The Effect of Foreign Direct Investment(FDI) on Real Estate In India

Posted on: 2022-09-09
The Effect of Foreign Direct Investment(FDI) on Real Estate In India The Effect of Foreign Direct Investment(FDI) on Real Estate In India

Foreign Direct Investment (FDI) is an investment type that authorises foreign nationals to hold ownership title of businesses and properties in India. FDI is the term that offers a distinct identity to such investments.

FDI Investment in India

The Government of India has a legal framework to follow for foreign entities to invest in the country. They fall under the below-mentioned three categories.

  • Automatic Route:- Beforehand approval from the Government is not needed to invest in industries falling under this type. Some of these industries are Airports, Industrial Parks, Mining, Manufacturing, and IT.
  • Government Approval Route:- Prior approval from the Government is mandatory for foreign investment in India. The industries falling under this category are Air transport services, Satellites, Print media, and Public sector banks.
  • Prohibited Sector:- FDI is not permitted in some Indian industries. Some verticals of real estate investment in India are restricted. Other prohibited sectors are Atomic energy, Lottery business, Manufacturing tobacco products, Gambling, and betting.

Importance of the real estate sector in India

The Indian property market is the second largest employer after agriculture. It is a massive contributor to the Indian economy. The reality market contributes approximately 50% of the GDP (Gross Domestic product). With a development spree in other industries, especially infrastructural ones, the demand for skilled and unskilled labour grew massively. Today, there is a workforce of over 70 million people in the Indian real estate market. It is likely to reach the 1 trillion mark by 2030. The property sector is an ancillary service provider for over 200 industries. A few dependent industries are Steel, Cement, Timber, Designing, leasing, and property consultancy.

Significance of FDI for Economic Growth

  • FDI investment is pivotal for bringing cash inflow into the country. FDI is significant for economic growth, as a developing nation requires continuous monetary support to meet its development goals. Fortunately, Foreign Direct Investment(FDI) in India is a better option to bet on despite lending money from international establishments like World Bank and International Monetary Fund (IMF).
  • FDI proves beneficial as the country does not have to face balance payment deficits, which many developing nations suffer from. The problem of balance deficit arises when a developing nation has a foreign currency requirement way more than its earning capacity. Foreign direct investment maintains a regular cash flow that keeps the economy moving.
  • FDI in a country is a gateway to limitless employment opportunities. An FDI investor seeks human resources to work seamlessly with advanced technologies. Foreign investment in India lets citizens work according to international work standards in different capacities. Hence, it is significant for the continuous growth of the economy.
  • The FDI investment in India by foreign companies also increases per capita income. With the world growing at a fast-pace, the requirement for skilful resource is a must and multi-national companies are not hesitant to hire skilful people at an increase pay package.

FDI regulations and policies in India

  • The country’s inclination towards liberalisation since 1991, has now become stringent to protect the nation from opportunists. Two year back, in 2020, the Union Government amended rules for FDI investment in India. According to which, neighbouring countries like Pakistan, China, Bangladesh, and Afghanistan need to obtain Government approval to invest in India. Interestingly, the measure is taken for prohibiting Chinese entry in the Indian market at a massive scale. The Government approval obligation is already in place for Pakistan and Bangladesh.
  • With some preventive measures to maintain the sovereignty of the nation, India went ahead in the FDI business to embrace technological advancement, skilfulness, and increase in income. In the oil and gas sector, the investment by foreign nationals is static at 49% with the clause of 100% foreign investment with ‘in-principle approval’ from the Government under PSU (Public Sector Undertaking).
  • The FDI in India rise from 49% to 74% in Defence and Insurance sector. Under the norm, a 100% FDI option in telecommunications is possible.

Foreign Direct Investment in the Indian Real Estate Sector

Despite favouring liberalisation, India has been protective about country’s real estate market. The Government, however, loosen the rules for investment in this domain. The unleashing of partial restrictions embark the sector on the pathway of success.

Factors driving FDI inflows into the Indian real estate market

  • Robust demand for Grade ‘A’ office space:- With various reputed MNC companies setting up offices and regional headquarters in India, the demand for premium offices with state-of-the-art facilities in Indian metro cities increased exponentially. India’s ranking in the Ease of doing business index witness a surge.
  • Relaxation in FDI in India:- The 100% foreign direct investment in townships and built-up infrastructure is now permissible. The Union Government of India in 2014 minimised the minimum built-up area, capital requirements, and relaxed exit norms for foreign investment in the construction sector.
  • Introduction of REITs:- The inception of Real Estate Investment Trusts (REITs) offers lucrative profitable opportunities for foreign investors. It includes minimum risk, high return on investment, continuous passive income, and simple exit rules. Until now, only the Embassy group ventured into REIT in 2019.

Key players and countries contributing to FDI in Indian real estate

  • Emmar Properties, a renowned realtor of Dubai with Delhi-based MGF Developments Limited., announces venturing into the realty sector. The duo plans commercial property investing in Gurugram, India’s second Silicon City.
  • UK-based construction giant Laing O'Rourke (LOR) announces collaboration with the DLF group for airport redevelopment and other infrastructural projects.
  • A Vancouver-based property investment company Royal Indian Raj International Corporation (RIRIC), is ready for a massive investment of US$ 2.9 billion in a solo real-estate project named Royal Garden City in Bangalore. The expected completion time of this project is ten years. Project’s retail cost is approximately Rs 41,000 crores.
  • The Indonesia-based Siputra Selim group plans an investment of $200 million into the housing sector in Kolkata.

Impact of Foreign Direct Investment on the Indian Real Estate Market

The inception of RERA Real Estate Regulatory Authority in 2016 monitors realty proceedings and ensures transparency in work. The standard builder-buyer agreements pan India have to follow RERA guidelines. In the context of real estate investment, the permission of 100% FDI in RERA-Registered projects having 100+ apartments opens doors for foreign currency inflow in the Indian economy via the real estate business. However, the companies can get returns only if the project complies with RERA guidelines.

From restrictions on FDI investment to easy venturing into businesses, FDI in India has come a long way. With broadening investment horizons, foreign investment companies are going forward to invest and yield profit. It is possible with the delivery of better infrastructure and homes to live and enjoy life to the maximum.

The paradigm shift from family business to managed property consultants, increase in FDI ratio, and introduction of RERA and REIT-like forum pave the way to the realty roadmap of new India. The future of FDI in Indian real estate looks bright as the Government emphasises ease of doing business while opening new avenues to elevate living standards.