Inflation below 4%, but Pranab warns of tougher times

Inflation below 4%, but Pranab warns of tougher times
The Financial Express, February 20, 2009, Page 1

Economy Bureau

Finance minister Pranab Mukherjee warned on Thursday that the full impact of the global slowdown is “yet to be felt”, though the UPA government had refrained from doing “too many radical things” in the interim Budget due to constitutional constraints. But he stressed that the government is willing to take more steps to spur the economy, broadly hinting at monetary measures like rate cuts.

“I am laying emphasis on both fiscal corrections and monetary corrections. Unless these two are moved together and they move in harmony, it would be difficult to tackle the problem,” he said, adding that “simply pressing the panic button” won’t achieve anything.

“If the economy demands certain things and if these could be done within (the constitutional constraints of an outgoing government), surely we would like to do them,” he said. Markets already anticipate a cut in policy rates by RBI with inflation touching a 14-month low of 3.92% for the first week of February.

“I will have consultations with the governor of the Reserve Bank. After that, I hope that while replying to the debate on the Budget (next week), I may be in a position—I am not making any assurance or commitment—to give more detailed information,” Mukherjee said.

The minister’s comments came a day after RBI governor D Subbarao said in Tokyo there is more room to reduce key rates. “The question is whether we should cut rates, when we should cut rates and by how much we should cut rates,” the governor said.

Warning of a sharper impact of the global slowdown on India than expected, he said the challenge for the government and RBI would be to “minimise the pain”. However, Subbarao dismissed suggestions to slow external liberalisation to protect Indian industry: “We should not give a wrong signal right now. The support—I would not use the word ‘protection’—that the Indian economy requires will be given.”

The government has already announced two stimulus packages to spur economic growth, which is expected to moderate from 9% to 7.1% in 2008-09.

Economic growth to recover next fiscal, assures Montek

Economic growth to recover next fiscal, assures Montek
The Economic Times, February 20, 2009, Page 10

Piyush Babele NEW DELHI

PLANNING Commission deputy chairman Montek Singh Ahluwalia has said the next financial year will be the year of economic recovery and the Indian economy is expected to grow between 6.5% and 7% in 2009-10. “The growth next year is expected to be more than the growth witnessed in the second half of current financial year. This would mean that the economy is on the path of recovery,” he told ET Hindi on its first anniversary.

For India, this is the first year of economic slowdown, mainly for the services sector and the manufacturing sector. The slowdown is due to external forces and not due to country’s economic policies, Mr Ahluwalia said. But India has left no stone unturned to avert the economic downturn, he added.

He said the impact of the global slowdown on the Indian economy was negligible in the first half of the current financial year, but the growth dipped in the second half. “The government has taken several steps that would improve the condition of the economy in the next financial year,” Mr Ahluwalia said.

“When we talk about the current economic situation, we should not forget that despite slowdown India is still the second-fastest growing economy of the world. We must also see the economic growth from another perspective. Even if we combine this year’s growth rate with the previous year; the figure will be higher than the 6-6.5% growth rate achieved during the NDA government,” he said.

Mr Ahluwalia expressed satisfaction the slowdown had not hit the farm sector and was limited to modern forms of the economy. “In this background, the government will invest in the infrastructure sector and NREGA. These schemes will strengthen the economy,” he said.

Obama unveils $275b housing rescue plan

Obama unveils $275b housing rescue plan
The Economic Times, February 20, 2009, Page 19

$75B Lifeline For Homeowners, $200B To Freddie Mac & Fannie Mae

AFP PHOENIX, ARIZONA

US PRESIDENT Barack Obama on Wednesday targeted the housing crisis at the root of the US economic meltdown, with a program which could cost $275 billion and reach nine million homeowners.

The strategy includes $75 billion designed as an incentive for lenders to reduce interest rates to prevent at-risk mortgage debtors joining the millions who have already fallen victim to foreclosures.

The government will also put up an additional $200 billion dollars to bolster confidence in efforts by federal lenders Freddie Mac and Fannie Mae to offer affordable mortgages and bring stability to the housing market.

Obama opened the new front in the broad battle against the economic crisis a day after signing a huge, $787-billion stimulus plan into law, and as he simultaneously attempts to restructure the debilitated US auto industry.

"All of us are paying a price for this home mortgage crisis and all of us will pay an even steeper price if we allow this crisis to continue to deepen," Obama said as he unveiled the plan in Arizona, one of the states worst hit by the crisis.

"When the housing market collapsed, so did the availability of credit on which our economy depends. "We will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure," Obama said.

Treasury officials said the plan could reach or make affordable one-and-a-half trillion dollars in mortgage debt and deal with a large proportion of the six million foreclosures expected over the next four years.

The plan includes incentives for lenders to help debtors who cannot make monthly payments but also cannot sell their homes due to negative equity, to lower mortgage payments to no more than 31% of their income.

The plan will see the treasury department double its financial support to troubled mortgage finance giants Fannie Mae and Freddie Mac, to $200 billion each, in an effort to stabilise the real estate sector.

A $75-billion initiative will target those who cannot afford to pay their mortgages and have seen the price of their properties plunge so cannot sell them and move into cheaper accommodation.

The initiative also aims to help families who put money down on homes and met their regular payments, yet cannot take advantage of refinancing made attractive by low mortgage rates because the value of their homes have sharply dropped.

Fed sees unusually prolonged recovery
THE United States' economy would face an "unusually gradual and prolonged" period of recovery as it struggles to climb out of a deep global downturn, the US central bank has warned. Releasing its economic outlook for 2009 on Wednesday the Federal Reserve or Fed said it expected that the economy would contract by 0.5% to 1.3% this year, unemployment would rise to 8.5% to 8.8% and inflation would remain under greater pressure. Bleak economic data reflecting a sharpening slide in housing, trade, industrial production, spending and employment rates "more than offset" any potential impact from an economic stimulus plan, the Fed said, forcing it to cut its economic outlook. — IANS/Washington.

Lok Housing to restate accounts

Lok Housing to restate accounts
Business Standard, February 20, 2009, Page 4

BS Reporter / Mumbai

In a first of its kind development, Mumbai-based Lok Housing and Construction is planning to restate its accounts for the past three financial years as the revenue it booked hasn’t materialised after investors and buyers backed out of its projects.

The plight of the Bombay Stock Exchange-listed company may befall on other real estate players, with analysts claiming that many more companies could follow suit by restating accounts.

The developer will write off Rs 225.01 crore worth of profit and Rs 282.14 crore of sales it recognised in its books in the previous financial years, according to the notes on the accounts. The profit to be written off will be marginally lower than that declared by the company.

"Due to the financial meltdown and severe economic recession, some of the parties with whom the company had entered into agreement to sell have failed to meet their commitments and considering the overall interest of the company, the agreement for sale entered into in the past financial years and in respect of which revenues already recognised have been mutually terminated/ cancelled," the company said in a statement to the exchanges recently.

Lok Housing had reported a profit of Rs 112.85 crore in FY08, Rs 91.67 crore in FY07 and Rs 21.86 crore in FY06. The company reported losses prior to these periods. The company would seek shareholder’s approval in May for the restatement of accounts, a company official said. It has already got the court's approval for the same.

As a common practice among developers, Lok Housing recognised sales and profit thereon at the time of entering into such agreements. Lok Housing Chairman and Managing Director Lalit C Gandhi refused to comment on the matter, saying it is sub judice. A source said both the end-users and investors failed to pay money for some of their projects. The company is expected to write off the amounts in one or two quarters.

"Considering the overall interest of the company, the agreement for sale entered into in the past financial years and in respect of which revenues already recognised have been mutually terminated/ cancelled," the company release added.

Analysts said other developers could also come out with such disclosures, given the slowdown and credit crunch faced by home buyers.

Realtors may divert surplus FDI via makeshift window

Realtors may divert surplus FDI via makeshift window
The Economic Times, February 19, 2009, Page 7

PROPOSED NORM IGNORES END-USE RESTRICTIONS, NULLIFIES FDI CONDITIONS

Rajat Guha NEW DELHI

IN A move to help the cash-strapped real estate sector, the commerce and industry ministry is likely to waive enduse restrictions and allow realty developers to divert surplus foreign direct investment to real estate projects where it was not allowed so far. According to the norms, FDI is allowed only in projects with a minimum investment of $10 million (in wholly-owned subsidiaries) or $5 million in joint ventures, and which has a minimum area of 10 hectares.

As per the proposal, which will require a Cabinet approval before being implemented, a real estate company which has brought in FDI in a project meeting the mandated conditions can now use the surplus funds in another project which may not meet the prescribed conditions. For example, a realty company that has raised FDI for a township in Faridabad which meets the minimum capitalisation and minimum area norms may now use a part of the surplus funds for a project in Gurgaon which may not have got a clearance from Foreign Investment Promotion Board (FIPB). Put simply, while the new norm does away with the end-use restrictions, it also nullifies the mandatory meeting of conditions for using FDI.

In the last FIPB meeting, the board deliberated that in view of the difficulties being faced by the real estate sector, some leeway is required, even if for a temporary period.

“We will soon issue the guidelines to be followed in case of requests for receiving FDI by realty companies engaged in various projects, not all of which are FDI-compliant as per Press Note 2 of 2005,” a senior official directly dealing with the new policy told ET. He asked not to be identified. The official added that the relief would be extended to the realty sector for a temporary period with an in-built sunset clause.

Interestingly, this comes even as the government had recently stepped up vigilance against companies channelling FDI money to projects that had not received FIPB clearance. While examining real estate company Keystone’s proposal in a meeting held in January, the board had asked the department of industrial policy and promotion (Dipp) to set up a monitoring cell to track FDI inflows into non-FDI compliant projects under the veil of FDI. The board was apprehensive that in such cases, there could be a possibility of funds getting diverted to projects that had not been cleared by FIPB.

In fact, Dipp has prepared a draft Press Note on guidelines on induction of FDI into Indian real estate companies with both FDI-compliant and non-FDI-compliant projects, where FDI is required to flow into FDI compliant projects only. Officials say this would be the fourth PN to be issued by the present government before the polls.

Real Estate Intelligence Report, Thursday, February 19, 2009

Room for more rate cut: RBI

Room for more rate cut: RBI
Business Standard, 19th February 2009, Page 3, Section II

BS REPORTER & REUTERS Mumbai/ Tokyo

Reserve Bank of India Governor D Subbarao today said that there is room to cut interest rates further.

“There certainly is room for cutting rates. The question is whether we should cut rates or not, when should we cut rates and by how much,” he told reporters in Tokyo.

The statement comes at a time when the market is expecting further action from the central bank, which has repeatedly cut the repo and the reverse repo rates and lowered the cash reserve ratio by 400 basis points to boost economic activity. Through its steps over Rs 3,88,000 crore has flown into the system but banks, especially foreign and private players, have not pared rates significantly.

Subbarao said RBI expects that commercial banks will take policy cues to reduce deposit and lending rates to keep credit flowing to productive sectors.

He also said that India is committed to open its capital account further but it will draw lessons from the current crisis on how to proceed. At a conference Subbarao said that India may see a further downturn in the investment demand before it recovers but its current account deficit may be smaller than expected.

Further, the RBI governor said that the combined fiscal deficit of states and central government may touch 10 per cent of the gross domestic product during the current fiscal. “So, it is a concern,”Subbarao said.

He warned that the growth moderation may be steeper and more extended than the previous projection. The government has projected 7.1 per cent growth this year 2008-09 and 7 per cent in 2009-10.

In recent months, industrial output has contracted, the services sector is slowing down, exports have been hit by the global downturn and investment demand is decelerating.

The fall in inflation should support consumption demand and reduce input costs. Furthermore, the decline in global crude prices will help reduce the subsidy bill and create fiscal space for infrastructure spending, the governor said.

Going forward, the monetary policy stance will continue to maintain comfortable rupee and foreign exchange liquidity positions, he said.

Referring to the availability of resources for various segments, he said there are indications that the pressure on mutual funds have eased and nonbanking finance companies are also making adjustments to balance their assets and liabilities.

Complete transactions before strike
Mumbai: The one-day strike called by officers and other employees of Reserve Bank of India on Friday may disrupt normal functioning, including its payment and settlement system, the central bank said today.

As a result, RBI has advised the public to complete their transactions on Thursday. The United Forum of Reserve Bank Officers’ and Employees has called the strike in protest against the banking regulator’s decision to withdraw pension updation scheme. RBI said the one day strike amounts to cessation of work and concerted refusal to work. NW18.

DIPP recommends changes in FDI norms for real estate

DIPP recommends changes in FDI norms for real estate
Business Standard, 19th February 2009, Page 3

NEERAJ THAKUR &JOE MATHEW New Delhi

The Department of Industrial Policy and Promotion (DIPP) has recommended relaxation in foreign investment rules in the real estate sector in a bid to facilitate cash-strapped realtors get overseas funds.

The DIPP is backing changes in rules to facilitate foreign direct investment (FDI) in real estate projects that are not FDI-compliant, according to sources.

DIPP members who are part of the Foreign Investment Promotion Board (FIPB), in a meeting held on January 22, were of the view that in light of the current liquidity crunch, some leeway was required for the sector. The DIPP has directed that the matter be examined expeditiously.

At present, FDI in the sector is allowed only in partially completed and Greenfield projects. There are also area specifications that developers have to comply with.

The DIPP is also examining the approach to be adopted in case of requests for receiving FDI by real estate companies that are engaged in various projects, not all of which are FDI-compliant according to Press Note 2 (2005) and which cannot be hived off.

Unitech has approached the FIPB for raising up to Rs 5,000 crore through global depository receipts. Unitech’s 10 per cent projects are not FDI-compliant.

If the DIPP allows real estate companies to get FDI in non-compliant projects, it will help Unitech raise money without difficulty.

Barack Obama to unveil plan for housing market

Barack Obama to unveil plan for housing market
The Financial Express, February 19, 2009, Page 13

Reuters, Washington

US President Barack Obama was set on Wednesday to unveil a plan to stabilize the troubled housing market, a main cause of the economy's deepening slump.

Fresh from signing into law a sweeping $787 billion fiscal stimulus package, Obama is turning his attention to the housing market, where foreclosures have continued to climb despite earlier initiatives aimed at halting that trend. The Obama plan will involve government subsidies to mortgage servicers and lenders to encourage them to lower payments for borrowers in distress.

The aim is to bring mortgage payments to a more affordable range of around 31% of borrowers' incomes. The administration has closely guarded the details of the roughly $50 billion plan but sources familiar with it have made clear it would be bolder than prior efforts to stem foreclosures.

Obama will outline the plan in a speech at a high school in Mesa, Arizona at 10:15 a.m. Mountain time (1715 GMT). It marks the second day of a two-day campaign-style swing Obama is taking to highlight his economic initiatives.

On Tuesday, he signed the stimulus bill into law at an event in Denver where he touted initiatives in the package aimed at encouraging the development of alternative energy sources, such as solar and wind power.

Obama said the stimulus package would "mark the beginning of the end" of the ills facing the economy, though he said it would not solve all the problems. On Wall Street, continued worries about the global economy sent US stock prices down toward their lows reached in November. The Dow Jones industrial average fell 297.81 points, or 3.8 % to 7,552.60. The Obama administration faces pressure to ensure the roll-out of the housing plan goes as smoothly as possible. A plan last week by Treasury Secretary Timothy Geithner to address the turmoil in the banking industry led to a drop in stock prices as investors panned it as lacking in detail.

An overhang of bad mortgage debt has contributed to the economy's difficulties because it has made it harder for consumers and businesses to get loans from banks. Stabilising the housing market could ease some of the problems with the banks.

At the end of last year, just over 9 % of all home loans in the United States were in arrears or already in foreclosure, the Mortgage Bankers Association has said.

Fall in prices by about 30 per cent should be enough to trigger demand’

Fall in prices by about 30 per cent should be enough to trigger demand’
Indian Express, February 07, 2009

Praveen K Singh

Working towards establishing a benchmark for real estate professionals in land, construction and property related areas in India, Sachin Sandhir, MD and Country Head, Royal Institution of Chartered Surveyors (RICS) believes that there is a growing consciousness among all stakeholders to revive the sector. He expects that the market to turn around in next 12 months as the real estate prices are at their lowest ebb now and this is the perfect time to enter the market. Excerpts from a conversation with Praveen K Singh:

What’s your assessment on the current market scenario when the global meltdown erodes market capitalisation of Indian real estate companies?

The global financial crisis continues to unravel, the real estate sector around the world continues to take a hit with credit in short supply and consumer demand in housing witnessing record lows. India too has seen real estate values decline while the government undertakes a two-pronged approach of investing in infrastructure and facilitating consumer spending in real estate through interest rate cuts and easing of liquidity norms for banks.

The situation in India is however slightly different from that of the West. In India, the conduct of the monetary policy and regulation over banks and housing finance companies ensured that the housing bubble did not develop. Further, the actual equity component in housing is much higher than in the West. Thus, housing prices in India have fallen by about 20 per cent and may fall further, but unlikely to get into a free-fall situation

What we are all witnessing today is a period of complete transition for the real estate sector with some fundamental differences this time. Customers will purchase based on need rather than based on the euphoria and hype we saw in 2006-2007. Already, sizes of homes have reduced and customers will be more circumspect in their purchase decisions. At the developer end, the indiscriminate growth will also give way to more rational and safer growth plans as a result most new projects will be price corrected with realistic values.

Current environment notwithstanding, the domestic real estate sector still presents enormous opportunities. I am bullish on the sector from the long term perspective, and believe the current down cycle is unlikely to stretch beyond 12 months. The residential segment which is driven by rising population, urbanisation, nuclearisation, and low penetration of housing finance will be a key driver.

What sense you are getting from international investors about the current scenario in India?

The one common thing that seems to be going around in everyone's mind is that since the prices are low. One can plan investment now or wait for the market to bottom out. Quite obviously, the latter would seem logical given the sheer amount of changes happening. However no one knows... where's the bottom? The problem is that everyone is trying to catch the bottom, and that is what needs to change.
Lenders are slashing home loan rates, Prices of real estate have slipped in tandem with the stock indices, recession in the United States and Europe has forced many NRIs to rethink their property investment plans in India leaving thousands of plush homes in so-called NRI colonies without buyers. There has been a drop of 50-60 per cent bookings by the NRIs over the last three months owing to tight liquidity conditions in the international markets. A lot of developers expect the situation to continue till the liquidity situation improves in foreign markets.

Do you think developers need to bring in further correction to make the sector in force once again?

Developers may need to bring in further correction but this standalone measure may not be adequate. A lot of measures need to be taken and by all stakeholders which includes the government, developers and consultants and they need to get together to work towards viable solutions with the aim to trigger demand in the market. Over long term, actual sales of developed properties will be required - I would like to state that while the liquidity for the next 12 months may be generated by land bank sales and asset liquidation, over the long term, only actual sales of developed properties will help the developers avoid any such concerns. Sales will only take place if prices are cut to bring back affordability. The key going forward will be the completion of projects to lifting cash-flow rather than to spend on new land or new projects planned but yet to be initiated.

Is it the right time to scale up investment activities in India, as valuations are expected to be down to more realistic levels?

The downtrend is likely to continue for at least 12 months and the market could take a couple of years to turnaround.

It is the purpose of purchase that should determine an ideal time to buy a house. From a self-use perspective, the decision can be made as soon as a property that meets the budget, location and size requirements is found. Most developers are offering special deals and willing to negotiate and therefore this may well be a good period.

The decision can be stalled for next 3 to 6 months to get a better perspective on the effects of various reforms being announced by the Government and players directly related to it.

When do you think situation will improve?

There is a growing consciousness among all stakeholders to revive the sector. I expect the interest rates will continue to fall and that coupled with a fall in prices by about 30 per cent should be enough to trigger demand and I see the market turning around within the next 12 months as I do believe that real estate prices are at their lowest ebb now and this is the perfect time to enter the market.

What according to you are the critical factors in front of the real estate sector?

First of all, we need to institutionalise real estate in India with a mechanism to review professional standards. Secondly, there's a requirement for a uniform land laws and a single window clearance system. Thirdly, we need quality safeguards in projects. Fourthly, efficient land records and effective regulation of land valuations and international standards to be followed for valuations as prescribed by the RICS and effective regulation to ensure that we don't see the overheated situation we saw in land prices till June 2008. And finally, we need to address the resource crunch and lack of skilled manpower and reliable information.