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Relaxed FDI regulations to stem realty revival
August 11, 2015

The recent relaxation of Foreign Direct Investment (FDI) in construction, efforts to make the Indian economy more lucrative for investment by foreign investors. The reduction in the minimum area for development as well as the minimum investment has widened the investor base that can now enter the country. Given lucrative the shortage of land and its high cost, the relaxation in norms is expected to help attract investment in the construction sector which has a multiplier effect on all other industries in an economy, largely by way of infrastructure creation.

Apart from the employment and income generation potential, greater investment in the construction sector would help the real estate industry, the growth of which has been mostly stagnant over the last few years. Enhancement of the affordable housing stock is also an urgent need due to the political significance attached to the cause. Another window in the recently-introduced amendment incentivizes the investor by allowing him to bypass the regulations regarding the minimum area and investment if 30 per cent of the project’s fund is dedicate to developing affordable housing. A lot more however, would need to be done to turn affordable housing a reality in metropolitans, especially given the extremely high costs of acquiring land.

The amendment in FDI rules is also bound to introduce several new entities in the infrastructure sector. Top-notch investors would compete against each other to develop the quality infrastructural facilities at the lowest possible cost and with the best technology available. Moreover, the newly-introduced Infrastructure Investment Trusts (InvITs) ensures that domestic investors would be able to contribute and benefit from these advancements. The introduction of Real Estate Investment Trusts (REITs) would help enhance a commercial environment required for setting up a sustainable investment scenario.

Experts, however, are currently unsure of the country’s readiness to handle a large and sudden influx of investment. FDI approval system at the Foreign Investment Promotion Board (FIPB) is a bone of contention for several investors, as obtaining approvals for investment needs to be done in a time-bound manner. Land acquisitions are considered a tedious and costly affair despite the Land Acquisition Act in place and the government working towards a system of single-window clearance for all necessary regulatory approvals.

In order to step-up investment in the construction sector, however, some liberalization and rationalization within internal policies is a necessary catalyst. The need is to ‘regulate’ the sector while not stemming its activities. A decline or stagnation in investment can be a major cause of worry for the economy as the construction sector also supports substantial employment generation over the entire spectrum from unskilled workers to engineers, architects, designers as well as financial services. Further, it creates demand for the products of a number of related industries including those in the manufacturing sector like cement, steel, fittings and fixtures etc., all of which can together affect the economy substantially.

On the day the Prime Minister launched the ‘Make in India’ campaign, he also acknowledged the need to rid the country of red-tapism. It should be, perhaps, the first step to be taken care of whilst opening the economy to the world and competing with the likes of manufacturing hubs such as China. The Indian economy would prosper immensely given that an enabling business environment is created by the government for all kinds of investors and consumers.

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