By: R K Chopra, Secretary General, Indo-American Chamber of Commerce
Track2Realty Exclusive: The multiplier effect of real estate sector and its capacity for generating employment is well recognized. It is estimated that the sector contributes close to 6 per cent to the gross domestic product (GDP) of India and is estimated to be growing at 20 per cent per annum.
Though realty sector eludes a definitional clarity, and it is widely held that there are four sub sectors, such as housing, retail, hospitality and commercials. It is also significant that the sector stimulates demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, consumer durables and so on. Therefore, it is considered to be the fourth largest sector among the manufacturing segment.
The year 2005 was a watershed for the real estate sector in the country. The government changed the policy to allow Foreign Direct Investment (FDI) in this sector. There was a boom in the investment and developmental activities.
The sector not only witnessed the entry of many new domestic realty players but also the arrival of many foreign real estate investment companies including private equity funds, pension funds and development companies triggered by the high returns on investments.
The industry achieved new heights during 2007 and early 2008, characterized by a growth in demand, substantial development and increased foreign investments. However, by mid-2008, the effects of the global economic slowdown were evident here too, and the growth was sluggish.
FDI inflow into real estate dropped significantly. In the financial years 2007-08, 2008-09 and 2009-10, the housing and real estate sector attracted FDIs of 8.9%, 10.3% and 11% respectively, of the total FDI flows in India. However, the financial year 2010-11 saw a mere 6% FDI in this sector.
There are a number of studies and working papers that have identified realty sector as a driver for promoting US investment in India. Historically, the US had shied away from investing in India in this sector on account of the government restrictions and lack of policy clarity. Even while the government allowed and attracted investment in the infrastructure sector, the response from the US investors was lackadaisical.
Admittedly with the opening up in part of the realty sector, there has been a spurt in PE investment from the US. But investment in the project side was not forthcoming, even though 100 per cent FDI is allowed for developing townships and settlements. FDI up to 100 per cent is also allowed in hotel and tourism sector through automatic route.
Introspection is needed as to what held back the FDI. Real estate policy of India lacks clarity. Subsequent to the opening up of the sector in 2005, there were misplaced fears among certain sectors that the policy is being widely misused for pumping in PE investment and excessive inflows has had distortionary effect on the economy. This has led to amendments to the FDI policy on real estate that have created unwanted apprehensions and confusion in the minds of global investors.
Further, lack of consistency in rules relating to development of SEZs, increased monitoring of the sector by regulatory agencies, tightening of rules for lending to the real estate sector etc. had acted as stumbling blocks for real estate sector in India in general and inflow of FDI into the country in particular.
Next: What deters US investment in Indian realty
