Tuesday, February 17, 2009
Unfinished business
Unfinished business
Business Standard, the strategist, February 17, 2009, Page 1
Can Unitech's Sanjay Chandra put his company back on track?
Bhupesh Bhandari & Joe C Mathew / Mumbai
“If you get emotionally attached to a hotel, you will never make money. Build in a down cycle and sell when the market is up,” Peter Barge, the well-regarded former chairman of Jones Lang LaSalle Hotels, had advised Sanjay Chandra in 2006 when he was in two minds whether to sell his stake in the Delhi Radisson or retain it.
With the same advice ringing in his ears, the 36-year-old managing director of real estate developer Unitech has put the upcoming Marriott Courtyard at Gurgaon on the block. With hotel valuations in a free fall, the timing may not be perfect, as Barge would have liked it, still Chandra hopes to shortly net up to Rs 250 crore from the sale. “We are in the business of selling assets,” he says candidly.
Unemotionally and in a severe down cycle, Chandra wants to set his house in order. He has put assets up for sale, scrapped some projects and slashed price tags mercilessly. He is negotiating with bankers as well as private equity investors to raise money and is lobbying hard with state governments to allow him to build low-cost affordable houses. To survive the crisis, the one-time builder of luxury homes is more than willing to slide down the value chain.
Till a year ago, Chandra, like most other real estate developers, had not anticipated the crisis. Unitech bought land wherever it was available and built a land bank of 14,000 acres across the country. To bankroll these acquisitions, Chandra says, the company planned to raise $1.5 billion (around Rs 7,000 crore at current exchange rates) by listing some prime assets in a real estate investment trust in Singapore. Another $1 billion (Rs 4,700 crore) was to be raised from investors.
Before the company could make the first moves, the markets went into a tailspin. The plans to raise money had to be shelved. And Unitech ended up with debt of over Rs 8,000 crore on its books. Most of this debt is short-term, while all projects will take six or seven years to complete. There is, therefore, a huge cash-flow mismatch which needs to be addressed.
That’s just one of the several problems Unitech is up against. The company owes Rs 1,000 crore to various states where it brought land. On the other hand, sales have taken a hard knock. Buyers for houses, offices and retail space overnight turned bearish. House sales, which account for almost 85 per cent of Unitech’s business, are down as much as 70 per cent.
Debt trap
Chandra’s first priority is to reduce the debt. On an average, it carries interest of about 14 per cent. This makes the quarterly interest burden on the company almost Rs 300 crore — not very different from its consolidated real estate income of Rs 375 crore for the quarter ended December 31, 2008.
Chandra has deftly capitalised a large chunk of this payment — the interest will be paid when the asset for which the loan was taken is sold. Thus, Unitech paid interest of just Rs 97 crore during the quarter. In other words, the company has deferred almost two-thirds of its interest liability. Still, the principal and the interest need to be cut. “We want to bring down the debt by 60 per cent,” says Chandra.
Chandra says that debt worth Rs 1,200 crore will get transferred to his new telecom venture, Unitech Wireless, in which Telenor of Norway has taken 60 per cent. Unitech Wireless will pay Unitech another Rs 900 crore for the investments it has made so far. Thus, it will reduce Unitech’s debt by Rs 2,100 crore.
On January 1, the Unitech board passed a resolution enabling the company to mobilise up to Rs 5,000 crore in equity capital. Chandra says he is in talks with some private equity funds focused on real estate to sell some stake.
This is easier said than done, say investment analysts. One, the Unitech share price has taken a real beating in the stock market, indicating scant appetite for any fresh paper from the company.
It has fallen well over 90 per cent from Rs 430 in February 2008 to around Rs 30 now. The Chandras (father Ramesh and his two sons, Sanjay and Ajay), who had made it to the coveted Forbes list of billionaires in 2007 with a personal wealth of $ 11.6 billion, are worth a fraction of that now. Two, foreign investment is not allowed in some projects of Unitech.
Chandra is aware of these problems. “We can raise only a fraction of the capital authorised by the board,” he admits. About the glitch regarding foreign investment, he says the all-powerful Foreign Investment Promotion Board has recently cleared a similar proposal put up by a Mumbai developer and is, therefore, likely to take a positive view of the Unitech application. “We have discussed the matter with the officials. The key is how to monitor the use of money received from abroad,” says he.
In addition, Chandra says he is negotiating with some private equity funds to invest in some of his projects. Before the September 2008 crash, a fund managed by Lehman Brothers had invested $150 million (Rs 700 crore) in a Unitech project. “Some funds dedicated to India are sitting on $6-7 billion,” he claims.
Industry insiders doubt if Chandra will find ready buyers for his projects. The Lehman-managed fund, for instance, was supposed to invest in three more projects. But it has since pulled out. “There is a huge mismatch in valuations. It will be a miracle if Unitech can pull off these deals,” says a rival who does not wish to be named.
Chandra also plans to sell two hotel projects, the Marriott Courtyard at Gurgaon and another one in Delhi, and an office complex in South Delhi to cut his debt. “I have got a buyer for the Gurgaon hotel. The market has put a value of Rs 200-250 crore on it,” says he. The land for the hotel was bought for just Rs 8 crore, so there are handsome profits to book. Chandra is also hopeful of wrapping up the office complex deal too within a month for Rs 450-600 crore.
Chandra says he is negotiating with some banks so that he can replace short-term debt of about Rs 1,000 crore taken from mutual funds with long-term money. This should even out some cash-flow mismatch and also reduce his interest payout by up to 350 percentage points.
Bottom of the heap
“When the market tanked, none of us had the right products for the housing market,” admits Chandra. As developers like Unitech had focused on the luxury end of the market, where the profit margins were hefty, they had nothing to sell once easy money vanished.
Housing finance companies became reluctant to lend and customers lost their appetite, thanks to fears of joblessness. Chandra’s first reaction was to cut the ticket price by as much as 50 per cent. Not only did he drop the rates but also cut floor space. At Nirvana in Gurgaon, for instance, Unitech started selling floors instead of standalone villas at one-third the price. “While we were selling not more than a dozen villas earlier, we sold 300 floors in a month,” says he.
This obviously hasn’t shown up in the company’s results. Net consolidated sales slumped 57 per cent to Rs 489 crore in the quarter ended December 31, 2008. Clearly, Chandra needs to do more if he has to revive sales.
To rescue the situation, Chandra wants to come out with flats priced below Rs 30 lakh. State-owned banks have opened a concessional window for buyers who take loans of up to Rs 20 lakh. Several real estate developers have, therefore, come out with price points around this figure. Unitech too wants to sell homes at these prices.
For instance, at the ambitious Unitech Grande at Noida, where all flats are currently priced above Rs 1 crore, new flats will be built at below Rs 30 lakh. “Almost 80 per cent of our new homes will be in this bracket,” says Chandra. But time is running out: The concessional finance window closes in June.
Business Standard, the strategist, February 17, 2009, Page 1
Can Unitech's Sanjay Chandra put his company back on track?
Bhupesh Bhandari & Joe C Mathew / Mumbai
“If you get emotionally attached to a hotel, you will never make money. Build in a down cycle and sell when the market is up,” Peter Barge, the well-regarded former chairman of Jones Lang LaSalle Hotels, had advised Sanjay Chandra in 2006 when he was in two minds whether to sell his stake in the Delhi Radisson or retain it.
With the same advice ringing in his ears, the 36-year-old managing director of real estate developer Unitech has put the upcoming Marriott Courtyard at Gurgaon on the block. With hotel valuations in a free fall, the timing may not be perfect, as Barge would have liked it, still Chandra hopes to shortly net up to Rs 250 crore from the sale. “We are in the business of selling assets,” he says candidly.
Unemotionally and in a severe down cycle, Chandra wants to set his house in order. He has put assets up for sale, scrapped some projects and slashed price tags mercilessly. He is negotiating with bankers as well as private equity investors to raise money and is lobbying hard with state governments to allow him to build low-cost affordable houses. To survive the crisis, the one-time builder of luxury homes is more than willing to slide down the value chain.
Till a year ago, Chandra, like most other real estate developers, had not anticipated the crisis. Unitech bought land wherever it was available and built a land bank of 14,000 acres across the country. To bankroll these acquisitions, Chandra says, the company planned to raise $1.5 billion (around Rs 7,000 crore at current exchange rates) by listing some prime assets in a real estate investment trust in Singapore. Another $1 billion (Rs 4,700 crore) was to be raised from investors.
Before the company could make the first moves, the markets went into a tailspin. The plans to raise money had to be shelved. And Unitech ended up with debt of over Rs 8,000 crore on its books. Most of this debt is short-term, while all projects will take six or seven years to complete. There is, therefore, a huge cash-flow mismatch which needs to be addressed.
That’s just one of the several problems Unitech is up against. The company owes Rs 1,000 crore to various states where it brought land. On the other hand, sales have taken a hard knock. Buyers for houses, offices and retail space overnight turned bearish. House sales, which account for almost 85 per cent of Unitech’s business, are down as much as 70 per cent.
Debt trap
Chandra’s first priority is to reduce the debt. On an average, it carries interest of about 14 per cent. This makes the quarterly interest burden on the company almost Rs 300 crore — not very different from its consolidated real estate income of Rs 375 crore for the quarter ended December 31, 2008.
Chandra has deftly capitalised a large chunk of this payment — the interest will be paid when the asset for which the loan was taken is sold. Thus, Unitech paid interest of just Rs 97 crore during the quarter. In other words, the company has deferred almost two-thirds of its interest liability. Still, the principal and the interest need to be cut. “We want to bring down the debt by 60 per cent,” says Chandra.
Chandra says that debt worth Rs 1,200 crore will get transferred to his new telecom venture, Unitech Wireless, in which Telenor of Norway has taken 60 per cent. Unitech Wireless will pay Unitech another Rs 900 crore for the investments it has made so far. Thus, it will reduce Unitech’s debt by Rs 2,100 crore.
On January 1, the Unitech board passed a resolution enabling the company to mobilise up to Rs 5,000 crore in equity capital. Chandra says he is in talks with some private equity funds focused on real estate to sell some stake.
This is easier said than done, say investment analysts. One, the Unitech share price has taken a real beating in the stock market, indicating scant appetite for any fresh paper from the company.
It has fallen well over 90 per cent from Rs 430 in February 2008 to around Rs 30 now. The Chandras (father Ramesh and his two sons, Sanjay and Ajay), who had made it to the coveted Forbes list of billionaires in 2007 with a personal wealth of $ 11.6 billion, are worth a fraction of that now. Two, foreign investment is not allowed in some projects of Unitech.
Chandra is aware of these problems. “We can raise only a fraction of the capital authorised by the board,” he admits. About the glitch regarding foreign investment, he says the all-powerful Foreign Investment Promotion Board has recently cleared a similar proposal put up by a Mumbai developer and is, therefore, likely to take a positive view of the Unitech application. “We have discussed the matter with the officials. The key is how to monitor the use of money received from abroad,” says he.
In addition, Chandra says he is negotiating with some private equity funds to invest in some of his projects. Before the September 2008 crash, a fund managed by Lehman Brothers had invested $150 million (Rs 700 crore) in a Unitech project. “Some funds dedicated to India are sitting on $6-7 billion,” he claims.
Industry insiders doubt if Chandra will find ready buyers for his projects. The Lehman-managed fund, for instance, was supposed to invest in three more projects. But it has since pulled out. “There is a huge mismatch in valuations. It will be a miracle if Unitech can pull off these deals,” says a rival who does not wish to be named.
Chandra also plans to sell two hotel projects, the Marriott Courtyard at Gurgaon and another one in Delhi, and an office complex in South Delhi to cut his debt. “I have got a buyer for the Gurgaon hotel. The market has put a value of Rs 200-250 crore on it,” says he. The land for the hotel was bought for just Rs 8 crore, so there are handsome profits to book. Chandra is also hopeful of wrapping up the office complex deal too within a month for Rs 450-600 crore.
Chandra says he is negotiating with some banks so that he can replace short-term debt of about Rs 1,000 crore taken from mutual funds with long-term money. This should even out some cash-flow mismatch and also reduce his interest payout by up to 350 percentage points.
Bottom of the heap
“When the market tanked, none of us had the right products for the housing market,” admits Chandra. As developers like Unitech had focused on the luxury end of the market, where the profit margins were hefty, they had nothing to sell once easy money vanished.
Housing finance companies became reluctant to lend and customers lost their appetite, thanks to fears of joblessness. Chandra’s first reaction was to cut the ticket price by as much as 50 per cent. Not only did he drop the rates but also cut floor space. At Nirvana in Gurgaon, for instance, Unitech started selling floors instead of standalone villas at one-third the price. “While we were selling not more than a dozen villas earlier, we sold 300 floors in a month,” says he.
This obviously hasn’t shown up in the company’s results. Net consolidated sales slumped 57 per cent to Rs 489 crore in the quarter ended December 31, 2008. Clearly, Chandra needs to do more if he has to revive sales.
To rescue the situation, Chandra wants to come out with flats priced below Rs 30 lakh. State-owned banks have opened a concessional window for buyers who take loans of up to Rs 20 lakh. Several real estate developers have, therefore, come out with price points around this figure. Unitech too wants to sell homes at these prices.
For instance, at the ambitious Unitech Grande at Noida, where all flats are currently priced above Rs 1 crore, new flats will be built at below Rs 30 lakh. “Almost 80 per cent of our new homes will be in this bracket,” says Chandra. But time is running out: The concessional finance window closes in June.
Analysts give their thumbs up to the switch in priorities. Says Shailesh Kanani of Angel Broking: “The shift from luxury housing and commercial real estate to affordable housing is a step in the right direction as low-priced and mid-sized houses are the only segments of the market that are seeing some movement today.”
The downturn in the commodity cycle has helped Unitech and other builders to rein in their construction costs. Chandra says he has been able to knock off about a quarter of his costs because of the crash in steel and cement prices and the contraction in contractor margins. In addition, Unitech has decided to keep the frills (Italian marble, Jacuzzi and so on) out of its homes. Architects and designers have been put on a tight leash.
Chandra has another ace up his sleeve. “The biggest advantage with Unitech is that a large part of its land bank was bought when prices were low. This will enable it to drop prices in this market,” says Gaurav Dalmia, the chairman of Landmark Land Holdings, which has invested in a score of real estate projects across the country.
The average cost of land for Unitech, according to Chandra, is just Rs 100 per square feet. In tony Gurgaon too, Chandra says his cost is Rs 120-130 per square feet. “Even if we take the cost of construction at Rs 1,500 per square feet, I can easily drop prices of flats from Rs 3,500 per square feet now,” says he.
Unitech, unlike some other developers, made it a point to always buy farm land directly from farmers and not through middlemen. Though it took more time, it has helped the company keep its costs low. “We bought land at Mohali in Punjab at Rs 60 lakh per acre. Someone else recently bought at Rs 5 crore per acre in an auction,” says Chandra.
Still, the population density norms have kept Unitech from building small houses at Gurgaon in Haryana and Noida in Uttar Pradesh, its principal markets. Thus, Chandra and other developers are lobbying with states to ease the norms.
Scale back
Like residential real estate, the commercial market too has fallen on bad times. Information technology companies, which till recently gave future commitments for office space (and locked prices in the bargain), have turned to ordering just-in-time. Office rentals are down 20 per cent. Payments from mall tenants, especially the smaller ones, have turned erratic.
As a result, Chandra has decided to scale back some projects. Two information technology parks, on in Gurgaon and the other in Greater Noida, now look uncertain.
A multi-product special economic zone in Haryana has been shelved. “Almost 70 per cent of the information technology parks announced in the country will not come up,” says Chandra.
Of course, the company is no longer acquiring real estate. “The 14,000 acres we had bought about a year ago looked good enough for 12 or 13 years. Now, it appears that this will last us for 16 years,” says Chandra.
Analysts as well as industry experts give Unitech a fair chance of sailing through the current crisis. The question uppermost in everybody’s mind is, will the Chandras be able to retain control of Unitech? The family is known to have pledged a large chunk of its stake (67.5 per cent at the end of December 2008, down from 74.5 per cent a year ago) to raise money. With Unitech shares down, don’t they run the danger of losing the company? Also, any new infusion of equity capital will dilute their stake further in the company.
Chandra admits that a large number of shares were indeed pledged to raise money and new investors could dilute the family’s control over the company. But some of these pledged shares, he says, have been brought back from the creditors. Recently, the family sold 2.5 million shares in Orissa Sponge Iron for Rs 23 crore to Bhushan Steel. In another deal not reported to the stock exchanges, it sold 3.5 million warrants to Bhushan Steel. Chandra says the family will liquidate some more investments to reclaim the pledged shares. Without emotion, just like Barge had advised.
The downturn in the commodity cycle has helped Unitech and other builders to rein in their construction costs. Chandra says he has been able to knock off about a quarter of his costs because of the crash in steel and cement prices and the contraction in contractor margins. In addition, Unitech has decided to keep the frills (Italian marble, Jacuzzi and so on) out of its homes. Architects and designers have been put on a tight leash.
Chandra has another ace up his sleeve. “The biggest advantage with Unitech is that a large part of its land bank was bought when prices were low. This will enable it to drop prices in this market,” says Gaurav Dalmia, the chairman of Landmark Land Holdings, which has invested in a score of real estate projects across the country.
The average cost of land for Unitech, according to Chandra, is just Rs 100 per square feet. In tony Gurgaon too, Chandra says his cost is Rs 120-130 per square feet. “Even if we take the cost of construction at Rs 1,500 per square feet, I can easily drop prices of flats from Rs 3,500 per square feet now,” says he.
Unitech, unlike some other developers, made it a point to always buy farm land directly from farmers and not through middlemen. Though it took more time, it has helped the company keep its costs low. “We bought land at Mohali in Punjab at Rs 60 lakh per acre. Someone else recently bought at Rs 5 crore per acre in an auction,” says Chandra.
Still, the population density norms have kept Unitech from building small houses at Gurgaon in Haryana and Noida in Uttar Pradesh, its principal markets. Thus, Chandra and other developers are lobbying with states to ease the norms.
Scale back
Like residential real estate, the commercial market too has fallen on bad times. Information technology companies, which till recently gave future commitments for office space (and locked prices in the bargain), have turned to ordering just-in-time. Office rentals are down 20 per cent. Payments from mall tenants, especially the smaller ones, have turned erratic.
As a result, Chandra has decided to scale back some projects. Two information technology parks, on in Gurgaon and the other in Greater Noida, now look uncertain.
A multi-product special economic zone in Haryana has been shelved. “Almost 70 per cent of the information technology parks announced in the country will not come up,” says Chandra.
Of course, the company is no longer acquiring real estate. “The 14,000 acres we had bought about a year ago looked good enough for 12 or 13 years. Now, it appears that this will last us for 16 years,” says Chandra.
Analysts as well as industry experts give Unitech a fair chance of sailing through the current crisis. The question uppermost in everybody’s mind is, will the Chandras be able to retain control of Unitech? The family is known to have pledged a large chunk of its stake (67.5 per cent at the end of December 2008, down from 74.5 per cent a year ago) to raise money. With Unitech shares down, don’t they run the danger of losing the company? Also, any new infusion of equity capital will dilute their stake further in the company.
Chandra admits that a large number of shares were indeed pledged to raise money and new investors could dilute the family’s control over the company. But some of these pledged shares, he says, have been brought back from the creditors. Recently, the family sold 2.5 million shares in Orissa Sponge Iron for Rs 23 crore to Bhushan Steel. In another deal not reported to the stock exchanges, it sold 3.5 million warrants to Bhushan Steel. Chandra says the family will liquidate some more investments to reclaim the pledged shares. Without emotion, just like Barge had advised.
VOTE ON ALL COUNTS
VOTE ON ALL COUNTS
The Economic Times, February 17, 2009, Page 1
THE FINAL UPA BUDGET WAS NOTHING BUT A CURSORY RUNDOWN OF THE GOVERNMENT’S ACHIEVEMENTS. IT DISAPPOINTED INDUSTRY. THE MARKETS, TOO, REACTED NEGATIVELY BY SLIDING 329 POINTS
A SUMMARY DISMISSAL OF SLOWDOWN
SWAMINATHAN S ANKLESARIA AIYAR
The Economic Times, February 17, 2009, Page 1
THE FINAL UPA BUDGET WAS NOTHING BUT A CURSORY RUNDOWN OF THE GOVERNMENT’S ACHIEVEMENTS. IT DISAPPOINTED INDUSTRY. THE MARKETS, TOO, REACTED NEGATIVELY BY SLIDING 329 POINTS
A SUMMARY DISMISSAL OF SLOWDOWN
SWAMINATHAN S ANKLESARIA AIYAR
DISSECTS THE INTERIM BUDGET
Y-A-A-A-W-N. The interim budget was the mother of all anti-climaxes. Instead of virtually launching the Congress party’s election campaign, as was widely expected, stand-in finance minister Pranab Mukherjee produced a long, bald statement of government accounts, so boring that some members of Parliament nodded off. Not a single new scheme or tax initiative relieved the tedium.
The business community, hoping for relief for recession hit sectors and a spur to demand, was disappointed. The Sensex plummeted 329.2 points. However, this index was down 200 points even before the budget speech ended, so much of the fall was due to gloomy global factors. The budget speech deepened the gloom.
Mr Mukherjee claimed that constitutional propriety obliged him to stick to a bare statement of accounts, and not announce any new schemes or tax proposals. However, this claim of propriety drew gasps of disappointment at what was widely seen as a missed golden opportunity. Such cynicism emanates from the fact that a government with seven tainted Cabinet ministers cannot with a straight face claim that propriety is top priority. So, Mr Mukherjee’s anticlimactic budget was widely interpreted as tactical. Sonia Gandhi will very soon be launching the party’s election campaign, and analysts speculated that she might not want Mr Mukherjee to steal any of her thunder. Party insiders said the public should expect something big very soon.
Bond yields rose with the revelation that government borrowing for 2009-10 is being budgeted at almost Rs 200,000 crore higher than the original estimate. However, it is not much higher than the revised budget figure for 2008-09; so the bond market has overreacted. Besides, the finance secretary later said the additional borrowing would not fall entirely on the markets—meaning RBI will be a big buyer.
The fiscal deficit, budgeted at 2.5% of GDP this year, will end up at 6%, to which should be added another 1.5% of GDP for off-budget items like dues to oil and fertiliser companies. Throw in another 3.5% of GDP of state government deficits, and India will have a consolidated fiscal deficit of 11% in 2008-09, as high as in the crisis year of 1991.
However, at a time of deep recession this should be seen as an economic stimulus rather than profligacy. Indeed, the government virtually boasts that its expanded fiscal deficit amounts to one of the biggest fiscal boosts anywhere in the world. Mr Mukherjee said the government would return to the high road of fiscal responsibility after the economy stabilised.
Ironically, what looked last February like pre-electoral populism (for ex. farm loan waivers) has turned out to be well-timed Keynesianism. The actual disbursement of both the farm loan waiver and Pay Commission award started in October, bang on time to counteract the global meltdown. This populism constitutes a bigger stimulus in hard cash than the two formal stimulus packages.
For 2009-10, the budget envisions a slightly lower fiscal deficit of 5.5% of GDP. The revenue deficit, budgeted at 1% of GDP last year, is budgeted at 4% next year. This means much of the higher government borrowing will be for give-aways and not hard investment. These ratios assume that nominal GDP will rise 10.97% next year, with inflation accounting for around 4% and real GDP growth for around 7%.
Y-A-A-A-W-N. The interim budget was the mother of all anti-climaxes. Instead of virtually launching the Congress party’s election campaign, as was widely expected, stand-in finance minister Pranab Mukherjee produced a long, bald statement of government accounts, so boring that some members of Parliament nodded off. Not a single new scheme or tax initiative relieved the tedium.
The business community, hoping for relief for recession hit sectors and a spur to demand, was disappointed. The Sensex plummeted 329.2 points. However, this index was down 200 points even before the budget speech ended, so much of the fall was due to gloomy global factors. The budget speech deepened the gloom.
Mr Mukherjee claimed that constitutional propriety obliged him to stick to a bare statement of accounts, and not announce any new schemes or tax proposals. However, this claim of propriety drew gasps of disappointment at what was widely seen as a missed golden opportunity. Such cynicism emanates from the fact that a government with seven tainted Cabinet ministers cannot with a straight face claim that propriety is top priority. So, Mr Mukherjee’s anticlimactic budget was widely interpreted as tactical. Sonia Gandhi will very soon be launching the party’s election campaign, and analysts speculated that she might not want Mr Mukherjee to steal any of her thunder. Party insiders said the public should expect something big very soon.
Bond yields rose with the revelation that government borrowing for 2009-10 is being budgeted at almost Rs 200,000 crore higher than the original estimate. However, it is not much higher than the revised budget figure for 2008-09; so the bond market has overreacted. Besides, the finance secretary later said the additional borrowing would not fall entirely on the markets—meaning RBI will be a big buyer.
The fiscal deficit, budgeted at 2.5% of GDP this year, will end up at 6%, to which should be added another 1.5% of GDP for off-budget items like dues to oil and fertiliser companies. Throw in another 3.5% of GDP of state government deficits, and India will have a consolidated fiscal deficit of 11% in 2008-09, as high as in the crisis year of 1991.
However, at a time of deep recession this should be seen as an economic stimulus rather than profligacy. Indeed, the government virtually boasts that its expanded fiscal deficit amounts to one of the biggest fiscal boosts anywhere in the world. Mr Mukherjee said the government would return to the high road of fiscal responsibility after the economy stabilised.
Ironically, what looked last February like pre-electoral populism (for ex. farm loan waivers) has turned out to be well-timed Keynesianism. The actual disbursement of both the farm loan waiver and Pay Commission award started in October, bang on time to counteract the global meltdown. This populism constitutes a bigger stimulus in hard cash than the two formal stimulus packages.
For 2009-10, the budget envisions a slightly lower fiscal deficit of 5.5% of GDP. The revenue deficit, budgeted at 1% of GDP last year, is budgeted at 4% next year. This means much of the higher government borrowing will be for give-aways and not hard investment. These ratios assume that nominal GDP will rise 10.97% next year, with inflation accounting for around 4% and real GDP growth for around 7%.
ECONOMIC TURNOUT
THE ECONOMY
TAX burden likely to moderate next year to shore up private consumption
GOVERNMENT will also step up spending to stimulate growth in a slowing economy
INCREASED spending to be financed largely through borrowings. Central and state fiscal deficits to add up to 11% of GDP
INDUSTRY & CORE
CEMENT, steel and construction to benefit from boost to infrastructure
CONSUMER goods companies to gain from increased rural demand
TEXTILES, carpets, leather, gem and jewellery, marine product makers to enjoy lower interest rates till September 30
UNIQUE ID plan to benefit software firms
THE MARKET
STREET disappointed with the budget. The Sensex and Nifty fall 3% each
REALTY, banking and metal shares among the worst hit, respective indices down 4-5%
PROSPECTS of large govt borrowings leading to higher interest rates reflect in the bond market as prices dip and yields harden
MORE funds for infrastructure as refinance to banks through IIFCL stepped up
SOCIAL SECTORS
CHEAPER credit for farmers to continue
MORE primary health centres and increased spend on education
CITY infrastructure & transport get a boost through more funds for urban renewal scheme
PENSION for widows below poverty line
Realty sector feels let down
Realty sector feels let down
The Hindu Business Line, February 17, 2009, Page 5
Our Bureau, Mumbai, Feb. 16
Expectations of realty players appeared to be belied.
Mr Rajesh Vardhan, Managing Director of the Vardhman Group said “Since this is a vote on account budget, no one expected any major policy changes in the Budget. Yet, there were some small measures that could have been introduced. For example, the Government could have increased the deduction for interest paid on housing loans from 1.5 lakh to Rs 2 lakh a year. In fact any steps to reduce interest on housing loans would have been welcome in the current market conditions.”
Expressing disappointment, Mr Rohtas Goel, Chairman and Managing Director, Omaxe Ltd, said, “The Budget was completely lacklustre. While one can understand that this was an interim Budget, given the adverse business sentiments, the Government could have taken exception and announced some sops for reviving the market. Benefits for housing would have created a ripple effect in the market and helped in giving a positive push to the economy.”
Mr Kaushal Sampat, COO, Dun & Bradstreet India, said, “With the lack of major growth stimulating measures in the interim Budget, we expect the RBI to cut interest rates further before the April monetary policy review to stimulate demand to a certain extent.”
Mr Anshuman Magazine, Chairman and Managing Director of CB Richard Ellis, South Asia Pvt Ltd, felt that “Although the expectations from the vote on account were limited as elections are due soon, the real estate industry was still hoping to get some stimulus, and none were announced.”
Housing left to stand on its own
Housing left to stand on its own
Business Standard, February 17, 2009, Page 4
Small hike in outlay for flagship housing scheme; nothing for urban housing
In spite of all the talk of helping the aam aadmi, the outlay under the Indira Aawas Yojana (IAY) for the rural poor in 2009-10 is more or less the same as in 2008-09 (revised estimate). While the central plan outlay in 2008-09 was Rs 7,919 crore, the amount budgeted for 2009-10 is Rs 7,920 crore.
Contrary to expectations, Finance Minister Pranab Mukherjee did not announce any sop for urban housing. The total outlay for rural housing in 2009-10 is estimated at Rs 8,800 crore, which includes Rs 880 crore for Sikkim and the North-East.
IYA is the flagship scheme of the central government and provides financial help for construction of dwelling units and upgrade of existing unserviceable houses for scheduled castes/scheduled tribes and non-scheduled castes/scheduled tribes rural families living below the poverty line.
The assistance provided under the scheme is Rs 35,000 per house in plain areas and Rs 38,500 in hilly or difficult areas. In addition, Rs 15,000 is provided for upgrades. Under the credit-cum-subsidy scheme, households with annual income of not more than Rs 32,000 are provided a subsidy of Rs 12,500.
After the two recent rounds of stimulus packages, real estate developers and bankers were expecting fresh measures to bolster demand. “It was a waste of opportunity for the government,” said Niranjan Hirandani, chairman of the Hirco group.
Fiscal incentives such as restoring Section 80(i) of the Income Tax Act for affordable housing that was withdrawn in 2007-08 would have helped create fresh demand and generated huge employment, he said, adding that nearly 1.5 million people in this sector had lost their jobs due to decline in demand. Real estate developers are facing a huge meltdown in demand for houses. The demand for commercial real estate has also fallen sharply.
Realty companies disappointed, dub it as a ‘lost opportunity’
Realty companies disappointed, dub it as a ‘lost opportunity’
The Financial Express, Corporates & Markets, February 17, 2009, Page I
fe Bureau, Mumbai
The interim Budget 2009 has come as a disappointment to the real estate sector, as developers feel that the government has failed to offer relief for realty and housing, which is crumbling under the liquidity crisis, job losses and a slowdown in demand.
Says Niranjan Hiranandani, managing director, Hiranandani Constructions, “This is a lost opportunity for the government. In extremely difficult times, where in the economic situation, 1.5 million jobs have been lost since the past three quarters, the finance minister could have created an economic success, instead of a political success and won the battle by infusing more funds into the real estate sector.”
Competitor, Lodha Group had hoped for some initiatives on affordable housing and tax benefits for developers but that didn’t happen, comments Abhinandan Lodha, director, Lodha Group. According to Hemant Shah, chairman of Akruti City, “We were expecting an increase in availability of liquidity in the real estate sector so that flats can be given to end-buyers below Rs 30 lakh, as this industry supports a large portion of the GDP. One can say that this is a pure economy budget.”
Kumar Builders too was completely disappointed with this interim Budget. Lalit Kumar Jain, chairman, Kumar builders said, “The finance minister should have given a subsidy of 2% in the home loan rate to loans up to Rs 35 lakh.”
Certain industry experts too have raised concerns about the lack of expected relief for the sector. Jai Mawani, head, real estate, KPMG told FE, “This interim Budget is more of a report card and a summary of various developments that have happened over the last few years. However, we were expecting that the finance minister could have created an environment of refinancing real estate projects and enabling the secondary market to finance the assets, which are already built in the form of a combination of tax incentives for low income housing and housing loans.”
Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj (JLLM), “We are aware that, by definition, an interim Budget will have its limitations. We had nevertheless hoped that it would factor in the overall languid state of the real estate sector and provide measures that will assist in energising it. In the final analysis, Indian real estate plays a cornerstone role in the country’s overall economy.”
Pradeep Jain, president, Confederation of Real Estate Developer’s Associations of India (CREDAI)-NCR said, “It was expected that through the interim Budget, the government would send a strong message to RBI to take the necessary steps, like reduction in the home mortgage interest rate to the tune of 6% to 6.5%. Also, to increase the bracket for priority lending for houses upto Rs 30 lakh instead of Rs 20 lakh, coupled with the reintroduction of section 80(IB) and reductions in direct taxes.”
Amitabh Das Mundhra, director, Simplex Infrastructures Ltd, said, “The interim Budget is a continuation of the government’s agenda for the past five years, with a further intention of increasing investment in the infrastructure sector. This would in turn keep the momentum of the economy going. Moreover, increased outlay for the Bharat Nirman Scheme and JNNURM would provide the requisite impetus to infrastructure development in the country. However, it’s essential that this spending is utilised appropriately, only then would it benefit the sector and the economy as a whole.”
Failed expectations
• No increase in availability of liquidity
• No subsidy in the home loan rate
• No reduction in home mortgage interest rate
• No increase in the bracket for priority lending
• No reintroduction of section 80(IB)
Realty majors reveal share pledging details
Realty majors reveal share pledging details
The Economic Times, February 17, 2009, Page 17
Unitech, Parsvnath, Omaxe, Ansal And Sobha Promoters Inform NSE
Our Bureau NEW DELHI
REAL estate developer Unitech declared on Monday that the promoters have pledged 49.48% of their total 64.4% stake in the company. Promoter holding in the company also fell by at least 3% since the beginning of this year to 64.4%. Other realty players, including Parsvnath, Omaxe, Sobha Developers and Ansal Properties and Infrastructure (API) too have informed NSE that promoters have pledged shares ranging from 13% to 64% of their company.
The latest data available with stock exchange confirms market speculation that promoters of realty firms have pledged a large percentage of their stake to financial institutions.
Unitech informed the stock exchange that “a very significant portion of the shares have been pledged as additional security for the loans availed by the company”. Promoters usually pledge shares as collateral for the secured loans from financial institutions as well as for their personal purposes.
Unitech did not declare the name of the financial institutions with which shares were pledged. But one Unitech executive suggested a large portion of shares have been pledged with IDFC, HDFC and JM Financial, although it couldn’t be verified independently.
According to the data made available by Unitech to NSE on Monday, the stake of promoter Ramesh Chandra and family has possibly reduced by 3% since the beginning of this year. The combined shareholding of Chandra’s three investment firms—Prakausali Investments, Mayfair Investments and Mayfair Capital—are 3% lower compared to the shareholding as on December 31, ‘08.
According to market traders, the decline in shareholding could be attributed to financial institutions selling pledged shares following a steep decline in share prices.
Delhi-based Parsvnath Developers too has declared that promoters have pledged 63.88% of total shares of the company. The promoters own 80.33% stake in Parsvnath, as on December-end. Also, Delhi-based Omaxe said promoters have pledged 13.19% out of their total 69.63% stake in the company. Ansal Properties and Infrastructure promoters have pledged 29.11% stake out of a total of 64.14%, mainly to IL&FS and HDFC. The promoters of Bangalore-based Sobha Developers, who own 50.06% in the company, have pledged 28.39% stake in the company.
MARKET PRESSURE
Unitech informed stock exchange that ‘a very significant portion of the shares have been pledged as additional security for loans availed by company’
A large portion of Unitech shares have been pledged with IDFC, HDFC and JM Financial
Decline in shareholding could be attributed to financial institutions selling pledged shares following a steep decline in share prices
Slowdown hits growth and finances
Slowdown hits growth and finances
The Economic Times, February 17, 2009, Page 16
Mythili Bhusnurmath
HIGH growth rates have helped. Changes in attitude have also helped. Above all, information systems and technology have helped the most. And, if I may add in a lighter vein, having a lucky finance minister may also have helped.” As Pranab Mukherjee unveiled the budget numbers in the UPA’s sixth and final budget, more correctly vote-on-account, on Monday, former FM P Chidambaram must be rueing budget day last year when he tempted Lady Luck.
Or maybe not! Because though Lady Luck seemed to have deserted the government after smiling on it for four successive years, Mr Chidambaram himself has been saved the embarrassment of presenting a rather sorry report of government finances. Thanks to a surprise cabinet reshuffle that saw him being shifted to the home ministry!
In all fairness, the about-turn in government finances that undoes the success of the post-reform period and takes us back to the pre-reform period is largely a consequence of the unprecedented turmoil in the global economy. As a result, after coming ‘within striking distance of fiscal correction’ it’s now back to square one all over again. And it is going to be an incredibly tough job for whichever government comes to power next.
Revised estimates presented in Parliament show revenues down, expenditure up. There can only be one outcome of such a scenario and sure enough, both revenue and fiscal deficits are up. And while the increase in fiscal deficit was expected, what is particularly worrisome is the more than four-fold increase in revenue deficit, up from 1% in budget estimates to 4.4% (Rs 2,41,273 crore) in the revised estimates. Incidentally, the fiscal deficit is not 6% as stated in the budget documents but 7.8% once off-budget items like fertiliser and oil bonds are factored in and may end up higher when the final figures come in.
This is, perhaps, inevitable when an economic slowdown is coupled with widespread unemployment. Any government, more so a democratically elected one, would have to spend more on programmes like the National Rural Employment Guarantee Programme (NREGA) to address basic livelihood concerns. Hence increased allocation on NREGA and other social development programmes like the Jawaharlal Nehru Urban Renewal Mission and Indira Awas Yojana to provide housing for the weaker sections is not only unavoidable but may even be desirable.
Having said that, two caveats must be kept in mind. One, unlike a higher fiscal deficit that can augment the country’s repayment capacity, a higher revenue deficit means the government is borrowing to spend on current consumption. A revenue deficit adds to the debt burden without creating the wherewithal to repay the debt. This is the reason why fiscal economists warn against countries running high revenue deficits.
Two, increased allocations do not translate into improved delivery on the ground. As the data on roads and other infrastructure projects released by the ministry on programme implementation has shown, progress has been tardy in most areas. Consequently, along with higher allocations government will have to spruce up implementation if we are to justify the much higher cost in terms of higher borrowing (and associated with that higher interest cost) of a higher revenue deficit.
Given that debt servicing (debt repayment plus interest payments) already accounts for almost 100% of revenue receipts, according to revised estimates for the current fiscal, the danger of a high revenue deficit going forward cannot be over-emphasised. The good thing is that the interim budget recognises the pitfalls of fiscal adventurism, with Mr Mukherjee reiterating on more than one occasion the need to ‘revert to fiscal consolidation at the earliest.’
No doubt, it is this realisation that has led the government to observe constitutional niceties and show commendable restraint, spurning the temptation to play the election card. It could not have been easy given the pressures and expectations from industry and the public. But for all of us with a stake in the future of this country, it is a welcome mark of responsible government.
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