Among all the sectors in which foreign investment has been gradually permitted, the most salutary impact on the overhaul of corporate functioning has been in real estate. Historically, this is one sector whose ability to churn black money has thrown the government?s most diligent tax detectives into a tizzy. In 1983-84, a study by the National Institute of Public Finance and Policy, still the only quoted figure on black money in the Indian economy, had estimated it between Rs 31,584 crore and Rs 36,786 crore. Twenty-five years thereafter, the finance ministry was convinced that the sum had grown by at least four times. Central to the worry was the role of real estate as a laundromat, turning black into white. Successive black money mop up schemes, ranging from bearer bonds to the VDIS of 1997-98, have had this sector within their sights. That black money is such a cause for public disaffection with the state of economic affairs is clear from the manifestos of all political parties, which make a point of driving it out.
So, it is quite an event when the business habits of this sector undergo such striking change. Cash payments, in black, are no longer the norm. This change has come about because of the inflow of foreign investment. Foreign companies with a reputation to preserve with their shareholders have made it clear to realtors that there can be no cash deals. According to tax consultants with top law firms, the cash proportion has collapsed from over 50% of all business deals made by real estate firms to less than 10% in the last one year or so. This has become even more noticeable in those firms that have foreign investors occupying seats on their boards.
Gigantic real estate transactions continue to make newspaper headlines in India, but none of these are in cash. Private equity firms and other foreign investors just cannot afford to let their portfolios be saddled with dodgy deals. This has started leading to some rather bizarre situations. At least two Delhi-based entrepreneurs, for example, are reported to have turned away overseas funding as they were not sure if graduating to a more transparent league would serve their financial interests.
So it is that the forceps effect of diligent foreign partners at the project end, and cash-averse banks at the retail lending end, is prying the real estate sector from the hold of black money. The deals that are replacing the cash ones are ?structured? ones. Sure, these tend to use special purpose vehicles that are intended to leverage the tax shelters available, but these are within legal boundaries. Often, they do graze pretty close to the edge of what?s permissible, but this is far removed from the blatant suitcase economy stuff that has plagued the real estate sector all these decades.
Payments for today?s mega deals tend to stretch over longer time periods, but that is a natural result of cleaner practices. As real estate operations become more and more significant, the benefits of clean operations will cascade through the entire economy. Adjustments would be easier, and the market more liquid. Just imagine how much more messy the US subprime crisis would have been if the documentation of deals had been dubious.
The benign influence of FDI in the real estate sector mirrors developments in several related sectors, notably retail. This is another sector where clean money can make a big difference to our corruption index and the consequent appeal of India as a place to do business in. It does no good to claim that enhanced domestic bank lending would have done a similar cleanup job. Banks are not driven by activist shareholders. Yet, overseas, banks do determine how a company conducts its business. The Indian stock market, too, will eventually hold realtors to admirably high levels of operational probity, customer sensitivity and concern for the surroundings as much as the money being made. Until then, thank FDI in real estate for the changes that are taking place.