Sunday, July 1, 2007

Revamping infrastructure in India

The recent rains in India and Mumbai particularly have brought out the woes of infrastructure in the financial capital of India. “India needs $ 320 billion investment in infrastructure alone” said Mr. P Chidambaram, Finance Minister at a conference in London. As India gallops in to a 10% average GDP growth for the next 10- 15 years, the infrastructure needs to cope up with the potential growth. India prides itself in possessing an intellectual labour force, world class business practices, a stable political climate and an effective legal system, however loses out on the infrastructure.

How do we revamp the infrastructure and bring it to world class? Sure enough our population is going to be a big challenge, but can also be an opportunity as China showed it to the world. We have a large labour force for infrastructure development, but sadly need the financial muscle for it as the Finance minister pointed out. It can come only from foreign direct investment (FDI) in real estate. Opening up FDI will result in many advantages such as getting larger funds, better quality construction, and increase in employment and eventually reduce the cost of real estate in the long run.

Next in agenda would be restructuring the legislative issues, such as Urban land ceiling regulation act, Land acquisition act, Rent control act, conversion of rural land to urban use etc which need to be restructured in a way to take into account growth and development of infrastructure.

Bringing in financial players like Mutual Funds into real estate can be encouraged so that big players can bring in the necessary investment into infrastructure. Many countries have something called Real Estate Investment Trust (REIT) that accept investments from public in the form of units or shares like mutual funds and invest in Real estate projects around the country. The retail investor gets an assured return in the form of dividend. This will bring in the necessary funds into the much starved real estate, superior technology, opportunities for the retail investor and bring stabilization in the real estate prices.

Improving road networks and faster connectivity between places can bring some stabilization into the skewed property price escalation. For example Mumbai and Delhi boast of 12-13% escalation in property prices as compared to Singapore which is 5% though Singapore is a small country compared to India and land is precious commodity there. By improving road network between urban areas, the property prices can be brought lower.

These are the areas the Government needs to focus if it desires to revamp infrastructure. Its high time necessary changes are brought in Financial, Legislative and Land regulations in real estate which badly need restructuring. Real estate is the biggest industry in India along with Retail and is the highest income provider for the Indian masses next to Agriculture and one can ill afford to lose the opportunity.

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