4th Aug 2014
Over the past decade, the construction industry has been hit hard by economic slowdowns and extreme market fluctuations. Construction and infrastructure play a significant role in a country’s economy, but rigid contractual policies and very high construction costs (among other factors) have been constricting the growth of this sector in India. Needless to say, growth in construction in infrastructure will not only result in more connected, streamlined and future-ready cities – it also means the creation of millions of new jobs and overall growth of the economy.
The new government did attempt to provide increased impetus to the construction and infrastructure sectors with additional allocation to infrastructure projects in the recent budget. However, sizeable budgetary allocations are nothing new in the Indian context. Everything looks good on paper until the funds for large projects hit bureaucratic hurdles on the road to implementation. Considering its complexity, clearing the opaque jungle of red tape that has been created in India over the decades is in any case not an easy task even for the most determined government.
If viewed from a market-level perspective, Budget 2014 has in fact not delivered any tangible means to reduce construction costs. The cost of construction materials has been increasing at a rate of 15-16% over the past three years, and this has seriously impeded developers’ ability to generate sufficient profits to launch new projects.
While this does not significantly impact larger developers who tend to launch residential projects for the mid-income and high-income segments of buyers, it is a challenge to smaller developers who typically cater to the needs of home buyers with smaller budgets. In other words, the high cost of construction remains a serious challenge to the affordable housing sector.
The factor of high construction costs continues to be at odds with the new government’s focus on proving housing for all by 2022. National-level developers will doubtlessly benefit from the recent budget loosening the norms of foreign direct investment into the affordable housing sector. This is because, thanks to their larger land holdings and financial positioning, they will be able to meet the minimum area norms and capitalization criteria required by the FDI policy. The FDI aspect for affordable housing is more or less geared towards large-scale development undertakings, often involving slum rehabilitation in the larger cities.
However, the biggest suppliers of budget housing in India have always been the smaller players. Because of the high land costs, the projects launched by these developers tend to be small and therefore of no interest to foreign institutional investors. These low-key developers will therefore not benefit from the relaxation of FDI norms into affordable housing projects, and continue to suffer from ever-escalating construction costs.
The one glimmer of hope on the horizon is the budget’s allocation of Rs. 40 billion towards low-cost housing schemes. However, no clarity has so far been offered on what categories of developers will be benefited, and what the qualification parameters are.
This allocation is basically compensation to the NHAI for the loss it incurs in the process of providing incentives and developers of affordable housing. However, incentivization takes place at a local level and depends on locally-decided parameters. For example, in a state like Gujarat (which already has very proactive policies for affordable housing) the benefits of this allocation will be more uniformly spread across stakeholders. This does not mean that all developers of affordable housing in other states will be equally benefited.