FDI in real estate
|
Is slowing down of FDI inflow going to adversely affect the real estate sector asks K. SUKUMARAN
|
The Finance Minister’s statement that we should learn how to manage foreign capital inflows — albeit leading to some problems — should on parallel have the ECBs in real estate to be slowing down. Let us examine the issue in the background of the rather phenomenal growth of the real estate growth so far.
What is quoted in the newspapers is, “there are some problems of copious flow of foreign investment, but that cannot become a ground to reject foreign investment”, which is a ‘mixed’ response to the subject.
If one has to trace the origin and growth of real estate development in our country, we need not travel far behind. Under the British Raj, there was no policy worth the name for this sector. In fact, no real attempt was made to find out the requirements and the gap in either the infrastructure or habitat needs in the Indian ‘colony’.
Even after the dawn of freedom, planned development of real estate sector had to wait for a clear quarter of a century, as the initial thrust was to provide food, keeping in abeyance the shelter needs for a future date.
The first attempt in the direction of systematic housing development was the formulation of Housing Policy in the year 1988 by the Ministry of Urban Development with the approval of the Parliament. Housing and Urban Development Corporation was set up which was entrusted with the primary task of giving financial support to State Housing Boards. Another initiative was the formation of National Housing Bank in the same year, to promote housing finance, which till then was never considered a State commitment.
When did the need for Foreign Direct Investment in real estate arise? The real estate sector grew by leaps and bounds over the last two decades or so and when the gap between the demand and supply widened, it become necessary to encourage private partnership.
Private sector naturally aimed at massive investments, including FDI. This was because it was easy to obtain ECBs at comparatively low interest and longer amortisation, utilising the liberalised policies of the Government in this regard. Joint ventures were also available without many restrictions. Even hundred per cent investments have been allowed in many cases.
At times of high domestic interest rate, the tendency has been to go in for ECBs, especially for long term investments which also keep down the cost of projects like integrated townships etc taken up by real estate companies. What the RBI and the Govt is trying to do now appear to be to restrict the Foreign inflows through ECBs, especially by the small players in real estate sector, where prices have doubled over the last couple of years. It is estimated that over 800 companies have raised about 20 billion dollars through ECBs during 2006-2007 itself.
The large inflows are creating problems of inflation too. The Government is unable to stop the flow of external debt as the majority of the capital raised abroad comes through the automatic route. Excessive flow of dollars is also exerting pressure on the rupee and increases the demand for Indian rupee. RBI has to release more rupees to absorb dollars entering the market, leading to increased liquidity and consequent inflation.
Slow down in foreign inflow
There are many advantages and disadvantages in attracting foreign inflow. On the positive side, it will bring in better efficiency in management of funds. Quality standards will improve. These funds will be cheaper and inflationary pressures may not affect continuous inflow, often. Some of the disadvantages are pressure on local investors and competition for developers, apart from pressure on the rupee. The advantages appear to outweigh the disadvantages. If that be so, why then we need to restrict the inflow?
Restrictions on funds inflow can take away the confidence of foreign investors in general. In these days of globalisation, shutting down the doors merely due to lack of long term vision may hurt the liberalisation path.
Global real estate scenario and Indian response
Around the globe, real estate grew fast during the last decade or so. However, the last one year saw real estate slump in the U.S. The Federal Reserve has been pretty upset over this as the housing slump has acted as a drag on the American economy. As against this, the growth in housing sector in India has been good.
Demand increase lead to price surge and yet developers are high on growth, especially in the smaller cities in the near future. At a time like this, if we restrict the foreign funds flow, it will send adverse signals all round. Even the stock market boom may be hit.
Long term consistent policies are what is needed and most of us will agree that short term political gains or losses must not be allowed to dictate economics.
Printer friendly
page
Send this article to Friends by
E-Mail
Property Plus
Bangalore
Chennai
Hyderabad
Kochi
Thiruvananthapuram
