Automatic Foreign Investment in India

A month and a half before the unveiling of India’s consolidated foreign investment policy, the government on Thursday doubled the ceiling on automatic foreign investment from Rs 600 crore to Rs 1,200 crore. Union commerce minister Anand Sharma, who announced the decision, said the move is expected to make India a more attractive destination for long-term investment. Under the current rules, long-term investments into most Indian sectors are ‘red-tape free’, subject to a cap on the amount of money invested. “We have got a good response from companies and investors, both from India and abroad,” he said, referring to his Christmas-eve invitation for suggestions from the public on simplifying foreign investment policy.

Sharma also announced that existing investors need not seek the government’s nod for incremental investments in sectors where a fresh investor would not be required to do so. Similarly, a single no-objection certificate from business partners would be enough for all subsequent investments of a company into India, he said. For calculating the investment, the government will look at actual capital inflow rather than the projected cost of the project, he said. The simplifications are seen as the result of the feedback given by the industry on the complexities of the existing policy. Sharma had, in December last year, urged companies and investors to give their suggestions on simplification and consolidation of India’s foreign investment rules.

Sharma said that long-term foreign investment (FDI) into India has remained at levels comparable to the year before. December saw inflows of $1.5 billion, taking the nine-month total to $20.9 billion against $21.2 during the same period a year ago. FDI flows, a signal of long-term confidence in India’s economic future, have remained flat for the last three years at around $35 billion even as the country moved up to top 3 in international ratings on investment friendliness. Sharma said the year may see record FDI inflows, despite starting off slowly. “Keeping the momentum in view, it is quite likely that FDI flows this year exceed those of last year’s,” he said. Meanwhile, India’s exports, which moved back into the positive territory in November, continued to grow in January. Total exports during January clocked $14.36 billion, clocking a growth of 11.5% compared to January 2009.

Sharma said the incentives announced by his ministry, such as cash support to exporters, would remain as they are even beyond the upcoming Budget, but some of the finance ministry-related sops, such as lower excise duties may be rolled back in a “cautious and considerate” manner in the Budget. Sharma said the government is in trade agreement talks with a number of countries, including Japan, the European Union, Turkey, New Zealand and Malaysia.

Home Prices in 2010

Apartment prices at Planet Godrej, a premium residential property developed by Godrej Properties in the tony Mahalaxmi area of Mumbai, had come down to as low as Rs 17,000 to Rs 18,000 a sq ft in the property market slowdown last year. The flats now sell at Rs 27,000 to Rs 30,000 a sq ft — just short of the peak rate of Rs 32,000 a sq ft in 2007-08. It’s not the commercial capital alone that has seen real estate prices on fire. Last week, the Jaypee group sold 600 plots on the Greater Noida Expressway, near Delhi, within three days at Rs 36,000 a sq yd (one sq yd equals nine sq ft). Brokers say the plots are now available for only Rs 39,000 a sq yard and will touch Rs 42,000 a sq yard within a few days.

On Pune’s posh Bhandarkar Road, apartment prices have risen 80 per cent in just five months. For example, flats at local developer Avaneesh Construction’s housing project are now available at Rs 9,000 a sq ft, compared to Rs 5,000 in August. Welcome back to the era of crazy rises in home prices. After a year of sanity, when property developers were reducing rates even in premium areas, it’s a rewind to 2007-08, when prices had more than doubled in as many years on the back of strong buyer and investor demand, as the stock markets boomed.

Then, apartment prices had gone down by 30 per cent from their peak, as home sales had almost come to a standstill in the last few quarters of 2008-09, reflecting a worldwide economic slowing. Pranay Vakil, chairman of Knight Frank India, a leading property consultant, says: “We have seen an up to 30 per cent rise in home prices in the last six months. A lot of pent-up demand came into the market around Diwali. That, coupled with strong NRI (non-resident Indian) interest, has led to the rebound in prices. Most NRIs have invested in Mumbai property this time, instead of Dubai.'’

The NRIs were absent from the property market in 2008-09. Vakil says prices have mostly risen in prime areas, where new projects are being sold out within days and where supply is limited. For instance, in the Prabhadevi area of Mumbai, if the delivery is three years away, prices have gone up to Rs 21,000 a sq ft. If the project completion is two-three months away, prices are Rs 25,000-Rs 27,000 a sq ft. But, if a house is ready to be moved into, it could go for Rs 30,000 a sq ft, Vakil adds.

The Maharashtra government has been quick to cash in on the rise in property prices and has increased stamp duty and registrations charges by 15 to 20 per cent in Mumbai, depending on the locality in the city. Last year, it did not revise these rates, as the property market was down. Analysts clearly see the return of investors in the residential market as stock markets have started booming. In the slowdown of 2008-09, investors had vanished from markets such as the National Capital Region.

Religare Capital Markets’ Associate Vice-President P Suman Memani attributes the rebound in property rates to the stock market boom. “Till August 2009, the price rise was moderate. But, after September, when indices shot up, investor and speculative interest returned to the real estate market. Sale prices have gone up by 50 per cent in some cases. It hurts genuine buyers and is not good for the market,’’ Memani says. Take Parsvnath Developers’ premium project, La Tropicana, in the Civil Lines area of Delhi. Brokers say prices have risen to Rs 12,000 a sq ft, from Rs 8,000 a sq ft in April 2009, a rise of 50 per cent. The developer has sold 415 apartments out of the 450 they have planned. The project is nearing completion.

In Mumbai, in the Oberoi Woods project in Goregaon East, prices have risen 50 per cent in the past nine months, from Rs 10,000 a sq ft in April to Rs 14,000-15,000 a sq ft now. “It is dangerous if prices go up from Rs 2,700 a sq ft to Rs 4,000 a sq ft even if the delivery is four years away,’’ Memani adds. Realty research firm Liases Foras’ Managing Director, Pankaj Kapoor, is also not happy. “The government is helping the developers to increase prices. They allowed restructuring of loans,” he adds.

Some developers do not agree and say price increases are just a function of the market. “We will go along with interest rates. If the annual interest rate is 10 per cent, we will raise it by 10 per cent. Customers will run away if you increase it irrationally. You have to increase it only to the level where it does not affect your sales,” says Unitech MD Sanjay Chandra. Adds Hiranandani Constructions’ Managing Director Niranjan Hiranandani: “I think such an increase is only in some isolated cases. If prices are reasonable, volumes will be good. If they are too high, volumes will come down.’’ So, where are the prices headed from now on? “The acid test for the property market will come in March, when the pent-up demand goes away and NRIs pull back. If stock markets continue to do well, demand will sustain. Otherwise, it will not,'’ says Vakil of Knight Frank.