Immediate reform measures include widening tax base, lowering tax rates, promoting Make in India and focusing on the Smart Cities Mission.
While economic liberalisation is desirable for both economic and social development, finding an optimum pace for reforms is the key challenge for policy makers. Should reforms be incremental or big bang? What should be the trade-off between short-term pain and long-term benefits?
India has had numerous path-breaking reforms over the years which slowly opened our interface to the rest of the word. Without doubt, India’s transformation over the last 25 years has been extraordinary. The country was once branded as extremely bureaucratic; investment decisions were mired with endless delays and the so-called license Raj was prevalent at every step of the way. Now, India has transformed itself to be one of the most attractive investment destinations.
My suggestion to the new regime would be to continue strengthening already introduced reforms, particularly those focussed on the ease of doing business.
- Persist with the effort to increase the tax base and boost digital transactions.
- The maximum marginal tax rate for individual taxpayers should progressively be reduced in order to further improve collections. Global data shows that lower tax rates result in higher tax collections as compliance improves.
- Consolidate the work done on the goods and services tax (GST). It is a well-known fact that no country has had a smooth transition to GST.
- Ensure that with the Insolvency and Bankruptcy Code, resolutions become time bound and efficient.
- Promote domestic manufacturing such as the Make in India initiative.
- Continue the initiative to develop 100 smart cities.
Coming from the housing industry, I would also like to mention some of the features of this sector. Housing always remains at the core of any economy and is a significant engine of growth. In India, it is estimated that for every rupee invested in the housing and real estate sector, Rs. 0.78 is added to the GDP. The housing sector is the second largest employment generator and ranks fourth in terms of the multiplier effect on the economy.
This is one area that generates strong optimism. The housing shortage is immense in India. The government’s ‘Housing for All by 2022’ and the granting of infrastructure status to the affordable housing sector are aimed at boosting the supply of affordable housing for the middle and lower income groups. Housing in conjunction with the Smart Cities Mission will have a multiplier effect on the economy.
The sector will housing will benefit from the establishment of the Real Estate [Regulation & Development] Act (RERA). The implementation of RERA is a confidence booster for homebuyers as there are now better checks and balances to monitor the progress of projects. RERA has ensured that a significant part of the ‘development risk’ will shift to the developer as compared to earlier when a large part of the risk was borne by the consumer. RERA will pave the way towards sustainable growth in the industry and will bring the cycle of trust.That said, the housing sector does need some key reforms ;
- Promoting rental housing: Economic growth is associated with a significant increase in rental market activity. However in India, participation in the rental market is declining. There is therefore a need to encourage investment in rental housing. Many people are unable to afford buying a home and therefore need to stay in rented property. Due to increasing job opportunities in larger cities (e.g. in services, IT), the mobility of the working population has exponentially increased in tandem with India’s economic growth. There is therefore a need to incentivise investment in residential rental properties.
- Financing Land at cheaper rate: Another issue I would like to mention is about how land funding can be made available at a reasonable rate. Since 2006, the RBI has prohibited banks and housing finance companies (HFCs) from funding land transactions. Financing land is therefore done largely by private equity funds and some NBFCs who charge exorbitant interest rates. This increases the cost of projects and therefore the sale price of the house. If HFCs or banks of a certain threshold size are permitted to fund developers to acquire land for affordable housing, it will rationalise the financing cost. This in turn will help reduce the ultimate cost for a homebuyer.
To conclude, continual reforms have been a priority for successive governments and it is pleasing to see that India’s structural reform agenda have grabbed the attention of global investors. There is an unambiguous thrust by policymakers to push India in the right direction. When the intent is right, the rest automatically follows. The India of today wants development, jobs and growth - and it is good to see that the policymakers are rising to fulfil its people’s aspirations.(The writer is vice- chairman and CEO, HDFC Ltd. Views are personal)