Crude oil prices should get everyone’s eyeballs now...

Pic credit: www.sputniknews.com

Indian government’s elbow room may get reduced dramatically if prices keep inching up

Global crude oil prices have already breeched the $45 per barrel figure in September 2016. Not a healthy sign considering that in January, it had hit the rock bottom of $28 a barrel and the highest of $50 in June. As winters approach demand for crude oil increases, adding to a global upswing in prices.

Crude oil prices have the potential to make or break the global economy. In July 2008, crude oil touched its lifetime high of $147.27 sending the global economy, already in a downward spiral, into a tailspin. It fell to under $50 per barrel in January 2015 for the first time since May 2009, providing relief to many oil consuming nations.

OPEC and Russia, the largest oil producers(28% of 88 Mn barrels of crude) are holding talks to ensure that it is a win-win situation for the oil producing nations. This includes trying to reach a bilateral oil and gas cooperation formula. Some OPEC countries have supported the cooperation pledge by the two countries, suggesting the crude oil under $50 per barrel was “unacceptable”.

Countries like Russia, Saudi Arabia and Venezuela are heavily dependent on earnings from crude oil to sustain their economies. Russia is estimated to lose $2 billion with every dollar fall in crude oil prices while.

Unfortunately, that spells as very bad news for the rest of the world, including India, where 80% of our domestic requirements are met by imports!

Crude oil inching towards the $50 per barrel mark could be a worrying sign for India.

During the last 10 years, India has imported inflation because of high global crude oil prices. Over the years, this has been one of the weakest links for India’s fiscal management.

Over the last 12-18 months, the government has raised customs and excise duties which showed up in its tax collections. During 2014-15, the government earned Rs. 75,441 crore compared to Rs. 46,926 crore a year ago. In addition to this, state governments earn revenue by levying sales tax. The ability of governments will be severely curtailed if crude oil prices were to continue the upward spiral. But, during this time when the prices were sliding, it did not mean that consumers in India paid less.

During 2015-16, as a result of low crude oil prices India’s oil import bill has nearly halved to around $70 billion, giving the government elbow room for spending on growth on schemes like ‘Housing for All’, which could be a game changer for India’s urbanisation plan. Prices of inputs like steel, cement, machinery and other could see an increase with higher oil prices.

I hope that the Government has factored in the price rise of crude imports in the budget, otherwise, with rising inflation, the spectre of a huge fiscal deficit also looms large, spelling trouble for Indian economy!

Issues related to Development in Real Estate...

At different places, I often hear people talking about how real estate companies are awash with funds. Some talk, in hushed tones, about the cash economy and others believe, and perpetuate the belief, that funds are lining up before realty companies to invest in them.

As much as realty companies would love to be in that situation, it is far from the truth. 

Realty companies face just about as much challenge raising capital as others. Some would argue that it is even more difficult to raise institutional capital because the sector has not been given industry status.

Despite the challenges faced by the developers in securing funding, nearly 35 per cent of it is added to the cost of a house by way of taxes and levies by the government. Urban land bodies and state governments together levy a variety of taxes in the form of registration, value added tax, service tax, developer agreement stamp duty and others.

There is constant pressure on cost because of the rising cost of input and cement prices in particular have been a worry for all construction companies. Getting working capital funding from banks is easier said than done.

With affordable housing projects being such a challenge to execute within the stipulated time and budget, it is a critical need of the hour that state governments take a fresh look at their priorities to rationalise the taxes on the real estate sector.

The demand to the government is not without precedent. During the 1990s, it took nearly five years for the mobile phone industry to get a million subscribers because the government levied a fixed licence fee from the telecom operators. When it changed to a revenue sharing formula after the New Telecom Policy in August 1999, the industry changed the face of India’s telecommunications industry. With a billion subscribers and over 400 million mobile internet users, India was adding 18 million subscribers at its peak every month! With a smart positive move in the 1990s, India is now ready to take its leap into the mobile digital dream.

The government’s policy of ‘Housing for All by 2022’ could follow that model too. The government needs to appreciate that the industry would want to make sure that its policy can be achieved and if both can join hands it can be a win-win situation for the people too.

Early signs of a seismic shift in banking are already being witnessed after the issue of new banking licences, payment bank licences and quicker integration of technology with banking. Many argue that the process is already underway and telecom and banking grip each others’ hands firmly and the pace of change could accelerate in the days ahead.

For the realty industry, several related developments may also be worth making a note of. All of this could help change the housing scenario in the country like never before. Better practices that enhance quality of construction and help turnaround projects faster are already available in India. Recent news reports suggest several realtors from Madhya Pradesh recently visited Delhi to take a firsthand look at the facilities of a company in Delhi. As companies face a shortage of quality construction workers, pressure of deadlines for delivering a project and seasonality worries, technology could come to their rescue.

Wider adoption of precast technology for realty projects will help in easing some of the pressures on realty companies. The pace at which precast technology helps cut down execution time is a great boon for companies and helps cut down on their operating capital cost. As the technology is adopted by companies outside the big cities, it will cut down the project time considerably.

Very soon, a regulator will be in place in every state to protect the consumers’ interest. Some states have started making the announcements and the tempo is expected to pick up.

It is now that the government needs to give a push to rationalising duties and taxes so that the policy dream can be achieved. Meeting a goal like that of providing housing for all is best done with the industry walking hand in hand with the government.