• Government eases FDI norms for real estate sector; MSP hikes kept at a 10-year low

In keeping with the pace it has gathered recently in implementing pending reform proposals, the Narendra Modi government on Wednesday sought to speed up its 100 smart cities project by easing the foreign direct investment (FDI) policy for the construction sector and sought to curb the subsidy bill by sticking to the recent practice of modest hikes in the benchmark prices of various crops.

The Cabinet Committee on Economic Affairs (CCEA) raised the minimum support price (MSP) of wheat, the most important winter crop, by just 3.6%, or R 50, to R1,450 per quintal.

The CCEA decided to raise the MSP of winter-sown crops by up to 4.2% for the crop year through June 2015, also aimed at containing inflation, the persistence of which at the retail level is the reason why interest rates remain high, stifling investments.

Wednesday’s relaxations for FDI in construction will accelerate the flow of funds to relatively small real estate projects that have remained out of bounds for foreign investors and kindle the pent-up demand for affordable housing, leading domestic players in the sector told FE. If not immediately, the move could also lead to real estate prices coming down with increased supply some months down the line. The sector has already started witnessing a renewed interest of private equity firms, they noted.

As far as FDI in construction is concerned, the investee company will now be required to bring minimum FDI of $5 million only within six months of the start of the project, as against $10 million earlier. “Subsequent tranches of FDI can be brought till the period of 10 years from the commencement of the project or before the completion of the project, whichever expires earlier,” said a statement issued after the CCEA meeting.

For construction-development projects, FDI can now come in with a minimum floor area of 20,000 sq m, against the lower threshold of 50,000 sq m till now. Subject to these conditions, 100% FDI will be permitted in the sector. While the three-year lock-in (since date of final investment) for FDI investors will broadly remain, the Foreign Investment Promotion Board will consider their proposals for exits before completion of the project on a case-by-case basis.

While no minimum land area will be stipulated for “serviced plots”, in the case of combination projects — which comprises service plots and construction projects — only either of the two conditions of capital and floor area will apply. Foreign investors can also exit on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure. Indian investors in FDI projects will be permitted to sell only developed plots.

As promised by finance minister Arun Jaitley in his Budget speech, there would be no restrictions on area and capitalisation if 30% of the project cost is earmarked for affordable housing. Between April 2000 and August 2014, construction development, including townships, housing and built-up infrastructure, received FDI worth $23.75 billion or 10% of the total FDI attracted by the country during the period.

The government had raised the MSPs of various crops in the range of 30% to 91% over the five years through the summer of 2013-14. While relentless increase in the MSPs led to higher disposal incomes with rural households, spurring consumption, it had also fanned inflation, especially in food items, and raised the government’s procurement costs. The latest increases in MSPs are the lowest in a decade for most of the crops in percentage terms.

Last October, facing criticism over its inability to contain food inflation, the UPA government effected mild hikes in the MSPs of winter crops to a maximum of 12.24% and prices of key crops like wheat and mustard seed were raised just 3.7% and 1.7%, respectively.

Lalit Kumar Jain, CMD, Kumar Urban Development and chairman, Credai, said the government’s move on construction FDI will benefit all “small-sized real estate projects” and not just affordable housing. “However, we feel that the government should consider relaxing the three-year lock-in period further for such investments and, instead, link the repatriation of money to the cash flows of the project,” he said.

According to Neeraj Sharma, partner, Walker Chandiok & Co, with more funding to be available to the real estate sector due to Wednesday’s decisions, the construction and deliveries of projects will indeed pick up.

Echoing this view, Rahul Sabharwal, COO, VBHC, said: “In the last four to six months, a lot of PE interest is being witnessed in India’s realty market and the government’s latest move will give a further fillip to the investments in the sector.” He said though prices may not come down immediately with this move, if the cost of funding comes down, that will make housing more affordable to the end user.

Anuj Puri, chairman and country head, JLL India, said: “This will benefit all segments of real estate, be it residential, commercial or retail. The biggest beneficiaries will remain residential segment and especially projects that are coming in the inner city areas.”

The NDA government earlier this year implemented modest hikes of up to 4% in the MSPs of summer crops, as the country stared at a wide-scale dry spell. Analysts said although wholesale price inflation slowed to an almost five-year low in September and retail inflation, too, hit a record low, with mild hikes in the MSPs the government sought to play safe, as the recent moderation in price rise came mostly off favourable bases.

The CCEA also raised the MSP of mustard seeds by 50 to Rs 3,100 per quintal, barley by Rs 50 to Rs 1,150 a quintal, gram by Rs 75 to Rs 3,175 a quintal, safflower by Rs 50 to Rs 3,050 a quintal and lentil by Rs 125 to Rs 3,075 a quintal, the maximum for any winter-sown crop, for the rabi marketing season.

The article appeared in the Financial Express. The article can be found here.