Realty - An Economic Catalyst Post Lockdown

Real estate is the focal sector with a high multiplier effect, says Harish Salve, Senior Advocate at a Town Hall Meeting Organized by CREDAI.

Covid - 19 has itself proven to be a big 'Catalyst for Change' - current economic crisis is such where patchwork is not good enough - pain killers, muscle relaxants and bandages will not work - time for a drastic surgery - Economy must be restarted / rebuilt - We have to hit the 'Reset Button', said Padma Bhushan Harish Salve, Senior Advocate - Supreme Court of India in a Town Hall Meeting organized by CREDAI the leading apex body of real estate developers which was moderated by Kunal Vajani, Head of Chambers - BlackRobe Chambers. 

In his forthright discourse during the Town Hall Meeting themed on “Realty - an economic catalyst post lockdown”, Salve mooted five cardinal mantras:-

Restart and Rebuild with inherent Trust on both sides (Government & Real Estate Sector) where an ecosystem forged on faith and non-hypocrisy is built. 

Mindset Changes at Different Levels

Ecosystem must change to promote transparency in business and new level of honesty. Government, businesses and citizens should be a 'Partnership' where the budget of India should be an account of the partnership with taxes as revenue from each partner.  

Salve was candid to advise both the government and the real estate industry “Stop romanticizing land”. Land is an economic resource and ought to always treated as one. The land acquisition laws have been one of the most regressive set of laws in India, which the government must reconsider. Post lockdown and in the new pandemic era, land is a resource for urbanization and urbanization is the only reality - it has to be accepted because India has 16 - 18% of the world population with 6 - 7% of the land. India enjoys a demographic dividend - average age group still in the 30s, but the same can turn into demographic nightmare, if land is continued to be 'romanticized' and adequate employment is not created by the government through the real estate sector.

Deficit Financing

Deficit financing is like a strong pain killer, it has its side effects, but it is necessary. Salve elucidated that deficit financing is obviously going to be expensive for the government - real estate therefore ought to be the focal sector for the government as it is the only sector which has a high multiplier effect. 'Demand Effect' of deficit financing is an important aspect of restarting Indian economy. The deficit finance that the government of India has resorted to i.e. injecting $265 billion as Covid-19 relief fund is a welcome measure given low interest rates and low oil prices. Salve exclaimed that it was a golden opportunity to slow down on oil imports and focus on re-building economy without worrying much about impact on currency.

Salve retorted to the critiques of deficit financing who have been raising concerns about the effect on the budget of India and said that one has to realize that India is more important than the budget of India - patience of the 'have nots' ought not be tested. If the course is now not corrected immediately and drastic / unprecedented measures not adopted there may be no India next year to present a budget of India.  

Infusion and Access of Funds

Given 83% of India works in the unorganized economy (as per calculation of Noble Prize winning Indian Economist) and a major chunk of those work in the real estate sector, Salve stressed on the importance of injection / infusion of funds into the real estate sector which can act as a catalyst to revive the Indian economy for a high return is assured in this sector if money that is invested is cheap. Salve highlighted that India has 'artificial' interest rates and real estate sector cannot be expected to borrow at higher rates as it will then not yield the expected results to ignite the Indian economy. 

Salve stressed on a fearless ecosystem where laws such FEMA which have outlived its utility as well as fears / inhibitions which were the genesis of the foreign exchange regulatory laws have to be forgotten.

The advantage of globally low interest rates to invest into the real estate sector and allow direct access to foreign funds which are available at low interest rate have to be captured and if the government is still unable to overcome its inhibitions to allow direct access then NBFCs should be allowed to borrow and regulate their arbitrage and given autonomy to refinance themselves.

What is of utmost significance is the Cash Flow-linked Funding - If monies bearing lower interest rates are permitted to be infused, they can be continued to be lent to the real estate sector at the same or marginally lower rates as on today, the lender will be in a position to provide a minimum of 2 [two] / 3 [three] years moratorium and thereafter still earn the balance interest at the same rate.

A two-pronged approach is required to spur real estate demand: Buyers' EMIs need to be divided by two with no extra interest burden and buyers allowed to cover it up in 2 years. If funds are available to the real estate sector at one-third the current interest rate, the industry will be able to give buyers three times the moratorium without any loss. For buyers, it will be a huge incentive to continue paying the deferred installment over a predetermined period.

Legal Reforms & Self-Regulation

Salve emphasized that land laws need a serious change and reformation coupled with utmost clarity. Public policies must be stable and less susceptible to politics, more BITs for foreign investments must be in place to offset bureaucratic turbulence and the enforcement system like the tax regulators and the enforcement directorate must be kept at bay for every trifle. Salve also expressed the investor resistance for India is based on not wanting to get into the thicket of Indian litigation which is notorious.

Salve stressed on the need for stopping post retirement Jobs for retired judges / civil servants as well as introduction of an element of self-regulation required - a retired chairman of a real estate company should be appointed as the Head of RERA.  Who will know the real estate better?

He deprecated tribunalization of Justice - being mere opportunities for creating post retirement employment for the retired Judges / civil servants and accentuated that tribunals such as the NCLT & NCLAT ought to be immediately disbanded. He also gave a piece of advice to the real estate sector as key step towards self-regulation by formulating a Code of Conduct 'Golden Standards' - including what is a good, bad and non-tolerable practice

In his concluding statement, Salve said Success Story waiting to happen - if there is a change the mindset: let's hit the 'Reset'.

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