Builders Need To Reduce Prices To Deal With Inventory: Economic Survey 2020
India's real estate developers were sitting at an unsold inventory stock worth Rs 7.77 lakh crore at the end of 2018, and they would have to consider reducing prices in order to breeze through the liquidity crunch, says the Economic Survey 2019-20. The Survey estimates about 9.43 lakh units with 41 months of inventory overhang stuck in various stages of construction in top eight cities.
“The real estate sector, residential property in particular, have been reeling with issues of delayed project deliveries and stalled projects, leading to a built-up of unsold inventory over the years,” says the Survey. “Housing prices have remained elevated even though growth in prices have fallen sharply since Q1 2015-16 and remained muted since then,” it adds.
While stating that the construction sector, including housing, accounts for 8.24 per cent of GDP and employs about 12 per cent of the work force, the Survey acknowledged that easing of credit in the financial sector would be one the government's primary concerns.
According to the Survey, which was presented by Finance Minister Nirmala Sitharaman in the Lok Sabha on January 31, 2020, a day before she presents the Union Budget 2020-21, 90 per cent of the urban population in the country now has pucca (homes built using basic building material) homes. It also indicates the government is on course to meet the ambitious target it set under the Housing for All by 2020 mission.
Chief Economic Advisor Krishnamurthy Subramanian-authored Survey, which acts the government performance report card for the previous year, also talks about launching pro-business policies in order to enable markets and build trust at a time when economic growth has hit a record low. Growth decelerated to 4.5 per cent in the period between July and September, official data show. While acknowledging that growth has bottomed out, the Survey predicted economic growth at 6 per cent to 6.5 per cent in the next financial year starting April 1.
“We welcome the positive outlook of the Survey. However, we strongly advocate that the Central government announce bolder policy and fiscal measures to recover from a sharp economic downturn and somnolent market scenario. The success of economic green shoots lies in connecting the right dots for economic prosperity in an immediate time frame,” said NAREDCO President Niranjan Hiranandani
Ninety per cent households in urban India own pucca homes and the same is true of nearly 78 per cent households in rural areas, says the Economic Survey. The Survey also points out that the government is set to achieve the ambitious target to provide homes to all by 2022, and has already built 47.33 lakh homes under the Pradhan Mantri Awas Yojana-Gramin. Under the urban component, 32 lakh homes have been constructed so far.
Ease of doing business
The Survey highlights the fact that India has jumped 79 positions in World Bank’s Doing Business rankings, improving its ranking from 142 in 2014 to 63 in 2019. The country has progressed on seven of the 10 parameters. The Goods and Service Tax (GST) and the Insolvency and Bankruptcy Code (IBC) top the list of reforms that have propelled India’s rise in rankings. India continues to trail in parameters such as Ease of Starting Business (rank 136), Registering Property (rank 154), Paying Taxes (rank 115), and Enforcing Contracts (rank 163).
India has, however, considerably improved the process to obtain construction permits over the last five years. In 2014, it took approximately 186 days and 28.2 per cent of the warehouse cost to get a construction permit. In 2019, it takes 98-113.5 days and 2.8-5.4 per cent of the warehouse cost for the same.
The Survey says that the Insolvency and Bankruptcy Code (IBC) has improved resolution processes in India compared to the earlier measures. The IBC proceedings take 340 days on an average compared to 4.3 years earlier and resulted in recovery of 42.5 per cent amount involved compared to 14.5 per cent under the earlier law.
While stating that monetary policy has remained accommodative in 2019-20, with a 110 basis points cut from 6.25 per cent in April 2019 to 5.15 per cent in October 2019, the Survey states that monetary transmission has been weak. It notes that credit spread, i.e., the difference between the repo rate and the weighted average lending rate is at the highest level this decade.
To achieve GDP of $5 trillion by 2024-2025, India will spend about $1.4 trillion over these years on infrastructure.
The survey also noted that since the launch of the Smart City Mission in 100 cities, 5,151 projects worth more than Rs.2 lakh crore are at various stages of implementation. A total of 1,290 projects worth Rs 22,569 crore have been completed and are operational.