What the Union Budget 2019 means for the Construction industry

Finance Minister Nirmala Sitharaman presented the NDA version 2.0 budget on the 5th of June 2019 to a mixed response from the construction industry. On the positive side the bigger picture is that the budget has set forth the path for India towards being a $5 trillion economy by 2025, however in the meantime we are heading into a transition phase which does not appear very rosy for the industry at this very moment. .

It is clear that NDA 2.0 has swiftly moved in the direction set out during its first version, of making the Indian story inclusive to everyone “sabka vikas” and ensuring that economic benefits enjoyed by the privileged few are shared equitably with all the citizens. It appears that the main intention here is to make sure that the cities, states and people who were left out during the benefits of opening up of the economy from UPA times have been given a large helping hand. This is welcome given the extremely unequal distribution of wealth in the Indian economy and the widening social disparity between the have and have-nots, thus halting a major crisis that would have hit the nation in the future.

However the disadvantage is that this has happened at the expense of the upper middle class and the Rich, who see themselves as a reason for driving strong economy and the market sentiment with their lavish consumption and spending habits.

The Background
Reality, apart from stocks and gold were the most lucrative assets that the rich invested their wealth on. However the onslaught of DeMon, RERA and GST in quick succession damped the investor sentiments. The second hit was the severe liquidity crisis faced by developers due to NBFC defaults and rising NPAs of banks. This was compounded by the oversupply by over zealous developers in prime cities like Mumbai and NCR region that lead to the over saturation of markets creating a large inventory of unsold units. For a market reeling under this triple whammy it held high hopes that the new budget would help break this deadlock and open up the market circulation. However this has not happened to a large extent.

The Good news:

The Budget has strongly focused on affordable housing and its housing for all commitment by 2022. From easy financial assistance by lowered rates of interest, to tax SOPs for homeowners and for making it easy for first time homeowners to purchase houses upto INR 30 lac to 45Lac in smaller cities this budget has surely created a positive sentiment in the vast majority of the middle class.

Reiterating its aspiration to create a New India, the Government’s thrust on alleviating the stress on the Housing Sector, finalization of model tenancy act to promote rental housing, increased demand for low-cost housing units, FIIs & FPIs investment investment in debt securities issued by NBFCs as a default cushion and capital boost to PSU Banks will provide the necessary impetus to Real Estate and Construction, which is the second largest employer the largest sector in India.

Further the Budget allocated the highest-ever budgetary support of Rs 82,570 crore to the highways sector to step up pedal on creating interlinked highways all across India. This will bring about a much needed infrastructure boost to the tier II and III cities as well as the vast rural hinterland. This will ensure that the demand for steel and cement that has declined due to the fall in the real estate sector is revived.

Higher taxes on imported materials of construction such as stone, hardware, branded furniture components will also set a field for local players and local materials to step up and exploit this opportunity. Demand for local materials hence would also boost the Make in India initiative of thus providing a much required impetus to the domestic manufacturing market.

The not so good news:

The take away from the budget is the additional tax on the HNI and the UHNI category. Most of these individuals live in the Prime cities of Mumbai, Delhi, Hyderabad and Bangalore and many of them directly or indirectly drive employment and consumption for the real estate and the construction industry, be it Lavish interiors for their residences in plush high rises or massive bungalows or their vast commercial offices. Though the additional tax may be a drop in the ocean for these billionaire’s wealth, it would nevertheless be perceived as a burden that could slightly dampen the sentiment.

The biggest damper for the interior construction industry would be a hike of nearly 20% in the duties of imported marble, and ceramic tiles. Roughly the marble flooring spend in an interior construction of a luxury residence is roughly close to 5-10% of the cost of total interior construction. A 20% increase would be a substantial hit on the pocket.

Costs for imported mountings for furniture, HVACs, CCTV cameras AV equipment have all been hiked further escalating the cost of an interior construction spend. In cosmopolitan markets where the cost of reality is already inflated, this will overstretch the spend for the luxury house even further, with people deferring their spends or developers driving heavy cost cutting.

The affordable housing boost will not benefit cities like Mumbai where the cost of land is already sky high. So a large section of people in prime metros will be still left fending for themselves in an already difficult market.

Most prime property in city centers is still locked under the old land lordship “pugdee” arrangements. Though the budget mentions creating a National Rental policy, despite several moves by the state there has been no clear direction on this. With a clear policy rethink on this matter large chunks of land locked under litigation can be brought out in urban centers for Urban affordable housing.

In conclusion:

With the current direction adopted in the budget, the larger picture in a few years to come is certainly optimistic for India. However the Industry needs to go through a lot of transitions to achieve that.

The hike on custom duties of imported materials for example is certainly a good direction to boost domestic manufacture and production, however the domestic manufacturing needs to be of a world class quality to justify the protection it receives. The attitudes of manufacturers needs to change from “can do” attitude to that of delivering world class value to the consumer.. However in the meanwhile the average customer will continue to feel the pinch on their pockets.

I have always promoted genuine Indian companies who have delivered consistent quality and have given excellent service to customers. I believe this budget is a golden opportunity to such earnest players to rise up to the occasion and indeed pave a way for the “New India.”

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