Real Estate Intelligence Report, Friday, June 12, 2009

India poised for return to 8% GDP’

India poised for return to 8% GDP’
The Economic Times, June 12, 2009, Page 1 & 8

Capital Inflows Rising, Financial Sector Reform Definitely On Agenda

MONTEK Singh Ahluwalia, the deputy chairman of the Planning Commission, is backing Prime Minister Manmohan Singh’s view that India will return to 8-9% growth in the medium term, since the country is on a strong wicket on many fronts. Once the global economy starts to recover, the return on capital will also be higher in an economy like India, which is poised to grow faster than its Western counterparts. And the entry of $5 billion into the country in the last two months is a clear sign of easing capital flow, he says in an interview with ET’s MK Venu & Soma Banerjee. Excerpts:

The prime minister mentioned that India will bounce back to 8-9% growth in the medium term even if developed economies do not recover... What are the conditions necessary to achieve this?

It is important to remember the supply-side constraints. A lot of people are concerned about the global economy. The impact of the global economy on us, primarily on the demand side, is less than would otherwise be the case. But as long as on the supply side, we are in a situation where productivity and domestic savings and the growth of capital and the growth of investment leading to the growth of capacity take place the way we want it, we should be able to grow at 8-9% as mentioned by the prime minister. There the focus is on savings—whether we are investing enough, if there will be enough inflow of foreign investment and whether domestic capital will be able to achieve the productivity gains is what we have to look at. All known cases of high growth are not those where you just expand capital stock but also where you have high levels of productivity. On all these counts, India is in a very strong position. WHAT has happened, though, is that the global economy will grow slowly, but over a medium term, we can overcome that problem.

In the context of India needing more foreign savings, do you think capital flows have already begun to ease? For example, if you look at the latest figures, there is FII inflow of more than $5 billion in the past two months.

It is quite clear that it has begun to ease. Last year, after the collapse of Lehman Brothers, there was a huge amount of uncertainty and a huge premium on liquidity. Global financial institutions were pulling back capital to reconstitute their own balance sheet. Now, there is some restoration of confidence that the system is not going to collapse. The news coming from the West is that perhaps, by the second half of the calendar year, the global economy will bottom out and start a gentle upswing.

No robust growth but there will be growth in 2010-11. This puts an end to fear and uncertainty. Once confidence is restored, global investors look for returns. Frankly, since the West will grow slower, the return on capital will be higher in economies which will grow faster, like India.

What are the key reforms that you would put on priority to drive investment-led growth in the next six months or one year?

It’s not enough to talk about reforms that will have an impact in the next six months. Psychologically, you also have to look at the reform signal for the medium term; the actual impact of those decisions come only after two to three years. The signals you give today change investor expectations, and that’s not necessarily to do with foreign investor expectations. Foreign investment is important but domestic investment is much larger.

So what are those things?

Clear movement on infrastructure, which everyone regards as the major constraint in India’s performance. It’s a supply constraint in the two- or three-year horizon but it also addresses the demand constraint in the short term. Underlying that, there needs to be positive movement on social sector reforms because it is the progress on social sector and the promise it holds out for greater inclusion which create a social consensus for modernisation. For example, we talk about setting up 30 universities. They won’t start tomorrow and we will be lucky if they start operating in the next three years. So everyone in India who has a child aged 13 or 14 will know that the prospects for that child will be better when he is ready to go university. The expansion of private universities that we desire will signal optimism to many people.

There is also a view that we need to look at financial sector reforms because there is a need for Indian businesses to explore newer financial services and we need a lot more banking to have genuine financial inclusion in the domestic market...

Absolutely. I would put financial sector reforms very much on the agenda. There is a view that because there has been a global financial crisis, there should be rethinking on financial sector reforms. I think this is wrongly applied in India. What the world crisis shows is unthinking liberalisation of the capital account and an expansion of unregulated financial sector can be dangerous because it leads to a lot of leverage and it creates a lot of activity in areas where there isn’t enough regulation. But that was never our intention. We were always of the view that the financial sector must operate within regulations but within those regulations, they should have more freedom. For example, we have a well-regulated system and so we should allow private sector banks to expand more freely. Once you have the regulations, we should allow competition among banks. We have allowed capital inflows but have not suggested a balanced system with some restrictions, very few restrictions on FDI, some on short-term borrowings. It presents a mixed picture. It would be wrong to say that we should not go in for financial sector reforms. There are lessons to be learnt but too many people are learning the wrong thing which is to stop everything. The financially over-liberalised economies are moving towards the centre of the spectrum but we were over-controlled and have to move towards less control in the sense of letting more players participate. It would be a great mistake to think that we must rethink financial reforms because of what happened in the western world.

On infrastructure, what are the lessons to be learnt?

We have done well in some sectors like rural roads in the North-East. The President’s address mentioned Bharat Nirman-II and we will take up more of those over the next two or three years under public investments. The second mode is by promoting public private partnership (PPP) projects. It took some time but the good news is that most of it is resolved. The new minister for transport, Mr Kamal Nath, says he wants to see 7,000 km of road per year. This is feasible through budgetary means and PPP. Meetings have been held with stakeholders. There are problems related to credit and banking and some of them can be addressed. With the restoration of normalcy in the rest of the world and robust growth in India, there would be a significant flow of private investments in roads and power sectors. We expect 70,000 mw to be added by the end of the Eleventh Plan, three times what we did in the Tenth Plan period. Our savings rate is fine and over the last two or three years, we have not had current account deficit. I think we can boost investments in India’s infrastructure sector at a time when global economies are growing at a slower pace and demand will be low. So it will have a contra-cyclical impact. We may have to do some more public spending and that will increase fiscal deficit but that’s part of the contra-cyclical strategy.

Your take on fiscal expansion. How much of it is tolerable, going forward?

The increment mentioned in the interim budget of 0.5% to 1% is right. The interim budget already includes a significant increase in the pre-stimulus budget level compared to 2008-09. There is lot of confusion on India’s stimulus. It is said that China gave 3% of GDP as stimulus and we provided only 1% of GDP. This is wrong. One way to look at it is how much has your stimulus increased compared to what was originally budgeted for. It is true that some of it was because we did not pass on the increase in oil prices and we subsidised it. That is a stimulus as money remained in the hands of the consumer and the government took the hit. Against the originally anticipated fiscal deficit target of 3% of GDP, the actual fiscal deficit turned out to be 7.8%, including off balance-sheet items like oil bonds. The additional fiscal deficit is over 4%. This is a form of stimulus. You can call some of it an automatic stabiliser. You haven’t provided for it but it kicks in to compensate for the loss of demand. This is a big debate in Europe, too. So while US authorities have given big additional stimulus, the Europeans claim their automatic stabilisers are so strong that their fiscal deficit expands even if they do not do anything consciously. For example, the unemployment dole kicks in automatically in Europe as unemployment increases. This does not need a fresh spending programme. I have seen some IMF calculations and the stimulus provided in India is not very different from China—a little over 3 percentage points of GDP on an annual calendar year basis for 2009.

Is there a case for some more monetary easing? There is a talk of how fiscal and monetary policies should complement and not constrain each other...

In well-regulated economies, the fiscal and monetary policies are integrated. The one takes into account the consequences and constraints of what the other is doing. In a period of crisis, the notion of independence of monetary autonomy has to be kept aside. It is happening in the US and that’s the case in India. Over the past six months, in the response to the crisis, by and large, monetary policies have been supportive of the overall fiscal stance of the Centre. There has been healthy co-operation between the two.

At the moment, a shortage of liquidity is not what is preventing credit from coming out. My recollection is that most banks, even today, are parking funds with the RBI under the reverse repo of the order of over a Rs 100,000 crore. The situation is very different from what it was in September/October, when there was a liquidity crunch. Once we know what the budget numbers are, it is easy to give the right monetary signals. Besides, big capital flows last month have resulted in considerable liquidity infusion. Sebi has said $5 billion has come in the last two months. So whoever is conducting monetary policy will have to keep several balls in the air and make the right call at the right time in regard to liquidity management... There is no liquidity problem now. The real problem is that banks have an elevated risk perception and that is natural but as investors gain confidence and the government gives the right signals, and the so-called green shoots become evident, bankers will also begin to change perception.

What are the changes in ground realities—credit rating agencies have softened perception towards India...

That is because of a changed realisation that India continued to grow robustly compared to many economies even in the worst recession since the Great Depression. A greater appreciation of fiscal deficit what led to this. But there has to be a medium-term plan to return to fiscal sustainability.

What could be done to restore revenue growth to achieve medium-term sustainability? Is disinvestment one such way?

Growth by itself will self correct the fisc. It will generate revenue in the medium term which will make all our inclusive growth programmes feasible. So when the PM says that 8-9% growth in medium term is sustainable, a good tax system will generate buoyancy. There is a good case for increasing expenditure this year but once it gains momentum we have to stabilise.

The extension of GST is the second. A major reform in the indirect tax regime that will not yield immediate results but will show gains in the medium term. We must have cautious expectations in the short term once it is rolled out on April 1 2010 but in the medium term (two to three years), this will make the indirect tax collections robust.

With regard to subsidies, there is no doubt that there have to be subsidies for some sections of the society but a lot of our subsidies are wasted. Like kerosene leaks out to the black market. Expansion of rural electrification should bring down the need for kerosene subsidies. Disinvestments are a way of creating capacities in the sectors that you need. There are sensitivities in the political spectrum but that is why the prime minister referred to building a consensus. If we could embark upon disinvestment of some of these companies, keeping 51% government holding intact, you could generate sizeable revenue over the next two to three years.

PM’s advisory council projects 7% growth

PM’s advisory council projects 7% growth
The Economic Times, June 12, 2009, Page 9

NEW DELHI: Sharing the optimism of Prime Minister Manmohan Singh, his advisory council on Thursday projected a growth rate of 7% for the current fiscal, reports Our Bureau. “I think it should be around 7%,” Prime Minister’s Economic Advisory Council (PMEAC) chairman Suresh Tendulkar said. Although the Reserve Bank, in its annual monetary policy in April, forecast a growth rate of around 6% for the current fiscal, the prime minister felt otherwise, saying the growth rate would at least be 7%. “We will maintain at least 7% growth rate. In the short run, we can’t do better (because of the global economic crisis) but this is not good enough,” Mr Singh said in Parliament, adding that with efforts, the country can revert to 8-9% economic growth.

Assocham sees 7.2% growth

Assocham sees 7.2% growth
The Economic Times, June 12, 2009, Page 9

NEW DELHI: The Indian economy may grow at 7.2% this fiscal on the back of an improvement in consumer sentiment, policy reforms and projected growth in the agriculture and industrial sectors, an Assocham survey said. In a survey of 300 businessmen, about 42% of the respondents said policy reforms would cast large impact on the GDP growth. "The Indian economy is expected to register a GDP growth rate of 7.2% in 2009-10 on account of an improvement in consumer sentiment, rural India and policy reforms," the chamber said.

Global economy to shrink by 3% in 2009

Global economy to shrink by 3% in 2009
The Economic Times, June 12, 2009, Page 19

WASHINGTON: The global economy is set to contract by close to 3% this year, worse than the previous estimates for a 1.75% decline, World Bank President Robert Zoellick said on Thursday. In a statement ahead of the Group of Eight finance ministers meeting in Italy at the weekend, Zoellick said poor countries were the hardest hit by the global crisis. "Although growth is expected to revive during the course of 2010, the pace of the recovery is uncertain and the poor in many developing countries will continue to be buffeted by the aftershocks," Zoellick said. He said most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign direct investment is reversed by the end of 2010.

Inflation rate dips to 0.13%; food still dearer

Inflation rate dips to 0.13%; food still dearer
The Hindu Business Line, June 12, 2009, Page 7

Wholesale Price Index of all commodities at 232.6.
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The sub-one per cent overall inflation numbers, however, hide the much higher price increases registered in foodstuffs.
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Our Bureau, New Delhi

The annual wholesale price index (WPI)-based inflation rate has further slipped from 0.48 to 0.13 per cent for the week ended May 30.

That makes it the thirteenth consecutive week where year-on-year inflation has ruled below the 1 per cent level. The all-commodities WPI (base 1993-94=100) was provisionally placed at 232.6 for the latest recorded week, as against 232.3 a year ago.

The coming week (i.e. ended June 6) could well see the headline inflation rate turning negative — the first time in over two decades. The reason for this is that the WPI last year, between May 31 and June 7, shot up from 232.3 to 236.5. The ‘base effect’ of this 1.8 per cent rise in a single week is likely to produce a negative inflation rate, when the June 6-ended WPI data is released.

The sub-one per cent overall inflation numbers, however, hide the much higher price increases registered in foodstuffs. Thus, while the all-commodities annual inflation for the latest recorded week was 0.13 per cent, the corresponding rate for the ‘primary articles’ group stood at 5.7 per cent. And within ‘primary articles’, the year-on-year price rise was 8.6 per cent for ‘food articles’ — which included foodgrains, fruits & vegetables and milk.

The significant reduction in headline inflation over recent weeks has been mainly brought about by the ‘fuel, power, light and lubricants’ and ‘manufactured products’ groups, which have respective weights of 14.23 per cent and 63.75 per cent in the all-commodities WPI, compared to 22.02 per cent for ‘primary articles’.

For the week ended May 30, the WPI for the fuel group actually fell 6.68 per cent year-on-year, while inching up by 0.39 per cent for manufactured products. But within manufactured products again, the inflation in ‘food products’ was 12.36 per cent. The latter included a disconcerting 31.27 per cent for sugar.

Inflation murmurs begin as oil closes in on $70

Inflation murmurs begin as oil closes in on $70
Business Standard, June 12, 2009, Page 6

Devika Banerji / New Delhi

Inflation in India has tumbled from a 16-year high of 12.91 per cent in August last year to below 1 per cent for the 12th straight week, raising hopes that a figure near zero would give the government the comfort to craft policies that would help boost the economy.

But the murmurs about a possible return of inflationary fears have already started doing the rounds. Reason: oil prices are close to breaking through the $70 per-barrel barrier and more forecasters are broadening expectations for a further upward swing.

In fact, it has taken just 75 trading days for international crude oil prices to double to $68 a barrel on June 8, 2009 — the fastest bull run over a 75-day time period in the last nine years. The price of the Indian crude basket has also increased to $68.66, giving rise to the feeling of ‘here we go again’ with what happened last year.

Listen to Goldman Sachs, the firm which predicted last week that economic recovery will push up oil prices to $85 per barrel by the end of this year and $90 by June next year.

In a report called ‘India Macro Stance’, Goldman said that inflationary pressures were sequentially building up. Recent data on both the Wholesale Price Index and the Consumer Price Index showed a sequential bottoming out between February and April. Latest readings of price indices were showing a bottoming out of inflation, it said.

With a recovery in domestic demand on the horizon, Goldman believed the output gap would continue to shrink, exerting upward pressures on prices. According to its estimates, a 10 per cent increase in the administered price of crude oil increases WPI inflation by 0.6 percentage points.

Goldman isn’t alone. Many economists and market players have started wondering whether the fast rising international crude prices coupled with food prices registering double-digit inflation rates will pose a threat to the Reserve Bank of India’s (RBI’s) benign prediction of 3-4 per cent in fiscal 2009-10. “The fundamentals are great, the only worry in the horizon is inflationary fears. It would be interesting to see how the central bank tackles the situation,” said Rashesh Shah, chairman of Edelweiss.

The prices of wheat, rice and sugar have constantly been on the rise for the last two months. The inflation rate for food items like cereals, pulses and wheat in the primary articles category has stayed near two-digit level since March, while sugar inflation touched 30 per cent last week.

Higher inflation not only affects the common man in terms of higher prices, but also will push up yield on government bonds and increase the cost of borrowing. This is because high inflation will erode real returns of government bondholders, who in turn would expect higher returns.

With a seven-year record high fiscal deficit, the government is planning to borrow in excess of Rs 3,20,000 crore in fiscal 2009-10. High government borrowing is one reason why yield on G-Secs have responded correspondingly to interest rate cuts announced by RBI.

Analysts have stated high Minimum Support Price (MSP) which has led to higher rural economy to be the major reason. Moreover, they also indicated at persisting irregularities in the supply chain leading to gaps in the demand-supply scenario resulting in high prices.

“It is important to beef up infrastructure at different levels to neutralise the demand and supply situation. Temporary ban on speculation in the oil market might also help,” added Abheek Barua, chief economist with HDFC Bank.

Commodity prices, particularly metals and intermediates, have also gone up sharply in the last three months. Copper, for example, is up 24.5 per cent to $4936 since April and the revival of the steel industry has put pressure on nickel prices. Prices are up nearly 50 per cent since April.

Globally, steel companies have started raising prices. Even plastic raw materials have also gone up by two-third from their lows last November following the sharp upturn in crude oil. Petrochemicals and chemicals in general have also shown a rising trend, resulting in a rise in India Inc’s input costs.

Tushar Poddar and Pranjul Bhandari of Goldman said broad money (M3) growth, at 20.5 per cent y-o-y at end-May remained higher than long-run averages and the central bank’s target of 17 per cent y-o-y. This has also been in part due to increased inflows and monetary accommodation of the fiscal deficit. The system is awash with liquidity, and they felt that the excess money growth would exert upward pressure on prices going forward.

There were some other early indications too of inflation hardening. According to a finance ministry statement on inflation issued in the last week of May, deseasonalised overall inflation, which had persistently remained negative since September 2008 and recorded a provisional rate of (-) 2.6 per cent in March 2009, firmed up at 3.2 per cent on the basis of the final WPI.

Some experts, however, have a more benign view and felt while higher food and oil prices were a cause of concern, the headline inflation would not be impacted much till oil crosses the three-digit mark.

Had it not for these two factors, inflation rate based on wholesale price index (WPI) would have gone into negative territory, described as “deflation”.

“We expect an inflation rate of 5 per cent till March next year with oil at $ 60 a barrel , but if it stays or rises from current levels, then inflation risks are bound to emerge,” said B Prasanna, an analyst with ICICI Securities.

“The current prices do not impose threat considering oil prices were at much higher levels last year. However if a steep rise in oil prices continue and cross $100 dollar per barrel, it will be a cause of worry,” said Jyontinder Kaur, an economist with HDFC bank.

The inflation rate for oil and fuel category has continued to register negative inflation since December last year, mainly due to the spurt in oil prices in the previous year when it went over $140 per barrel in July, 2008.

Therefore, due to high base effect, as inflation is calculated by comparing this year’s prices against last year’s, oil prices, as of now, are not significantly pushing the inflation rate up.

The category of fuel (which includes power) with 22 products occupies around 14 per cent weight in the inflation index. There are 10 products which are oil or its derivatives, out of which 4 products are under the administered pricing mechanism (APM) that is government determining the price. These four products are petrol, diesel, kerosene and LPG.

“These four products which have around 5 per cent weight of the index and are currently at lower levels will also cushion us against high inflation,” Kaur added.

Inflation at 0.13%

The inflation rate for the week ended May 30 came down to 0.13 per cent, the lowest since the new series started in 1993-94, primarily due to the decrease in prices of manufactured products on an annual basis.

The inflation rate stood at 0.48 per cent for the previous week ended May 23 and 9.32 per cent during the corresponding week in 2008.

Experts say that the decrease in inflation rate is the result of the base effect and expect negative inflation in the next two weeks. The low interest rates also create scope for the Reserve Bank of India (RBI) to cut key interest rates like repo and reverse repo.

“There is a scope for a last 25 basis points rate cut by RBI considering inflation is bound to go further down,” said Jyotinder Kaur, an economist with HDFC Bank. RBI has already cut repo rate — the rate at which lends to banks — by more than 4 percentage points since September 2008 to stimulate demand.

Inflation slips to 0.13%, 30-yr low

Inflation slips to 0.13%, 30-yr low
Times of India, June 12, 2009, Page 23

Prabhakar Sinha TNN, New Delhi

Inflation dipped to 0.13% for the week-ended May 30, the lowest level in the last three decades, government data showed on Thursday. In next week, inflation is expected to become negative. In the previous week, the annual inflation was 0.48%.

Despite inflation set to go into negative territory, Prime Minister's Economy Advisory Council chairman Suresh Tendulkar ruled out any possibility of deflation. However, economists feel that inflation will remain in the negative territory for around two months. ‘‘We expect a spell of negative year-on-year inflation for two to four months from June 6, 2008,'' said consulting firm Edelweiss in a report.

Inflation is hovering at less than 1% level since March 7. It was expected to fall below zero earlier but because of the sharp rise in the food article prices, it continued to hover around 0.5% for the last three weeks. During the same period last year, because of spurt in the prices of commodities and food articles, annual inflation at the double-digit level. Inthe week ended May 31, 2008 inflation was ruling at 9.32%.

As the annual inflation is measured against the prevailing wholesale price index (WPI) of the corresponding week last year, the sudden spurt in the price rise in the week ended June 7, 2008 made the WPI index rose by 1.8% to 236.5 from 232.3 in the previous week. But, in 2009, the WPI index is witnessing an average weekly rise of (- 0.01%) to 0.6%. In the week ended May 30, 2009, WPI was at 232.6. Even if the index rises by 1% during the week ended June 6, 2009, inflation will become negative.

In the week ended May 30, inflation fell to 0.13%, despite the rise in food articles prices. The prices of eggs increased by 11%, mutton by 3% and fruit and vegetables and spices by 2% each. The prices of ghee rose by 4% and Khandsari by 2%. But the prices of industrial products continue to fall. Prices of textile items, metal products and plastic items and machinery fell during the week.

Such a steep fall in inflation may prompt the banks to cut interest rates. There is an expectation that banks may cut prime lending rate by 50 basis points in the next couple of weeks. Edelweiss said that the lowest point of WPI inflation could be around (-2%).

Oil boils to $72 on recovery hope

Singapore: Oil prices climbed above $72 a barrel on Thursday in Asia as investor optimism about a global economic recovery pushed crude to fresh highs for the year.

Benchmark crude for July delivery rose was up 72 cents at $72.05 by early afternoon Singapore time in electronic trading on the New York Mercantile Exchange. On Wednesday, it rose $1.32 to settle at $71.33.

Oil has jumped from below $35 a barrel in March on expectations the worst of a severe US recession was over. Traders are now beginning to price in a recovery by the end of the year and improving crude demand, analysts said. AP

Investment growth to put economy back on track: Citi

Investment growth to put economy back on track: Citi
The Financial Express, June 12, 2009, Page 12

Press Trust of India, New Delhi

Improvement in the investment climate and other factors are likely to help India get back to the growth path, though exports and industrial production are yet to pick up, according to global financial services provider Citi.

‘‘While some incremental data have yet to recover, we think India will do better...,’’ Citi economist Rohini Malkani said in a research note on Thursday citing various factors including revival in investment.

Earlier this month, the global financial services major revised its outlook for India’s GDP growth for 2009-10 to 6.8% from 5.5% and for the next fiscal to 7.8% from 6.6%.

The bank’s revision of India’s GDP forecast is mainly on higher investment growth, Citi said adding the key driver during FY’03-08 was the 17.1% compounded annual growth in investments.

Malkani said the country’s macro is looking up on the back of election results, improvement in the investment climate, both domestic and global, and signs of thawing credit markets.

She said focus on infrastructure development, inclusive growth, business environment (rationalise taxes, land, labour), education, and global integration and financial liberalisation will drive growth.

‘‘The upward revision (of GDP forecast) is primarily due to higher investment growth, where we have raised our numbers from 4% to 9% in FY'10 and from 5.4 to 11.3% in FY'11,’’ Citi said.

While Citi expects ‘‘growth momentum to be stable and deeper’’ in India, there are wild cards like El Nino threat though food stocks are a buffer, continuance of availability of capital and oil prices.

‘‘The rupee, which has gained about 6% after the election results, is likely to strengthen further in the medium term due to higher growth and increased capital flows,’’ Malkani said.

Pranab asks States to quickly resolve pending issues on GST

Pranab asks States to quickly resolve pending issues on GST
The Hindu Business Line, June 12, 2009, Page 15

— Ramesh Sharma

No meeting point yet: The Union Finance Minister, Mr Pranab Mukherjee, with the Ministers of State, Mr Namo Narain Meena, and Mr S.S. Palanimanickam, during a pre-Budget meeting with the State Finance Ministers , in the Capital on Thursday.

Our Bureau

New Delhi, June 11 The Union Finance Minister, Mr Pranab Mukherjee, on Thursday urged all the Chief Ministers and Finance Ministers of States to “expeditiously” resolve the pending issues concerning goods and services tax (GST) implementation, stating that this proposed new tax system was a critical part of the economic reforms.

Addressing a conference of Finance Ministers of States as part of pre-budget discussions, Mr Mukherjee asked them to focus on the introduction of GST from April 1, 2010. This statement is seen as a reaffirmation of Centre’s intent to help usher in GST from that date.

However, there are still various issues that need to be tied up at the level of States. Many States including some BJP-ruled ones have today expressed reservations on the proposed new system. Some of them have raised issues on compensation for revenue loss, design, etc.

Missing consensus

The current thinking in the Empowered Committee of State Finance Ministers, which had been tasked to design the GST framework in consultation with the Centre, is to have a system of dual GST— a Central-level GST (subsuming central taxes such as excise and service tax) and a State-level GST (subsuming VAT, octroi, entry taxes, etc).

Both the Centre and the States are yet to arrive at a consensus on how the dual GST should be administered and assessed — whether it would be a single authority (Central or State) or would it be multiple authorities, that is a Central authority looking after Central GST administration and a State authority (existing VAT department) administering and assessing the State GST.

On their part, some industry associations are pushing for a single unified national level GST that would be administered by a single authority. Only then, feel industry captains, the GST benefits could be well harnessed.

Industry view

At today’s meeting, Assam has submitted to the Centre that any loss arising to the State on account of adoption of GST should be fully compensated on a permanent basis. Currently, the Centre is willing to provide compensation for revenue losses for GST implementation only up to five years.

“We do agree that GST should be implemented. Its implementation would lead to permanent revenue loss for us. They said they will give compensation but only for five years. We have pointed out that revenue loss would be a permanent one. So, there should be full compensation and on a permanent basis,” Mr Tarun Gogoi, Assam’s Chief Minister, told reporters here.

Realty players see renewed interest from PEs, NRIs

Realty players see renewed interest from PEs, NRIs
Business Standard, June 12, 2009, Page 5

Red Fort Capital to invest in Parsvnath’s project

Red Fort Capital to invest in Parsvnath’s project
The Hindu Business Line, June 12, 2009, Page 2

Our Bureau, New Delhi

The Delhi-based Parsvnath Developers Ltd has inked an agreement with real estate private equity fund Red Fort Capital to invest in its luxury residential project in Delhi. Red Fort Capital will invest Rs 90 crore into Parsvnath’s subsidiary which is executing the project, and in turn subscribe to 18 per cent equity interest.

Parsvnath Landmark Developers (PLDPL) a wholly-owned subsidiary of Parsvnath Developers, is executing the project - Parsvnath La Tropicana, spread over 16.84 acres , with a saleable area of about 1.9 million sq. ft. The construction of the project is expected to commence shortly as PLDPL has received requisite approvals, including sanction of building plans by the Municipal Corporation of Delhi.

The project is expected to be completed in three years and the company hopes it would generate revenues of about Rs 1,300 crore.

Mr Pradeep Jain, Chairman, Parsvnath Developers, said, “Through PLDPL, the company is planning to execute this premium luxury housing project, comprising three-, four- and five-bedroom units, penthouses and villas.”

Red Fort to pick 18% in Parsvnath’s Delhi project

Red Fort to pick 18% in Parsvnath’s Delhi project
The Economic Times, June 12, 2009, Page 4

Our Bureau NEW DELHI

REAL estate-focused private equity firm Red Fort Capital is picking up 18% stake in Parsvnath Developers’ much-delayed premium residential project in Civil Lines, Delhi, for Rs 90 crore, a release issued by the property developer said Thursday.

The project—Parsvnath La Tropicana—has a total of 453 apartments in 3, 4 and 5-bedroom categories, priced between Rs 2.5 crore and Rs 5 crore at a rate of Rs 10,000 per sqft.

The prices being offered by Parsvnath look quite steep given the price erosion in the property market over the last one year. Country’s largest real estate developer DLF launched a housing project in April in Delhi at around half the rate. Projects of both DLF and Parsvnath are almost equidistant from the central business district Connaught Place in central Delhi.

Parsvnath claims to have sold around 60% of the apartments in the project so far, but has not yet started construction since its launch three years ago because of the delay in obtaining government clearances.

The company said it will shortly start construction work as it has now received all requisite approvals from the government agencies. Parsvnath expects the project to be completed in three years and generate total revenue of Rs 1,300 crore.

Real estate players have been facing a major cash crunch after home sales diminished due to galloping property prices and the cost of borrowings. At the same time, banks cut credit supply to the sector and other investors such as private equity funds avoided further exposure.

Many realty firms have started launching low-priced or ‘affordable’ homes to stimulate demand. Several private equity players too have shown interest in investing in such projects, but Red Fort’s investment in Parsvnath’s premium housing project comes as a surprise. The deal, however, is an indicator that private equity firms are slowly returning to the sector.

BIG MALLS MAKE A COMEBACK

BIG MALLS MAKE A COMEBACK
ET Realty, June 12, 2009, Page 1

The global financial meltdown and its concomitant effect on India's real estate industry had forced developers to defer supply of mall space in 2008. However, in what could be seen as early signs of revival of retail real estate, as many as 100 malls, spread over 30 million sq ft, are expected to come up in 2009 and 2010. Though this figure is much lower than what was projected a couple of years ago, analysts say this is finally a positive development, realtors are now more keen on matching supply with demand, placing themselves in strategic locations and offering greater differentiation. An additional 31,846,504-sq ft of mall space will be created across India, according to a report, Mall Realities India 2010, released by retail research group Images in association with the Shopping Centres Association of India, Jones Lang LaSalle Meghraj and Cushman & Wakefield (C&W) India.

House That: Demand picks up on back of discounts

House That: Demand picks up on back of discounts
The Economic Times, June 12, 2009, Page 6

Sanjeev Choudhary NEW DELHI

HOME sales have picked up in select Indian markets over the last couple of months, but analysts warn that the prices may not have bottomed out yet as developers are sitting on a huge inventory.

Markets like Delhi National Capital Region — that includes Delhi and surrounding areas such as Gurgaon, Faridabad, Noida and Ghaziabad — have seen a rebound in home demand with several builders launching projects at a discount to market rates.

They call it disruptive pricing. And it has worked. In one day DLF, India’s largest real estate company, sold almost double the number of flats in Delhi than all the builders together in Mumbai in the March quarter.

Check out the numbers. DLF sold 1,356 apartments in Delhi on April 7, when it launched a residential project in West Delhi by offering flats at up to 32% less than market rates. Unitech, another builder with a nationwide presence, said it sold 3,000 apartments in two months in Gurgaon, Mumbai and Chennai. Jaypee Group said it sold 5,000 apartments in Noida in three months, while BPTP claimed to have sold 4,700 flats in Faridabad in one month.

Compare that with 740 flats sold in the whole of Mumbai in the first three months of 2009 and 4,491 apartments sold in the national capital region in the same period, as quoted by a recent UBS report.

“There is a definite rise in interest among home buyers and an attractive pricing has led to bookings,” Anshul Jain, CEO of international property consultancy firm DTZ India, said. It was the cement-to-hotels conglomerate Jaypee Group that started the affordable house bandwagon in the capital region, by targeting frills and reducing apartment sizes. “We offered houses at prices 25-30% lower than market rate and that brought buyers to us,” said Rita Dixit, director of Jaiprakash Associate who oversees the group’s real estate business.

The pick up in demand is unlikely to firm up prices soon. “It’s the end user’s market. It will be a long while before speculators get in and jack up prices,” said Unitech MD Sanjay Chandra. UBS analysts, in fact, see further erosion in prices. “The industry will still see further price cuts as higher absorption is required to clean the system of current inventory,” its analysts Suhas Harinarayan and Pankaj Sharma wrote in a sector report.

The March quarter sales accounted for just 10% of the inventory in Mumbai and Delhi, it said. At that rate, it will take another ten quarters to flush out the inventory even if there’s no fresh supply. In a separate report, Goldman Sachs analysts Vishnu Gopal and Shruti Gandhi said upward movement in prices was unlikely this financial year. “We expect that projects may continue to be launched below prevailing market rates,” they said.

Some people, like Delhi-based Raheja Developers’ chairman Navin Raheja, however, expect the prices to firm up. “Once execution begins at the new projects and completion risk reduces, properties will start attracting higher prices,” he said, about the new projects going at discounted rates. Property prices have seen significant correction. As per Goldman Sachs, average annual fall in residential prices was 21% in Gurgaon. Prices in Bangalore, Mumbai and Hyderabad are 21%, 16% and 15% off their highs, respectively.

Mumbai suburbs Goregaon and Borivali saw apartment prices halve from their peak, while the fall was 35% at Greater Noida.

DLF to offload stake in construction arm

DLF to offload stake in construction arm
The Financial Express, Corporates & Markets, June 12, 2009, Page 1

Kakoly Chatterjee, New Delhi

The country’s largest real estate firm, DLF, is planning to offload its stake in its construction arm, which is an equal joint venture with the UK-based construction company, Laing O'Rourke. DLF is expected to recover upwards of Rs 250 crore (the amount it had invested for the JV initially) from the stake sale.

The realty company had said while announcing its financial results that it would be exiting its non-core businesses.

In all likelihood, DLF will be selling its stake to Laing O'Rourke itself. A company spokesperson when contacted declined to comment.

In early 2006, DLF had entered into a joint venture with Laing O'Rourke. The two partners invested Rs 250 crore each towards an initial corpus of Rs 500 crore. The JV had projected a turnover of Rs 5,000 crore by 2010-11. The joint venture was hoping to tap the infrastructure sector, which includes express highways, airports and hi-tech construction involving power plants. It had also plans of bidding for modernisation of airports like Chennai and Kolkata. Another important role that the joint venture construction firm was expected to play was to take charge of all DLF's construction activities.

However, with a changed scenario during the downturn, DLF, like most real estate firms, had to take a relook and restructure its business plans. It is reeling under huge debt, currently its net debt stands at Rs 13,958 crore. As part of its plans to service debts, DLF recently raised Rs 3,860 through stake sale by the promoters.

It is also under pressure from dip in bottomlines.

For the whole of 2008-09, DLF's net profit decreased by 41% at Rs 4,629 crore compared with Rs 7,812 crore in the previous fiscal. DLF reported a 93% plunge in consolidated net profit for the fourth quarter of 2008-09 at Rs 159.05 crore.