By Stuart Burns (Ag Metal Miner):
When we think of India as an investment destination or look at the economy for areas that could provide growth and wealth generation construction is not normally one that sits high on the list.
The popular view is construction of any kind is so mired in bureaucracy that nothing ever gets done and waste is endemic in the system. Indeed, India’s generally appalling infrastructure supports that view from the moment a visitor arrives at an airport, railway station or takes to the highways. But in fact, India’s construction industry is a major contributor to the country’s GDP and one of the largest employers, with around 33 million workers. Not only that, but according to an article in the construction publication Globalconreview the property sector attracted $1.2 billion in Foreign Direct Investment in 2013-14, admittedly down 8% from 2012-13, but still substantial. While the Indian economy grew by 5% in 2013, the construction sector grew by 5.9%.
New Prime Minister Narendra Modi has made many small changes since he came into office creating an air of optimism and positivity not seen in Indian politics for a generation. None of his changes could be said to be radical but, in summary, they are overwhelmingly positive and have been well received by the business community.
His long-term popularity and success will be judged on how well he improves the lot of the common man, all billion plus of them, so his latest initiative has much to commend it. Recognizing that the country cannot afford the levels of investment needed to create a revolution in affordable housing, to upgrade education facilities and to improve supporting infrastructure the only solution is to attract FDI funds and know how. In the past, this has been significant but still held back by strict rules that limit the attractiveness to investors.
The article says that under current rules 100% FDI is allowed for the development of townships, housing and some infrastructure, but the rules for property developments require minimum capitalization of $10 million for wholly-owned subsidiaries and $5 million for joint ventures with Indian partners. Developments must be 50,000 square meters in size, and developers may not sell off their assets until 3 years after project completion.
In a bid to open up the sector and attract substantial inward investment, the government is considering the removal of all restrictions on size and minimum capitalization for 100 designated “smart cities” that have been identified for the scheme, as well as prioritizing affordable housing projects. The 3-year lock-in period would also be removed under the new proposal if developers committed to the 30% affordable housing minimum requirement.
Under the plans the new cities would be satellite towns of larger cities or modernized existing mid-sized cities rather than greenfield sites but, even so, one of the biggest hurdles, despite explicit assurances by the government to speed up approvals and address issues related to land acquisition, will remain India’s bureaucracy and land ownership issues. Still, the aim to create these 100 smart cities, expected to accommodate 100 million people, has much to commend it. If the project achieves only partial success it could stimulate a boom in Indian construction, jobs, steel and copper consumption and provide a welcome boost to national growth.
This piece is cross-posted from OilPrice.com with permission.