Realty FDI: Land central to Modi's development agenda; it will endanger economy

It probably is just a coincidence. On the day the Supreme Court gave a wrap on its knuckles on the black money issue, the government relaxed FDI rules for the sector - a segment in the economy where such illegal funds thrive.

The government, while relaxing the rules, has said that the move is aimed at increasing the fund flow into the sector where most players are in dire need of money not only to start new projects, but even to complete the incomplete ones.

Explaining the rationale behind the move, the government said in the release that investment in the sector has a “multiplier effect” on the economy as it will boost the construction of infrastructure, which in turn will generate jobs and create demand for many industrial products.

More investments into the sector will increase the number of houses available and also boost affordable housing, the government has said.

The sector has been witnessing a sharp fall in FDI flows over the last two years. Of the total FDI flow, real estate got 7 percent last financial year - a far cry from the 22 percent share it got in 2009-10. This financial year until August, the share is just 3.7 percent, almost half of the 7 percent it got in the year-ago period. The government wants to correct this.

“Therefore, in order to step up investment in construction development with its backward and forward linkages for many other sectors of the economy, it is felt that some liberalization and rationalization of the FDI policy on construction development could be the necessary catalyst to give a boost to the sector,” the government has said.

Is the government missing something here? Nothing, apparently. All intentions are good - create job and demand, boost economy etc. But the only problem is that all these happen in an ideal environment, where the prices of land and houses are not too high and buyers are staying away for the reasons other than the prices, like deflation.

But the problem with India is that the situation is not ideal. And so clearly, the government is missing a key link in its whole strategy: the prices. The statement is silent about this aspect.

There are various estimates as to how much house prices have risen over the last few years. According to the National Housing Board’s housing index, the prices on an average have risen about 18 percent in 15 cities, over the last three years.

But then the index is no where near the ground reality. As Vivek Kaul calculates in this Firstbiz column , the prices in Mumbai are so high that an average city resident will have to spend34 years’ of income to buy a home in the city. The average price of a flat in the city is Rs 1.2 crore, he says citing a media report.

So, the biggest problem plaguing the sector is the prices. No genuine buyer can buy a house because of the extremelyhigh prices. And the government seems to have glossed over this fact, when it brought in the crucial reform yesterday.

This would mean the outcome of the measures will be exactly opposite of what they were intended at. They will only help the companies and not the buyer. Even the smart city projects, which Prime Minister Narendra Modi has dreamt up in the run-up to the elections, will only push up land and house prices.

So what do you make out of the latest reform from the government? That land is central to the Modi government’s development agenda - be it creating infrastructure or helping the real estate sector or even mining reform.

The link between infrastructure and land need not be explained. But mining? Yes mining too needs land and a lot of it. The only difference is that here the poorest of the poor will be at the receiving end.With the government going all out to boost the business sentiment, chances areminingcompanies too will get a hand holding from the government to acquire the tribal land.In fact, an earlier report in the Business Standard said the government is “discussing possible ways to do away with the mandatory requirement of securing consent from tribal gram sabhas (village councils) before cutting down their forests for industrial purposes”.

Now the question is how effective will a land-centric development agenda be? To get an answer, one only needs to look at China, a country which had constructed scores of ghost towns to inflate demandand economic growth. The end result was a huge bubble in real estate,which is nowdeflating, if not bursting. The latest GDP data showed the economic growth is slowing down due to cooling real estate. At 7.3 percent, the growth was at the slowest since the first quarter of 2009.

If Modi indeed wants to avert such an eventuality, he will have to rein in real estate prices, which are poised to rise further due to his latest reform, smart city projects and infrastructure push. For this, he should unearth the black money, not abroad, but here, right under his nose.