The proposed Union Budget 2021-22 focusses on reviving the Indian economy, adversely impacted by the Covid-19 induced lockdowns, from a government estimated GDP decline of 7.7% in 2020. Compared to budgets prepared in the last decade, this one takes the boldest steps to boost economic growth through government led investments in building real infrastructure, leading to the government’s target of 14.4% GDP growth in the coming fiscal year of 2021-22.
“Overall the proposed Union Budget for FY 2021-22 is positive as it is driven primarily by an impressive 34% increase in capex investments in the construction and development of real infrastructure. These investments will spur large scale construction activities, which will create many more jobs, generate more income and boost overall demand in the economy. Not burdening the citizens and businesses of the country with additional taxes is very welcome and will go a long way in strengthening confidence in our economic recovery. We are hopeful that proper and quick implementation of the Government’s aim to disinvest, privatise and monetize assets with also improve the overall business sentiments and environments. These initiatives will bring in large volumes of private investments from abroad where there is high liquidity”, said Sankey Prasad, FRICS, Chairman & Managing Director (India), Colliers International.
While it may appear that the budget does not offer significant incentives for the real estate sector. However, a close analysis suggests that the government continues to focus on affordable housing by extending income tax benefits to both the demand and supply side since this is the most underserved segment in housing, presenting an opportunity for developers. Further, the budget is aimed at unlocking capital tied up in stressed assets, inefficient public sector undertakings, and bank reserves against bad debts. At the same time, there is an opportunity for investors, with the priority to attract large volumes of institutional (including foreign) capital by providing more flexibility to REITs. Hence, we expect this year’s budget to have a steady and meaningful impact on the real estate sector’s fortunes over the next two years.
Rebuilding the economy by building health and infrastructure
The allocations to public health and wellbeing are a welcome surprise; that these are planned to be funded without increasing taxes, duties and cess is remarkable. Colliers expects the investments in infrastructure will help to create jobs, and a focus on manufacturing and tech will increase demand for industrial land and commercial offices, while the knock-on effect of rising incomes should support the housing and retail demand. These bold steps by the government go a long way in instilling global confidence in India and its economy.
Thrust maintained on affordable housing
As Colliers anticipated, the government continued its thrust on affordable housing by extending previously announced incentives to homebuyers and developers. Developers only began focussing on the affordable and mid-segments since 2016, due to slow demand in the high-end and luxury segments. Both tax incentives should support the affordable housing sector and help achieve the Union government’s target of Housing for All by 2022.
The announced tax deduction for affordable rental housing allows for a 100% tax deduction for a project, wherein the income includes any profits and gains derived from the business of developing and
building affordable housing. While this is aimed at providing increased development of affordable rental housing, we believed the incentives need a longer duration with wider coverage to meet the intended aims.
Higher allocations for development of urban infrastructure
Colliers expects infrastructure improvements in Tier 2 will boost growth, providing an opportunity for businesses to expand, supporting office demand. As the quality-of-life improves, and thus cities become more attractive, we expect real estate demand will increase across segments. The monetization of government assets should unlock more land for development, supporting demand for office, residential and retail businesses.
REITs to raise funds at a cheaper rate
Colliers believes allowing trusts to raise debt from FPIs will attract increased investments into real estate. This should help REITs raise debt from international investors at a lower cost and increase institutional investor participation. Currently India has two listed REITs, with the third REIT launched on 3 February 20211. Colliers believes that an ARC will enable faster and more efficient resolution of insolvent assets, providing a huge opportunity for distressed assets in the sector, while giving institutional investors an opportunity to snap up assets at a lower valuation.
Startup ecosystem gets a boost
As of end-December 2020, there were 41,061 startups and 38 unicorns in India, making India’s startup ecosystem the world’s third-largest. The announcement regarding 1-person companies should foster innovation and encourage the technology-enabled Indian diaspora in the US and UK to start up in India. The lower regulation is an opportunity for entrepreneurs who should benefit from the government’s tax incentives.