Notes from Davos: An economic driver called Modi
New Delhi: On the first day here at the World Economic Forum at Davos, there is no getting around Narendra Modi. Every second conversation that I strike up or am engaged in seems to come
New Delhi: On the first day here at the World Economic Forum at Davos, there is no getting around Narendra Modi. Every second conversation that I strike up or am engaged in seems to come back to India's enigmatic new Prime Minister. One of the many questions I'm asked about him is whether Modi's popularity and ability to inspire hope are based solely on his electoral promises, or is there real substance here?
By now, it is more than evident that Narendra Modi really means business, and that the new reforms he is introducing are turning out to be very favorable for the country's economy. The new attitude towards urbanization and growth that Modi brings in, and his vision of India competing with the world's super-powers, has received a lot of backing not only from Indians but also served to perk up interest from foreign companies eyeing Indian shores for their operations, as well as foreign investors.
Modi has already demonstrated in Gujarat what his pro-business, infrastructure and policy-driven approach can do for economic revival and growth. His image is of a determined change-bringer and vanquisher of the lassitude that defined the old guard is what was needed most when it comes to rebooting India's viability as a peer in the Global Economy.
Modi came at a time when the former UPA government's image was marred by corruption cases, scams and failure to rein in rampant inflation. Today, he has an unenviable and monumental task before him now while dealing with deeply entrenched challenges and scripting a new growth story for India. He faces many obstacles on the road to delivering on his vision.
On the road to turn the Indian economy around and bring the country back into the global sweepstakes, Modi has launched many new initiatives. One of the most talked-about was his reviving the 'smart cities' concept - which, though not new one in India, lacked the forward momentum that comes from focused policies and the requisite policy-level funding. With these now part of the Modi government's mandate, and with the awareness that has been created about smart cities, we are very likely to see smart cities becoming India's new standard for urbanization, rather than interesting novelties.
Information technology, which we all acknowledge as an important economic driver for India, has not leveraged optimally. It needs to move from being seen as a mere 'employment spinner' to becoming a medium for change. Modi has set his mind to make the IT sector a shining light for Brand India, and he is backing this vision massive funding, as well.
From what we have seen so far, ‘Minimum Government, Maximum Governance' does not appear to be an empty election slogan. I believe that the direction that Modi's new reforms point towards a very favorable future for India. It is early days yet, and we should not expect overnight miracles; further major reforms that will potentially improve business sentiments in the Indian economy will necessarily have to happen more gradually. What is certain is that with a relentlessly pro-business government at the Centre, they will not have to wait too long in the wings anymore
* Inflation
Inflation was a major hurdle for growth of the Indian economy. It not only affected consumer spending, borrowing cost and therefore sentiment but also the construction sector, which depends heavily on raw materials such as cement, steel, etc. Major supply-side constraints such as allocation of natural resources to core industries, and the need for improved infrastructure for easy transportation and simplified taxation for goods crossing state-borders, are key areas for the Modi government to focus on. These are among the primary reasons for India's high inflation ratings.
Inflation definitely needed to be reined in to promote growth. The level which the RBI perceives as comfortable for the Indian economy ranges between 4 per cent-6 per cent for WPI inflation. Currently, WPI is within controllable limits. However, if we take the real estate perspective, the costs for cement, bricks, steel and other raw materials continue to remain high. This has led to annual building construction costs inflation hovering around 17 per cent y/y over the last four years.
A lot of this is due to constraints on the supply-side rather than merely price concerns. For instance, the cement industry is currently undergoing capacity underutilization, due to which fixed costs are proportionately higher. Also, transportation costs have increased significantly in the last one year, as the central government has gradually deregulated fuel prices.
Both the RBI and the Modi government have shown great resolve to tackle the problem of inflation and its correlation with the generalized borrowing cost in the economy. We have already seen inflation coming down drastically, although this wild horse needs expert monitoring beyond the feigning scope of the fiscal authority. With PM Modi expressing his desire to give the RBI Chairman Dr. Rajan a hindrance-free monetary policy regime, he has not only displayed professionalism but also put to rest criticisms that the new Indian PM wants the first control on every policy tool.
* GST (Goods & Sales Tax)
India's complex tax structure renders doing business on a pan-India level difficult. This has been repeatedly highlighted in annual surveys conducted by the World Bank. Single-window clearance for real estate projects is vital to save time, effort and the costs involved in obtaining permissions from various related departments. The introduction of a uniform tax structure for all states is equally critical, particularly to boost the manufacturing, warehousing and logistics industries that is likely to become major occupiers of real estate over the coming decade.
The problem with introducing Central GST (Goods & Sales Tax) lies primarily in convincing the various state authorities, since several states feel that their financial autonomy will be threatened if revenues are collected and distributed by the Centre. Will Modi be able to cut through this Gordian knot? The industry certainly hopes so. Meanwhile, Modi has his work cut out for him in other respects, as well.
* LARR (Land Acquisition, Rehabilitation and Resettlement) Act
Land-related bureaucracy is high in India, and it acts as a deterrent for investors to operate in the Indian real estate and infrastructure space. The economy is desperate to get past this hurdle, as it needs support from infrastructure development for further growth - and infrastructure is highly land-centric. While the modified LARR (Land Acquisition, Rehabilitation and Resettlement) Act which was put into effect last year by the UPA government has attempted to reduce the bureaucracy involved, there is a current and very pressing need to revisit this Act. Provisions in the bill such as the significant rise in compensation to original inhabitants, the tedious rehabilitation clauses and other norms need to be relaxed if it is to serve its purpose of untangling.
The critical nature of this bill is undeniable, and the Modi government has realized this. His government has even risked taking the ordinance route to pass the crucial amendments that will allow the act to contribute positively. Needless to say, these decisions will have political implications, and Modi's government will have to approach the issue not only with determination laced with a lot of caution.
* Affordable Housing
Modi has made it clear that affordable housing is a focus area which he intends to promote as a priority sector. He is obviously aware that in order to do so, the sector will need to see much more incentives for developers as well as for banks. Modi's government has the right intentions, but it will be difficult to implement them unless the previously mentioned issues - namely inflation, implementation of GST and revision of the Land Acquisition, Rehabilitation and Resettlement Act are dealt with.
The Union Budget for FY2014-15 has already prioritized affordable housing by giving it a status equivalent of infrastructure. Subsequently, to make financing policies more pragmatic, the RBI raised the limit for individual loans for affordable housing from the previous INR 25 lakhs to INR 65 lakhs in metropolitan cities and INR 50 lakhs in other cities. There is no doubt that we are seeing a lot more policy-level will and impetus for affordable housing than witnessed in several preceding years.
At this juncture, the Indian government is sitting on a high fiscal deficit and therefore has limited resources to resort to public investment-led growth. In order to help India reach its economic potential and grow at a rate of 7 per cent a year, the Government has to pull out all the stops in creating an enabling environment for private investors to step up investments. In fact, there is already a revival in sentiment among real estate stakeholders, so Modi is definitely on the right track.
* Investment climate
There has been considerable sentiment traction on the introduction of REITs, which can enable small savings to be channelled into real estate for the first time. With REITs now finally part of the visible landscape rather than just a barely glimpsed mirage in the desert, a major concern of the industry with regards to creating large quantum of liquidity is getting resolved. REITs will render the entire real estate funding process more institutionalized, and therefore transparent. Some of the stringent measures proposed in the earlier version of REIT guidelines have been relaxed, with a view to making Indian REITs competitive globally.
We are now looking at a real possibility for Indian real estate attracting a sizeable amount of investments. While SEBI and the RBI would play an instrumental role in formulating the rules and policies governing REITs and FDI, it is the government which is empowered to fast-track the process by hard and determined action.
Again, Modi and his overall vision and perception for growth will obviously play a leading role, and there is already sufficient evidence that he is taking it very seriously. His plan to construct 100 smart cities across various parts of the country and simultaneously relaxing FDI norms for investment in these cities will create ample investment opportunities, thereby also enabling uniform real estate growth across the nation.
(Anuj Puri is Chairman & Country Head at JLL India)