Executive Summary

Amit kumar (102, Sec-A)

Topic – Real estate
Issue – Impact of recession on real estate in India and Role of RBI
Real estate in India

The Indian real estate sector plays a significant role in the country's economy. The real estate
sector is second only to agriculture in terms of employment generation and contributes heavily
towards the gross domestic product (GDP). Almost five per cent of the country's GDP is
contributed to by the housing sector. In the next five years, this contribution to the GDP is
expected to rise to 6 per cent. Development of real estate in India is attributed to the off-shoring
and outsourcing businesses, such as high-end technology consultation, call centres and
programming houses.

Effect of Recession

The real estate industry was a very booming industry in India till 0ctober 2008. The demand
for IT space and pace of demand in Indian real estate sector which had gained a very high
impact image of investing Commercial spaces. And also the high net worth of individual
investors had created a very fast in India. But the impact of recession in US economy has
impacted Indian Real Estate market because due to globalisation investors free to invest the
money in other countries in the term of FII and FDI. So, recession effect the investment in India
by fall of investment.

Bankruptcy of Lehman Brother an oldest financial firm of American market and sell process of
PE Firm Merryl lynch by the largest US Bank of America is best example of very fast recession
in financial industry and created a crisis in all over US economy. All of these changes in US
economy have impacted in Indian economy as well as Real estate segment as most of the Indian
players have their liquidity funded by both of these firms. Also the IT segment which was mainly
funded by the PE firms or have their export to US markets have noticed very sharp drop of net
worth of their firms. This recession also impacted the Sensex which has bullish very sharply and
brings down the net worth of the leader of Indian real estate player very low. The impact can be
shown in share price of DLF, Unitech, GMR group, Reliance group, Wipro, Satyam etc groups.
The market rates in India are dropped by 10 to 30% in most of prominent as well as upcoming
cities and the trend appears to be still continuing till it will not recover the effects of this
financial crisis.

According the expert the current global recession has dominant Keynesian features. But the
crucial issue is not only demand contraction but this has been brought about by a market failure
which fuels adverse expectations on the part of both producers and consumers. These adverse
expectations lead to reduced production by producers anticipating lack of demand and increased
savings by consumers anticipating lack of jobs. Due to unemployment and increase saving the
domestic market of real estate has fall down.

ROLE OF GOVERMENT AND RBI

The government has introduced many progressive reform measures to unlock the potential of the
sector and also meet increasing demand levels and the Reserve Bank of India's (RBI) move
allowing banks to provide special treatment to the real estate sector.

• 100 per cent FDI allowed in realty projects through the automatic route.

• 51 per cent FDI allowed in single-brand retail outlets and 100 per cent in cash-and-carry
through the automatic route.

• To ensure more liquidity for the real estate sector, RBI allowed the registered housing
finance companies to raise short-term funds from overseas markets.
• The RBI also permitted Indian banks to offer better interest rates for foreign currency
deposits by the non-residents
• For exporters, RBI increased the time limit for pre-shipment export credit from 180 days
to 270 days with immediate.

Real Estate Still a Good Investment Option

Real estate in India has been increased with help of public companies, FDI and private equity
firms. Foreign institutional investors (FIIs) have also shown confidence in the country’s
construction sector and are shoring up investment.