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How Real Estate Acts as an engine to Indian Economy?

Being a critical sector of our economy, real estate has a huge multiplier effect on the economy. Therefore, it is a big driver of our economic growth. As known, it is the second-largest employment-generating sector after agriculture. The real estate is growing at a rate of about 20% per annum and has been contributing about 5-6% to India’s GDP. It generates a high level of direct employment and stimulates the demand in over 250 supporting industries such as cement, paint, steel, brick, building materials, and so on. Really, it can be said that the Indian real estate industry has been on a roller coaster ride since 2005.
It is necessary that real estate development in a country takes place in a very healthy and efficient manner. Many real estate players in India have already adopted a business process re-engineering and have done commendable work by offering products with substantial demand such as customized housing, shopping complexes/malls, office complexes, multiplex, etc.
A Glimpse from the Past
The government’s policy to allow Foreign Direct Investment (FDI) in the real investment sector has consequently led to a boom in investment and developmental activities. As a result, the sector not only witnessed the entry of many new domestic realty players, but also welcomed many foreign real estate investors including private equity funds, pension funds and development companies, lured by the high returns on investments. Since then, the real estate sector has been riding through many highs and lows.
The industry touched new heights during 2007 and early 2008, characterized by a growth in demand, increased foreign investments and substantial development. But, unfortunately, the effects of the global economic led to the slowdown and the industry took a ‘U’ turn. The inflow of FDI into real estate dropped significantly and one of the most promising markets for foreign investments experienced a huge downturn.
Financial Support for the Sector
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 in India. However, the financial year 2010-11 saw a mere 6% FDI in this sector. The year 2010 saw the Indian real estate sector spring back into action which suffered due to the aftermath of the global downturn. The emphasis on ‘affordable housing’ aided the real estate sector to overcome the financial crisis it had witnessed.
Undoubtedly, the sector holds huge potential to attract FDI in its various segments. This can be achieved with the joint efforts of both the industry and the Government. Here, the industry should work towards increased transparency, improved delivery and project execution, clear land titles. On the same time, the Government must provide economic incentives to developers to build low cost and affordable housing for the masses. Additionally, it should also review the existing FDI guidelines for investment and development in Indian real estate to increase the flow of foreign capital into the sector.
Boosting R&D in Real Estate
The Government must provide incentives to the public and private sectors to take up R&D (Research and development) activities for new building materials and technologies so that the industry can deliver affordable, sustainable and environment friendly building (both residential and commercial) structures.
India has huge potential to attract large foreign investments into real estate as the real estate in developed countries is reaching a point of saturation and the demand and prices are falling. As such, the global real estate players are looking at emerging economies such as India for tapping opportunities in real estate.
Indian real estate is a strong contender here due to its strong economic fundamentals and demographic factors. Also, while developed economies are still struggling to regain their growth impetus, developing countries like India and China are expected to grow at a reasonably high rate. In the coming years, the opportunities in the real estate sector will attract more global players to India and hence will help the industry to mature, improve management, adopt advanced construction techniques and become more transparent.
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