What the Rs.25, 000 crore booster package for the housing sector cannot achieve

India's housing sector is in a slump, dragging down the economic growth of the entire nation. Reviving it is a major challenge for the government.
India's housing sector is in a slump, dragging down the economic growth of the entire nation. Reviving it is a major challenge for the government.

India’s property market is in a financial cul-de-sac. And it’s no secret that demonetization and the new tax regime of GST, alongside the collapse of infrastructure major ILFS (its default on loan payments crippled housing finance companies) are mainly responsible for it.

Those have sapped liquidity from the system, and the housing sector, particularly, has been impacted. Hundreds of thousands of projects have been stalled for lack of funds and both developers and buyers have been left in the lurch.

Undoing the damage is of paramount importance for the housing sector is an important bellwether for the Indian economy. Once housing demand picks up, ancillary industries of cement, steel and others receive a boost too. This translates into jobs and economic expansion, obviously.

Sensing the urgency, Nirmala Sitaram has just announced a Rs.25, 000 crore booster package for the beleaguered housing industry. With all the money, the finance minister expects to revive 1, 600 stalled projects in the affordable and middle-income housing sector where around 4.5 lakh home buyers money is stuck.

However, not many seem to be too confident about the potential of the move. They have branded it as a quick fix and with good reason.

We find out why:

What strikes us the most is the fact that the massive sum can help complete just about 6 percent of the stalled residential projects if utilized super efficiently. This is a finding by Bloomberg.

Yet another estimate puts the number at a slightly better 16 percent.

Too little, too late, you might be wondering.

In its defense, the government has said that the money would get the ball rolling. Even with a handful of projects being completed, liquidity will be infused into the sector. Intrinsically linked industries will receive a boost and eventually the economic mechanism will rally. Buyers, who have already paid developers of such projects, would also see a ray of hope.

Second blocker pointed out by market pundits is the inordinate time before the money finally circulates in the system. This is mainly due to the involved process of identifying projects that fill the bill.

As per the finance minister’s announcement, housing projects that are 70 percent complete, have a positive networth and cost less than Rs.2 crore in Mumbai, Rs.1.5 crore in Bengaluru, Pune, Delhi-NCR, Chennai and Kolkata and Rs.1 crore in other cities can be eligible for it.

Screening such projects will be time consuming for sure and it may not be any before six months that the funds will find their way into the selected stalled projects. By the time the move has the desired effect, it will at least be a year.

Third, even if the all the unfinished projects are completed, there is no guarantee that it would buoy the economy. With a large number of unsold housing units in India, there is no assurance the newly completed ones would find takers.

The problem lies with demand. As per a Fitch Group company called India Ratings and Research, the scheme will have little effect on demand. This may distort the market which at present is correcting itself.

In the long run, oversupply putting downward pressure on prices along with high taxes, including the stamp duty and GST, that developers are forced to fork out, can actually compound the problem of the housing industry.

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