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.