Conditional On The Coalition Government

Updated: May 30 2004, 05:30am hrs
The immediate reaction to the post poll scenario of the new government formation by the corporate world has been mixed and guarded, even though the backlash in the stock markets has been far more dramatic. This is despite the fact that at a broad level almost all the parties forming the government do endorse the liberalisation agenda.

The present concerns are mostly on account of the pace and quantum of economic reforms that would be witnessed hereafter, more so in the context of the substantial unfinished reforms agenda which is the residue of the reforms initiated by the previous government. The reform policy of the new government is expected to emerge over the next few months as the dynamics of coalition politics evolves.

However, from the real estate sector standpoint, the impact would be directly dependent on the macro economic growth trends and the efficiency of the macro management, which the new government achieves. At a more micro level, the impact would be conditional on the incremental variation in foreign investment flows as well as the rate of expansion of existing businesses in the country.

The office property sector over the last couple of years, in most metropolitan cities, has been inevitably driven by the buoyant demand from IT/ITES sector companies, whether foreign or domestic. So much so that it would not be incorrect to say that the IT and ITES sectors are at the core of the office property markets in India and more or less define the growth path in the same. The huge impetus to IT was also a result of consistent efforts by the erstwhile IT champion chief ministers such as SM Krishna and Chandrababu Naidu, which had gone a long way in reinforcing the India proactive for International IT business image. Hence any slowdown in the economic growth and the championing of the IT/ITES sector in terms of new policy or shift in focus away from the same could have detrimental impact on the office property markets across the country.

The scenario in the structured retail property sector is slightly different. Since its evolution in 1998, the entire sector has grown at a tremendous rate largely on the back of a huge supply response and is till now mostly reliant on the demand generated from Indian retail chains and departmental stores. Though at the back of the mind, the developers were optimistic that the opening up of the foreign direct investment (FDI) in retail would help push the sector to a higher growth level. If the FDI policy is not considered on a priority basis by the new government, the retail sector would probably not loose its existing momentum in the short term, but certainly expectations of achieving higher growth would eventually be scaled down.

The residential property markets over the last couple of years have recovered steadily on the back of a regime of low housing finance rates, progressive tax exemptions of previous budgets and overall robust macro-economic growth. The bounce back in this property segment has been more evident and striking in the context of the fairly long preceding slump in the markets. Also, in many of the metropolises, especially in southern India, the residential property development has hinged on the back of fantastic growth in the IT and ITES sectors. Thus, stable and efficient macro economic and fiscal management as well as the ability to maintain the finance and lending rates would be critical factors in deciding whether the mass demand for houses and residential property remain upbeat, and would largely define the growth patterns in future. Though these are initial days of the government formation process and clear directives and policies are yet to be announced, it is important to understand the context and the impact of possible policy shifts on real estate and construction as this sector along with others would determine the eventual outcome of the decisions by virtue of their large contribution to the Indian economy.

The author is head, India Property Research