Investment Opportunities in Indian Construction Industry

Construction and other development projects attract a 100% FDI under automatic route. The government of India has been developing and implem

The Indian construction industry is the engine of the Indian economy. This sector is responsible for propelling the country’s overall development as good infrastructure is the basis for all other projects, and it enjoys prime attention from the government. The construction industry in India consists of the real estate as well as the urban development segment. While the real estate segment covers residential, office, retail, hotels and leisure parks, among others, the urban development segment broadly consists of sub-segments such as water supply, sanitation, urban transport, schools, and healthcare.

Foreign Direct Investment in the Construction Industry:

Construction-development projects which would include development of townships, construction of residential/ commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships attract FDI as following:
  • 100% FDI under automatic route is permitted in completed projects for operations and management of townships, malls/shopping complexes, and business constructions.
  • 100% FDI is allowed under the automatic route for urban infrastructures such as urban transport, water supply and sewerage and sewage treatment.
It is clarified that FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs). Real estate business means dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent/ income on lease of the property, not amounting to transfer, will not amount to real estate business.

Therefore, condition of lock-in period does not apply to Hotels, Tourist Resorts, Hospitals, Special Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs.

Investment Opportunities and Growth Drivers:

North Eastern Region Urban Development Programme (NERUDP): The central sector programme is being implemented by the Ministry of Urban Development (MoUD). Financial aid (70% of the cost) is being provided by the Asian Development Bank in the form of loan to the government for development of infrastructure in north eastern cities.

Construction industry in India will remain buoyant due to increased demand from real estate and infrastructure projects. Indian Real Estate sector expected to reach a market size of USD 1 Trillion by 2030. It’s contribution to the country’s GDP is expected to be approximately 13% by 2025 as per the Ministry of Housing and Urban Affairs. Other growth drivers are:
  • Technologies and solutions for smart, sustainable and connected cities and integrated townships
  • Industrial corridors are planned
  • 25 railway stations re-development besides 3,500 km line addition
  • Six Mega ports planned
  • Increasing demand for commercial space: Construction of office spaces, hotels, retail, entertainment units. Annual absorption of office space in India crossed 42 mn sq ft in 2017.
  • Construction development in residential, retail, commercial and hospitality sectors, development of townships
  • Construction of roads, bridges, hotels, resorts
  • Technologies for the promotion of low cost and affordable housing
  • Green building solutions
  • Sustainable and environmentally friendly building materials.
  • Training and skill development of construction sector workers
  • Urban water supply, urban sewerage and sewage treatment. 
Reasons to Invest:

Government Policies: The government of India has been developing and implementing policies that ensure the time-bound creation of world-class infrastructure within the nation - from power plants to bridges to dams, roads, and other urban development projects. In 2018, India was ranked 44 out of 167 countries in the World Bank's Logistics Performance Index (LPI) and in 2019, it ranked second in the Agility Emerging Markets Logistics Index.
 
In 2019, the Indian construction industry also witnessed seven merger and acquisition deals worth 1,461 million Dollars. The largest PE investment worth 1.9 billion Dollars was also closed in the acquisition of Pipeline Infrastructure India by Canadian asset management firm Brookfield’s. The same year, the electricity production in the country reached 1,252.61 BU, the National Highways Authority of India (NHAI) also completed the construction of 3,979 kilometres of highways, its highest ever figure.

Incentives for Affordable housing: In FY 2020-21, a tax holiday was proposed for affordable housing projects to incentivize such projects in India. The budget announces that this holiday can be availed for one more year till 31st March 2022. Further, a new tax exemption will be notified for Affordable Rental Housing Projects.
 
The National Infrastructure Pipeline: The National Infrastructure Pipeline (NIP) has a mission to improve project preparation and attract investments into infrastructure. The aim is to provide world-class infrastructure to Indian citizens, thereby, improving their quality of life.
  • The NIP aims to provide a positive and enabling environment for significant private investment in infrastructure at all three levels of government.
  • It also seeks to design, deliver, construct, and maintain public infrastructure projects to meet efficiency, equity, inclusiveness, and disaster resilience goals.
  • The pipeline creates a fast-track institutional, regulatory, and implementation framework for infrastructure and benchmarks infrastructure performance as per global best practices and standards.
  • It makes use of the latest technology to enhance service standards, efficiency, and safety across the Indian construction industry.
  • The NIP will support and encourage even more infrastructure projects and create jobs. The idea is to improve citizens’ ease of living and provide equitable access to infrastructure, thus, making growth more inclusive.
  • Well-developed infrastructure within a country enhances the level and scope of its economic activity and the NIP will provide better-prepared projects and reduce aggressive bids and failures in project delivery.
  • It will also ensure enhanced access to sources of finance. And for financial institutions and investors, the NIP will increase investor confidence as identified projects are better prepared and there is active project monitoring by a competent authority.
The Indian government has undertaken a number of measures to ease access to funding for this sector. Construction activities contribute more than 10% of India’s GDP. The construction industry in India has seen sustained demand from the industrial and real estate sector. An estimated USD 650 Billion will be required for urban infrastructure over the next 20 years. Housing for seniors has seen increased interest levels from corporates, the hospitality and healthcare industries over the last few years.

Pradhan Mantri Awas Yojana (Urban – Housing for All): The Pradhan Mantra Awas Yojana (PMAY) aims to provide housing for all by 2022 and is being implemented from June 2015. PMAY provides central assistance to Urban Local Bodies (ULBs) and other implementing agencies through States/UTs for in-situ rehabilitation of existing slum dwellers using land as a resource with private participation; credit-linked subsidy, affordable housing in partnership and subsidy for beneficiary-led individual house construction/enhancement.
  • The total investment (as of December 2018) involved in the PMAY (Urban) is USD 50 Bn.
  • Under the PMAY-G, an amount of INR 1351.11 cr has been released during the month of November 2020.
  • Till 19th January 2021, 1.26 cr houses have already been built across the country under the scheme.
Atal Mission for Rejuvenation and Urban Transformation (AMRUT): The purpose of the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) is to:
  • Ensure that every household has access to a tap with assured supply of water and a sewerage connection
  • Increase the amenity value of cities by developing greenery and well maintained open spaces (e.g. parks)
  • Reduce pollution by switching to public transport or constructing facilities for non-motorized transport
  • USD 858 Mn was the budget allocation in the Union Budget 2018-19 for the AMRUT scheme.
Many of the government schemes related to construction converge in their goals, although the path they choose may be different. There is a strong link between AMRUT and the Smart Cities mission – while AMRUT aims to achieve urban transformation using the project-based approach, the Smart Cities Mission follows an area-based strategy.

Project ‘Metro Lite' and 'Metro Neo' will boost urban infrastructure in tier-2 cities. In addition to this, the government will raise the share of public transport in urban areas through the expansion of the metro rail network and the city bus service will be strengthened. A new scheme will be launched at a cost of INR 18,000 crores to support the expansion of public bus transport services. The scheme is said to facilitate the deployment of innovative public-private partnership (PPP) models to allow private sector players to finance, acquire, operate and maintain over 20,000 buses. A total of 702 km of the conventional metro is operational and another 1,016 km of metro and the regional rapid transit system (RRTS) is under construction in 27 cities.

The Annual Union Budget for 2021-22 gave strong signal for infrastructure development focusing on actualizing the ambitious national infrastructure pipeline targeting an investment of INR 111 lakh crores over 5 years. The signal comes from the announced budgetary allocations and decisions with announcement to tap into budgetary resources of PSUs and wide-ranging InvITs monetising assets in highways, power transmission, gas pipelines, dedicated freight corridors, airport.

Here are some highlights from the budget:

  1. Government aims to complete 11,000 km of National Highway Infrastructure this year.
  2. 3800 km of Highway constructed under Bharat Mala. Another 8500 km is expected to be constructed by March 2022. Total 11,000 km National Highway targeted under Bharat mala, INR 1,18,000 crore allotted to Ministry of Road Transport and Highways.
  3. A record sum of INR 1,10,055 crore for Indian Railways, of which 1,07,100 is for capital expenditure only
  4. Piped Natural Gas (PNG): Independent Gas Transport System Operator to be set up, for facilitation and coordination of booking of common gas carrier capacity, in all-natural gas pipelines, on non-discriminatory and open access basis.
  • Ujjwala scheme to cover 1 crore more beneficiaries
  • 100 more districts under city gas distribution network
  • Independent gas transport system operator to be set up
  • Bill to set up a DFI will be introduced
Opportunities for Foreign Investors:

Foreign investors should note the following factors that will drive the investment viability of India’s construction sector:
  • Continuous increases in the demand for infrastructure and real estate.
  • The real estate sector expected to be valued at US$1 trillion by 2030 and is expected to contribute approximately 13 percent to the country’s GDP by 2025.
  • The country’s urban population is expected to be 50 percent of the total population by 2025.
India hosts numerous projects that foreign investors can choose to invest in. Popular examples include the development of residential and commercial buildings, transport infrastructure, as well as maintaining efficient systems of water supply and sewerage. More recently, the focus has turned to constructing green buildings by using sustainable and environment-friendly materials and renewable-based technologies as part of the smart city development program.

Conclusion:

It is necessary for India to overcome deficiencies in its infrastructure and improve service quality in both urban and rural areas. Most importantly, India must utilize the full potential of its growing urban economy in order to raise its contribution to the national GDP.
While the Covid-19 pandemic has hampered short-term growth in the Indian construction industry, when the economy resurges as it is projected to, exciting opportunities for infrastructure investment and development in India will be made available to market players.