Reforms, better town planning, quicker approval needed in real estate sector for betterment of economy
The Indian economy is now facing the reality of a significant moderation in growth partly due to the prolonged weakness in the global economy coupled with structural imbalances in the Indian economy. One sector, in particular, that continues to be buffeted by bad news and has few sympathisers is the real estate industry.
Of the many charges made against the industry, ‘exorbitant’ or ‘unrealistic’ pricing leading to profiteering is often the main complaint. But is that true? In a fragmented industry such as this, how can developers dictate pricing?
Led by a chorus of influential voices and supported by the ridiculous levels of prices in Mumbai, it was easy for policymakers, regulators and financiers to clamp down on the industry. Monetary policy on the industry has been tight since 2007 with periodic further tightening thereafter.
However, given the slowdown in the macro economy, it is essential to consider some important facts about this industry and the critical role it plays in the economy. The real estate and construction industry accounts for 19.5% of GDP and 20.6% of gross capital formation in the economy. The industry arguably provides employment to the largest number of skilled and unskilled workers. By various estimates, 33 million people are employed in the industry. This sector also drives core industries like cement and steel.
In this writer’s view, high real estate prices will remain a reality for some time in India due to three key factors:
1) Huge pent-up demand with the supply side artificially constrained by a set of archaic state and central laws.
2) Opaque functioning of the planning and approving authorities who are vested with a disproportionate level of discretionary powers.
3) Weak machinery for enforcement of consumer rights due to an overburdened judiciary.
On the first point, consider a simple statistic. India accounts for ~17.8% of the world’s population (behind only China, ~19.5%), but accounts for a relatively smaller share (2.4%) of the world’s surface area. This disproportionate share of the world’s population makes India one of the more densely-populated countries in the world. India’s population density at 373 per sq km is 7.4x of the world’s and 2.7x of China’s population density.