Construction Sector in India- Government Policies and Growth drivers

December 15, 2014

Latest Union budget has muted the idea of developing 100 new Smart Cities  and that will increase the scope of construction sector to a larger extend. 10% of the GDP is India is based on construction activity and India requires USD 650 Billion in next 20 years time to develop the urban infrastructure of developing India. Under the Make in India campaign the Government has projected an  investment of USD 1000 Billion for the infrastructure sector between 2012- 2017, 40% of which is to be funded by the Private Sector. 45% of the infrastructure sector investment will be funnelled to fuel the growth of the construction activity and 20% to modernise the construction activity. This will help the demand in infrastructure sector and thereby boost the economic activity in general.

In order to achieve the goal the Government of India has undertaken a number of measures to ease to access the funding sector. India has as estimated urban housing shortage of 18.8 Million dwelling units, in 2012. The housing shortage in rural India was 47.4 Million Units in 2012.

 

Growth Indicators and investment models

Present level of Urban infrastructure are inadequate to meet the demands of the existing urban population . There is need for infrastructure in Urban areas requires creation of new, inclusive smart cities. The new cities will meet the demand of the increasing population and cater the migration from rural to urban areas.  In order to meet this growing demand and to bridge the gap between the peaking demand and inadequate supply, the Government of India is in a mission of developing 500 Cities , which include cities with a population of 100,000 and some cities of religious and tourism importance.  The Public Private Partnership [PPP] model shall be largely depended upon to support the development of Smart cities and the mission is to attain the required levels within a period of 10 years.

 

The immense level of migration to Cities from rural areas is escalating the demand for urban cities and in order to cater that requirements in a quality manner, the urban local bodies are encouraged to enter into joint ventures, private sector partners or through other models with Foreign players in a larger manner.

 

Investment Opportunities

There are immense opportunities available for investors in construction of residential houses, retail , commercial and hospitality sectors, technologies for smart sustainable cities and integrated townships, low cost housing technologies, green building solutions, sustainable and environment friendly building solutions, training of manpower for construction sector, water supply, sewage and sewerage systems.

 

As per the Foreign Direct Investment Policy of India, investments in  Townships, housing, built-up infrastructure and construction development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) is permissible under 100% Automatic route

Investment will be subject to the following conditions:

 

  1. Minimum area to be developed under each project would be as under:

    1. In case of development of serviced housing plots, a minimum land area of 10 hectares

    2. In case of construction-development projects, a minimum built-up area of 50,000 sq.mts

    3. In case of a combination project, any one of the above two conditions would suffice.

  2. Minimum capitalization of US $10 million for wholly owned subsidiaries and US $ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company.

  3. Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. Original investment means the entire amount brought in as FDI. The lock-in period of three years will be applied from the date of receipt of each installment/tranche of FDI or from the date of completion of minimum capitalization, whichever is later. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.

  4. At least 50% of each such project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor/investee company would not be permitted to sell undeveloped plots. For the purpose of these guidelines, “undeveloped plots” will mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under prescribed regulations, have not been made available. It will be necessary that the investor provides this infrastructure and obtains the completion certificate from the concerned local body/service agency before he would be allowed to dispose of serviced housing plots.

  5. The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Body concerned.

  6. The investor/investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/bye-laws/regulations of the State Government/ Municipal/Local Body concerned.

  7. The State Government/Municipal/Local Body concerned, which approves the building/development plans, would monitor compliance of the above conditions by the developer.

Note:

(i) The conditions at (1) to (4) above would not apply to Hotels & Tourism, Hospitals, Special Economic Zones (SEZs), Education Sector, Old Age Homes and investment by NRIs. 

(ii) FDI is not allowed in Real Estate Business

 

Government is planning to further relax the provisions by cutshoritng the minimum area requriement from 10 Hecters to 5 hecters and minimum construction area requirement from 50000 sq.mtrs to 10000 sq.mtrs and the same is in final discussion stage. The said change will attract medium sized players to the Indian real estate market and will boost up the growth in the infrastrucure segment

 

FOREIGN DIRECT INVESTMENT OPPORTUNITIES IN INDUSTRIAL PARKS

  1. “Industrial Park” is a project in which quality infrastructure in the form of plots of developed land or built up space or a combination with common facilities, is developed and made available to all the allottee units for the purposes of industrial activity.

  2. “Infrastructure” refers to facilities required for functioning of units located in the Industrial Park and includes roads (including approach roads), water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.

  3.  “Common Facilities” refer to the facilities available for all the units located in the industrial park, and include facilities of power, roads (including approach roads), water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.

  4. “Allocable area” in the Industrial Park mean

  • in the case of plots of developed land- the net site area available for allocation to the units, excluding the area for common facilities.

  • in the case of built up space- the floor area and built up space utilized for providing common facilities.

  • in the case of a combination of developed land and built-up space- the net

  • site and floor area available for allocation to the units excluding the site

  • area and built up space utilized for providing common facilities

 

“Industrial Activity” means manufacturing; electricity; gas and water supply; post and telecommunications; software publishing, consultancy and supply; data processing, database activities and distribution of electronic content; other computer related activities; basic and applied R&D on bio-technology, pharmaceutical sciences/life sciences, natural sciences and engineering; business and management consultancy activities; and architectural, engineering and other technical activities.

 

FDI in Industrial Parks would not be subject to the conditionalities applicable for

construction development projects etc. spelt out in para above, provided the

Industrial Parks meet with the under-mentioned conditions:

 

  1. it would comprise of a minimum of 10 units and no single unit shall occupymore than 50% of the allocable area;

  2. the minimum percentage of the area to be allocated for industrial activityshall not be less than 66% of the total allocable area

 

Real estate investment Trust [RIETS] & Infrastructure Investment Trust [INVITS]

The introduction of new funds will provide necessary support to the sector in terms of required large scale investments.

 

Agencies related to Infrastructure development

Ministry of Urban Development (www.moud.gov.in)
Ministry of Rural Development(www.rural.nic.in)
JJNRUM(www.jnnurm.nic.in)
The Confederation of Real Estate Developers Association of India (www.credai.org)
Builders Association of India (www.baionline.in)
Construction Development Council (www.cidc.in)

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