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Here are 18 questions for which you may get answers in 2018; Harish Rao

Harish Rao, Director, sawdust

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In many respects year 2018 may prove to be a turning point for Indian economy in general and building materials and realty sector in particular. It is not just because year 2018 follows three major historical steps taken by the government, namely, demonetization, introduction of RERA and GST but also because we are just 15 months away from next General Elections. So, one can expect some populist and also some demand creating steps by the government in the following months. It is in this light that we have listed out the following 18 questions for which you may find answers/clues during the year:

  • Will Indian Realty Sector see revival in 2018?

First, it was demonetization in 2016 which was followed by introduction of RERA and finally, the introduction of GST – all happened in quick succession and Indian Realty Sector which was already reeling under the pressure of unsold housing stocks was the worst sufferer of these policy decisions of the government. Whatever revival hopes were there, all were dashed to the ground due to these market disruptive (in the short term) steps. One hopes, things may start looking up at least in the later part of 2018.

  • Will the GST for affordable houses be reduced?

There is a strong case for reduction of GST for affordable houses to make it more attractive for home buyers. Bringing down the effective Goods & Services Tax (GST) rate from current 12% after factoring the lowering of land prices could ease the tax burden and help in propping up residential sales. Optimism for rate reduction stems from the fact that 2018 is an election year with four leading states going for polls during the year which is seen as a precursor to final electoral battle next year. Government may do anything and everything to win over the electorate as it did in recent Gujarat state election.

  • Whether Budget 2018 will provide boost for housing?

Budget 2017 contained many incentives to boost the real estate sector – infrastructure status for affordable housing, expanding the scope of the Pradhan Mantri Awas Yojana to include mid-income groups, economically weaker sections and low-income population and an interest subsidy of 3%-6.5% on home loans. One is hopeful that the new Budget will contain some provisions for those who are affected by defaults by builders and some steps to speed up the process of implementation of ‘Housing for all’ program. The government should remove the five-year limit for availing income tax benefits for home buyers as delays by builders has made it difficult to seek the relief.

  • Whether the ‘Smart City’ project implementation gather momentum?

Though government’s ‘Smart City’ project was announced three years ago, its implementation is tardy requiring the government to have a relook at its strategy. The government may have to provide some additional incentives to state governments and local bodies meeting the deadline of implementation. One of the greatest hurdles in implementing the project is the insufficient delegation of authority to the SPV implementing the project. Also, existence of multiple authorities at state level is hampering the progress. The government needs to sort out all these issues on an urgent basis.

  • Whether the availability of sand will improve?

In India, the amount of sand used for construction has tripled since 2000. Demand is expected to keep soaring: the country plans to build at least 60m new houses by 2024. However, in recent times supply of sand in many states affected due to sand mining ban in few states which again due to environmental issues and involvement of unorganized sector. While the situation has improved in some states but the industry is controlled by the mafia and the price of sand is often rigged. It should be seen whether sand supply situation improves in 2018 and whether the government comes out with some pragmatic policy statement to resolve the issues once for all.  

  • Will introduction of e-way bill system improve logistic efficiency for cement companies?

Though Octroi Nakas have disappeared from city entry points or state borders after the introduction of GST in the country, this has not resulted in considerable reduction of the transportation time of bulk carriers like cement transportation. According to cement manufacturers considerable time is wasted/spent at state borders for checking on weight, etc. which has prevented logistic cost going down substantially from pre-GST era. However, cement manufacturers hope that situation would improve substantially once e-way bill system is introduced which will do away with checking on the weight, etc. on the borders. With the imminent introduction of e-way bill system from 1st February, we have to wait and watch what impact it will have on logistic efficiency, both in terms of cost and time.

  • Will the GST rate for cement and paints be reduced?

In November last year, the government brought down the GST rate for most of the building materials from 28% to 18%. However, GST rates of cement and paints were kept untouched at 28% which surprised many. As both are important materials in realty sector reduction in their tax rates would help to bring down the cost construction which in turn help to reduce the home price, the government may take positive step sooner than later. 

  • Will the price of TiO2 stabilize?

Though the price of most of the raw materials used in paints manufacturing remained stable in recent months, rising price of TiO2 is a matter of concern for the paint manufacturers. Since there is no significant capacity addition envisaged in the market, the trend (of rising price) may persist for longer duration unless Chinese suppliers who had faced some constraint during the last few months in terms of production restart their production. Paint manufacturers would be anxious to see the price of TiO2 stabilizing soon.

  • Will IKEA entry disrupt Indian furniture market?

IKEA, global home furnishings retailer, will be entering the Indian market through its first store in Hyderabad in early 2018 which will be followed by similar stores in Mumbai and Bengaluru. In fact, the global furnishing major plans to open around 25 stores in India by the end of the year 2025. The stores will be spread across the country, with cities such as Delhi, Gurgaon, Mumbai, Bengaluru, Chennai and Pune as the hub. Though it entry into Indian market will be gradual, initial response to the Swedish Home furnishings company’s store needs to be watched closely. It may redefine the furniture being marketed in India.

  • Will RelWood disrupt furniture material market?

In 2017, Reliance Industries Ltd (RIL) entered into a license agreement with Resysta International GmbH (Resysta) to produce and market RelWood™, a Natural Fiber Polymer Composite (NFPC), in India. The NFPC developed by Resysta is a weather and water-resistant material which has the look and feel of wood, which is not affected by termites, does not splinter or rot over time, is obtained using a renewable resource and is fully recyclable. It even weathers salt water, sun and wind. This product can be used for furniture making and in other home improvement applications. People expect that RelWood™ would do the same thing to furniture industry now which the PET bottles did to liquid storing and carrying in 1990s. 2018 will be a crucial year for RelWood and consumer response to the product will be keenly followed by the experts and competitors.

  • Will introduction of e-way bill system result in consolidation in the plywood industry?

Plywood manufacturers in organized sector feel that in the absence of e-way bill system unorganized sector would be operating unhampered in the old style and with the checks at inter-state borders gone their operation would become much easier in post-GST era. Once the e-way bill system is introduced, illegal movement of goods (without paying tax) will be brought down substantially which will help the market to grow more systematically. It is also expected that under e-way bill system, manufacturers in unorganized sector would find the going tougher as the price advantage which they enjoyed (due to non-payment of tax) would come down substantially. This would eventually result in organized sector eating into the market share of unorganized sector.

  • Will MDF become preferred material for furniture makers?

Though most of the leading manufacturers of plywood are setting up facilities for MDF manufacturing, the product has not yet been able to create its own market. In the post-GST era, industry people are expecting a demand shift from low priced plywood which is dominated by the unorganized sector to MDF as the price gap between the two is reducing while MDF is known to be a better product than low quality plywood. The situation is likely to become clearer in 2018.  

  • Will soaring crude price push up natural gas price for ceramics manufacturers?

Power and fuel are the second-largest cost component for tile companies accounting for nearly 20% of their revenue. Also, most of the tiles manufacturers (including those in unorganized sector) have now shifted to gas from coal gasifiers. Any increase in natural gas price, which is likely considering upsurge in crude oil price, is likely to impact their cost of production. It is interesting to see whether gas price will remain stable in 2018 or it will go up. If it goes up, whether the tiles manufacturers will be able to pass on the hike to consumers is another question for which you may get answer as the year unfolds.

  • Will the ceramics industry see consolidation in 2018?

At present, unorganized sector accounts for nearly 50% of the ceramic tiles manufactured in the country. Earlier, unorganized sector used to sell products at much cheaper rate than those in the organized sector due to tax savings enjoyed by them. However, with the introduction of GST, playing field has been leveled and the price gap between organized and unorganized players has narrowed down substantially. In the coming days, demand is expected to shift markedly towards organized sector as the consumers are increasingly becoming brand conscious. Manufacturers in unorganized sector may soon become contract manufacturers of those in organized sector and some may even have to shut their shop. Year 2018 may prove to be a turning point in the Indian tiles industry.

  • Will India become second largest tiles manufacturer in the world?

China, Brazil and India are the top three producers of tiles in the world, accounting for almost 62% of global output. China accounts for almost half of global production whereas India’s share is 7%. The three largest producers in the world are also the largest consumers with China consuming 40% of global production, Brazil 7% and India 6%. However, among the three, India is the fastest growing consumer of tiles and if the same momentum is maintained in 2018, India can become second largest manufacturer/consumer of tiles in the world.      

  • Will Indian home textiles exporters benefit from Chinese slowdown?

It is not just Chinese slowdown but strict action taken against the polluting industries in that country which are providing opportunities elsewhere, including India. Many of the Chinese dye manufacturing units have been closed down which in turn may help the Indian home textile exporters to increase their market share, especially in USA. How far Indian exporters will be able to make most out of the opportunity thrown by closure of units in China will become clear in 2018.

  • Will competition in home textile market intensify?

Looking inward is the strategy adopted by leading home textile exporters from India in recent years. For example, Trident entered the domestic market in 2014; Indo Count which exports to 56 countries world-wide entered Indian market in 2016 with its “BOUTIQUE Living” brand; and Welspun India, the largest exporter of home textiles from India, sells home textiles in India through “Spaces” brand. Tough conditions prevailing in international market and huge unutilized capacity are forcing many manufacturers to become aggressive in Indian market. This aggressive marketing is expected to be continued in 2018 also which may result in introduction of many new brands at competitive prices. So, the consumers may have all the reasons to smile!

  • Will the e-commerce in home improvement pick up?

E-commerce in building materials is happening but not at the scale one would have expected. E-commerce constitutes insignificant portion of the total sales of the building materials manufacturers. However, with GST regime getting stabilized and various provisions becoming clearer, future of e-commerce is bright say the experts. Also, increased digitalization of payments and unorganized sector becoming insignificant day by day, e-commerce may emerge as major channel of sales for the companies. You may get enough clues to this end in 2018. 

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