Budget 2021: ‘Constructing’ The Post-Covid Economy
Workers at the National Highway 24 road widening and bypass project, in Ghaziabad, Uttar Pradesh, India, on May 11, 2020. (Photographer: T. Narayan/Bloomberg)

Budget 2021: ‘Constructing’ The Post-Covid Economy


Union Budget 2021-22 will be one of the most anticipated events in India’s recent history. The dust is settling after the torrid health catastrophe that affected millions and threatened to leave a permanent emotional scar, and we are finally seeing the light at the end of the tunnel. India has had a faster than expected economic recovery and a low fatality rate from Covid-19. India’s case fatality rate of 1.44% is amongst the lowest in the world. The distribution of vaccines has also commenced. Commendable efforts by the government and healthcare professionals as well people and community participation to take safety precautions are enabling India to get itself back on track.

The policies that will be introduced in the upcoming union budget are expected to set the tone for what steps the government takes next; and how quickly India is able to shrug off the crisis. The priority of the government will likely be on measures and policies that will lead to sustained economic growth, boost consumption, and encourage private investments. The budget emphasis will probably lay on healthcare and livelihood-creating sectors such as infrastructure and housing. The expectations are high from the budget and I would like to elucidate some of the key suggestions that the government could consider.

Budget 2021: ‘Constructing’ The Post-Covid Economy

Job Creation

If India is to reach its full potential, job creation is critical. Focus on jobs could be one of the main agendas of the budget. The pandemic and the resultant job losses in some sectors are expected to have far-reaching implications on the Indian economy. For that, reforms in sectors that create large-scale employment such as housing and real estate, infrastructure, construction, and manufacturing will be required.

For instance, the housing and real estate sector creates jobs directly and indirectly. According to India’s Economic Survey 2017-18, nearly 90% of the workforce employed in the real estate sector are engaged in the construction of buildings. Over 80% of the employment in the real estate and construction sector constitutes a minimally skilled workforce. Further, the sector is expected to require over 66 million people by 2022.

Housing is one of the largest employment generators in the economy with linkages to nearly 300 industries – both in terms of direct jobs and the jobs it creates in ancillary industries such as cement, steel, power etc.

The creation of jobs generates income, increases consumption, and results in greater demand for goods and services. Job creation increases aggregate demand and eventually leads to higher economic growth.

It has been rightly said, “Don’t worry too much about GDP growth, worry about jobs. If we focus on jobs, GDP will take care of itself.”

Focus On Housing

The government and the regulators have recognised the critical role housing and real estate plays in the Indian economy. In recent years, affordable housing has been at the forefront and the central government aims to incentivise all constituents in the housing chain – be it developers, homebuyers, or financiers. For a rapidly growing country like India with a large young population that needs more homes at affordable price points, six incentives specific for the housing and real estate sector could be considered.

1. Interest deduction on housing loans could be raised from Rs 2 lakh to Rs 5 lakh. The deduction could be revaluated periodically and linked to inflation.

2. The real estate sector has been facing challenges since 2017 and the demand for under-construction properties has slowed down significantly. Whilst the Special Window for Completion of Affordable and Mid-Income Housing or SWAMIH is an excellent initiative, there are numerous housing projects which require last-mile funding.

It is not practical for a single fund to resolve all the last-mile funding issues faced by the sector.

Historically, some part of the funding for a project used to come from sale proceeds of under-construction properties. However, in the last couple of years, due to GST and a variety of factors, the demand for under-construction properties has come down, which has resulted in housing projects which are 60-80% complete, unable to receive last-mile funding.

Lenders are reluctant to lend to stressed projects because any fresh funding will be classified as a non-performing loan on day one in the books of the new lender. Regulators may want to consider changing the regulations such that any secured fresh funding should be ring-fenced. This move will enable people to move into their new homes and end their uncertainty and frustration due to delays.

3. An additional option is to allow external commercial borrowings for real estate projects. Further, investment by foreign-owned or controlled SEBI-regulated investment vehicles up to 100% under automatic route should be permitted in entities that acquire completed and under-construction residential units or projects. Foreign investment is needed to provide last mile funding by buying inventory in residential projects which are stuck due to a lack of financial resources.

4. The Credit Linked Subsidy Scheme—a component of the Pradhan Mantri Awas Yojana—has been a major success. There is a need to extend PMAY benefits to more locations and extend the deadline for the middle-income group till March 2022 like the extension which is provided in the economically weaker sections / lower-income group category.

5. There is a need to promote the rental market in India. Currently, the setoff and carry forward of losses from house property is restricted to Rs 2 lakh. The earlier law did not have such restrictions and hence the earlier law could be restored. Alternately, the limit for a setoff of loss on account of interest should be increased to Rs 5 lakh.

6. Depreciation like benefits for homes can be introduced wherein the cost of the house can be written off / or part thereof over some time.

Personal Tax Reforms

Whilst corporate tax rates have come down, personal tax rates need to be further reduced to leave more money in the hands of people. Further, the surcharge on high taxpayers needs to be rationalised as these are the people who have the capacity to spend the most and spur demand. Global data shows that lower tax rates result in higher tax collections as compliance improves. I believe that lowering the tax rate will help increase the tax base in India.

In fact, we just witnessed this example in Maharashtra when the state government lowered that stamp duty to 2% for properties registered before Dec. 31, 2020. Coupled with interest rates at an all-time low and the reduction in stamp duty, Mumbai recorded historic registrations of house sale deeds in November and December. As a result, the state government’s treasury collection from registrations increased, inferring that strong home sales have more than compensated for the lower stamp duty.

My personal opinion is that tax collections would definitely increase if income tax rates are reduced. In a similar vein, the union budget could consider removing the long-term capital gains tax for investments in equity shares or by raising the period from one to two years. Moreover, the levy of Securities Transaction Tax on listed securities was the reason for the removal of LTCG earlier. Additionally, doing away with taxing dividend income could be considered. Such steps will put more disposable income into the hands of the individual and channelise household savings into productive assets.

To conclude, continual reforms have been a priority for the current government. There is an unambiguous thrust by policymakers to push India in the right direction. It is often said that India performs best in a crisis. The pandemic may just become a catalyst to bring in further reforms in ease of doing business, development, jobs, growth, and a stable tax regime to ensure India’s sustained long-term growth.

Keki Mistry is Vice Chairman and Chief Executive Officer of Housing Development Finance Corporation.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.

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