India’s otherwise vibrant and thriving real estate sector currently pretty much mirrors the state of the economy. Sales have dropped, margins are under pressure and both high interest rates and fund availability are stumbling blocks.
At the same time, the opportunity is immense and a helping hand in the upcoming budget can give a much-needed fillip to the construction industry. When housing projects take off, it has a rub-off effect on a number of other industries like cement and steel and generates both direct and indirect employment.
According to estimates, there is a shortage of 1.87 crore houses in urban areas. Assuming a conservative cost of `20 lakh for each dwelling, we are looking at a gargantuan investment.
A key demand of real estate companies has been that tax breaks under Section 80-IA of the Income Tax Act, so far given to infrastructure companies, should be extended to the housing sector. Under this rule, infrastructure companies are entitled to a 100% tax holiday for 10 years.
Extending tax breaks to real estate companies will particularly help push affordable housing projects, which has been a key agenda for the government. Given that slums in cities are only expanding, there is an urgent need to address this segment of the housing sector. Clearly, this is one area where the government and housing companies can work together under public-private partnership model.
Infrastructure status also means that developers can access funds from India Infrastructure Finance Co Ltd, which lends at lower rates than commercial banks.
Approval processes should also become simpler and faster. Currently, obtaining 60-odd permissions to begin construction can take as much as two years. During this time, the cost of acquisition or even simply the cost of holding the land for projects rises. Single-window clearance is the need of the hour to prevent cost escalation, but we know that will not happen in the short term.
The cost of owning a property has gone up significantly due to jump in inflation. The budget, therefore, should provide higher deduction on interest payment on a housing loan.
Currently, it is capped at `150,000 in a financial year for a self-occupied house. At the same time, the principal repayment which currently forms part of Section 80-C, should be allowed to be deducted under a separate section.
The budget can also look to announce creation of special residential zones on the lines of special economic zones. Such exclusive zones, backed by tax breaks, will translate into development of townships with all facilities including schools, hospitals, recreation centres and office space.
A number of prospective buyers are currently keeping their plans in abeyance due to high interest rates.
Once interest rates moderate, demand is expected to pick up. The Indian economy is at the cusp of recovery. A pragmatic, balanced budget will only hasten that process.
The writer is executive director, DLF Ltd