Can Union Budget 2025 fix the larger problems afflicting the business of Indian real estate? This question is more relevant than asking to what extent the Union Finance Minister will fulfill the wishes of the sector. This is because the real estate has largely been ignored, heavily taxed, and least considered in the budget of last few years. Irony is that for some strange reasons the stakeholders who have a large wish list on the eve of Union Budget every year, justify the sector being ignored in the post budget analysis.
Yes, there are a few silver lines here and there in every Union Budget. But that hardly addresses the larger concerns of either the home buyers or the developers. Prior to the Union Budget every industry is loaded with its set of demands & wish list, and real estate is no different. But then real estate is not like any other industry. It is not an industry in the first place. And then it is a complex business, and sooner the stakeholders admit it the better it would be for both the demand & supply side, as well as the policy makers.
A fake narrative of booming business has hurt the sector more than anything else in the power corridors. Why should the Finance Minister offer incentives to a business that is self-certified as booming & contributing significantly to the GDP. It is always better to address the concerns of the industries that are struggling. Add to it, the lofty demands, like granting industry status etc, was meant to be ignored.
A few questions that need to be asked:
Does real estate operate like an industry?
Do builders sell products like a matured industry?
Isn’t fiscal mismanagement the biggest headline of the sector?
Haven’t regulations like RERA failed to address the pain points of the buyers?
Three things that compound the problems of real estate are:
A business that sells before the product is ready
Localized nature of business with stakeholders of different geographies having different agenda
The opaque operations by the developers at large
The stakeholders of real estate have their own agenda and wish list. But then many of these are the demands are making rounds for the last few years.
In order to understand the budget wish list, chances of Finance Minister’s approval, and overall impact on the sector, it is important to first understand the problems and then think of the viable solutions, if any considered by the Government. This is because many of the challenges of the sector are self-inflicted injuries. There are issues beyond what the Union Budget can address.
Problem #1 Shrinking middle class: Shrinking middle class is the “Real Challenge” before the Indian economy in general and real estate sector in particular. But then the stakeholders are either not talking about this, or worse even, living in the denial with illusionary job market that is booming with higher salaries all around. The urban salaried middle class has historically been the major demand drivers of housing market in many economies and India is no different. This set of buyers is increasingly phasing out of the housing market. Rising unemployment that is leading to decline in consumption and disposable income is the greatest challenge and unless that is addressed the real demand in the real estate sector would be missing.
How can the Union Budget fix it? Creating more jobs and reigniting consumption that could lead to asset creation needs a surgery approach and definitely not a band-aid approach. Stimulus to the industries alone won’t fix this problem. An incentive aligned with more job creation, along with government spending could go a long way in creating more jobs that will eventually lead to housing demand. But the tone & direction of Union Budget in last few years doesn’t seem to suggest that the Government is even thinking on these lines.
Problem #2 Stagflation & challenges of survival: What is keeping the Indian middle class away from any high value purchase nowadays is the challenge to survive. Despite the denial of the Government with selective data & statistics, there lies the stark reality of stagnant wage growth and hyper-inflation, leading to lesser household savings and higher borrowing. The record gold mortgage by Indian household is a big red alert. The inflation, most notably with the three critical areas of consumption – food inflation, medical inflation & education inflation has pushed middle class on the edge. High cost of living for an average Indian is further compounded with the challenges of higher taxation.
What can the Union Budget do to fix it? Tax rationalization is the need of the hour. The Government can consider increase in personal Income Tax exemption up to the earning of INR 15 lakh per year. GST rates on consumption items could also be rationalized. It absolutely makes no sense for an average Indian that there is 6 times more GST on essential food items than the luxury items like gold & diamond.
Problem #3 Over-supply & absorption of luxury housing: The over-supply & absorption of luxury housing has led to a very lopsided growth of Indian housing market in the last few years post pandemic. The stakeholders are increasingly realizing the depth of the problem now. Luxury housing has reached to its plateau point and doesn’t seem to drive the business 2025 onwards.
What can the Union Budget do to fix it? Unfortunately, the Finance Minister can’t regulate the supply of housing at the top of the pyramid. But what the Union Budget could do is to restructure the taxation and increase taxation with luxury housing and at the same time lower the tax, or remove it, with affordable housing.
Problem #4: Market focus on repeat buyers than first time buyers: There is no denying that investors drive the real estate market in this part of the world. The wish list of the developers hence seems to attract the repeat buyers and not the first-time buyers. The developers in their collective consciousness have always advocated for tax incentives that could only tempt those who can afford to buy a house. But the ground reality is that the vast majority of the Indians can’t afford to buy a house. Property market continues to be a game of top 10 cities & top 4% of Indian demography, while being out of the reach of the common man.
The sector is not bothered to cater to mass housing; nor are they asking for any incentives that could make home buying easier for the lower end of the pyramid. How could mere adjustments with the definition of affordable housing and increasing the price cap make homes more affordable?
What can the Union Budget do to fix it? The Government should bring back indexation benefits, keeping in mind the ground reality of distress sales in many cases. This would give confidence to the buyers on the edge who are apprehensive that property sales in the wake of any emergency would be a double burden. The buyers of affordable housing need to be subsidized with more incentives like increase in the tax deduction limit on home loan interest from INR 2 lakhs to INR 4 lakhs, under Section 24 of Income Tax Act. Reinstating the Credit Linked Subsidy Scheme could also help the affordable home buyers. Further, a revision of the current deduction limit from INR 1.5 lakh to INR 5 lakh under Section 80(c) could also be considered to ease home ownership experience. There is demand for Stamp Duty cut as well but then that is a State Subject.
Problem #5: Higher input cost of property: Property prices are increasingly moving northwards due to higher input cost. Higher input cost of construction material, higher taxation, and higher cost of capital is all leading to affordability curve going beyond what market can absorb.
What can the Union Budget do to fix it? The Union Budget can take measures to rationalize GST on raw materials. GST on under construction properties could be done with. Adjustments to input tax credit would also reduce the cost burden on developers. Green developments could be incentivized. Single window clearance would marginally reduce the overall project cost. The Government can also introduce incentives to attract both domestic and foreign investments.
Problem #6: No focus on long-term sustainable urbanization: Indian real estate with potential to contribute significantly to the GDP is still all about the Top 10 cities. There is no blueprint to create more functional cities. No one knows what happened with the plan to create 100 Smart Cities. The developers have no incentive to move to Tier II & III cities, while the home buyers have no job or economic activity to shift. Issues like Rental Housing and Model Tenance Act have to move forward beyond the lip service of high flying announcements that are stuck up with execution logjam.
What can the Union Budget do to fix it: Along with infrastructural development, what the Finance Minister can do is to offer incentives to industries, developers and affordable home buyers for shifting base to Tier II & III cities. Tax holiday for businesses and tax benefits to home buyers can lead to sustainable development of India’s quest for urbanization.
These are the problems and possible solutions for the Union Budget to make housing for all a reality in the true sense of the term. These measures could also address the larger concerns of India’s urbanization. The even bigger question is whether these issues figure in the top priority areas of the Government.
Ravi Sinha
#RaviTrack2Media
Ravi Sinha is a journalist with over two decades of cross-discipline media exposure. He is the CEO of real estate thinktank group Track2Realty. He has been writing extensively on the real estate sector for more than a decade now. Evaluation of real estate brand performance is his core domain expertise and he has immense insight into consumers’ psychograph. He has conceptualised Track2Realty BrandXReport as India’s 1st & only objective & non-paid brand rating journal that is industry-accepted benchmark of brand equity & ranking of the Indian real estate companies.
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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