Real State of Challenges

Govt. must try to not only weed out the black money from realty market but also provide affordable housing to its burgeoning middle class. 

India’s growing realty sector has become a multi faceted regulatory challenge for the Govt. On one hand the very purpose of providing affordable housing has fallen flat, on the other it has given rise to the circulation of black money in the absence of stringent regulations. In a bid to regulate this shoddy real estate market, the forthcoming budget might bring in a Real Estate Regulatory Authority. Flourishing realty sector is paramount as it is a 5% contributor to GDP and a huge source of job provider to unskilled labor. The multiplier impact of the same on its ancillary segments is also abundant. With the rapidly growing urban population providing affordable accommodation to them is the foremost duty of the Govt. It would be interesting to watch how it ensures transparency and affordability in the Indian Real Estate Sector through its recent effort of appointing a National Regulator.

The biggest trouble with the realty sector is that it has become a reliable source of parking black money emerging as one of the best investment option to evade taxes for people sitting on wads of unaccounted money. In addition to this numerous approvals needed for property purchase provides chain of chances to make many people party to corruption. This cartel of dealers, brokers, investors and corrupt bureaucrats involved in illicit transactions and illegal land acquisition makes it a tough call, a nightmare for middle class salaried house-hunters to even think of owning a house. Stringent RBI guidelines for land loans and the fact that most of the real estate transactions are made in cash makes it even tougher for them to acquire enough money to go for such high profile land deals. In the end it is only high-heeled crooks who grab the land and sells it on even higher prices giving birth to a vicious cycle. It seems that real sector boom is not because of the maxim of demand and supply but that of spare black money and no other option to invest.

While India is among the top countries in terms of housing and work space needs, it ranks 181 in construction permission processes according to the World Bank Doing Business Report 2012. Delays in consents add 40% to a project’s cost. It is in this back drop that Real Estate sector is in hope of acquiring industry and infrastructure status, a demand further endorsed by Confederation of Real Estate Developers' Associations of India (CREDAI) - NCR and Federation of Indian Chambers of Commerce and Industry (FICCI). It will make affordable housing a sub-sector which will reduce the no. of approvals requisite from the state Govt. It will also help cash strapped developers to easily procure finance from banks.

As above mentioned, efforts are made in the forthcoming budget session to approve a Real Estate Regulatory bill in order to keep a check over unrestrained and concealed land transactions. As per this regulatory bill, the developer has to get accreditation from national regulator and make a public disclosure of on-sale property intimating them with all necessary details. Regulator will also ensure that separate bank accounts for each project are maintained to collect payments from buyers. However, strong nexus between real estate market players and politicians leaves the success of this real estate regulatory bill suspicious.

Govt. must recall that the three major economies i.e. of USA, UK and to some extent of China went into a deep slowdown just because their real estate market failed. The significance of realty sector is bumping up day by day with the ever increasing population. It is high time that the actual status of demand and supply of housing is maintained so that a middle class salaried person isn’t charged exorbitantly out of market price. It is required that whatever measures are being taken in the upcoming budget session, must be impeccable enough to strongly tighten the Indian Real Estate Sector.

Dirty data

It is high time that those responsible for maintaining economic statistics sincerely maneuvers to restore people’s confidence in official economic data.

The fundamentals of Indian policy making is under deep suspicion now with an ever increasing erosion of authenticity and quality of India's economic data. It is unfortunate that even macro economy data such as inflation, GDP figure, and IIP or export rate, which are the backbone of the economy, have been misreported in India, let alone micro economy data. Whole data quality in the country is dubious and is being put under serious question by various corners. Finance Ministry itself questioned the veracity of statistical data given by one of its own arms i.e. Central Statistical Organization (CSO). Such incidents strengthens the roots of unreliability in the minds of investors, economists, policy-makers or researchers who find themselves confounded with whether to trust on India’s officially acclaimed economic data or not.

As above mentioned, inflation, GDP, Export data and IIP are four major key determinants of monetary policy and surprisingly statistics of all these significant data have been wrongly reported time and again. To discuss recent examples, the IIP growth figures for January 2012 were scaled down sharply to 1.1 per cent from earlier estimates of 6.8 per cent. The reason given was wrong reporting of sugar data, which stood at 58.09 lakh tonnes, not the earlier reported 134.08 lakh tonnes.  It is surprising that no statistician could notice unprecedented surge in sugar production data. Apart from this, GDP data for the first quarter of 2010-11 was also miscalculated because the price deflator was incorrectly used. A similar error was reported in country’s export data in 2011 which was erroneously inflated by $9 billion due to some software glitch. Besides, it seems that inflation miscalculation in India has become somewhat a norm. Last year within a span of six months inflation data was revised two times first in April (March inflation data) then in July (April inflation data). All these glaring errors are suggestive of lackadaisical attitude of Govt. that it cannot even ensure to provide authentic statistical data of the country.

It is paradoxical that India who trumpets its being IT-power could not even manage to develop an efficient quality of data-estimation. Not only does it faulty, but also incomprehensive. Many commodities and services are left in data aggregation. Sometimes when prices on certain products come too late to be included in the data release, the missing quotations are repeated or estimated depending on commodity nature which certainly not gives a clear but notional picture of reality. Given creaky data collection system in the country, it is grossly pathetic on the part of Govt. if even data computation falls prey to languid system. Getting data estimates wrong bears sweeping repercussions on policy-making. Socio-economic welfare of the country rests on acquiring correct socio-economic data such as education, health, poverty, unemployment, birth rate, death rate etc., collection of which is worse than macro economy data and which is a major factor that impedes the crafting of policies that can strengthen the links between growth, poverty reduction, and development.

Robust and authentic economic data is the least that a Govt. is supposed to provide transparently. It is pertinent to recall the repercussions European Union faced due to data-fizzing executed by Greek Govt. just to avail EU’s membership. Highly significant it is for Govt. worldwide not to fiddle with statistical data because sooner or later harsh and hidden economic reality does bare itself resulting in to disastrous aftermath. It is high time that those responsible for maintaining economic statistics sincerely maneuvers to restore people’s confidence in official data which is the grist of each policy-formulation and economic decisions. 

Creaky Consensus

Genuine doubts on success of GST are still looming large as consensus on the introduction of the same appears loose and creaky.

After a long and arduous test of central government’s persuasive skills, states have finally agreed to the introduction of the long awaited Goods and Services Tax (GST). Decks have been cleared for the nationwide roll-out of GST in 2014 albeit by the new government after general elections. Genuine doubts on success of GST are still looming large despite a broad agreement with states on the contours of GST. Value Added Tax (VAT) experience coming  handy to this apprehension. All the hoopla created around  (VAT) has been fizzled out just in few years due to the over tinkering of VAT rates by the states. This has   defeated  the very purpose of harmonized taxation system for goods across the states.  

GST being at second level after VAT is more comprehensive in nature. It, as the name suggests, will be applicable to goods and services both and will replace litany of indirect taxes at state as well as at central level. Taxing services which yet falls in Central Govt. territory will come in the purview of state Govt in a limited manner. Although political reverberations on this radical tax hint that even if it is implemented, it may face the same fate as VAT did.

Indirect taxes, levied on the consumption goods are quite heterogeneous. Taxes like excise duty, custom duty, services tax, Central sales tax  are put by the central Govt while VAT/sales tax, Octroi are levied by the state govts. Rates of state level indirect taxes are varied in various states leading to incongruity and confusion for producers and consumers. As India is going to adopt dual GST i.e. the combination of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST), it has potential to set aside these several central and state level indirect taxes by mere a single tax. CGST will subsume excise duty, services tax and additional duties of custom while SGST will substitute VAT/sales tax, octroi,state surcharges etc. This SGST rate is supposed to be uniform across the states. Uniform GST will help reduce inflation as common tax regime can take off the demand pressures from the market, a fact endorsed by RBI deputy Governor Sudhir Gokharan.

Another characteristic of GST is that it is a destination/consumption based tax i.e. it will be charged only on value added at every single stage of production. The tax on value addition is ensured through a tax credit mechanism throughout the supply chain. GST paid on the procurement of goods and services is available for set-off against the GST payable on the supply of goods or services. The idea is that the final consumer will bear the GST charged to him by the last person in the supply chain. This mechanism of GST has instilled a sense of excitement among industries which have gone wary of giving plethora of taxes to plethora of departments. Consumers will also be benefited as industries will pass on their profit to consumers in the long run by lowering down prices.

It is true that no ideal tax model can be fitted in all countries but any internationally-experimented model, if adopted, must not be tampered with to the extent that the real purpose of the same loses its value. That is exactly what happened with VAT and is happening with GST model in India. Brinkmanship of state politicos has neither let survive any tax reform in India before, nor would it now. The fact that GST will restrict the power of state govt. to levy additional discretionary taxes and that no state will like its state exchequer get totally dependent on central bounties, they will try their best to deviate themselves from it. The adhocism of taxation structure is the real cause of worry as state Govts have not yet subscribed the fact that a stable tax regime is a must for growth. Consensus on introduction of GST appears creaky and loose. Hence, at central level GST might work but the fate is uncertain for states. if GST could be implemented homogeneously across the states keeping in view the revenue-neutral rates for them, it is well and good, otherwise trampled GST, the one in discussion right now will take it nowhere but VAT way. 

Bond against Inflation

With an ever increasing import of gold and nose-diving Rupee, government is forced to reckon with the idea of providing a hedge  to investors against  the return eating monster i.e. inflation.  Gold has become  only solace for investors to park their surplus as every other financial instrument has surrendered before the might of stubborn double digit Inflation. Reserve bank of India is now seriously considering to open the window of Inflation Index bonds- a  debt instrument  offering protection against high inflation.

India’s fresh lure of gold is predominantly driven by financial investment needs. Gold imports in India have risen to its peak and resulted in a panicky level of current account deficit and weak rupee resultantly. Apart form making gold imports costlier govt wants to divert the gold buying frenzy towards a befitting investment alternative. Inflation Indexed bond comes as an appropriate option in this context.

Inflation indexed bonds are those overall return on which is adjusted against increasing inflation. Inflation indexed bonds are popular and successful in USA, UK, Australia, Sweden and many other developed countries.  India introduced a derivative of the same i.e. capital indexed bonds earlier in 1997, then again in 2004 but the bond failed to garner attention as only principal amount was indexed against inflation not the coupon rate, consequently the real returns remained unprotected from inflation. RBI is again considering for a new avatar of IIB amid a couple of ifs and buts.

A robust inflation index is the most important pre-requisite for IIBs. India has several inflation measuring indices, ranging from wholesale to retail Inflation. It is still not clear which one would be used for pegging return on IIB . That IIB may disrupt the G-sec market is also a prevailing concern for the central bank. Government securities are the major source of govt  borrowings.  Fixed interest of G-sec will surely make the former i.e. IIBs a preferable investment option over the latter.

The timing of issuing IIBs is also a point to ponder.  Govt or issuer has to shell out  more money during the high inflation period. Considerate thought must also be given to defining tax rate on IIBs returns. Higher taxation on the same will eat into the vitals of returns.  It would be ideally prudent that IIBs are left tax-exempted otherwise it will be of no significance to investors.

IIBs are a welcome concept but the current challenge is to tame the lure of gold to contain higher gold imports. Given the policy bottlenecks of IIBs, it seems doubtful if it can provide equivalent benefit as gold does. Returns on gold is already three times higher than inflation rate with the prospect of spurring further. Gold-indexed bonds , yielding similar returns as this metal does in physical form, could become a better idea in the short run. A cornucopia of IIB and GIB  may do a lot better in the given situation of Indian economy.