Impact of real estate sector on Indian macro-economy and vice-versa

Abstract

Real estate industry is the second largest employer after agriculture, and it is estimated to grow by 30 percent over next decade. The housing sector contributes around 5-6 percent of the Gross Domestic Product (GDP) of India. It is expected to reach $180 billion by 2020 from 2014 figures of $93.8 billion. The Indian government is supporting the real estate sector through its initiative like 100 smart cities, relaxed Foreign Direct Investment (FDI) norms, Housing for all by 2020 program and allotting $3.72 billion for the housing and urban development, etc. During the financial years 2008 to 2020, the market size is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 percent. According to September 2015 report of Department of Industry Policy and Promotion, the construction industry (township, housing, and build-up infrastructure) draws 9% of the total inflow of FDI in India. According to RBI August 2015 data, real estate activities attracted $202 million in the year 2014-15, and it was placed fourth after Manufacturing, construction and financial services. On the other hand, Monetary Policy of India is focused on regulations of the money supply, price stability (Containing Inflation), cost and availability of credit in the economy, lending and borrowing rates and more significantly the promotion of economic growth. The major focus of Indian Monetary policy is on checking the price stability that to control the inflation/deflation Reserve Bank of India uses direct and indirect instruments to implement the monetary policy like Cash Reserve ratio, repo and reverse repo rates, statutory liquidity ratio, open market operations, etc. It is interesting to see that real estate is a big contributor to the growth of India, and monetary policy plays a significant role in it. So we wanted to analyze the impact of real estate on monetary policy of India and what role does monetary policy play in growth or decline of real estate industry in India. Real estate plays an important role India in terms from providing affording housing to infrastructure. It covers residential housing, commercial offices, trading spaces such as theatres, hotels and restaurants, retail outlets (mall and multiplexes), special economic zones (SEZs), factories and other industrial parks such as government buildings. Real estate involves purchasing, sales and development of land, for the residential and non-residential purpose. Though real estate industry can be divided into commercial and residential segments, it is primarily divided into four sub-segments: housing, retail, hospitality and commercial. The housing segment is biggest of these four sub-segments. It has been the major beneficiary of economic growth in India since 2000. Sectoral growth combined with series of reforms has resulted in significant commercial and residential real estate, which includes the development of a large number of cities, office space development, retail mall culture, metro rails, world class airports and various road projects.