at 5% increase.

• With a subdued demand across the world, China can rely on export driven growth strategy at its own peril. India’s consumption driven strategy leaves a good headroom from potential upside.

• Pressures of the property bubble are already felt in China as real estate prices are on a decline.

I1A2D4

The Road Ahead

India is now one of the strongest growing economies and remains better positioned compared to its peers. Our country with a stable political environment recorded a sharp decline in inflation and managed to reduce Current Account Deficit (CAD) significantly. prime minister’s foreign visits have managed to win the foreign investor’s confidence yet again indicated by rising FII/FDI inflows. A combination of tactical measures like  the mobilization of NRI deposits, RBI’s success in building forex reserves, restriction on gold imports and slowdown in imports augur well for maintaining sustained growth rate. Currency devaluation war, how- ever, is one major external shock that remains a cause for concern. However, global sentiment still remains bullish on Indian economy on account of the following factors:

• RBI Governor, Mr. Raghuram Rajan has succeeded in building a strong monetary policy discipline that focusses on inflation targeting which in turn strength- ens the rupee.

• With the Land Acquisition Bill, FDIs and GST reforms round the corner, Indian growth story is expected to continue.

• India Inc’s earnings are expected to be 7% this year. Estimated reduction in corporate taxes and GST replacing state taxes will push the earnings upwards.

Major Challenges

• Currency devaluation war is one major external shock that remains a cause for concern

• Subdued global demand can hit India’s exports further impacting the economy

• Impending decision by the US Fed to raise interest rates has the potential to cause volatility in capital and forex markets

          Going by the business cycles and the empirical data on macroeconomic variables, Indian economy certainly is in a good shape compared to its northern neighbour. However, the onus lies on the government to bank on a great opportunity that the ‘peak’ of economic cycle has to offer.

References

  • CRISIL Research Reports on Indian Economy
  • Science of Monetary Policy: Some perspectives on Indian Economy by M J Manohar Rao
  •  www.worldbank.com

IMG_7666About the author:

The author was a Banking and Financial Service student of batch 2014-16. He is currently Management Trainee at CRISIL Research. His area of interest is economic research,  capital market, stock picking, and fund management. You can contact him at shulin.kamat@gmail.com.