Finance Minister Pranab Mukherjee continues with his efforts to prime the economy. The interest subvention on housing loans is designed to prod a sector that is stirring after a deep freeze. Home loan growth is crawling at around 5 per cent, less than a half of what it was a year ago. The percentage point subsidy on mortgage rates for loans less than Rs 10 lakh should bring more buyers into the market. It caps last December’s cheap credit scheme that resulted in mortgage rates declining to 8.5 per cent and to 9.25 per cent, respectively, for loans up to Rs 5 lakh and Rs 20 lakh. With some banks and housing finance companies still charging their existing customers upwards of 12 per cent, the composite credit subsidy available to a typical prospective home buyer — an overwhelming majority of mortgages in India are for under Rs 15 lakh — works out to nearly 4 per cent.
A tax holiday to real estate companies should, likewise, shore up the supply side. By waiving income tax on projects taken up in 2007-08 if they are completed by March 2012, the finance minister hopes to bring more affordable housing stock into the market within a deadline. With a project pipeline as long as it is today, Mr Mukherjee can reasonably expect builders to heed his exhortation on transferring the tax benefit to buyers. Expectations of a special package for housing were high before the finance minister presented his maiden budget for this government. The Rs 1,000 crore interest subsidy and tax giveaways, announced just as the Lok Sabha passed the Finance Bill on Monday, ought to meet some of them.
Housing is vital to any process that will put India back on its high trend-line growth, which Mr Mukherjee sees happening as early as next year. The backward and forward linkages of the sector are incontestable and a real estate revival could feed into the incipient recovery of the steel and cement industries. Construction, among the largest employers in the country with a big appetite for migrant farm workers, is critically dependent on housing starts. According to independent estimates, every rupee spent in construction adds Rs 3.7 to the national income and every direct job in the sector spins off two allied ones. The finance minister has played a balanced hand for the housing sector as policy interventions go. It remains to be seen whether more of them will be needed.