In an interview with equitymaster.com, Mr. Keki Mistry, Managing Director, HDFC, shared his views on the Budget and its implication of the housing finance industry.
EQTM: Are you satisfied with the announcements for the housing sector?
Mr. Mistry: The housing sector has got a fair number of benefits. The Finance Minister has made an announcement for a mortgage credit guarantee scheme, which is effectively something like a mortgage insurance. The second positive is that the capital gains that are made will now be tax free if the amount is invested with the National Housing Board (NHB). Effectively, if it is invested with the NHB, it remains within the housing sector. Third is that the benefit under Section 24 for interest payment has been extended for a period of three years. The amount has not been enhanced but that has really not made a difference. Our average loan size is Rs 345,000. On this, even if you take interest at 11.5% -12%, interest amount is not more than Rs 40,000. So the existing limit of Rs 150,000 more than covers that. Fourth thing that has been done is that 37(I) clearance that was required anytime you buy a property has been removed. Lastly, there was a mention about securitisation and foreclosure laws. So there are quite a bit of positives.
EQTM: How do you think that the governmentís initiative for the infrastructure would boost housing?
Mr. Mistry: What they have done on the infrastructure front is that they have talked of Rs 10 bn of equity funds. But that is not really for the housing sector. I donít think there has been any incentive given for the infrastructure sector that will boost housing sector. This type of investment is very necessary in the infrastructure sector especially in the context of the fact that infrastructure projects are not short term. The benefit of an infrastructure project would be realised after five to six years. To encourage such projects when times are bad is a very good sign. This is something absolutely essential. Equity funding is required and that role has to be taken up by the government.
EQTM: What do you think about the reduction in interest rates and the benchmark with the G-Sec yields?
Mr. Mistry: Well, I think they were expected. But there is disappointment with two or three things. I think there is nothing for growth. The only thing for growth is the depreciation allowance. However, this is of importance for industry that buys plant and machinery. Industry buy plant and machinery only when demand for goods and services increases. Will demand rise as a result of this budget? In my view, No. The reason why demand will not increase is because with interest rates coming down, tax incentives going down, people will start looking at saving more money to get the same amount of income. Therefore, savings will be encouraged. More money will go into savings products and less into actual consumption. If less money, to my mind, goes into consumption, companies are not going to go on an expansion mode.
EQTM: The finance minister has lowered the tax incentives to individuals. Are they fair?
Mr. Mistry: To my mind, the most unpeaceful aspect of the budget from an individuals point of view and not from an economics aspect is the reduction in tax benefits. On one side, your taxes are going up. Though the hike is not so high i.e. 30% will increase to 31.5%. But in a scenario where interest rates are falling, it is important to leave money with people. You are on one side, reducing the income and on the other, increasing tax. You have reduced Section 88 benefits for the investors. You are saying you cannot invest more than Rs 200,000 in RBI relief bonds. Where will people invest money? People are looking for safety. People have been paying taxes for several years. When you retire after paying taxes for your working life, you will find yourself in a situation where you are earning even lesser when compared with the limited amount that you were earning before. You are talking of inflation of 1%-3%. In the last few years, inflation was not in this range. Inflation is much higher. If you want medical attention, if you want to go to the doctor and buy medicines, it costs much more. So the retired people, to my mind, would have a strong feeling of being let down.
EQTM: How would you rate the budget?
Mr. Mistry: No, I will not get into rating. But generally, the negatives of the budget are growth. I donít see how growth is going to come. The negatives of the budget are that the individuals will feel the pinch. No efforts have been made to widen the tax base. Existing taxpayers will just have to shell out more. Thirdly, retired people will feel that they have been let down. Depreciation allowance is not going to spur growth by itself. Interest rates reduction of 50 basis points is fine but taking into consideration the retired people, it is low. Another negative is the ceiling limit on RBI bonds. If an individual retires, he wants to put his money somewhere safe, three years ago he would have invested in UTI. So people want to put their money where the government is giving them social security, atleast some mechanism of parking their money at places which are safe. Obviously there is also a fiscal issue. Defense expenditure is high, but you cannot avoid it. So the Finance Minister has to do something here.
Infrastructure fund is a positive. The vision on this front is not just for two years, but it goes beyond that. This is a big positive.