Budget 2017: Government may accord infrastructure status to low-cost housing

MUMBAI/AHMEDABAD: The government may tweak the definition of the infrastructure sector in the upcoming budget to include low-cost or affordable housing, a move that would reduce costs for developers and attract investors, two people with the knowledge of the matter told ET.

The change is being proposed about a month after Prime Minister Narendra Modi announced concessions on interest rates for low-cost housing loans under the Pradhan Mantri Aawas Yojana. “If we want housing for all by 2020, re-categorising affordable housing as infrastructure is essential. The government had sought feedback about this about a week ago,” a person familiar with the development said. “I see this happening in the upcoming budget.”

The government has been pushing Modi’s pet project of providing about 20 million houses across India by 2020. IT has reached out to senior finance ministry officials and the Reserve Bank of India for feedback on the proposed change and how to prevent it from being misused.

“The important thing here would be to define affordable housing or low-cost housing. And these projects will have to be insulated in a way that no one is able to take money out without completion of the project,” another person aware of the development said.




Real estate developers have been under stress as they have borrowed funds at a higher cost. In addition, banks are reluctant to lend money to the sector and the situation worsened after the November 8 announcement scrapping high-denomination currency notes, leading to a fall in real estate sales.

“If affordable housing is given infrastructure status, it would lower the borrowing cost for the developers. Also, regulations should be simplified to directly borrow foreign debt, which can cost around 4-5% on dollar return,” said Hemal Mehta, a partner at Deloitte Haskins & Sells. Industry experts said that while it may appear to be a small change, categorising low-cost housing as infrastructure could have far-reaching results.

“Real estate industry has been asking for the infrastructure status for affordable housing for last three years, but this time it is only logical that it could go ahead. This is mainly because the prime minister has announced the new scheme and infrastructure status will help reduce the borrowing cost and help accelerate growth,” said Jeenendra Bhandari, partner at MGB and Co, an audit and tax firm. The government’s focus is on affordable housing in the rural areas and there could be additional tweaks in this aspect in the budget. Emailed queries sent to finance ministry officials, the Central Board of Direct Taxes and the RBI did not elicit any response.

Regulations will have to be changed so that low-cost housing projects do not attract adverse taxes but easier project finance even from investors outside India, the people in the know said. Industry experts said a change in status, along with clear guidelines, could mean low-cost housing could attract investment from foreign pension funds and insurance companies.

“These projects could have a dollar-denominated debt and offer a return of 4-5%. This would work well for both domestic developers as well as foreign investors,” an expert said. As per the recommendations, the government can look at allowing tax-free returns to foreign investors that invest in low-cost housing. This could solve some of the funding issues the sector is facing.