COVID-19 Offers A Chance For Reforms In The Real Estate Sector

In his video conference with chief ministers on April 11, Prime Minister Narendra Modi made a pitch for ‘jaan bhi jahaan bhi’. The reason for the shift from the earlier stated position of ‘jaan hai to jahaan hai’ is a clear recognition of the reality that economic concerns cannot be ignored indefinitely, and steps need to be taken not only to have the engines rolling again, but to roll at a much faster pace for compensating all that has or will be lost as a consequence of the lockdown.

The housing sector may serve as a case in point.

As is well-recognised, housing investment has one of the highest multiplier effects in the economy. The slowdown in the housing sector had already begun to have a telling effect on the linked sectors. The pandemic now threatens to pull the hand-brake. Radical and drastic steps may be the need of the hour.

For decades, the sector has operated in a regulatory quagmire that has promoted red tape, increased cost and fostered delays. Much of what has plagued this sector is, therefore, already identifiable, and its consequences, well known. An oft-repeated example is that of the multitude of approvals that are needed for a housing project. Depending on its nature, location and size, the number of approvals required from different agencies may well run into few scores.

While the single-window clearing mechanism has been rolled out in pockets, it is suggested that a nationwide implementation may result in several months of time saving, and cost reduction by up to a fifth, in completion of an average housing project across India. Analysts may differ on the quantum or value of the benefits that may potentially accrue from such measures, but there is no doubt on the fact that such measures will be nothing but beneficial.

The stamp duty and registration costs regime may also be a worth a relook. On average, across states, they result in escalation of the cost of real estate transactions by about 5-8 percent. While they contribute substantially to government revenue, such high costs often deter developers from consummating transactions. Moreover, such costs are without exception passed on to the end use customer, for whom these additional costs may be enough to postpone the decision to buy that one apartment which has been a dream. Steps taken by the various state governments to waive, reduce, and/or restructure the incidence of stamp duty would help to reduce or stagger outflows of real estate developers. This is not to negate arguments that are being made to outrightly eliminate this and replace it with an extended application of the GST regime, with its potential bearing on future transactional costs.

The law of demand in micro-economics propounds the inverse relationship between price and demand, i.e., cetris peribus (all other things being constant), price and demand will always move in the opposite direction. In other words, lower the price, higher is the demand.

Just the two measures highlighted above may potentially save about a quarter of the costs that are currently incurred towards a housing project. It is nobody’s guess that such considerable reductions in cost will serve as a big booster to housing demand. With its multiplier effect, this should positively impact several other sectors too. Now, while the economy has come to a virtual standstill, this could be a good way to restart the real estate sector.

Those not in favour of revisiting the cost regime may argue against it on the ground of it resulting in considerable loss of revenue to the exchequer, impacting the fiscal deficit, and, in turn, bringing with it all evils related therewith. Believers in Keynes would argue that fiscal expansionism may be essential for economic revival. Proponents of long-term reform may also find support from enthusiasts of Laffer’s theory (less tax may sometimes result in higher revenue due to increased economic activity). However, the cost-benefit argument is best left to resolution in debates among economists.

Realists may also argue that while benefits of a single-window clearance mechanism are not in doubt, implementation is far easier said than done. This cannot be disputed, given the fact that we have failed to implement such a mechanism despite decades of arguments in its favour.

Then again, desperate times such as these present the precise opportunity to bring about far reaching changes such as this. One must also not forget: lesser approvals mean lesser governmental agencies involved, which would lead to lesser human interaction, and in turn boost ‘social distancing’ — the mantra of the day.