A whole new chapter in public funding
While Union Finance Minister Nirmala Sitharaman is expected to provide a big boost to infrastructure, she has a tough task ahead balancing the unprecedented demands of the related industries. Perhaps a new chapter in public funding is in the offing. Here is how captains of industry are analysing their budget expectations this year.
The Finance Minister will present the first ever "paperless" Union Budget 2021 on February 1. Already stretched out due to the coronavirus-spurred stimulus packages and financial incentives offered over the last 10 months, India’s finance ministry will need to come up with unique solutions to fill its coffers and also provide the necessary boost to industries. The expectation that India's growth will be around 11.5% next year is reason for cheer; however, we must understand that these numbers are mounted on a 23% contraction (and some economists say the contraction is much more).
A fine balancing act will have to be done to raise revenues to provide the right impetus to the business and services sector. Also, with emphasis on Atmanirbhar Bharat, local manufacturing may be given more sops. A coronavirus cess or surcharge on certain categories of individuals is in the offing.
As with every year, each industry has a long pre-Budget wishlist and each industry would want their demands to be given priority. In this piece we share some of the expectations in the new post-coronavirus era of a few core sectors. Many of the sectors have been hard hit but have a crucial role to play in the post-vaccination era where the world would be limping back to normalcy from global economic disruption.
The Asia Pacific Real Estate Association has made a submission to the government seeking input tax credit on goods or services used for the construction of immovable property against leasing services, which is currently restricted under Section 17(5) of the Central Goods & Services Tax Act, 2017. These measures will spur consumption and investment in the real estate sector which will automatically benefit the ancillary industries.
Ramesh Nair, CEO and Country Head (India), Jones Lang LaSalle (JLL), an American commercial real estate services company, is of the opinion that the time is right to accord Industry status to the real estate sector. While there has been a continuance of recovery in the fourth quarter which started in Q3 2020, the actual market transaction volumes continue to be lower compared to pre-Covid levels. Nair also advocates extension of benefit u/s 80EEA to avail additional Rs 150,000 interest deduction on home loans to existing homebuyers with home loans and first time homebuyers. Additionally, according to Nair, there should be separate provision for deduction of 'principal repayment' on home loans, removal of restriction on setting off loss from house property against other heads of income currently at Rs 0.2 million and there should be reduction in holding period of REITs for long-term capital gains. Nair’s wish list also includes, allowing 100% FDI in completed residential real estate projects through the automatic route and allowing input tax credit on calculation of GST payable in real estate.
Echoing similar sentiments is National Real Estate Development Council (NAREDCO), an autonomous self-regulatory body set up in 1998 under the Ministry of Housing and Urban Affairs, Government of India which believes that rental housing needs to be given to push to realise the dream of “Housing For All” by 2022. NAREDCO’s recommendations include: Restructuring of loans or offering a one-time roll-over of loans given to developers to ease the liquidity situation, rent to be tax-free for a period up to five years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, further reduction in home loan interest rates to below 7%, increasing the cap of Rs 45 lakh for a property to be classified as affordable as it as it keeps most projects in National Capital Region (NCR) and the Mumbai Metropolitan Region (MMR) out of the ambit of “affordable housing” and rationalisation of stamp duty rates.
The Confederation of Indian Industry (CII) also suggests sale or leasing of government’s surplus land.
A few other recommendations made to the government by various bodies for consideration in the budget are as follows:
Interest on housing loans should be fully allowed under income tax deduction without any ceiling from the current limit of Rs 0.2 million to incentivise home buyers and spurring overall demand
- Extension and increasing subsidy amount of Credit Linked Subsidy Scheme (CLSS), promoting increase in the activity level in the affordable housing sector - by two years i.e. up to 31 March 2023.
- Increasing the size and scope of the Stressed Asset Fund to revive stuck residential projects
- lowering the long-term gains tax for sale of house property and rationalising the GST for under-construction properties.
- Consider increasing the corpus of SWAMIH funds to provide last-mile funding to residential projects as well as undertake deep restructuring of real estate-related loans to smoothen the repayment process such as easing payback of redemption premiums.
In addition, experts have recommended that opening up foreign investment should be prioritised. Ashoo Gupta of Shardul Amarchand Mangaldas, a law firm, calls for an NIIF-like fund to be created for international investors. Gupta also appeals to the government to “relook at” the minimum built-up requirement of 50,000 sq m in projects; that foreign direct investment (FDI) be promoted; and that the date for commencement for commercial operations (DCCO) under Atmanirbhar 2.0 be extended by one more year for commercial real estate projects.
4th Indian Cement Review Conference 2021
Infrastructure and energy
Investing in infrastructure seems imminent this year from all indications, but overruns that have always plagued the industry will cost us more.
As a part of the five-year National Infrastructure Pipeline, conceptualised by the government in 2019, work should immediately start on the pending water and sanitation projects, social and healthcare infrastructure projects, affordable housing projects, commercial infrastructure projects, energy and power development projects that include solar, wind and renewable, logistics projects etc. As established, increase in infrastructure development is directly proportional to the creation of employment opportunities. Given the relatively low investment expectation from the state governments and private players due to the Covid-19 pandemic, the prerogative is on the central government to allocate funds and encourage development across infrastructure sectors. That would be absolutely critical to pull the nation out of the present cycle of unemployment and worsening opportunities. Deepto Roy, Partner at Shardul Amarchand Mangaldas & Co, believes that a focused and coordinated expenditure in large scale construction and infrastructure projects would go a long way in addressing sustained job creation objectives since development of infrastructure has a multiplier effect on demand and efficiency of transport and increases commercial and entrepreneurship opportunities.
As Roy and his colleagues Varnika Mohan and Disha Adhikary point out, delays have in some cases been exceptionally long: the Udhampur–Srinagar–Baramulla railway project, originally to be commissioned in 2002, is now anticipated to be commissioned in 2022 at a staggering cost overrun of 1,017.96%. The Kameng Hydroelectric Project, scheduled to be commissioned in 2009, faces a cost overrun of 217.49%. Conversion of RIG Sagar Samrat to mobile offshore production, scheduled for commissioning in 2013, faces a cost overrun of 114.26%. Construction of a new highway from km 0.00 on NH-54 near Lawngtlai, whose original date of opening was in 2010, is now confronted with a cost escalation of 93.80%.
CII suggests substantial equity infusion in NABARD for financing agriculture and rural sector, in SIDBI for financing MSMEs and in IIFCL for financing infrastructure.
Credit Analysis & Research Ltd (CARE Ratings) believes that a separate fund for stalled infra projects would give the necessary impetus to the economy.
Chintan Sheth, Director, Ashwin Sheth Group has appealed for speeding up infrastructure development to improve connectivity to various emerging micro-markets. Major chambers and industry associations have sought expediting projects like Dams and Hydroelectric projects of Narmada Valley Development Project, Navi Mumbai International Airport, Delhi-Mumbai Industrial Corridor (DMIC), Bharatmala Project to link the west of India with the east of India, Mumbai Trans Harbour Link between Mumbai’s eastern suburb of Sewri and Nhava Seva across the harbor, Gujarat International Finance Tec-City (GIFT) etc.
The government is also expected to develop India’s vast inland waterways to connect sites of commerce seamlessly and economically.
CII wants a move towards competitive import tariffs – with select exceptions - over 3 years, with lowest or nil slab on inputs or raw materials (say 0-2.5%), standard slab for final products (say 5.00-7.5%) and intermediates at intermediary level (say 2.5-5%).
Harsha Kadam, CEO, Schaeffler India and President, Industrial Business echoes similar views and says, “from an overall manufacturing industry perspective, stabilisation of raw material prices is of importance to the industry, promoting finished goods exports will in turn increase forex reserve and a positive step. The industry requires some relief in custom duties especially for raw materials and other manufacturing elements.”
The Indian stainless steel industry has urged the government to slash the existing import duties on key raw materials in the upcoming Union Budget 2021-22. Indian Stainless Steel Development Association (ISSDA), the apex body representing the domestic industry, has appealed to exempt the 2.5% Basic Customs Duty (BCD) levied while importing key raw materials, including ferro-nickel and stainless steel scrap. Currently, neither of these raw materials is available in the country, necessitating their import.
Other items on the wishlist of the steel industry are:
- Abolition of the existing 7.5% import duty on graphite electrodes, a critical component in stainless steel manufacturing, as they constitute a major share of input cost
- An increase in the import duty on stainless steel flat products to 12.5%, to bring it at par with carbon steel products
- On one hand the Steel Industry in India is grappling with scarcity of its key raw material viz iron ore and iron ore pellets, on the other hand iron ore exports from India are rising. This results in higher production cost of Steel which needs to be addressed by restricting export of iron ore and pellets.
- The domestic steel industry seeks reduction in customs duty on different types of coals (mainly coking coal (presently 2.5%) and metallurgical coal (presently 5%)) for which domestic substitution is not available and the industry has to largely depend upon imports.
KK Pahuja, President, Indian Stainless Steel Development Association (ISSDA), concurs “India continues to be the second largest producer and consumer of stainless steel in the world. High input costs, coupled with imports from FTA countries, have eroded the global competitiveness of Indian companies.”
The cement industry is showing positive signs in expansion of both greenfield and brownfield projects, and the industry is hoping that real estate remains in focus this year, says Ashok Dembla, MD, Humboldt Wedag India.
Make in Steel 2021
Warehousing and logistics
If one sector has been in sharp focus in recent weeks, it is logistics. The distribution network for Covid-19 vaccines is acting as the thread that connects the country through cold chain and storage infrastructure. Industry bodies are urging the government to significantly ramp up its cold chain facilities as India prepares for a mega Covid-19 vaccination drive in the coming months. For the upcoming budget, the centre can provide subsidies to the State governments for the development of these cold storages. Through the 2021 budget, the Production-Linked Incentive (PLI) scheme could get a further push to boost private sector participation in logistics infrastructure creation.
Dhruvil Sanghvi, CEO, LogiNext says lobal and national supply chain is the backbone of modern civilisation and needs to be simplified. "Currently, there is a very high degree of compliance and paperwork, making it difficult for technology companies to serve a global audience forcing companies to shift base outside the country. Urgent steps in this direction will help high growth companies keep a base in India, generate employment across the spectrum and help revive the economy."
There is a pressing need for a complete digital transformation of the industry, says Sanjay Bhatia, Co-Founder, Freightwalla, for efficient handling of international shipments: "We hope the union budget will announce suitable investments towards the digitisation of the shipping and logistics sector," Bhatia says. "A leap towards the initiative will bring in transparency, reduction in cost, and better cost management. Digitisation should also include implementing smart single-window clearance for smooth processing of shipments or approvals. We also expect that the proposed National Logistics Policy may get announced during the announcement of union budget 2021."
Demand for Grade-A warehousing is expected to increase consistently, says Welspun One Logistics Park's MD Anshul Singhal, adding, "Further incentives towards private and institutional investment in warehousing and logistics parks through tax benefits, streamlined compliance and strengthening last-mile connectivity via support infrastructures like roadways, interstate transport, and factory-to-port facilities, will greatly benefit the sector's growth. These steps will not only generate employment but will significantly reduce logistics costs, which currently makes up about 14% of the GDP. Investment in automation and AI can also be encouraged, as this will enable the flow of private long-term capital into the sector."
With the migrant labour crisis and the stringent lockdown over much of the year, construction equipment is one industry to be directly impacted by the coronavirus. What are the Budget 2021 expectations from this industry? And will the Union Budget 2021-22 raise hopes or disappoint?
Compressor manufacturer Atlas Copco’s General Manager Tony Herbruggen says that 2020 has been a difficult and forgettable year, but says this year should be good for such sectors as mining. Interestingly, Atlas Copco launched its portable air compressors as per their announced schedule, and although their newly inaugurated factory near Pune had been completely shut down, production has been picking up. Herbruggen told Construction World recently, “Mining will start to grow very much in 2021, I think they should continue with the projects that they have started before they look into new projects because this is good for the economy. We have a very good positive feeling about mining in India for 2021.”
Ramesh Palagiri, MD at Wirtgen India, says we are six to nine months from reaching pre-coronavirus volumes. The India head of the German manufacturer of road and mineral technologies machinery hopes more engineering, procurement, construction (EPC) projects are on the anvil this year.
The troublesome year 2020 will ensure that the finance minister will need to walk a tightrope on Budget day to address pain points of as many sectors as possible and also generate revenues.