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Reforms in the real estate sector: For a stronger economy

Government must act quickly to implement the much-needed reforms in the real-estate sector to help it sail through the current economic downturn and act as the growth engine of Indian economy.

By Anubhav Srivastava

August 20, 2009

 The current global financial crisis has badly hit the real estate sector in India. All construction activities have virtually come to a standstill even as the builders are facing difficulty in selling out the existing inventory. However its still remains one of the most important sectors of the economy. After agriculture, the real estate sector is the second largest employer in India. 

Moreover, the real estate industry has significant linkages with other sectors of the economy. The sector has more than 250 associated industries and hence any investment in the sector has a cascading effect on all associated industries. An investment of one rupee in this sector leads to 78 paise getting added to India’s GDP. 

Even before the current economic crisis came to head, the real estate sector was witnessing some major policy bottlenecks, most of them related to the investment opportunities and taxation. According to industry experts, the sector is overburdened with taxes ranging from service tax, value added tax, central sales tax and excise duty on immovable property. 

Besides there is an urgent need of suitable amendments in the Foreign Direct Investment (FDI) guidelines in the sector. At present, FDI is allowed only in greenfield projects in India. There is a need to allow FDI in companies which are involved in real estate development. This will open up new sources of funding for the real-estate companies. The guidelines regarding FDI in infrastructure sector must also be more clearly defined. 

There are several measures that the government can take to help the sector maximize its growth. Since housing for all is one has been the aim of many central and state government schemes, the government should confer infrastructure status to the housing sector. This move will help the real estate companies in getting access to low cost institutional funds. 

The government should focus on evolving a rational structure of stamp duties that have to be paid on the sale and purchase of land and housing properties. In some states in India, the stamp duty is as high as 14-15 per cent. The stamp duty on property should be reduced to a maximum limit of 3 per cent and all states in India should have uniform stamp duty rates. This move will help to reduce the property rates and bring more transparency in transactions. 

The laws dealing with housing projects also need to be streamlined in order to give a push to the developmental activities, particularly in urban areas. Laws like Rent Control Act and Urban Land Ceiling and Regulation Act are highly restrictive and must be repealed. All efforts must be made to restrict growth of slums in urban areas and develop them into hygienic colonies. There is also a need of suitable amendments in the Agriculture Land Ceiling Act and also the Land Acquisition Act of 1894.

Another factor that hampers the growth of real estate sector in India is the lack of basic amenities like water supply, roads, power and sanitation. Government should make efforts to increase partnership with private sector companies in building these basic amenities. The participation of private players in infrastructure sector will, apart from bringing latest technology and management practices, ensure timely completion of the projects. 

One area where India has constantly lagged behind is ensuring single window clearance for private companies. The situation is particularly bad in the real estate sector where clearance is required form nearly 10 different agencies before the work on the project can be started. The absence of single window clearance not only discourages investments but also leads to delays and corruption. Government must ensure that the practice of single window clearance for the real estate projects is implemented as soon as possible. 

Thought the government is India is moving forward on some of the reform measures suggested above, the process of must be made quicker. If given proper environment, the real estate sector can emerge as the driving force of the Indian economy. 

The author is Editor, Policy Proposals For India. 


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