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After the unprecedented demonetisation move, there was a lot of anxiety and speculations as to the next big announcement by Prime Minister (PM) Narendra Modi in his New Year’s Eve speech. The excitement predominantly centered around the outcome of the 50 days demonetisation struggle as well as the next steps to carry forward the agenda to eradicate black money.
Instead, other than an reassurance on his commitment to fight the corruption and menace of black money, PM Modi chose to focus almost all of his attention on announcements on a range of schemes introduced for the betterment of poor, lower middle class/ income group and small businessmen who were most affected by the move. The political debate on the success or the lack of it of the demonetisation move continues as does the debate on the content of the speech of the PM, particularly on the lack of specific details. Leaving aside the political or the larger economic ramifications of demonitisation, the sops offered in the speech are interesting on their own and are likely to have a significant economic impact on key sectors of the economy.
The two key schemes proposed in the course of the speech included the announcement of housing schemes for urban poor/ lower middle class. As per the said scheme, 4 percent interest subvention shall be provided on housing loans up to INR 9 lakhs and 3 percent interest subvention shall be provided on housing loan of up to INR 12 lakhs. Further, the number of houses being built for the poor under Pradhan Mantri Awas Yojana (PMAY) in the rural area has also been increased by 33 percent.
The two schemes announced by PM Modi are in addition to the existing credit linked subsidy scheme introduced under the PMAY which provides 6.5 percent interest subvention on housing loan up to INR 6 lakhs.
On similar lines, the PM also introduced a scheme for rural poor/ lower middle class by providing 3 percent interest subvention on loan up to INR 2 lakhs borrowed for the purpose of constructing new house or expansion of an existing house.
Overall, this is a positive move and directionally aligned to the larger vision of the government on housing for all and will positively impact the housing financial institutes and the affordable housing sector in general in India. In the medium to long term however, affordable housing sector as a whole needs a concerted effort both from the Central and State Governments who need to work on policy measures to cut down the overall cycle of approvals and consequently development as well as to make suitable land parcels at affordable rates.
Taking the cue from the speech, scheduled banks notably led by State Bank of India, swung into action by announcing steep cuts in their lending rates. The impact of the rate cut and its correlation with the demand for housing cannot be over emphasized.
The choice of a rate cut as a measure to boost housing demand not only helps the government to directly assuage the middle/low income groups that were impacted by demonetisation but it seems that the government is also betting on the fact that a pick up in the housing sector in general will kick start the demand for core sectors such as steel, cement and the likes apart from contributing positively towards large scale employment generation.
Hitherto, only Scheduled Commercial Banks and selected Regional Rural banks were eligible lending institutions who were covered under the Credit Guarantee Fund scheme for Micro, Small and Medium Enterprises (MSMEs). PM Modi, while announcing the increase in Credit Guarantees for MSMEs from INR 1 crore to INR 2 crores, added that Non-Banking Financial Companies (NBFCs) shall also be classified as eligible lenders who will be entitled to Credit Guarantee scheme.
Raising the credit limit would definitely bring relief to MSMEs and extending the ambit of Credit Guarantee scheme is expected to give a big boost to NBFCs engaged in providing micro finance to MSMEs.
PM’s announcement on conversion of 30 million Kisan Credit Cards into Rupay cards will facilitate farmers to withdraw money from ATMs instead of having to visit bank branches. While demonetisation has its share of pros and cons, there is no denying that it has acted as a significant catalyst to financial inclusion and this move is expected to push this theme further.
The Central Board of Direct Taxes (CBDT) in its recent press release has also announced its measures for promoting digital payments and creation of less-cash economy by reducing the percentage of deemed profit from 8 percent to 6 percent on total turnover/ gross receipt received through banking channel or by digital means during the financial year 2016-17. PM Modi reiterated the CBDT’s decision to give tax relief to small businesses.
The above initiative should elevate the demand for use of digital payment systems and make cash transactions passé and such payment systems would compel businesses to be equipped with contemporary technology. This has opened a wide market for mobile wallet applications like PayTM, Mobikwik, etc. and Unified Payment Interface (UPI) applications allowing money transfer between two bank accounts by using a smartphone.
Given the ambit of digital market, PM has announced a new digital payment application named Bharat Interface for Money (BHIM), which seeks to support Aadhaar based payments.
All in all, the measures announced are largely in the positive direction for key sectors of the economy such as real estate, banking, etc. The question that begs to be answered is whether the PM has left any further dry powder for the upcoming budget on February 1, 2017?
- By Kalpesh Maroo, Partner, BMR & Associates LLP with inputs from Vivek M M, Associate. Views expressed are personal.