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India, FDI and Smart Cities: The race for fastest economy

fdi, modi government, smart cities, realtymyths
“The government is eying big on inflow of FDI and Smart Cities. FDI is critical to sustain the economic growth. The government believes that Smart Cities would help it attract adequate amount of FDI. The efforts have started showing results as well. Still, it is the execution and development of these cities that will decide the future of this ambitious project. If the government wants to take the GDP beyond 8 per cent and become fastest growing economy, proper planning and development of Smart Cities becomes critical”

smart cities, FDI, Modi government, realtymyths

Santosh Sinha

Foreign Direct Investment or FDI is one of the major ingredients of Economic Growth. There is a strong relationship between foreign investment and the growth of an economy. For instance, if the economy has to grow by 7 to 8 per cent per year, at least 35 to 40 per cent of the GDP should be invested back in the markets. When this required limit is not met, foreign borrowing and foreign investments help mend this investment-savings gap. It is this reason that every government tries to attract as much FDI as possible to keep the pace of economic growth intact.

Modi Government, since the beginning, has put its focus on economic growth. In its two years at the center, BJP-led NDA government has managed to achieve growth of 7.6 per cent. A major portion of this growth story should be attributed to government’s efforts towards improving FDI flow in India. In November 2015, it reformed the FDI norms and made it more investor friendly. To talk about construction sector, in particular, there were three path-breaking reforms. Earlier, the FDI policy enforced conditions with regards to project status, project size, lock-in periods, etc. due to which the eligible options in real estate projects for foreign investors were limited predominantly to large projects with development size of over 0.54 million sq. ft. With the relaxation in FDI norms where the government removed all these caps, the entire real estate became accessible to foreign investors.

As per a report entitled “Opportunities for foreign investors in Indian Real Estate”, global real estate consultancy Cushman & Wakefield reported that the total private equity investments from foreign funds in Indian real estate increased 33%, from USD 1,676 million in 2014 to USD 2,220 million in 2015. It also reported that owing to high property prices and high investment potential, Mumbai was accounted for about 35% of the total foreign investments in 2015, followed by Delhi NCR accounting for about 25% of the investments.

By duly identifying the potential of FDI, the Government is keeping no stone unturned. Its initiative of developing 100 Smart Cities is one such masterstroke which will, potentially, draw more FDI into the economy. It has so far announced 33 cities out of which 13 were announced recently. Minister for Urban Development, Venkaiya Naidu, while announcing these names, said, “New urban sector initiatives in India have a total investment potential of $15 billion at the moment”. Creating new smart cities across India may be looked as a strategy to pitch more cities accessible to Foreign Investments and release pressure off the existing urban cities. This smart move will regularize the flow of foreign funds across the country.

The Government is directly pitching to the foreign investors to come and invest in these projects. Fortunately, the results are positive.  The Asian Development Bank has, in principle, agreed to extend a loan of $1 billion. The World Bank has also shown its willingness to participate by extending a loan of $0.5 billion. The BRICS Development Bank has also responded positively.

Though funding is one of the important aspects, it is the operational nuances that, if not sorted, would create problems for the government. The issues like technical assistance, waste management, renewable energy management, water treatment and supply, development of smart technologies to control traffic and transport etc are some of the issues which need to be fixed immediately.

The Government is trying to align these operational hiccups. It has asked the city administrations to come up with their suggestive plans; cities failing this may face elimination. Many cities, which have so far been selected, submitted their plans related to intelligent transport solutions, provision of WiFi services, radio frequency based identity tags for individual household dustbins and many more. These cities are likely to launch affordable housing schemes, sewage treatment plants, smart street lighting, roof-top mounted solar paneling, solid waste management, and waste-water recycling projects from July 2016.

Modi Government wants to continue with the current GDP growth rate of 7.6 per cent and improve it to 8 per cent by the end of FY 2016-17. For this, it has to keep the FDI inflow intact. Undoubtedly, if it succeeds in proper planning and execution of these smart cities, it would cross the magical mark and surely become the fastest growing economy in the world.

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