Annual Budget Year 2017: Sum and Substances


Any material communication by the government should be looked to connect long term dispersed dots rather than looking that piece in isolation. The budget is one such communication. The priority of NDA government is clear; spurring demand of long term assets such as housing, infrastructure and reduce leakages and wasteful expenditure. It not subscribe to artificial prosperity by fueling consumption led growth as well as entitlement to society living in bottom of pyramid. The key measures undertaken in this budget are such as surcharge on income over 50 L, extending subsidy benefits to economic backward classes, infrastructure status to low cost housing, plugging accounting leakages, bringing equality by taxing the rich and giving back to have not’s. This government strongly believes in multiplier impact of Housing sector on overall economy (BJP model in Gujarat between Year 2002-2014, Chinese model of growth in Housing sector)

The theme played out this budget has been stringent measures are the final nail in the coffin to deflate real estate prices. The Finance Minister has broken the malaise of closed loop of circular money circulation in Real Estate sector (sale of one real estate proceed going to purchase of another real estate to save capital gain) or sometimes half heartedly trickling to NHAI/REC  bonds with 3 years of lock in. It is noticeable that physical assets (Real Estate, Jewellery) accounts for 50% while equity allocation is less than two percent of households assets This is done by following policy measures:

  1. Lowering the capital gain years threshold to 2 years for claiming capital gains, signal’s a genuine attempt to encourage people to exit their real estate holding at much faster pace than before and alternatively find more productive other investment avenues.
  2. The budget has indicated that many more bonds will be opened to channelize money in financial instrument from sale of real estate proceeds. This will encourage big financial migration from the sector where investors are getting dissuaded by low investment returns over last two years.
  3. Last attempt, in form of tax rebate for one year by persuading builders to liquidate inventory over one year cycle after receiving commencement certificate in order to augment supply in the system.
  4. However, the final straw on investors back is limiting notional loss from house property to Rs 2 lacs per annum instead of unlimited tax shield created by misguided policy under Sec 71 of IT Act. I have written about misuse of this policy on various occasions as property investors have crowded the property markets for the last decade, pushing actual user far off. Now, this will push HNI investors out of property market for years to come. To my belief, no policy measure will have such a far reaching impact on driving down property prices than this one.

These stringent measures will have long term repercussion resulting in lower land prices, enhancing supply of land in the system and dissuading investors from hoarding of land, apartments.

Now the question remains why government has chosen to remain silent about taxation on Long term capital gain, despite the loud roar of our Prime Minister, in Jan 2017 at Mumbai. The answer lies in scanning through the recent history of Divestment program of the Government. We are running an ambitious divestment target (Rs 72,500 Crs.) and it was necessary to cheer the mood and set the stage right for the financial markets.


The byproduct of this exercise is an avalanche of investment flow into financial markets especially equities where tax incidence in long term capital creation is Nil. I have spoken about impending households savings to financial assets on various occasion, the policies in this budget has expedited the financial migration process.

(Manish Bhandari, CEO Vallum Capital Advisors)


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