Name of the student: SWAPNIL JAIN

Year and Section: 5TH YR- ‘B’

Class Roll No. 23
Assignment no: 03
Date of submission: 23/03/2020
Topic: What do you understand by economic liberalization in
India? Elaborate the impact of Foreign Direct Investment (F.D.I.)
policy in construction sector.
QUESTION

What do you understand by economic liberalization in India? Elaborate the

impact of Foreign Direct Investment (F.D.I.) policy in construction sector.

ANSWER
Economic Reforms (New Economic Policy) mean and include all economic changes
made by Government of India since July, 1991 to pace the way of all around prosperity
of Indian Economy. These changes have been made in Government policies regarding
foreign investment, trade, industry, foreign exchange, fiscal affairs, etc. All these
changes are called new economic policy.

CONCEPT OF ECONOMIC LIBERALISATION

Liberalisation means the removal of unrequired controls and restrictions. Efforts are
made to create an economic environment in which the industrial and business
enterprises may work smoothly and contribute in the process of economic and social
development. It is important that liberalisation does not mean an uncontrolled economy.
It only means the removal of obstacles and unnecessary restrictions in the way of
development. Meaning of Economic Liberalisation Economic reforms undertaken since
July, 1991 are described as economic liberalisation.

Economic liberalisation has two components:

(a) relaxing or removing counter-productive restrictions on the operation of market and

economic transactions so as to permit a freer operation of the market forces, and

(b) creating a stable macroeconomic policy environment conducive to the market forces.
Relaxation or removal of restrictions on economic transactions may involve:

(i) procedural changes such as changing the procedure of licensing of imports, foreign
investment and domestic investment,

(ii) legislative changes such as the repeal of outdated legislation, bringing into existence
various regulatory authorities such as SEBI, IRAI, TRAI, CERC, SERCs etc.

Both the procedural and legislative changes aim at bringing about major changes in the
formal rules governing the interaction in the economic realm. Private entrepreneurs will
have the flexibility to adjust their activities in response to market signals without seeking
a license or a permission of concerned government agencies. The government and 60
legislature are expected to provide supportive environment for the smooth and impartial
functioning of market forces.

Meaning of Economic Liberalisation for Development Strategy

Economic liberalisation involves a major shift in the development strategy. It takes away
from minimising the reliance on international division of labour towards progressive
integration with the global economy and aggressive participation in it. It takes away from
overextended and inefficient public sector in commercial activities towards the clearly
focused public sector performing the core functions of defence, health and education. It
takes away from the direct control regime of license-permit raj towards freer play of the
functioning markets.

Meaning of Economic Liberalisation for Government Policy

Stabilisation and structural adjustment are the two components of economic

liberalisation. Stabilisation involves correcting the past fiscal profligacy and maintaining
a macroeconomic environment that is conducive to the smooth and effective operation
of domestic and international markets. It requires responsible monetary, fiscal and
exchange rate policy to maintain a reasonably low rate of inflation and 'realistic' foreign
exchange rate that is consistent with viable and healthy balance of payments. Structural
adjustment involves reallocating resources (capital, labour, skill, and entrepreneurship)
so as to reduce the wastages and to improve the international competitiveness of
domestic organisations.

Meaning of Economic Liberalisation for Bureaucracy

The bureaucracy needs to change the mindset of 'controllers' to that of 'facilitators' for
the smooth functioning of market. They are the implementors of the core functions of
government. They have an important role in formulating and implementing the
procedural and legislative changes that are integral to economic liberalisation. Their
dominant concern for non-transparent and procedure-orientation with complex
procedures has to give a way to the result-orientation and accountability in their
activities. Meaning of Economic Liberalisation for Private Entrepreneurs

Private entrepreneurs such as producers, traders, agents servers, investors,

entrepreneurs, etc. need to pay greater need to the signals from market and accept the
consequences of commercial risk that go with the free operation of market. They have
to resolve the transitional tensions not by approaching the government for a bail-out but
by accepting and relying on market-based mechanism of adjustments.
Meaning of Economic Liberalisation for General Public

Freer domestic and international markets are expected to offer wider choices to general
public with reference to the commodities and services they produce and buy, the saving
and investment opportunities and the choice of occupations and professions. General
public too, needs to get out of the 'over-dependency syndrome' of earlier period. We all
have to realise that we need to rely on the informal institutions of civil society by
starting with the extreme hypothesis that government is the source of problems rather
than providing solutions to the problems.

Economic Liberalisation is only a mean and not an End

Economic liberalisation is not a solution for social and political problems. Economic
libralisation creates an environment for freer operation of markets. Even though
everybody may not be able to take the advantage of these opportunities.
Simultaneously, there would always be those who would set the example for others to
follow and also provide signals for opportunities which others are unable or unwilling to
grasp. Consequently, economic liberalisation process would be more successful if
various segments of the society and polity realise and accept their implications.
Persistence of economic scarcities make the resolution of political and social conflicts
more difficult.
FOREIGN DIRECT INVESTMENT IN CONSTRUCTION DEVELOPMENT SECTOR IN
INDIA

The Construction/ Real Estate sector is one of the most critical sectors of the Indian
economy due to its huge multiplier effect on the economy. Any impact on the Real Estate
sector has a direct bearing on economic growth. Due to the well-acknowledged need for
foreign investments into this sector because of the sheer demand, the Foreign Direct
Investment (FDI) route has attracted foreign investors’ interest in this sector.
In the year 2005, Reserve Bank of India (RBI) issued a notification and the township,
housing, construction development project sector and built up infrastructure was opened
for 100% FDI with specific terms and conditions.
The Reserve Bank of India has recently relaxed norms on end-use of funds raised via
external commercial borrowings, making it more attractive and viable for corporates
including non-banking finance companies to raise cheaper offshore funds. With a view to
further liberalize the ECB framework, it has been decided to relax the end-use restrictions
and allow the use of funds for working capital requirements, general corporate purposes
and repayment of rupee loans. ECBs with a minimum average maturity period of 10 years
can now be used for working capital purposes and general corporate purposes.
These changes will improve ease of doing business in India.
There have been changes in FDI policy in this sector from time to time and following is
the updated policy as of now.
*Real Estate Business
“Real Estate Business” has been defined as dealing in land and immovable property with
a view of earning profit there from and does not include development of townships,
construction of residential/commercial premises, roads or bridges, educational
institutions, recreational facilities, city/regional level infrastructure, townships.
Significantly, the earning of rent or income, not amounting to transfer, from lease of a
project in which FDI is permitted would not tantamount to ‘Real Estate Business’.
Applicable conditions for FDI in Real Estate Sector in India:

Conditions Applicability under FDI Policy 2017

Minimum Capitalization No minimum requirement

Exit and Lock-in restrictions
• The investor is permitted to exit from the investment: (i) after
3 years from the date of each tranche of foreign investment,
or (ii) on the completion of the project; or (iii) on the
completion/development of trunk infrastructure i.e., roads,
water supply, street lighting, drainage and sewerage.
• The lock-in period of 3 years will also not apply to Hotels &
Tourist Resorts, Hospitals, Special Economic Zones,
Educational Institutions, Old Age Homes and investment by
NRIs.

Transfer of stake from a non- Transfer without any repatriation of investment is not subject
resident investor to another to any lock-in or prior RBI approval.
non-resident investor

Separate Phases/Projects Each phase of a project is considered as a separate project

for the purposes of the FDI Policy
 Minimum Land Stipulation There is no minimum area requirement.

Completed Assets • 100% FDI is permitted under automatic route into completed
projects for operation and management of townships, malls/
shopping complexes and business centers.
• However, there is a lock-in period of 3 years applicable.

Transfer of control from Transfer of control from residents to non-residents as a

residents to non-residents consequence of foreign investment is also permitted.
However, there is a lock in period of 3 years applicable and no
transfer of immovable property is permitted during this period.

Earning or rent/income on FDI is not permitted in an entity which is engaged or proposes

lease of the property to engage in ‘Real Estate Business’. However the earning of
rent/ income on lease of the property, not amounting to
transfer, does not amount to ‘Real Estate Business’ and
hence is permitted.

Obligations on Indian • Indian Investee Company is permitted to sell only developed

Investee company
plots, i.e. the plots where trunk infrastructure has been
available.
• Indian Investee Company is responsible for obtaining all
approvals, payment of development and other charges, and
compliance with all other requirements as prescribed by local
government bodies.

Authority to monitor The State Government/Municipal/Local Body concerned,

compliance which approves the building/development plans, will monitor
compliance of all the conditions by the developer.
Open Conditions
• Timeline at which stage the foreign investment must come in is not provided in the existing
regulations and the clarification on the same is awaited.
• In the absence of any timeline for investment, since the FDI is permitted in construction-
development projects, it is to be seen at what stage a project can qualify as being in the
‘construction-development’ phase.
• Real estate being a state subject, any guidelines or regulations by state for the benefit of
foreign investors would be a welcome step and is awaited.
Take Away
RBI has been regularly improving the real estate sector for FDI, which will hold great
potential for formation of employment and generation of income. Furthermore,
considering the urgent need to enhance the affordable housing stock, the government
had provided definite relaxations to conditions for FDI in Real Estate sector. It also
clarified that real estate broking services do not amount to real estate business and are,
therefore, eligible for 100 per cent FDI under the automatic route.
It is safe to say that the construction/ real estate sector of India is one of the most
significant sectors of the country’s economy given its huge multiplier effect on the
economy. Any change or impact witnessed by the real estate sector has a direct
bearing on economic growth.

Naturally, the sector has plenty of opportunities and has attracted substantial foreign
direct investments over the years.

The Reserve Bank of India (RBI) in 2005 notified that the township, housing
construction development project sector and built up infrastructure was opened for 100
per cent foreign direct investment with specific terms and conditions.

More recently the RBI further relaxed FDI norms and policies on end-use of funds that
are raised through external commercial borrowings. This relaxation granted makes it
more attractive for foreign entities including corporates, non-banking finance
companies, or individuals to raise comparatively cheaper offshore funds.
In order to further liberalize the ECB framework, it has been decided to relax the end-
use restrictions and allow the use of funds for working capital requirements, general
corporate purposes and repayment of rupee loans. ECBs which have a minimum
average maturity period of 10 years can now be used for working capital purposes and
general corporate purposes.

These changes will improve the ease of doing business within the country.

Currently, a 100 per cent foreign direct investment is allowed in construction-

development projects, which includes development of townships, construction of
commercial and residential premises, roads, or bridges, hotels, hospitals, resorts,
educational institutions, recreational facilities, are allowed under the automatic route for
approval.