Can The Government Do More For Affordable Housing?

Sachin Agarwal, CMD - Maple Shelters

Sachin Agarwal, CMD – Maple Shelters

Narendra Modi’s government has made massive forward strides within a short period. The progress in such a short period is remarkable, considering that the government is still hamstrung by a disproportionate fiscal deficit and its ability to induce further growth through public investment.

It is evident that the Modi Government cannot leave any stone unturned in order to bring about an environment that is attractive as easy to navigate for private investors. But judging from what we have seen so far, the real estate industry in India is definitely back on track in 2014. Still, there are complex challenges that remain. Two of these are inflation and, despite the demonstrated good intention, affordable housing.

On the inflation front, the RBI and the Modi government have taken a determined stand. From a larger perspective, inflation obviously impacts the overall borrowing cost in the economy and as a result is a major stumbling block for faster economic growth. But the effect of inflation on real estate as an industry is quite pronounced because it acts as a deterrent to spending by consumers and increases the financial burden of home loan borrowing. In such an environment, home purchase sentiment will remain subdued.

But inflation also has a grievous effect on the construction sector. The Indian construction industry is very dependent on raw materials like steel and cement. The higher the cost of constructing a residential project, the higher will be the cost of flats. Indian developers are seriously challenged by the constantly increasing cost of construction. The rise in this cost has been no less than 18% every year for the last four years. It is surprising and extremely worrying that the recent Union Budget did not make any provisions to bring the cost of construction down.

Inflation should not be tackled only by keeping borrowing rates high. Another way to bring it down which is very pertinent to the real estate construction industry is to fast-track the development of roads and highways so that goods can be transported more quickly and efficiently. Raw materials for construction are constantly sourced from all over the country. At the same time, the method in which tax is levied on such goods as they cross state borders must be simplified. In other words, the introduction of GST (Goods and Services Tax) system is very important at this stage.

When it comes to affordable housing as a segment, many of the measures that were pending for a long time materialized in the recent Union Budget. The affordable housing segment was finally given priority by granting the benefits of infrastructure status. The RBI also increased the limit for home loans availed for purchasing budget homes. Previously, the limit was a mere Rs. 25 lakh and this has now been raised to Rs 65 lakhs in the primary Indian cities and Rs. 50 lakh in tier 2 and tier 3 cities and towns.

But there is more to encouraging affordable housing than just incentivizing banks. Developers of such housing projects must also be given more breaks so that affordable housing development becomes more attractive and therefore encourages more builders to join the bandwagon. The ‘smart cities’ concept is getting a lot of limelight today, but what a country like India really needs is ‘affordable cities’.

Finally, there is a lot of land in the core areas of our cities that is being held by various government bodies. We have seen enough instances where such land is auctioned off to the highest-bidding developers who want to build luxury housing on these plots. If the current government is really focused on encouraging affordable housing in India, then it must release such land solely for the creation of such housing.

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