Home minister P Chidambaram, speaking for Prime Minister Manmohan Singh, who now holds charge of finance, told Lok Sabha, “Floating interest rates must come down. The loans for existing home loans will be reset as the PLR is reduced.”

Chidambaram said that steps had been taken to address the liquidity crisis but banks remained risk averse while those seeking home loans were deterred by the 12-13% rates being currently charged. “I am sure that banks will sincerely attempt to reset the floating rates,” said the minister, who till recently held the finance portfolio.

Government’s signaling is significant for political as well as economic reasons. As Chidambaram explained, the housing sector is a critical part of the economy as “it concerns steel, cement, bricks, electrical equipment, labour of various kinds… it is a major driver of the economy”. But also, with general elections not too far off, the government needs to address a constituency which has been grumpy over soaring EMIs and lengthening loan tenures.

In a debate that saw all-around concern over falling employment, Chidambaram sought to assuage fears that the tunnel was growing longer and darker. He said India would still grow at 7% at the end of the next year even though he said the process of structural adjustment would not be painless. “Steel demand is down so it is bound to affect production. If we don’t lift some curbs on exports, people will be thrown out of jobs,” he said.

As he intervened in a discussion on economic situation in the House, Chidambaram largely covered ground that he had already been over previously, taking on the NDA criticism by reeling out growth figures for the years the Opposition had been in power and offering a comparison with UPA’s statistics. He also, as he has before, pointed to massive outlays for the social sector to argue that UPA had done more for farmers and the poor.

Chidambaram said UPA’s flagship schemes were aimed at those who lived in extreme poverty, a number he put at between 250-300 million. He admitted that a programme like PDS suffered from a leakage of 40% while complaints of forged muster rolls hurt the National Rural Employment Guarantee Act, but argued that there was no option but to persevere with such initiatives.

He said the large government spending was helping the economy while the social sector programs were a crucial safety net for the poor. Touching on recent measures to respond to the financial crisis, he said the government had taken some rapid-fire decisions in the last 12 weeks.
He used the opportunity to take a shot at the Left and also, by implication, those in Congress, who had been wary of celebrating India’s growth story for fear of being seen as “anti-poor”. “You must be consistent both ideologically and in your suggestions,” he said as he expressed a sense of satisfaction over “a fall in growth of 1-2% agitating the minds of MPs”.

“We must have laid off some employees somewhere,” DLF Chairman K P Singh told reporters on the sidelines of India Economic Summit, but did not give the number of jobs that were cut.

The company has also deferred some of its projects due to poor demand. “In hotels, residential and commercial everywhere…deferred because of lower demand and liquidity crisis,” he said, again without sharing the specifics.

Singh also said high interest rates have taken a toll on demand. “There are no takers for housing sector… Ideally, the interest rate should be around 7%.”

Asked if the current prices of the realty projects are inflationary, Singh denied and said: “It cannot be inflationary as it has to be competitive. It also depends on supply and demand.”

Because of demand going down, many projects have been closed down by many developers across the country, he added.

Indiabulls’ group spokesperson Gagan Banga said, “Interest rate hike has dampened the sentiment in the real estate market, which will result in further slowdown. We see 5-15% price correction in the real estate sector in the next few months depending on the project and its location”.

Real estate market has been under pressure for the past six months with sales declining by up to 70% in several markets and prices declining by up to 20% in overheated pockets like Gurgaon, Greater Noida, Ghaziabad and Kundli in the national capital region and some Mumbai suburbs.
Cushman & Wakefield South Asia MD Sanjay Verma said, “There is no alternative to credit. Land transactions have dried up due to developers’ inability to bring funds. The fund-raising plans of developers have also changed and some have limited their expansion plans”.
Some developers, especially smaller ones, also fear that their project might get stuck due to unavailability of funds. The bank credit had already dried up for small developers and they now fear rising interest rate will further increase their borrowing cost from NBFCs or private moneylenders. With homeloan rates, likely to go up, the advance money received from customers too will dry up forcing them to slow the pace of project execution.

Unitech general manager (corporate planning & strategy) R Nagraju, however, feels that high borrowing cost will have only a marginal impact on company’s margins. He pointed out that a bigger concern is slackening demand.

Mr. Nagraju said, “We can’t do anything about high interest rates, but we need to stimulate demand by adapting our products suited to the current market needs. This could mean cutting down on frills and making houses more affordable to the end user” .

Unitech plans to launch houses at Rs 40 lakh in Gurgaon and at even lower price points in smaller cities, which it thinks will find large number of buyers. Similarly, Ansal Properties and Infrastructure (API) is tweaking its plans to suit the changing demand scenario.

API CEO Anil Kumar said, “We plan to launch plotted development projects soon, which still have a good demand. Besides, we would focus on execution of projects rather than launching more housing projects” .