The construction ban is justified

The Nikkei India Manufacturing Purchasing Managers’ Index for July was at its lowest in the past eight years and demand took a deep dive owing to GST adjustments. By the deadline of August 25, over 36 lakh businesses had filed their GST returns. The overall impact is indicated to be an upswing of 16.6 per cent on a comprehensive level, though some states would need compensation and others may have a beneficial gain. The disruption of demand has hurt the industry and is not likely to be compensated by the same quantum of the drop.

Demand needs momentum.
The interest relaxation of 25 bps was too meagre, given the low levels of inflation currently. Public spending will need to be kept up to hold the economic growth numbers. Even though Tata Steel and JSW have begun to plan their expansion, none will invest yet. They may be keener in making a pick from the stressed companies sounding their death knells at the altars of the NCLT.

The August 29 mayhem in Mumbai was a repeat of the havoc in 2005. Little has changed in 12 years. Although social media updated everyone earlier on what was to follow and office-goers left offices earlier, as the tracks were flooded, trains stopped, electricity cut off and the Bandra-Worli Sea Link closed, traffic was left in a complete jam.

The usual areas prone to water-logging caused several people to abandon their vehicles and walk home in the filth.

The High Court has banned new construction in Mumbai and an appeal to reverse this in May 2017 was thrown out by the courts. When I raised this issue with the BMC Commissioner at a conference, he had dismissed the suggestion, saying, ‘Stopping construction is not the answer.’ Then, Mr Ajoy Mehta, what is the answer? Is August 29 your answer?

Simply put, enhancing the infrastructure capacity of the city is the answer. So what is the capacity required for a city of our population in terms of storm-water drainage, solid waste management, power, water supply, and so on? Why can’t we have the BMC targeting these numbers for the creation of capacity? These should be linked to TDR charges and capacity creation should lead permissions. In our quest to win better ‘ease of doing business’ rankings, the number of permissions have been brought down – it would now take 60 days instead of over 200 in Mumbai and Delhi to get construction permits. But permissions should be given only after enough capacity is created. Why has the BMC not been able to provide even a dumping ground for construction debris, the original reason for the ban on construction? If construction is allowed to continue without the authorities providing for increase in capacity, we will soon be seeking the ‘right to breathe’ instead of ‘right to privacy’.

PRIME THE PUMP

Earlier in May, when I had asked Sajjan Jindal, chief of JSW – the group with the best appetite for capital investment – when the private sector would begin investing, he had replied that we were poised for an imminent renewal in sentiment for private investment. Recently, Ajay Piramal, head of Piramal Group and Shriram Group, reflected that a higher GDP number would initiate private investment flow into the economy. And, the World Bank projects that gross fixed capital formation (GFCF), which indicates investment demand in the economy, will grow by 6.8 per cent in FY18 and 8.8 per cent in FY19.

However, the situation appears to be suboptimal currently. According to CMIE, announcements of new industrial and infrastructural projects remained muted in the first quarter of 2017-18. Only 448 projects were announced during the quarter. This is the lowest quarterly project announcement seen since June 2014, the time when the last capex cycle bottomed out. Further, the completion of projects has dipped over previous consecutive quarters. Lower project initiation and a falling commissioning rate will be a double whammy – the only way to change this situation is to enhance the rate of commissioning of the project pipeline and, at the same time, improve the launch of new infrastructure projects. Stalled projects have also not seen any significant resolution. Ideally, the current government is in the best position to resolve and move this rapidly. If the RBI has recognised the need to resolve the mountain of debt through insolvency resolution professionals, why not seek help in resolving stalled projects too?

Foreign funds are keen to invest in toll-operate-transfer (TOT) projects so they can realise the toll yields on completed projects. Hence, NHAI is preparing to offer such completed projects and generate liquidity. Further, the Insolvency & Bankruptcy Code will help quicker consolidation as companies find a solution for bailing out. L&T’s results also indicate that larger companies with stronger balance sheets can take on the burden of stressful financial cycles as contracting for infrastructure is essentially becoming a big boys’ game. There is a need for out-of-the-box solutions to resolve the infrastructure growth gridlock.

So, if private investment is yet to make its mark, what is keeping our engines sputtering if not humming? Public spending. Government spending grew by 13 per cent, year-on-year, in the two months April-May 2017 to touch Rs 4.6 lakh crore against Rs 2.9 lakh crore in April-May 2016. Capital expenditure for infrastructure creation and other assets rose 63 per cent in April-May to Rs 54,000 crore from Rs 33,000 crore in the same two months a year ago. With GST affecting working capital cycles, government spending will be needed to keep the economy pumped up.

Brace for impact!

Nagpur has been in the news ever since the political capital shifted under the current regime. All roads now lead to this ‘orange’ city which has always been a ‘capital in waiting’. The 710-km road that recently invited controversy was the Rs 46,000-crore Mumbai-Nagpur Expressway, which revised its invitation for bids with a supplementary advertisement and caused much heartburn, as the riders imposed were allegedly introduced to outfox fair competition. The project, which is expected to be completed in two years, envisages 16 packages of construction. High-speed corridors have proven to bring prosperity within the corridor zone and this can pave the way for some political capital, as 24 new nodes will be developed in phases projected to generate employment for 25,000 people each across logistic, industrial, IT, agro-industry, tourism, education, healthcare, auto, warehousing and food processing, besides from social infrastructure development including hotels, malls, petrol pumps, offices, hospitals and educational institutes.

Thirty more smart cities have been added to the existing 60, taking the tally to 90 cities that have been selected under the Centre’s Smart Cities mission, taking the total budgeted spend to over $31 billion. Of the ones selected, 26 have proposed affordable housing projects, 26 cities will be taking up school and hospital projects, and 29 will be taking up redesign and redevelopment of roads to enable walking and cycling. Development is likely to score higher in smaller cities as the impact of infrastructure projects is more visible and has a life-changing impact. This underscores the importance of the recently launched Energy Conservation Building Code 2017 (ECBC 2017) developed by the Ministry of Power and Bureau of Energy Efficiency (BEE). ECBC 2017 mandates a 25 per cent saving in energy for compliance. However, we recommend that the ECBC rating must devolve, unless renewed annually for effective compliance.

Led by its dynamic municipal commissioner Kunal Kumar, Pune Municipal Corporation (PMC) has created history by raising Rs 200 crore for its Rs 2,800-crore water supply project via bonds. The bonds have been listed on the stock exchanges. PMC plans to raise Rs 2,264 crore over the next five years and plans to repay the debt by enhancing its revenues through water charges.

The remarkable aspect of this issue was the appetite as the issue elicited oversubscription to the extent of Rs 1,200 crore. This sets the stage for a new stream of funds for municipalities while ushering in an era of transparency.

The worst news for India’s economy has been the loan waivers the state governments have conceded to, all at the altar of political capital. On the other hand, the GST juggernaut is ready to roll. Now, it’s time to brace for impact.

Don’t stymie equipment & technology

The recent inauguration of the 9.15-km Dhola-Sadiya Bridge, India’s longest bridge above water, by Prime Minister Modi coincided with the completion of three years of his government in office. Apart from underscoring the government’s emphasis on infrastructure, it also reaffirmed its resolve in improving connectivity to the Northeastern region. Built at Rs 1,000 crore under PPP with Navayuga Engineering over rivers Bramhaputra and Lohit, the bridge cuts travel time by four hours.

In fact, the Nitin Gadkari ministry has awarded 16,800 km of highway contracts and constructed around 8,500 km for the year ended March, taking the count up to 23 km per day. The 135-km Eastern Peripheral Expressway, being constructed to decongest Delhi, is scheduled for completion in the next few months. Similarly, other expressways to take off include Delhi-Meerut, Mumbai-Vadodara, Dwarka Expressway, Bengaluru-Chennai and Delhi-Jaipur. With HAM not being popular yet, EPC is the easier way to accelerate road development. The 43-km, 12-lane Dedicated Freight Corridor costing Rs 3,000 crore from JNPT (Navi Mumbai) to Panvel, being built to ease container traffic is also under construction. Further, the UDAN scheme envisages 45 new airports and 70 regional routes, and caps ticket fares at Rs 2,500 for one-hour flights. Six new ports are being developed, and automobile and leather clusters have been planned alongside. Indeed, infrastructure bottlenecks are being addressed like never before and the pace is surely picking up.

However, the recent rate slabs announced under GST are likely to undermine infrastructure plans as construction equipment has been put under the same category as luxury cars! The rate applicable is 28 per cent; given the fact that 70 per cent of buyers of construction equipment are small entrepreneurs, small rental companies and hiring small setups, their capacity to buy will be affected and may deter the pace of execution. A pace of 40 km per day from the current 23 km would require extensive mechanisation and the government must consider a slab that encourages adoption. Categorising it with luxury cars is unfair – if the government thinks this equipment is purchased by companies that will pass on the tax impact, it is ill-advised. The Budget has allocated a spend of Rs 3.96 lakh crore on infrastructure in 2017-18 and this GST rate will result in inflating the cost, apart from affecting rightful demand. Even the ‘Make in India’ initiative that is helping the industry gain its status as an export hub will take a beating with the GST dampener. Given the importance of building infrastructure at a reasonable cost and easing the pressure of high financial costs hurting the infrastructure industry, a rate of 12 per cent for GST is being proposed.

We are getting there

NITI Aayog has put forth a plan to turn India’s economy to reach a size of $7.5 trillion, (though targeting $10 trillion) or more than three times of what it is today, at $2 trillion. Implementation of GST, tax reform and ease of doing business (read the Cover Story) are all parts of the building blocks of this plan. And, they all seem to be moving on course so far. India is on the throes of a massive change. The change is not only limited to economy and industry but is also being instituted in social behaviour, and most importantly, in changing mindsets. Just look at what all is happening: Swachh Bharat, Digital India, Smart Cities, AMRUT, Affordable Housing, E-governance, E-Procurement, Make in India, Direct Benefit Transfer, Demonetisation, black money campaign, renewable energy thrust, UDAN, etc, and other social campaigns such as the Ujwala Yojna, Beti Bachao Beti Padhao and so on. This is a lot of work in so short a time and work is in progress.

The recently announced affordable housing scheme and Pradhan Mantri Awas Yojana or PMAY have seen the launch of over 350 projects to build about 2 lakh houses with a private sector commitment of investing Rs 38,000 crore. The cost of constructing these units will be in the range of Rs 15 lakh to Rs 30 lakh with an average construction cost of Rs 18 lakh per house.

Under PMAY-U, central assistance is provided to each beneficiary in the range of Rs 1 lakh to Rs 2.35 lakh. Of the 2 lakh houses, over 1 lakh will be constructed in Maharashtra, followed by 41,921 houses in the NCR; 28,465 in Gujarat; 7,037 in Karnataka; and 6,055 in Uttar Pradesh; among others. Cement prices have already reached pre-demonetisation levels on the back of demand coming from infrastructure and will firm further due to these housing projects.

GST is on track and is likely to cause another disruption for a quarter, but will soon bring great prosperity. Distressed assets of around $6.8 trillion sitting on books of the banks would also heave a sigh of relief as firms and funds like KKR, Lone Star, Kotak and Edelweiss are planning to mobilise their resurrection. It is estimated by experts that the capital required for the next four to five years to resolve distressed situations is about Rs 30,000 crore to Rs 40,000 crore, and it is already being provided for by NBFCs, PEs and international funds.

The PM completes three years on May 26 this month and a lot is on his plate. Fortunately, for us, his plans have accorded priority to infrastructure and while public spending is leading the way, the private sector is preparing to jump in the fray too. Recently, at a private charity function, I bumped into Sajjan Jindal, Chairman of JSW Group, and when I posed him a casual question on whether the private sector was ready to invest into the India story: “We are getting there,” he quipped.

Is the economic miracle a mirage

In the December quarter, the construction sector took a hit. The average net revenue of 156 firms in the mid and large-sized category, excluding L&T, fell by 9 per cent YoY. Road developers took a hit on account of toll collections, which were suspended for three weeks. Orders across infrastructure sector slid several notches. The road sector itself, as reported earlier in this column, has not been able to achieve its targets.

NHAI and the Ministry of Road Transport and Highways had awarded projects of about 3,200 km and 3,100 km, respectively, till mid-February. NHAI had watered down its forecast for FY17 from 10,000 km to 6,700 km. In nine months of FY17, the NHAI awards have dwindled by 8 per cent YoY. While the new hybrid annuity model (HAM) had many takers owing to PPP, lenders are reluctant given the overhang of past record liabilities. As per reports, only 15 of the 35 projects awarded under HAM have achieved financial closure and some have even been cancelled. Even if we factor in an achievement confidence index of 40 per cent on projected estimates, the aspirational scale is so huge that anything over 40 per cent would add a welcome spur to economic growth. As per Nitin Gadkari, Minister of MoRTH & Shipping, a national perspective plan under the Sagarmala project has been prepared and projects worth Rs 8 lakh crore have been identified. This can accelerate momentum in trade as with a 7,500-km coastline, our country transports only 6 per cent of its cargo through waterways compared to around 55 per cent on roadways and 35 per cent by the railways. As a result, logistic costs as a percentage of GDP is as high as 19 per cent compared to 12.5 per cent in China.

On the brighter side, the process to expedite government spending is in the works. With four more states falling with the ruling party, the agenda of development will step up activity locally. Uttar Pradesh, Uttarakhand, Manipur and Goa will toe the Centre’s diktat of development. The state budgets and their policies reflect the urgency to transform. This is evident from policies being introduced in creating a better business environment in Gujarat, Haryana, Maharashtra, Andhra Pradesh and Telangana. The most notable among the reforms are related to land and its use. Unlocking land for commercial and industrial use will lead to increase in economic activity.

If bad bank loans can now find a solution, we may return to an easy money era that would accelerate return on capital and bring back private investors. Only then will we be set for an economic miracle.

When will the good times roll in?

India is on a path of deep-rooted reform. Many initiatives have been triggered that will see fruition this year: Implementation of RERA (with a deadline of May 17), appointment of a Real-Estate Regulator, credit ratings of municipal corporations, issuance of municipal bonds by cities, introduction of GST, and much more. While these shifts do cause disruption in the regular flow of commerce and require systemic adjustment, India can afford this exercise as growth numbers are robust enough to absorb the shocks of change.

Now, however, all eyes are on public spending, which can bring the mojo back. An amount of Rs 3.96 lakh crore (against Rs 3.48 lakh crore the previous year) has been budgeted for infrastructure with Rs 2.41 lakh crore for transport alone. A separate amount has been provided for metro projects to the tune of Rs 18,000 crore and, similarly, among other schemes like Swachh Bharat, Bharatnet, Deen Dayal Jyoti Yojana, etc.

The government´s record last year gives us a reason to believe that spending has gathered momentum as the chains of bureaucracy are being delinked through transparency and accountability. However, it is important that the urgency shown in preponing the dates for the Budget should crystallise into an early disbursal of funds for the projects.

A favourable poll result for the ruling party will accelerate government programmes. Renewable power prices, including solar and wind, seem to have ushered in hope for improvement in production costs for India´s manufacturing sector. Labour costs have risen geometrically for all industries. Also, with rural electrification being implemented on a war footing and Bharatnet expected to make high-speed broadband on a fibre-optic network available by 2017-18 in more than 1.5 lakh gram panchayats, the aspirations of the population will explode countrywide. Lag in power availability stunted our progress; but states are resurrecting their power finances with UDAY.

Further, housing, which was the topic of our cover story last issue, is likely to gallop as it has now been given ´infrastructure´ status and the Central Government is providing interest subvention for ´affordable housing´. ´With an additional interest subvention of 3-odd per cent offered by states, housing demand can skyrocket,´ stated the Union Minister of Urban Development and Housing, while launching the new logo of CW at a conference organised by PHD Chamber in Delhi recently. What´s more, the smart cities mission is quietly making progress with 30 of the 60 identified cities having organised SPVs and appointed CEOs. Tenders are being issued and over 90 projects are underway. To discuss smart solutions that can be executed in the Indian context across cities, Smart Cities Council India is organising the 4th SM@RT CITIES SUMMIT at Pragati Maidan, New Delhi, from March 15-17. For details, visit www.SmartCitiesSummit.in.

Indeed, the vote is for development all the way. And if all political parties realise this, we are likely to see development as a common agenda with each vying to outdo each other. Then, the good times would have truly begun.

Set for an infra-run

Data suggests that demonetisation has hit the pace of announcement of new investment proposals during the quarter-ended December 2016

The Union Budget has set the tone for 2017 by accelerating the growth agenda. The allocation for infrastructure at Rs 3.96 lakh crore, over Rs 3.49 lakh crore last year, will fuel the sector. Of the increase of Rs 47,000 crore, transport itself will consume Rs 24,000 crore.

The Railway Budget has been the largest-ever at Rs 1.31 lakh crore – an 8.26 per cent increase over the Rs 1.21 lakh crore allocated in 2016-17. Railway lines of 3,500 km will be commissioned in 2017-18 while at least 25 stations are expected to be awarded during 2017-18 for station redevelopment. Allocation for highways has been increased from Rs 57,976 crore in 2016-17 to Rs 64,900 crore in 2017-18. Around 2,000 km of coastal connectivity roads have been identified for construction and development.

The dark horse in the transport sector, the Pradhan Mantri Gram Sadak Yojana (PMGSY) has gathered pace. Last year, when I asked Minister Nitin Gadkari at a CII meet, why the PMGSY programme, which had tremendous potential, was not going anywhere – he responded that it did not fall under his ministry but that the government was working on an impetus for it.

The pace of construction of PMGSY roads has accelerated to reach 133 km per day in 2016-17, as against an average of 73 km during the period 2011-2014. And, the Budget has continued to provide Rs 19,000 crore in 2017-18 for this scheme. Together with the contribution of States, an amount of Rs 27,000 crore will be spent on PMGSY in 2017-18.

The other big bang boost has been for the housing sector. National Housing Bank will refinance individual housing loans of about Rs 20,000 crore in 2017-18. Affordable housing has been given the ´infrastructure´ status, which will enable these projects to avail benefits including interest subvention. Further, a target to complete 1 crore houses by 2019 has been set for the homeless and those living in kutcha houses.

Allocation for Pradhan Mantri Awas Yojana (PMAY) has been raised from Rs 20,000 crore in 2016-17 to Rs 29,000 crore in 2017-18. Owing to these reforms, there is a likelihood of an ample availability of affordable housing in the next three years.

Among other infrastructure projects, the Metro projects will see the introduction of a Metro Policy and higher allocation of Rs 18,000 crore, against Rs 10,000 crore in the previous year. AMRUT and the Smart Cities mission will continue to move forward with an allocation of Rs 9,000 crore, against Rs 7,296 crore, as 60 selected cities gear up to issue tenders for city development.

The Namami Gange project has been allocated an increase of Rs 100 crore from Rs 2,150 crore to Rs 2,250 crore. And, Sagarmala has received an enhanced allocation of Rs 150 crore from Rs 450 to 600 crore. The Swachh Bharat campaign is being vigorously run and the allocation has risen to Rs 16,000 crore. Armed with the demonetisation swell in the banks, the finance minister had some head room to hold back the temptation of hiking the service tax in view of the forthcoming Goods and Service Tax (GST), which was a big relief. Further, though the large corporate sector did not get the tax reduction, the FM reduced taxes by 5 per cent for the MSMEs, which have an annual turnover of Rs 50 crore or less, thereby benefitting nearly 64 lakh companies.

Issues that need further attention by the ministry include implementation of the projects. Even the irrigation projects, which found mention in his last year´s Budget speech where 23 of the 99 projects would require to be completed by March 2017, are likely to miss the deadline. As per CMIE, new investment proposals worth Rs 1.25 lakh crore were observed during the quarter ended December 2016. This is low compared to the average Rs 2.36 lakh crore worth of new investments seen per quarter in the preceding nine quarters of the Modi Government. Data suggests that demonetisation has hit the pace of announcement of new investment proposals during the quarter-ended December 2016. Two hundred and twenty seven new investment proposals worth Rs 81,800 crore were announced during this quarter till November 8, 2016. In comparison, only 177 investment proposals worth Rs 43,700 crore were made between November 9 and December 31, 2016.

As for stalled projects, though the current government was to invigorate the economy by debottlenecking and accelerating these, the data points to the contrary. CMIE capex figures show that year-end stalled project figures for 2016 are at their highest levels since December 1995. The total value of stalled projects has reached Rs 11.70 lakh crore in the December quarter, accounting for 12.11 per cent of the total projects under implementation. Among the prime reasons for which the projects are stalled, ´obstacles in environment clearances´ contribute to 20 per cent while ´lack of promoter interest´ seems to be a growing trend over ´land acquisition issues´.

However, the absolute value of new project announcements shows that 2016 ranks second best among the last five years. This means that but for demonetisation, the economy was set for a run. Even if we examine the performance for the road sector, the contracts awarded and the length of roads constructed in the highway sector has been way behind claims of the road ministry.

The status of construction awarded and completed during September 2016 vis-a-vis targets set forth for 2016-17 are as follows:
However, the stage is set for a revival of the tempo. The Dispute Resolution Bill, release of funds for cases stuck in arbitration, reduction in interest rates, resolution of some severely stuck road projects, consolidation of some road assets and the infusion of some foreign capital, which has come to the rescue for some developers – all has signaled the dawn of the good times by Diwali 2016. And now, with the demonetisation impact easing up, the delayed dawn of good times is on the horizon again.

Can the Budget bring the mojo back?

Demonetisation has dealt a body blow to the economy whether we like it or not. It has delayed the uptick in the economy by a minimum of several quarters. The informal economy is in tatters and the business outlook is glum.

But it is done and nothing can be done about it. Building a cashless economy is a long-term goal but given the fillip provided owing to the diktat, digital payments and the infrastructure required for their enablement are set to leapfrog.

The argument that the informal economy can become part of the formal economy by such legal leverage is flawed. On the contrary, when the fruits of development ripen under the formal economy, they beckon with sweet dividends. But this, too, is more likely to happen provided the formal economy offers infrastructure to enable ´ease of doing business´. Currently, the formal economy is low down in the rankings globally and has barely moved up a notch despite fervent campaigns trying to create a favourable pitch for the same.

The reason it is not being reflected is because the constituents, like the legal system for enforcing contracts, resolving insolvency, obtaining construction permits, are not tuned in to this level of efficiency. They need overhauling. The Insolvency and Bankruptcy Code 2016 has just got notified and has been activated in the last quarter. But why are we ranked 172nd in paying taxes? If we want more and more tax payers, the process should be made payer-friendly and easy to comprehend and observe. Disillusionment with the formal economy will always encourage new entrants to find easier, unlawful ways of avoiding taxes. Starting a business, too, is a difficult proposition. Then, how can we create and harness young talent, which is the true demographic dividend? Thus, only when the states make it easy to do business will the informal economy take lessons in joining the formal economy.

For instance, dealing with construction permits is a nightmare. State governments need to bring down the number of permits and arrive at a one-window solution. The Model Building Bylaws introduced earlier this year provide a framework for online approvals for building and construction projects in urban areas, including simplified environmental and other clearances within 30 days, and encourage self-declaration. Similarly, various states need to adopt the Real-Estate Regulation Act to make the shift. Here, the act has stiffened penalties for the developers, but has kept no onus of delay in permissions on the authorities, leaving the developer exposed to the mercy of the authorities.

Meanwhile, roads need to step up the acceleration. Up to November, the total length of road contracts awarded has been 5,688 km and the length of roads constructed 4,021 km, which is 12 km per day.

A huge development in the Northeast under NHIDCL is underway, covering a length of 8,007 km to be executed at about Rs 100,000 crore. And, in urban infrastructure, from January to December 2016, a total investment of Rs 272,380 crore has been approved for the smart city plans of 60 cities, AMRUT, PMAY (Urban), new metro projects, Swachh Bharat Mission (Urban), and redevelopment of seven Central Government residential colonies in New Delhi.

Public spending will need to further be stepped up to create employment opportunities for the informal sector. The Budget is expected to reduce taxes, offer incentives for using digital payments and announce major initiatives in public spending. The growth momentum had just about begun to accelerate when November 8 struck. Now, that mojo seems elusive. Can the Budget bring it back?

PS: The Union Budget is scheduled on 1st February, a big change in practice followed ever since we became independent. Construction World too is making a big change. Watch out for the February issue!

White knight wanted after black money battle

There are very few events etched in the memories of an entire generation. For the Americans, it was the 9/11 attack and the Lehman brothers collapse. For Indians, it was the Kargil skirmish, the 26/11 terror attack and, now, demonetisation.
This bold and moral move by the PM has had its share of execution challenges, the consequences of which are grave. At just about the time when the green shoots, as reported in this column, began to stabilise, the land beneath them was scorched. Real estate, consumer goods, jewellery and the informal business segment of the country have been victims of a frontal attack. Businesses have reported a loss of 30-40 per cent in revenues. The momentum of money has ground to a halt. Banks have run out of money to dispense. Fortunately, the government is course-correcting rapidly. It is ready to launch an extension of the ´Voluntary Disclosure Income Scheme´, where a tax of 50 per cent would give unaccounted money a holy dip with another 25 per cent of the money being subject to a zero interest bearing bond for four years, thus allowing the offender to circulate 25 per cent of his declaration in an official form. This would effectively cost the declarer 57 per cent. The challenge is that there are several ´start-up gangs´ that have reinvented the art of conversion at a lower cost of 25 per cent. So although the money remains tainted, legal tender is received in place of the obsolete notes. This would dampen the response to such conversion.

Unless we are able to increase the number of tax-paying individuals from the current 30 million to at least 45 million, the effectiveness of the demonetisation exercise may remain in question. The country, however, has improved its image by portraying a robust financial system that has been able to withstand such staggering logistics.

That said, real estate has suffered a big blow. According to a report by PropEquity, housing prices in 42 major cities across India could drop by up to 30 per cent over six to twelve months, wiping out over Rs 8 lakh crore worth of market value of residential properties sold and unsold by developers since 2008. The bigger casualty is employment, which is likely to suffer a setback.

This may be one of the stiffest challenges that the Modi Government will face. Our CW issue with Minister for Skill Development and Entrepreneurship Rajiv Pratap Rudy has already highlighted the fact that improvement in skills for 35 million workers was a prerequisite for desired growth. However, demonetisation has severely hit the informal sector, which will need to undertake some costs to come into the formal economy. Targeting benefits to reach the right segments would require precision and agility on the part of the government.

On the brighter side, interest rates are set to come down. Income tax rates, too, will ease up
The cycle of low rents and high interest is likely to turn with interest rates softening up and rents hardening. Public spending will continue to drive economic sentiment. Private-sector spending will defer all plans but overseas investments with a stronger dollar may rise if the Fed rates remain easy. But there is a fear that the Federal Reserve may increase the rates and just as $3.18 billion fled the country in November alone (the steepest selling in equity and bonds by foreign institutions in the past three years), such a trigger may depress our outlook.
As the government brings in more money to be accounted for in a formalised manner by curbing black money, it needs to set benchmarks for the use of this money, especially the money managed and run by it. Only 15 of the 74 loss-making PSUs have been asked to shut shop so far. With more and more digital mechanisms in place in the government, it needs to relook at its hiring policies and shed some weight by moving experienced bureaucrats into management positions of SPVs, which are JVs under the PPP mode.

The fight against black money will also need to provide a balm for those wounded as part of collateral damage, to keep up the spirit of the population that is supporting this moral battle.
We need a ´white´ knight!