New norms to benefit construction sector

The easing of norms for foreign direct investment in the construction sector, approved by the government last week, can give a boost to this important sector. Though 100 per cent FDI was allowed in the sector as early as 2005, constrictive rules had prevented it from taking full benefits of the policy. The main rules that needed change related to the minimum area development and freedom for investors to exit. The discouraging effect of the norms had become clear in the last few years when the economy went into a downturn. The share of the sector in total FDI fell from 20 per cent in 2009-10 to about 3 per cent last year. It was $ 1.3 billion in 2012-13 against $ 3.1 billion in the previous year. The inflow has been a low $ 167 million in the first four months of this financial year. 

 

So, the need to liberalise the norms has been felt for some time. The government has now decided to reduce the minimum built-up area required to attract FDI from 50,000 sq m to 20,000 sq m and to lower the capital requirement level from $ 10 million (Rs 61.4 crore) to $ 5 million (Rs 30.7 crore). Investors will be allowed to exit a project on its completion or three years after the final investment date. They will also be allowed to repatriate investment and transfer their stake to other investors. The easing of rules is in line with the nature of the Indian construction market and suits its requirements better than the earlier norms which were seen as too rigid. It is felt that it will lower risk and ensure better returns on projects.   This is likely to make the Indian market more attractive for foreign investors. It is expected that it will give a boost to the affordable housing projects also because there are exemptions and concessions directed at such schemes.

The importance of promoting investment in the construction sector cannot be over-emphasised. It is a sector that caters to a basic need and has great potential to grow in a developing economy. The growth of the sector will also give a thrust to many other sectors like steel. It also employs large numbers of people and has the potential to absorb more labour. The government’s plans to boost the manufacturing and infrastructure sectors and set up a number of smart cities can achieve success only with support from the construction industry. All construction companies are in heavy debt because of high interest rates and a credit crunch. Easier availability of FDI is bound to help them. Along with the recent decision to set up real estate investment trusts (REITS), the new norms will make the sector healthier.