India Lifts Restraint On Land Investment [WSJ]
Rules for Foreign Ownership Ease, Fueling Optimism About Party-Led Initiatives
By JAY SOLOMON and ERIC BELLMAN
Staff Reporters of THE WALL STREET JOURNAL
February 25, 2005; Page A16
NEW DELHI -- India's cabinet has approved foreign investors' ownership of as much as 100% in some real-estate projects without special government approval, fueling further optimism about the Congress party-led government's commitment to pursuing economic liberalization.
The announcement comes as Finance Minister P. Chidambaram prepares to unveil on Monday India's budget for the year ending March 31, 2006, which analysts expect will include additional measures to spur investment in the country's moribund infrastructure.
The budget also is seen introducing proposals to reduce India's fiscal deficit, which stands at 10% of the country's economic output, including the finances of its state governments. Mr. Chidambaram is expected to outline plans to implement new tax proposals as well as efforts to raise revenue through the sale of state-owned companies.
Before the real-estate change, foreign investors were required to receive approval from India's Foreign Investment Promotion board before participating in the construction of hotels, apartment buildings or other construction projects. Yesterday India's Ministry of Commerce and Industry announced it would waive this requirement and relax a ceiling on land purchases by foreign companies.
Now, these companies need to buy a minimum of 25 acres, compared with 100 acres previously. But to keep foreign-land speculators out of the market, overseas companies will be allowed to sell only plots they have fully developed with roads, water supply and other basic infrastructure. India is hoping the new building will create revenue and jobs for the cement and steel industries.
"It is expected that allowed investment...in the construction-and-development sector would have a multiplier effect on the economy by boosting construction activities of all types," said Kamal Nath, India's minister of commerce and industry.
Analysts and investors said opening the real-estate market could trigger a flood of foreign investment and expertise that will improve the quality of Indian offices and homes, as well as encourage competition that could help cap prime property prices.
"This one decision could spur a lot of activity in the sector," said Chan Chakravarti, joint managing director of international real-estate consultant, Cushman & Wakefield India. "It will help institutionalize and professionalize the nascent market and make it a very attractive market for global players."
Foreign property developers have been trying to get more directly involved in India for years. Demand for new offices and homes has been climbing more than 15% annually, as India has turned in some of the world's strongest growth rates in gross domestic product. More than half of that demand is from the thriving information technology industry.
India has been reluctant to open the sector to foreign investment because of concerns that a flood of money could lead to the kind of property speculation that triggered volatility in other Asian economies such as Japan and Thailand in the 1990s.
The victory by the Congress party in May initially fueled deep concerns among businessmen and investors, because of the party's reliance on a coalition of leftists to form a government. India's financial markets crashed in the days following the vote, as coalition politicians talked of funding employment-guarantee plans and scrapping the country's privatization ministry.
But Prime Minister Manmohan Singh and Mr. Chidambaram generally have received credit for continuing to pursue economic change. In recent months New Delhi announced a raising of investment caps in the aviation and telecommunications sectors. The government also moved to liberalize India's banking sector and foreign-investment procedures.
India's central bank has projected that India's economy will grow by nearly 7% in the current fiscal year, ending March 31, after growing 8.5% in the previous fiscal year. Investors have responded by driving the Bombay Stock Exchange index up nearly 60% since May. Foreign investors, meanwhile, pumped nearly $1.5 billion into the stock market during the first two weeks of February alone.
Analysts expect Mr. Chidambaram's budget speech Monday to continue these proinvestment initiatives while also concentrating on lowering India's deficit. The budget is expected to further outline steps to reduce barriers to investment in the real-estate, financial-services and insurance sectors.
Mr. Singh's government in May said it would scrap the previous government's plans to relinquish management control of many state-owned enterprises. But his administration has sought to sell minority stakes of as much as 49% in a bid to raise resources for social programs. Analysts said Mr. Chidambaram could set a revenue target from asset sales of as much as 100 billion rupees, or about $2.3 billion, for the year ending in March 2006.
A key element of the budget is expected to be tax overhaul, as Mr. Chidambaram has announced his intention to significantly reduce India's fiscal deficit in the coming years. The finance minister has said he plans to initiate a value-added tax by April 1. And economic analysts say they expect the budget to contain steps to widen India's tax base, particularly in the services sector.
A report by J.P. Morgan Chase & Co. said it expects Mr. Chidambaram to cut India's corporate-tax rate by 2% to 3% this coming fiscal year, but lower several exemptions for companies. The report also said New Delhi likely will abolish the 2.5% surcharge on corporate tax. For the coming fiscal year, the U.S. investment bank forecasts India will reduce its budget deficit, excluding state governments, to 4.3% of GDP from 4.6%.
"The upcoming budget will probably be a bold statement that would further cement the government's commitment to reforms," said Rajeev Malik, J.P. Morgan's regional Asia economist based in Singapore.
Still, economic analysts said Mr. Chidambaram's plans could still be challenged by India's fractious political system. This weekend, the results of elections in the northern Indian state of Bihar will be counted, and the results could affect the political equation in New Delhi. Indian polls are projecting that a key participant in Congress's ruling coalition, the Rashtriya Janata Dal party, could lose power in the state.
Such a development isn't expected to cause the Congress's government to fall. But it could significantly increase strains within the ruling coalition.
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