Union Budget 2013-14: GREAT EXPECTATIONS

Amid high expectations the Finance Minister will present the FY2013-14 Budget. Since the re-entry of P Chidambaram in the Finance Ministry, which remains his forte, there seems to be significantly visible positive changes in investor sentiments. Taking a clue from Chidambarams image as a investors darling and reforms initiated by him since his re-entry to the North Block, it has raised expectations from the Finance Minister to continue the same in the budget. Having a quick look on the latest macro economic figures, the growth in GDP during the year 2012-13 is estimated at 5.0% as compared to the growth rate of 6.2% in 2011-12. IIP figures show a dicey situation of the Indian mining and manufacturing sector, the growth rate during April-December 2012-13 over the corresponding period of 2011-12 has been (-)1.9% and 0.7% respectively. The level of gross domestic savings vis-a vis GDP also reduced to by 3.2 per cent points from 34% to 30.8%. The growth rate in agriculture sector was 1.8%. Real GDP growth rate could be set at modest rate of 6% for FY14. The budget will aim to provide an investment-led supply push to growth with increasing private participation as against a consumption-led demand pull backed by higher subsidies and cash transfers. Moreover, the FM has already indicated it will be a responsible budget with fiscal deficit pegged at 4.8%. Fiscal deficit control remains the top priority for FM. A lower fiscal deficit will avert rating downgrading of India from current BBB- to Junk status. The rating agencies are keeping an eagle eye on the fisacl slippage situtaion of India. A lower fiscal deficit will result in lower borrowing cost and also result in more money in the hands of private sector and reduction in interest rates which will fuel growth in the country. The cutting of borrowings by Rs.12,000 crore has sent a strong signal that FM is very much on containing fiscal deficit within the targeted limits. Fiscal tightening through reduction in non-plan expenditures like reducing defence budget, administrative costs or deferring Air-India bail-out package could be a possible route for FM. The deregulation of fuel prices and hiking of railway fares are steps in the same line of reducting non-plan expenditures In the area of planed expenditures, subsidy on fertilizers can be expected to be raised because of three reasons first being the highly anticipated Food Security Bill, second to bring back the struggling agriclututral sector on growth rate track of 2.5% and above from the current growth rate of 1.8%, third to partly solve the evergreen issue inflation by the way of giving a supply push. This can also be rendered as a populist measure for the upcoming elections. The main worry is to bring the CPI inflation levels around 6-7% from the current double digit level of 10.79%. Although when compared to developed nations inflation at 6-7% seems to be high, one cannot expect inflation levels at 1-2% when the fixed deposit rates are around 8-9%. Moreover, inflation at moderate levels is accepted if backed by high growth. Although there will be no reduction in planned expenditure, the budget is expected to be one of most austere budgets of its time when compared to the previous ones. FMs take on the issue of Indias need for infrastruture development will result in higher allocation to infrastruture development expenditure budget. The FM aims at an infrastruture backed growth trajectory. He may be expected to announce policy shifhts aimed at greater private participation in the infrastructure developmet area. Since the Government is already largely free from the burden of fuel subsidy, the funds saved from it can be expected to be diverted to support increased planned expenditures. Rather than just increasing the plan expenditure amount in the budget, this time FM could signal some measures on increasing the effectiveness of the plan expenditures.Some new announcements on proposed planned expenditures cannot be ruled out considering the elections taking place in 2014. Looking at the revenue side of the budget, when revenue augmentation is concerned, the budget will not provide any new area

of revenue generation, there seems no room for the FM to do so, the general public is still facing relatively high inflation and the Governement is also facing wrath for it. So any revenue augmentation step by raising duties on price and income inelastic products would put the masses away from ruling party, a situtation which Chidambaram would like to avoid. It is also expected that taxing the super rich will not be an ideal solution to reduce fiscal deficit because it will lead to capital outflows/capital flight and will encourage tax evasions. However, increarse in import duties on luxuries goods can be expected. The ban on lower duty paying (only 1% because of bilateral trade treaty against 10% on normal trade) imported gold jewellery from Thailand is on the same lines. There will be no change in the tax slabs but change in the exemption limit of Rs.1 lakh could be a possibility, and along with the launch of Rajiv Gandhi Equity Saving Scheme (RGESS), stock markets can expect inflow of funds from domestic investors. Moreover, to curb the demand of physical gold, FM can be expected to encourage schemes intented at converting the investment in physical gold into financal investment like gold ETF. Recently released CSO data indicates that gross domestic savings (GDS) in 2011-12 fell to 30.8% from 34% in 2010-11. The fall in GDS is mainly due to decrease in the rates of financial savings of the households sector from 12% in 2009-10 to 8% in 201112. This is a result of high inflation, negative real return on deposits and strong returns available on physical assests like gold and real estate. Although in the last few months demand from foreign investors for Indian stocks has provided a new lease of life to the Indian stock markets, the demand from domestic investors is reducing because of high volatality in the markets. Tradionally the Indian investors are averse to risks rather than risk takers so they prefer investment avenues like gold which can protect them against volatality and high inflation which makes real returns negative. The FM is expected to be hard on the issue tax arrears. Direct tax arrears in 2009-10 amounted to 2.8% of GDP and 67% of total direct tax revenues. Similarly, tax collection and related administrative charges are too high. These things will be on prority list of FM. Stability focused reforms are strongly expected from FM. The establishment of National Investment Board (NIA) for fast approval of investment proposals and other off-budget reforms to simplify the investment approval procedures will bring the much required stability in current dicey times. Proposal of allowing FDI in pension funds will open new sector for investing. This will surely help in getting FDI which was reculatant to enter India due to confusion over policy and regulation matters. Changes in the investment limits of Qualified Foreign Investors can also be raised to create an encouraging environment for FIIs further participation. The Finance Minister is looking at the unification of various regulatory regimes that govern investments in stock and debt. The budget will not have much for the common man to cherish about in the short-term but may lead to long-term welfare and having a right Minister at the right place and at the right time can also help. Rasananda Panda and Jignesh Danak

Real estate's expectations from Union Budget 2013-2014

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Current Status The GDP for the current financial year is not likely to cross the 5.7-5.9% mark - the predicted 8% in GDP growth is highly unrealistic. We expect the budget to come up with some immediate and effective announcements to remedy the situation. In recent quarters, the Government and the RBI have been unable to curb the inflation to a more comfortable level of between 5-6%. Considering that the upcoming budget is expected to a populist one, given the Union election ahead in 2014, addressing the compromised GDP and skyrocketing inflation must be given highest priority. The macro-economic concerns are having a cascading effect on Indian real estate. Here are the considerations that the sector needs from the upcoming budget as well as in terms of overall enablement: - Reduce High Cost Of Borrowing: Presently, interest rates charged by the banks to developers and home buyers are at an all-time peak and need to be brought down. A reduction in the base rate (rate below which no banks can lend to the corporates or industries) is necessary to help banks lower their lending rates. The Government should address these concerns in the budget, and this should be followed through by RBI in terms of easing the repo rates and relaxing other policy instruments such as the CRR, SLR, etc. to inject liquidity into the system. This is essential if the Indian economy's key sectors such as manufacturing and real estate are to grow. The regulatory and monetary authorities need to bring down the housing loan rates to provide affordable housing to more cities and towns. The scope of the interest rate subsidy for loans towards affordable housing should be amplified and broadened to include a wider price band of budget housing to benefit home buyers, especially in lower income groups. - Make Provisions For Special Residential Zones: The Government could seriously consider enacting provisions for Special Residential Zones (SRZs) to incentivise the growth of housing stock at targeted locations. - Increase Infrastructure Allocations: The budget needs to increase infrastructure spending in urban areas with a view to unlocking the value of neglected and hidden land assets in suburban and peripheral districts. This will enable more holistic growth for the real estate markets in our overburdened metros and allow the demand for housing to spread over a larger canvas. The increased demand in peripheral locations in which infrastructure has made the real estate markets there more viable will also help bring down prices in the central areas. - Provide Real Estate With Industry Status: The country's real estate industry contributes approximately 5% to the GDP. Moreover, the real estate sector has grown significantly over the past decade, with tangible transformation in quality and business standards. However, due to lack of regulations and effective policies, the sector is experiencing many challenges on its growth path. The budget must consider the fact that the Indian real estate sector generates countless jobs across its various verticals. By granting it industry status, the Government would enable the sector to access debt lending at better interest rates and reduced collateral values. - Take Steps To Provide Better Clarity In Land Titles: This is another policy hurdle which needs to be tackled by the Government. Across the country, land needs the benefit of legally documented ownership assigned to the right persons or entities. The lack of clarity on land titles shakes the confidence of investors, and is a serious hindrance to overall growth. The budget should make specific allocations towards regularizing and digitalizing land records.

- Provide More Adequate Sources Of Finance: Since the sector is not under the umbrella of any specific regulatory authority, financing has been an issue over a number of years of credit slowdown. What is required at the current time is the liberalization of finance for the real estate sector. The budget should enable a broader scope for external commercial borrowings for real estate and provide a general relaxation of financing norms. - Take Steps To Moderate Rising Input Costs: The input prices for construction have skyrocketed in recent years, rising by more than 50% in the last two years alone. In addition, builders are faced with the increased costs of external and internal development charges, licenses and charges for change of land use from various departments. These factors have been directly responsible for rising real estate prices. The budget should make provisions for subsidized construction materials for low-to-mid-income housing, and rationalized license fees and other government levies. - Unblock The Approvals Pipeline: In this budget, the Government should come up with simple and effective polices that will ease real estate development approval procedures. Obtaining the 57-odd permissions to begin construction of a project can take as much as two years. During this time, the cost of acquisition or even just holding the land for projects rises. Single-window clearances are the need of the hour, since the absence of such mechanisms causes project delays which prove to be expensive to both developers and end users. - Take Steps To Improve Investor Interest: REITs should be implemented so that small investors will get a chance to invest in real estate assets. The enactment of legislation on REITs to provide exit opportunities to real estate investors would be a real step in the right direction. - Enact the Real Estate Regulatory Bill: The Government should once and for all finalize and implement the proposed Real Estate Regulatory bill, which is needed to bring rationality back to the sector. This draft bill, which is pending since 2009, aims to create a regulatory authority for the realty sector, ensure sale of immovable properties in an efficient and transparent manner, and to protect consumer interest. One key proposal of this bill is to set up a regulatory authority in each state. The sector looks forward to intentions in this regard finally translating into action. - Implement GST: The Government avowed plans to introduce GST sooner rather than later need to be implemented. This will go a long way in streamlining the economy and providing stimulus to GDP growth.