Real Estate Intelligence Service, Monday, July 13, 2009

High govt borrowings not to impact pvt sector: Pranab

High govt borrowings not to impact pvt sector: Pranab
The Financial Express, July 13, 2009, Page 1 & 13

Indronil Roychowdhury

Finance minister Pranab Mukherjee on Sunday assured the private sector that the government borrowing programme will not crowd out resources for them. The finance ministry plans to borrow Rs 3,97,957 crore during 2009-10 to meet government expenditure as it expects tax resources to decline by 2% this year. This is 52% more than the Rs 2,61,972 crore it raised as net domestic market loan in 2008-09.

“Borrowers will not have to pay higher interest rate for their loan and the private sector will not be crowded out for the government borrowing,” the minister said, after simultaneously inaugurating a nationwide network of 154 State Bank of India branches and 2,151 ATMs of the bank, from his constituency, Jangipur.

Meanwhile, RBI deputy governor Usha Thorat on Sunday said, “The general easing of monetary conditions have also ensured that the additional borrowing needs of the government do not result in crowding out of credit to the private sector”. She said to manage the heavy government borrowing programme better, “the distribution method for the primary issuances was also shifted to uniform price auction in view of the uncertain market conditions. Offers of shorter term bonds and benchmark securities have also helped meet investor preference and stabilise yields”.

Mukherjee had made similar points after meeting the board of RBI on Saturday, led by governor D Subbarao, deputy governors Shyamala Gopinath, Usha Thorat and KC Chakrabarty. Finance secretary Ashok Chawla, expenditure secretary Sushma Nath, revenue secretary PV Bhide and chief economic advisor Arvind Virmani were also present at the meeting.

In a tight credit market, more the government borrows, lesser is the space left for the private sector. This could also push up interest rates. Yield on the most-traded 5-year government bond closed at 6.43% against 6.37% on Friday. The bond market was closed on Saturday.

Mukherjee said the government is working in close cooperation with the central bank. “There is no inherent contradiction that we are pursuing or following with RBI in reference to the annual monetary and the fiscal policies. We are working in close cooperation. We have done it during the worst period of the present crisis,” he said.

On interest rates, he said RBI has taken various steps and will take measures required by the situation. “The Reserve Bank has taken various steps throughout the crisis period. As and when the situation requires, appropriate action will be taken. But what action and at what time, I cannot tell you now,” the minister said.

Realty players tempted to toe govt line in housing sector

Realty players tempted to toe govt line in housing sector
The Economic Times, July 12, 2009, Page 8

Aman Dhall, ET Bureau, NEW DELHI

The government is considering a proposal that could indirectly regulate the real estate market. The plan advocates a private-public partnership where public agencies such as National Housing Bank (NHB) and Delhi Development Authority (DDA), backed by government financing agencies, would underwrite the housing units constructed by private builders.

According to a source close to the development, the move would ensure in case a developer is unable to sell the housing units in the market, which is in line with the government programme, then public agencies would intervene and purchase the unsold inventory.

While this would not apply to a project entirely being executed by a private builder, it would apply to only projects where there is a government role. The way it would work is as follows. Say a state housing board, for instance Haryana Urban Development Authority (HUDA), acquires land and the housing agency sells it to a private developer for construction and delivery of housing units. The HUDA could fix a ceiling on the maximum price the developer would be able to charge the buyers and in case there is unsold inventory then the HUDA may have to purchase it.

As per various estimates, India has a shortfall of 20-25 million housing units in the urban areas and this would only mount as the country gets more urbanised areas. Public agencies have possession of huge land stock and engaging private developers for construction can help solve the problem of quality and affordable housing in India.

The blueprint, if it gets the nod, is expected to ease liquidity in the housing sector and enhance confidence among the suppliers of credit for housing projects and the suppliers of housing units. The proposal aims at a larger objective of providing affordable housing to the masses. "The idea is to harness the synergies in the public-private partnership via a supply-side intervention," the source said.

The scheme will work on the same principles as the underwriting of issues (corporate bonds, initial public offers) by the financial intermediaries, in case there is a shortfall in subscription by the targeted investors. The project was initially planned to run on a trial basis with a state government that is not constrained by the Fiscal Responsibility and Budget Management norms, the source added. The source said a high-level committee comprising various stakeholders would soon be set up to fine tune the proposal.

There is a competing demand from various sectors on the two critical resources - land and finance - both of which are in short supply in the housing sector. "The model will ensure greater discipline, transparency and accountability in the construction industry, resulting in all round confidence," the source said.

RV Verma, executive director of NHB, feels it is a step in the right direction and would result in higher efficiency, sustainability of funding and construction with the 'backstop' underwriting facility extended by the public agencies with government support. "The whole efficiency of the structure would lie in the clarity around the role of each actor, commonality of objective and performing to scales in a partnership mode," he feels.

Jai Mavani, executive director, head of infrastructure and government practice, KPMG, however, feels that though the proposal may result in credit enhancement, developers should not be completely abstained from risks pertaining to the project. "Underwriting could certainly be a carrot for developers but could backfire if they have no skin in the game. Complacency could result in lowering of the quality standards and timeliness of the delivery," he said. According to him, underwriting ideally should cover only costs and not the margins, otherwise it would operate as a subsidy. "This is not necessary given the maturity of the industry and existence of a number of players," Mr Mavani said.

Revival on as factory output fires again

Revival on as factory output fires again
The Economic Times, July 11, 2009, Page 1

ET Bureau, NEW DELHI

Industrial output rose for the second straight month in May, drawing varying interpretations from the finance ministry and the Planning
Commission: the former saw it as one more sign of economic recovery, while the latter viewed the data with a little more circumspection.

Led by the consumer durables sector, the Index of Industrial Production rose by 2.7%, its biggest increase since October 2008. Industrial output, which expanded by a revised 1.2% in April, is seen as responding to the economic stimulus packages from the government.

Finance secretary Ashok Chawla said factory production was showing signs of improvement, indicating that the country is back on the trajectory of high growth. “This is what we were expecting, what we have been saying for some time now. Except capital goods and non-consumer durables, the rest are certainly looking much better. I think, we are back on track as was expected,” he told reporters.

While the 12.4% increase in the output of consumer durables such as refrigerators, televisions and electronic appliances boosted growth in the manufacturing sector to 2.5%, consumer non-durables (perishables such as food items) and capital goods continued to languish in negative territory. Electricity generation went up by 3.3% and the mining sector posted a growth of 3.7%.

Mr Chawla said he expected the growth trend to continue and that the sectors, which have shown “slight” negative growth, would improve in the coming months.

Planning Commission deputy chairman Montek Singh Ahluwalia, on the other hand, was chary of painting too rosy a picture too soon. “We do believe that the worst is over. But, there is difference between the worst being over and getting back to robust growth. The real question is that how rapidly we resume growth,” he said.

DK Joshi, principal economist at ratings agency Crisil, observed that nothing conclusive could be said about the months ahead, as the performance of industry is also linked to the monsoon.

“The growth in consumer durables and the cement and steel sectors can be directly attributable to the stimulus packages announced by the government,” Mr Joshi said.

He added, however, that if monsoon fails, the effects of the stimulus packages could get negated. Moreover, the performance of the industrial sector, this year, would not match that of previous years as exports are still low and demand in Western markets is yet to pick up, he said.

Rs 1 lakh cr for 12,000-km road projects: Nath

Rs 1 lakh cr for 12,000-km road projects: Nath
The Economic Times, July 11, 2009, Page 1 & 7

ET Bureau, MUMBAI

The government plans to invest around Rs 1,00,000 crore to build about 12,000 kilometres of roads this year mainly through the toll-based
model, with options to bring in foreign investors, Union minister for roads Kamal Nath said on Friday.

In the move to bring in foreign investors, the ministry of road transport and highways, along with ICICI Bank, is planning to conduct international road shows in Asia, Europe and the US.

Speaking at a conference in Mumbai, Mr Nath said: “Road projects in the country require around Rs 2,00,000 crore over the next three years for which we are considering innovative financing instruments that will fund road projects and attract domestic and foreign investors.”

Efforts are also being made to involve all possible investment channels, including pension funds, sovereign wealth funds, equity funds, besides funds from banks. The minister has already announced measures to boost road and highway connectivity—at the rate of 20 km daily—to India’s existing road network of 34 lakh kilometres.

However, Mr Nath ruled out the possibility of forming Road Financing Corporation on the lines of Power Financing Corporation, unless it provided substantial benefits for solving investment-related problems of the road sector.

The priority of the government is to have 60% of the projects on the toll-based revenue model, while the remaining would be on annuity and engineering-procurement-construction contract models.

Mr Nath said the prime focus will be on toll-based model for these road projects and would build specialised tolling companies, similar to that in developed countries.

Referring to the issue of land acquisition—a sticky area in various states—Mr Nath said the land acquisition process has not been efficient and has been one of the biggest challenges for completion and cost overruns.

Mr Nath said the National Highway Authority of India will invite bids only for those projects for which 80% land has been acquired. The minister also warned that projects stuck on continued land acquisition front could be abolished and asked state chief ministers to support road development projects.

NHB to bring 25 cities under realty price index

NHB to bring 25 cities under realty price index
The Financial Express, July 11, 2009, Page 11

Kakoly Chatterjee, New Delhi

National Housing Bank (NHB) is hoping to take the number of cities to 25 under its ambit for Residex—the residential property price index— in another four years. The index was test launched in 2001 so as to help determine the price trends of residential properties of a region.

Once the Residex is in place, NHB is also looking at indexing commercial properties and lands at a later stage. The challenge is in collecting data and it will be easier if government issues a statutory for property brokers to get registered. “Covering 63 cities for Residex is a long journey ahead”, Raj Pal, principal advisor, NHB said.

“In order to smoothen the process of collecting data, NHB is signing a memorandum of understanding (MoU) with National Association of Realtors (NAR) in July,” Pal said. Other institutions like National Real Estate Development Council (Naredco), housing finance companies (HFCs) and commercial banks are expected to work in partnership with NHB to make data more easily available to NHB for Residex.

The apex body has spent around Rs 45 lakh in the last two years for collecting and collating data for 15 cities. Once Residex gains in terms of visibility and acceptance, a commercially sustainable model would emerge.

The National Council for Applied Economic Research (NCAER) runs primary checks on the data that is collected. The system used for NHB Residex is repeat sale model and for this the cities are divided into several zones and a couple of colonies from every zone are considered every time the updation takes place.

Suresh Chandra, deputy general manager, personal banking, State Bank of India, said, “By accessing the Residex data we will be aware of the realistic cost of the properties". He said through this data it will be easier to detect fraudulent practices of developers and counsel the borrowers accordingly. In case a property is overpriced the bank can advise clients to explore other projects.

Chandra said that mitigating risks would be easier and more scientific after the housing index includes all major cities. "The loan to value (LTV) ratio is uniform for all cities currently, but with the housing index coming into place the LTV can vary from city to city,” he said. Chandra said the Residex should also include more information like details of the builders, its financials, how many projects it has done, what has been the experience of customers with him, his fund status and so on.

Acording to Anil Kumar, CEO, Ansal API, Residex is not going to be of much help to the developer. “The previous price trend in a particular city is not going to indicate the future price trends. Prices of properties depends on a lot many factors like change in price of input costs like cement and steel. Property prices also depend on policy matters like changes in floor area ratio (FAR). The developers can bring down the price if the FAR is increased. However, all these factors cannot be included in the index”.

Data crunching

•Residex was test launched in 2001 so as to help determine the price trends of residential properties of a region

•Once the Residex is in place, NHB will also look at indexing commercial properties and lands

•In order to smoothen the process of collecting data, NHB is signing an MoU with National Association of Realtors in July

PM confident of 8-9% growth despite crisis

PM confident of 8-9% growth despite crisis
The Financial Express, Fe Investor, July 12, 2009, Page 1

Press Trust of India

On Board PM’s Aircraft Prime Minister Manmohan Singh on Saturday said he was confident that India would be able to sustain a growth rate of 8 to 9% this fiscal and come out of the current crisis stronger.

He, however, warned that the road ahead was going to be difficult. “It is not going to be easy but I am convinced that India’s savings rate, which is as high as 35% with a normal capital output ratio of 4:1, we should be able to sustain, with a little bit effort, a growth rate of about 8 to 9% notwithstanding the difficulties on the international front,” Singh told reporters accompanying him on his way back home from a four-day visit to Italy.

Against the backdrop of the world attempting a recovery from the recession caused by the financial crisis in the heart of the developed world, the Prime Minister said he had discussions with the leaders of G-8 and G-5, Egypt and African countries and “while there are some signs of recovery, the world economy is still a long way from recovering the earlier growth momentum and there must be questions whether that will soon be possible for the global economy”.

He said in his statement at the G-8 summit, he mentioned that all available indicators for 2009 pointed to a deceleration in the US economy and the EU economies, which would affect the global environment for the development of the third world countries. “(However) I am confident that our domestic economic strengths will enable us to return to our earlier path of rapid and inclusive growth,” he added.

Stimulus for construction sector likely

Stimulus for construction sector likely
The Financial Express, Fe Investor, July 12, 2009, Page 1

Sunny Verma

The government is considering a fiscal stimulus for the construction sector that has been badly affected by the economic slowdown. “Slowdown in investment in the construction sector has put a halt to everything. We are trying to see whether there could be a stimulus (package) for the construction sector,” labour and employment secretary Sudha Pillai said on Saturday.

Growth in the construction sector slipped to 7.1% in 2008-09 as compared to 10.1% in 2007-08, according to Central Statistical Organisation data, with a growth rate of 6.8% for the January-March 2009 period. With job losses in the sector reported to be substantial, the labour ministry is conducting a study to analyse the impact of the slowdown on construction workers.

Pillai said the global economic crisis has resulted in significant job losses in rural areas and in some export-oriented sectors, although the government’s rural job guarantee programme helped in containing them.

The pain caused by the economic downturn, however, has resulted in a record number of 98 lakh people lining up to withdraw their provident fund money in 2008-09. The average number of claims that the Employees Provident Funds Organisation (EPFO) usually settles annually is around 25 lakh. “There were 98 lakh claims made last fiscal, which is very high compared to the previous fiscal,” Pillai said.

Massive job losses in areas like textiles, diamond, and small and medium sectors pushed people to withdraw PF money to tide over cash crunch at the retail level, she added.

Endorsing the government’s overall fiscal stimulus programme, Pillai said the steps were essential to protect growth in the current “unusual economic situation”. The government was “trying to put more money in the hands of the people” to ensure that the stimulus packages resulted in a large multiplier effect, Pillai said at a post-Budget analysis seminar in the Capital.

The Centre’s fiscal deficit is projected to rise to 6.8% of the GDP in 2009-10 from 6.2% in 2008-09 due to a series of tax cuts and expenditure increases announced to protect the growth rate.

The EPFO settled 25.76 lakh provident fund claims in 2006-07, 22.44 lakh in 2005-06 and 24.09 lakh in 2004-05, as per data maintained by the Fund. Last week, EPFO kept the interest rate unchanged at 8.5% on around Rs 1.82 lakh crore of PF deposits parked by 4.5 crore subscribers. The labour ministry has estimated job losses at 5 lakh in the October-December 2008.

However, the National Rural Employment Guarantee Act, 2005 (NREGA), which provides 100 days employment to every rural household adult, has “cushioned the flow of job losses”, Pillai said. Budget 2009-10 has raised the allocation for NREGA by 144% to Rs 39,100 crore in this fiscal.

The Budget seminar was organised jointly by the Indian Council for Research in International Economic Relations, Centre for Policy Research, India Development Foundation, National Council for Applied Economic Research and National Institute of Public Finance and Policy.

DIPP wants to relax FDI rules for small constructions

DIPP wants to relax FDI rules for small constructions
Business Standard, July 11, 2009

Neeraj Thakur / New Delhi

To encourage the flow of foreign direct investment (FDI) in smaller construction projects — integrated townships and hospitality projects — the Department of Industrial Policy & Promotion (DIPP) has recommended changes to the Press Note 2 of 2005. These recommendations have been sent to the Cabinet Committee on Economic Affairs.

The department has asked for a reduction in the minimum area to be developed under each project from 25 acres to 10 acres for development of serviced housing plots. It has also asked for reduction in the minimum built-up area for construction development projects to 10,000 sq m.

DIPP feels that in smaller cities and towns, developing serviced plots or built-up areas according to guidelines prescribed in Press Note 2 is not economically viable. The minimum area requirement is viewed as a deterrent infusing FDI into companies desirous of undertaking small-size construction projects.

Foreign investment brought into such projects will be subject to a lock-in period from the date of infusion. The lock-in would also hold for three years after project completion.

To promote infrastructure development in tourism, DIPP has recommended that 100 per cent FDI be allowed in mixed development projects. The FDI policy permits foreign investment up to 100 percent through the automatic route in tourism-related industry, hotels and hospitals when they are standalone activities. There are an estimated 1.2 million hotel rooms in the country. The country needs to double its hotel rooms to 2.9 million by 2010, to meet the demand during the Commonwealth Games.

Punjab clears much-awaited SEZ Bill

Punjab clears much-awaited SEZ Bill
The Economic Times, July 13, 2009, Page 15

Chandigarh:

With the SAD-BJP government clearing the much-awaited Punjab Special Economic Zones Bill, 2009, the decks have been cleared for developers to give a major boost to the development of the Special Economic Zone’s (SEZ’s) in the state.

As per the norms laid down in the policy, the requirement of areas for setting up SEZs in case of a multi product SEZ is 1,000 hectare, product-specific 100 hectare, IT-specific 10 hectare and warehousing 40 hectare. Speaking about the policy, state industries & commerce minister Manoranjan Kalia said due to paucity of land and high cost in the state, the government has asked the Centre for relaxation in the aforementioned norms and has also sought permission for development of SEZs as per viability of the project, to be determined by the developer.

Although the new industrial policy is yet to get the Cabinet’s approval, Punjab has now become the 6th state in the country after Haryana, Gujarat,West Bengal, Maharashtra and Madhya Pradesh to enact the SEZ Act.

The Punjab Act is little different from the SEZ Acts in other states, as it provides exemption from payment of any tax, duty, fee, cess or any other levy, whereas the Acts of Gujarat and Maharashtra specify exemption from sales tax, VAT, motor spirit tax, luxury tax, entertainment tax, purchase tax and other state taxes. These exemptions under Punjab Act will be on export or import of goods in SEZ, inter-unit transaction in SEZ, movement of goods in SEZ for value addition and on any service to SEZ developer or unit. All SEZ units will also be given public utility status. Moreover, the Punjab Act will provide exemption from stamp duty, registration fee and social security cess on purchase of land for SEZ and on first transfer or lease of immovable property within SEZ for industrial, commercial or residential purposes. The allocation and transfer of land within the SEZ can be done only by way of sale or lease as per the Punjab Act.

While referring to the over all SEZ scenario, Mr Kalia said that the Centre has given formal approvals to 578 projects in the country, out of which seven are from Punjab. Among the 322 notified SEZs, two are in Mohali - QuarkCity India for IT industry and Ranbaxy Laboratories SEZ in the pharma sector.

The total investment envisaged in the SEZs projects on all India basis comes to Rs 1,08,903 crore while the 18 projects to come up in Punjab would entail an investment of Rs 10,182 crore. “QuarkCity would cover an area of 13.75 hectare with a proposed investment of Rs 500 crore and give employment to some 27,500 people, whereas the Ranbaxy Labs SEZ would cover 32 hectare with an investment of Rs 265 crore,” said Mr Kalia.

In order to make the clearance of projects more convenient and hassle free, the state government has made a single-tier approval system instead of two-tier process. A project approval committee headed by the chief secretary, along with administrative secretaries concerned will look after all the SEZ proposals in Punjab. The committee will give in-principle approval, if land is not in possession of the developer and will grant final approval after land possession. After approval by the committee, the proposal will be sent to the Centre. The SEZ Act also provides permission for generation of electricity in or outside SEZ for consumption of units in SEZ, whereas in other states, generation of electricity is allowed only within SEZ. There will be no electricity duty on generation, transmission, distribution and consumption of electricity within SEZ. The state government will also notify the SEZ after approval by the Centre. The SEZ developer will prepare the development plan of SEZ in accordance with the development plan or master plan of the area, where SEZ is to be located.

Mr Kalia further said that the Act enables the SEZ developer to demarcate the sites for industrial, commercial, residential and other purposes in SEZ and also let them free to fix the rates for transfer of land/building within the SEZ to the units. The Act allows the developer to maintain the SEZ and also empowers them to levy charges for maintenance. However, the developer will have to pay the charges to local authority in case its services are utilised. SS Channy, industries & commerce secretary, said that with the implementation of Punjab SEZ Act, the road is clear for proposed 18 SEZs to set up their ventures in the state. This will give boost to rapid industrialisation and will also attract more SEZs in Punjab. He pointed out that Punjab Industrial Facilitation Act, 2005, providing single-window clearance in a time bound manner with the provision of deemed clearance if approval is not granted in the notified time schedule, will also be applicable in the SEZs.