Renewed confidence defined India in financial year 2015. Investor
sentiment had never been stronger and this was aided by a favourable
macro-economic environment. For a commodity importing economy like
India, lower crude oil prices helped rein in inflation and the fiscal
and current account deficit. Against a prolonged global economic
slowdown, India stood out as the country with immense growth potential.
The global economic outlook continues to remain challenging. The timing
of the lift-off in US interest rates remains uncertain, though
inevitable. Further, the current divergence in global monetary policies
compounds the uncertainty. This has resulted in increased volatility in
asset prices and has heightened the risk of adverse spillovers,
particularly for emerging markets. In this milieu, it is natural that
some investors may be increasingly edgy. Trying as these circumstances
may be, it is reassuring that there are ample long-term investors who
believe India''s best is still to come.
Sometimes expectations run ahead of what can realistically be
delivered. India is a difficult country to govern in many ways, but
there is confidence in the country. Those who have watched India long
enough know that India has a vibrant and noisy democratic voice that is
rarely in unison. This is why the legislative process is unduly long
and tedious, but it is certainly no longer derailed.
There have been a number of salutary initiatives taken which will hold
India in good stead. Credibility has been restored with the transparent
auctions of natural resources. The thrust given to financial inclusion
has been unprecedented. Today, almost all Indian households have been
brought into the fold of institutionalised finance. The government''s
social security initiative of providing a pension, accident and life
insurance will go a long way in deepening the financial system. Equally
important, has been the successful implementation of the direct benefit
Efforts have been made to simplify the process of starting a business.
Streamlining and raising threshold limits for foreign direct investment
(FDI) is significant as it will speed up approval timelines. Key
sectors like defence, construction, railways and insurance have been
opened up and benefits will accrue in the ensuing years as more FDI is
encouraged. Clearly for India, reforms will be incremental, not ''big
A vision for a nation with such a large unrealised growth potential is
essential. This vision has been well elucidated by the government. It
envisages a modern, smart, clean and well-connected India. Within this
vision, ''Housing for All'' by 2022 features prominently. Some may
dismiss this as hetoric with little action. Others who truly understand
that housing is a unique asset will work relentlessly towards this
goal. Needless to add, we at HDFC belong to the latter, though we
recognised this thirty-eight years ago. We have remained steadfast in
our goal of increasing home ownership in India. Five million housing
units have been cumulatively financed by HDFC - a number that gives us
immense pride and satisfaction. Yet we recognise our efforts need to
intensify manifold if a majority of our citizens are ever to get
humane, decent and affordable housing.
The path to any grand vision is rarely smooth, but some roadblocks can
be overcome. One of my greatest concerns today is who will physically
build in India on the scale required- Urbanisation is an irreversible
trend. By 2030, 600 million Indians will be living in urban India.
Rejuvenation of existing urban areas and creation of new cities will
require smart real estate and urban infrastructure related solutions.
It is the construction sector that has to deliver most of this.
The construction sector contributes around 8% to India''s GDP and has
a two-fold multiplier effect on other industries with backward and
forward linkages. 10% of India''s workforce which translates into 45
million jobs is directly or indirectly created by the construction
industry. By 2022, the largest incremental growth in jobs is expected
to come from this sector - an estimated 77 million new jobs. India
needs growth, physical infrastructure and jobs - all of which can be
delivered by the construction sector, provided a conducive policy
framework supports the sector.
Many construction companies are hamstrung with over leveraged balance
sheets, though this is only one aspect of the problem. For the
construction sector to revive, there is an urgent need to reduce delays
in claims settlements. Ironically, a majority of these claims are with
government bodies. There is also a need for a credible and efficient
arbitration and dispute resolution mechanism to safeguard against
lengthy litigation processes. Further, standardisation of contracts
(which would also facilitate standardisation of taxation) and ensuring
strict adherence to contractual terms will go a long way in boosting
Where there is a will, there is affordable housing
The perennial question is how can housing be made more affordable-
There currently is a disconnect in the housing market. On one hand
there is an acute shortage of housing, but on the other, in some of the
larger cities, there is a growing stock of unsold inventory. The answer
lies in the pricing points not being right. The real demand is in the
affordable housing segment, not high- end luxury housing. Developers
are not relenting on the pricing of existing stock, while the cost of
launching new projects is only rising.
Solutions to these problems have been elucidated several times. Faster
approval processes will reduce overall costs and on-line approvals will
bring in the much needed transparency. Approvals take between 18 to 24
months. Needless to add, there are at least 50 approvals required
across different authorities. If there is consensus that fewer approvals
and interventions reduces overall costs, compresses timelines and
ultimately benefits the homebuyer, then fast-tracking of approvals is
imperative. Equal onus must lie with developers as well to ensure
strict adherence to ethical building codes and standards. Projects
often get delayed as certain developers try to deviate from standard
building norms by paying to flout rules. Such malpractices are
hazardous for all. A regime that shuns ''speed money'' and focuses
only on ''speed'' would go a long way in improving affordability in
the housing sector.
The other critical issue pertains to the high cost that developers
incur while borrowing to fund the purchase of land. This initial high
cost keeps getting multiplied and is the key reason why housing becomes
more unaffordable for many. The root of the problem is that banks and
housing finance companies (HFCs) have been prohibited from funding land
transactions by the regulators. So at the initial stage, it is the
private equity players, the non-banking finance companies and informal
private lenders that fund developers to acquire land. These are at
prohibitive costs, ranging between 18 to 24% per annum. It is only at
the construction stage and after requisite approvals are obtained that
banks and HFCs are allowed to fund projects. By this time, developers
are already saddled with high cost debt to service.
In 2006, the regulators prohibited banks and HFCs from funding land
transactions. Such actions may be justifiable when there are fears of
asset price bubbles. Over two years ago, the regulators reduced risk
weights on exposures to commercial real estate - residential housing.
This signaled that there were no fears of any speculative bubble. Then
logically, the regulators now need to relax this near decade old
restriction. The regulators should, within limits, permit banks and
HFCs to fund land transactions - or at least land transactions that are
acquired specifically for residential purposes.
This is a simple, doable solution. It will bring residential prices
down, increase the stock of affordable housing and fulfill the
aspirations of more Indians becoming homeowners. So the key question
remains - will the regulators oblige?
Meanwhile, HDFC finished another year of steady growth. As from the day
we started business, we remain committed in helping build a property
owning democracy for it guarantees a peaceful and prosperous society.
We are excited about the prospects of India''s future and hope the
vision of 100 smart cities and a rejuvenated urban India turn into
The challenges are immense, yet I remain optimistic to reiterate that
India has never had a better chance than today to make the ''big
change'' for generations to come.
DEEPAK S. PAREKH