India eases foreign investment rules for construction sector

The Indian government has eased foreign direct investment (FDI) rules for the construction sector, a move that is expected to attract more money into Asia's third largest economy as it seeks to build hotels, homes and townships.

Under the new rules, announced on 3 December, foreign investment is now allowed in projects with a minimum built area of 20,000 square metres (around 215,285 square feet), significantly lower from the previous 50,000 square metres threshold.

The minimum capital investment by foreign firms has been halved to $5m (£3.2m, €4m), according to a government statement.

Vishwas Udgirkar, senior director at Deloitte says that the new rules will appeal to investors with less cash or to those with a lower risk-appetite, but that many key decisions for investors were out of the hands of the central government.

Decisions to allot land for development and the granting of various approvals typically rests with individual states and municipalities in India.

Udgirkar told Reuters: "[New Delhi's move] sends a signal to investors. But many other things need to be done simultaneously, at the state level, at the city level."

Prime Minister Narendra Modi has an ambitious vision to build 100 so-called 'smart cities' by 2020 and foreign funds will be needed to develop those projects.

Foreign investment into India's construction sector totaled $446m in the five months up to 31 August.

The sector received $1.2bn in foreign direct investment in the financial year ended 31 March, 2014, as against $1.3bn the previous year. The pace of foreign investment in India's construction industry has slowed in the wake of the global economic downturn.

The nation's construction sector, worth an estimated $126bn, attracted 11% of all foreign investment into the country between 2000 and 2013.

Previously, India allowed 100% FDI in real estate development but with tough conditions, including a lock-in period of three years during which the investment could not be repatriated.