10 steps to reboot strangled ‘Built Environment Sector’, post lockdown

By Amol Shimpi & Sumeet Mehta

COVID-19 has created unprecedented economic losses due to the extended lockdown. As we are completing almost two months of lockdown, discussions are centered on how to revive the economy. 

Two sectors that are large contributors to the economy are part of the Built Environment Sector: real estate and infrastructure. 

Real estate contributed around 7% of the GDP, and construction & infrastructure spending is pegged at around 9% of the GDP. 

The Built Environment Sector is the second largest employment generator in the country, after agriculture. 

A vibrant Built Environment Sector would result in providing income to a large number of unskilled labour. This is why it is important for governments, both, Union and State, to focus on reinvigorating this sector after the lockdown is lifted. 

We present 10 points to revitalize the sector to spearhead economic growth:

1. Invest heavily in infrastructure to boost economic growth and job creation:

The government has announced a Rs 1 lakh crore investment in infrastructure. This would be the biggest trigger driving economic growth after lockdown is lifted. Classical Keynesian economics talks about giving income in the hands of the masses so that they can spend it on consumption expenditure, thereby driving economic growth. 

Here it is important to ensure that growth is driven by asset creation, instead of merely giving handouts to people. 

The government needs to focus on building and expanding roads, invest in new ports and upgradation of existing ports to improve their efficiency and reduce logistics costs. Equal attention needs to be paid on developing urban and social infrastructure. 

COVID-19 has highlighted the grave situation of healthcare infrastructure in the country. India has 0.9 beds per 1,000 persons, as against WHO standards of 3 beds per 1,000 persons. India needs to aggressively invest in building new hospitals and primary, secondary, and tertiary healthcare facilities across the country from major cities to small villages. 

Similarly, India is suffering from a lack of proper schools and institutes of learning. Like healthcare, the government needs to invest heavily in building schools and colleges, and technical and vocational training institutions, especially in villages and taluka centres. At the same time, the government must focus on initiating and quickly completing mega projects like dams, canals, irrigation, river connectivity, etc. This would create employment for unskilled labour and drive consumption based economic growth and create assets that would be productively used for decades. 

2. Remove red tape and improve ease of doing business:

Bureaucratic red-tapism has caused tremendous damage to the country. This is the time the government should initiate a round of radical reforms and address the issue of delays and increased costs arising due to permissions, approvals, clearances, licenses, etc required to start a project – be it in infrastructure or real estate sector. 

Lord Winston Churchill had once said, “Never let a good crisis go to waste.” This crisis can be very effectively used to remove final remains of bureaucratic interference that slows down the process and increases cost and effort of doing business. 

Permissions need to be given based on certifications by professionals, like architects, etc. Laws and procedures need to be amended to create a set of rules that a real estate and infrastructure developer needs to comply with and subject to certification by the architect and/or other consultants, auto permissions must be granted immediately on filing of the application. 

It becomes imperative for the developer to adhere to requisite building and other codes and rules and regulations. To ensure there is total compliance based on declarations and certifications, the government can create flying squads to verify the projects and in case of violations, strict punishment and stiff penalties must be imposed on violators. It is time the government started trusting the industry and 95% honest businessmen don’t have to pay for mischief of 5% scrupulous businessmen. 

3. Increase FSI and ground coverage to make real estate projects viable:

State government and local bodies would find it mutually beneficial to increase FSI allowable on the projects by up to 50% subject to various criteria including density analysis, absorption capacity of the market, etc. 

Local bodies would also gain from this move by being able to charge a reasonable premium on the additional FSI. This would result in developers getting more area for sale and thereby reducing cost of land.

Along with higher FSI, local bodies must allow for higher ground coverage so that developers don’t have to go for high rises. Taller the building, the longer it takes to complete the project and increases the project cost. Higher construction cost and project duration would make many projects unviable or would force developers to pass on increase in construction cost on the consumer. 

So in the interest of the industry and consumers, it would be an ideal move by the local bodies to increase ground coverage of the projects. 

4. Industry must compulsorily support Make in India and Design in India:

While the industry seeks all benefits from the government, industry needs to come together to ensure that it buys raw material from local manufacturers and thereby support Make in India program initiated by PM Modi. At the same time, Indian developers must ensure that they buy services of local architects, designers, landscape consultants, etc. 

This will ensure that real estate and infrastructure industry acts as a catalyst driving job creation in India in all allied sectors. To enable this, Government can make it compulsory for Indian developers to buy services of local service providers only.

5. SWAMIH Fund must fund consolidation in the industry:

SWAMIH Fund is lending minimum amount of Rs 100 crore and maximum developers are in need of Rs 10 to Rs 50 crore to complete their projects. It is understandable that management of SWAMIH Fund cannot lend such small amounts for two reasons. 

First, asset management and monitoring of such huge number of accounts becomes extremely difficult and can cause bigger problems of mismanagement. 

Second, majority of the small builders who need money lack proper corporate governance and management systems in their organization and worst is lack of transparency. 

In such a situation theovernment must motivate SWAMIH Fund to lend money to large developers with respected brands, credible track record of delivering projects on time, and strong balance sheets. 

These developers can use monies advanced by SWAMIH to take over and complete projects of smaller developers that are stuck midway.

6. Interest rate charged by SWAMIH Fund must be in line with market rates:

Rate of interest charged by SWAMIH Fund needs to be competitive with the rates in the market. After factoring risk of scale and developer risk, cost of funds for smaller developers would be extremely high for them to borrow and ensure project is viable. 

This would deter many small builders from borrowing and completing projects. In such cases if funds are advanced to large developers based on their credit rating, and those funds deployed in completing projects of smaller developers, would ensure real estate sector gets funded and is able to complete stuck up projects and hand it over to customers, and thereby building customer confidence for the industry.

7. Enhance PMAY eligibility criteria from current limit of Rs 45 lakh:

In metros like Mumbai and Delhi, it is not possible to buy even a small house for Rs 45 lakh. As a result the middle class residents in these cities are unable to buy a home. It is imperative for the government to increase the threshold value for affordable housing in Tier 1 city from current limit of Rs 45 lakh. 

Loan and subsidy limits in metro cities must be increased commensurately to cover middle class in PMAY and support them in buying their first home. This will help real estate industry to get buyer support and liquidate their inventory. 

8. Facilitate ease in availing GST Input Tax Credit on purchases and reconciliation of GSTR 2A:

Developers who have opted for the GST Scheme that allows Input Tax Credit (ITC) need to be allowed to avail input tax credit, if they have made the payment, irrespective of whether vendors have paid the said tax.

Today it has become extremely tedious for developers to chase vendors and force them to pay the said tax to the exchequer, to claim ITC. Reconciliation in GSTR 2A is the area of compliance that requires simplification to enable ease of doing business. 

9. Increase Income Tax benefits for first home buyers:

Currently, Income Tax benefits extended to home buyers are limited to Rs 2.5 lakh deduction for interest paid on home loans under Section 24(2) and Rs 1.5 lakh deduction for loan repayment under Section 80C. This is inadequate for first home buyers in metro cities like Mumbai and Delhi. 

These two deductions must be allowed on actual amount of interest paid and loan repaid, to offer more benefit to home buyers and incentivize him to buy his dream home. 

10. State governments must introduce Stamp Duty Deferment Scheme:

For under construction projects, payment of Stamp Duty in one single installment increases pressure on home buyer. While developers are demanding a reduction in rates, they fail to assess the negative impact of the same on State’s finances. 

The states are reeling under pressure of lower tax collections due to lockdown and slowdown in economic activity after the lockdown is lifted. In such a situation, making such representations would only result in governments ignoring the same. 

Instead, it would be advisable that developers understand the challenging situation faced by the state governments.  In such a situation, instead of having to incur a loss of tax revenue arising from reduction in stamp duty, governments can collect Stamp Duty in installments on every progress payment, instead of one single bullet payment. 

Registration fees can be paid in full at the time of registration of the deeds.  This would offer a breather to the buyer and also ensure state doesn’t lose its revenue.

If all governments manage to implement these proposals, real estate and infrastructure sector would get adequate support and in turn the sector can contribute to economic growth of the country. 

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Amol Shimpi is an architect and urban planner by qualification and the Associate Dean and Director of RICS School of Built Environment, Amity University Mumbai. He tweets from @Amolshimpi

Sumeet Mehta is a Chartered Accountant by qualification and a corporate finance and investment professional. He is also the author of ‘Diagnosing GST for Doctors’  published by CNBC Books 18. He tweets from @sumeetnmehta

Both the authors are Elected Members of Royal Institute of Chartered Surveyors (RICS), London. 

The views expressed in this article are their own and not that of their firms/institutions.

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