Facilitating growth will be the theme of Budget over next couple of years: Keki Mistry, HDFC

“On a sustainable long-term basis with a 10-year, 20-year view, the demand for housing will remain strong for a variety of reasons. The penetration level of housing in India is one of the lowest in the world. Our mortgage to GDP ratio is about 11% compared to China, which is in the 20s or some of the advanced economies where it is in the 60s and 70s. Also, we have a young population and they will want to buy houses over the next 20 years,” says Keki Mistry, VC & MD, HDFC

The revival in the housing sector has been strong. The banks have never looked better. Overall credit growth is going up. Can all of this remain as is, if not get bigger?
I would say that the demand will be strong not for one quarter or one year or two years or five years, it will be strong for several decades give or take one or two quarters. So let us not get into this quarterly sort of aberration which can keep happening. On a sustainable long-term basis with a 10-year, 20-year view, I would say the demand for housing will remain strong for a variety of reasons.

Firstly, the penetration level of housing in India is one of the lowest in the world. Our mortgage to GDP ratio is about 11% compared to China, which is in the 20s or some of the advanced economies where it is in the 60s and 70s. We are very underpenetrated and therefore the growth in the coming years and decades will be strong, that is number one.

Number two, we have a young population. Two-thirds of our population is below 35 years of age. The average age of a person when he first buys a home in India is about 37, 38, 39 years. There are so many people, almost two-thirds of the population, who have not even contemplated or are looking to buy a house today but over the next 3, 5, 10, 15, 20 years all these people will necessarily come to the market to buy a house. Then we will see structural continuity in the demand for housing in India for a very long time.

It has been clear in the last seven years as well that housing is definitely one of the priorities of the Narendra Modi government. But since the rates have been going up, there is pressure on the wallet. EMIs are going up. What can the finance minister do on February 1 to make sure that the housing market stays the way it is and young Indians buy homes?
A housing loan is a 15-year or a 13-year loan on average. In that period of 13 years, interest rates will go up and come down. One cannot know if a bank can afford to give a 13-year fixed rate loan because you do not have access to a 13-year fixed rate economy, necessarily every lender in the market gives floating rate loans, when interest rates increase or decrease depending on various facets of the economy.

Since rates have gone up in recent times, the EMIs are higher. Therefore we see temporarily the amount of money that people are putting into SIPs have come down. But one must understand that housing loans are for 13 years or 15 years and over that period of time, rates will go up and come down. It does not make too much economic difference whether you take a loan at the time when rates are higher or low because if they are high now they will come down, if they are low today they will go up at some point in time. In a long-term loan it really does not make much difference when you take a floating rate loan.

Coming back to the Budget, what I believe would probably be the theme of the Budget over the next couple of years is to continue facilitating growth. We have done extremely well. It gives full credit to the government and full credit to the RBI for the measures that they have taken. But we should be on a path to achieve a $5 trillion GDP by 2025.

That means putting more in incentivising savings, incentivising investments, encouraging more foreign money coming into India and encouraging manufacturing and these are some of the measures that may need to be taken over the next couple of years to put India on path to achieve a $5-trillion economy which would be very pragmatic.

Speaking specifically on tax, the government has reduced rates for corporates in 2020. The corporate tax growth since then has been pretty strong. Should this be considered from a personal tax standpoint as well or reduction in taxes, increased in savings and incentivised reporting?
One could probably look at how to incentivise more savings or more investment in the economy. We have reduced the tax rates a few years ago for corporates and as a result of the reduction in corporate tax rates, we have seen more tax collection. Not only has the tax collection increased over time, but also companies with more cash in their hands have reinvested that money in their businesses. The businesses have grown, more jobs got created and as a result of higher business, the incomes are higher and therefore the tax paid by them is also higher.

Now while that was done for corporates, individual tax rates still probably may need to be looked at. The individual marginal tax rate in India is 43 odd percent, 42.7% if I recall right. So there might be some measure in place over the next two-three years to look at bringing that tax rate down so as to incentivise people to save more and to invest more, which will then result in economic growth and it will result in higher tax collection over a period of time.

There is also plenty of focus on PLI and the schemes have done well. You have got a good ear to the ground. Hhow much of an impact is it really making on manufacturing in your view and what is the potential like?
Globally all over the world, people are now looking at this China plus one policy. So India should be the biggest beneficiary of that and we probably would be the biggest beneficiary. So any measures that can be taken to encourage manufacturing, encourage more people to bring capital into India for businesses will not only create jobs, increase the FDI in the country but also need overall economic growth. So that is another area. Manufacturing today is about 17% of our GDP, whereas globally, in most countries it is around 25%.

We have also spoken about the need for incentives. But the challenge here is whether the government has the fiscal bandwidth because the deficit has been higher than what it has been in the past. How do you think the government can strike a balance this time?
First of all, whilst the fiscal deficit might be a little higher than what it was in the past, it was largely induced by Covid. Otherwise, the fiscal consolidation path which was started a few years ago, has continued unabated. I would expect that to continue even in the current year. Because we have had very robust collections in terms of taxation and GST, I would think that the fiscal target will be more than met in the current year and the aim would be to reduce the fiscal deficit in the current year.

The cost of construction has also gone up. It is impacting the balance sheet and therefore, then what does it mean for financiers like yourselves?
I have already talked about the housing sector. If you encourage the housing sector, construction will happen. Construction is a matter of demand and supply. If the demand is there for a product, the developers will construct more and more projects and we are already seeing that in the last couple of years, the number of projects getting launched is increasing all over the place.

Now in the affordable housing space, the CLSS scheme that the government had, which has got discontinued now, could perhaps get revived because that will create further impetus for demand in the smaller towns and amongst the affordable housing segment which will encourage more construction to take place in those markets.

There is also a lot of chatter around the capital gains tax. One really has to streamline the capital gains tax structure and the other is to increase levies. What is your outlook? How should the government approach this?
Capital gains is an important mechanism for the capital markets. Any sharp increase in the capital gains tax rate would create a negative sentiment as far as the markets are concerned and may affect further investment. All we need is the harmonisation of the capital gains tax rates. We have different rates for different kinds of gains and different rates for equity. Unlisted equity is different, listed is different, debt is different and so on and so forth.

So some harmonisation could be required but at the same time, increasing capital gains tax rate is not necessarily a good idea because it could slow down investments in the capital markets.

But divestment has proven to be a challenge for the government. How should the government pursue this challenge going forward?
Divestment is a function of capital markets. If the capital markets are strong, the ability to divest, the ability to list some of the public sector units will also increase. It is a matter of time. Divestment targets should be met in the coming years because a robust and a buoyant capital market should aid divestments.