India’s construction industry offers several investment opportunities for foreign companies given the country’s ambitious scope for infrastructure modernization, developing ‘smart cities’, improving logistics and transportation routes, and ensuring affordable housing for all.
Foreign investors also benefit from being able to invest in construction projects without requiring government approval.
India’s construction industry is rapidly expanding and includes real estate and urban development projects. Real estate includes housing projects, building offices, hotels, leisure parks etc. and urban development projects include highway construction, building schools, transport and healthcare infrastructure, sewage treatment, water supply, power generation etc.
Given the country’s ambition to modernize infrastructure, advance its cities with ‘smart’ development, and boost employment, India is expected to become the third largest construction market in the world by 2025.
The construction industry covers a wide scope and contributes around 55 percent to the steel industry, 15 percent to the paint industry, and 30 percent to the glass industry.
To facilitate growth, India has relaxed foreign investment norms in this industry and in 2020, the real estate sector alone received investment worth US$5 billion.
In terms of job creation, the Indian construction sector is responsible for employing 51 million people and earned the title of the most employed sector in 2017.
Foreign investment policy for India’s construction industry
Under the current foreign direct investment (FDI) Policy, India allows 100 percent FDI under the automatic route to:
- Complete urban infrastructure and development projects, such as residential or commercial premises, roads, bridges, hotels, resorts, hospitals, educational institutions, and recreational facilities
- Manage and conduct operations in completed townships and business construction
- Begin real estate projects under Special Economic Zones (SEZs)
- Construct industrial parks
In the period between April 2000 to September 2020, India’s construction sector received FDI worth US$17.22 billion for infrastructure activities and US$25.78 billion for construction development, as per government data.
Since the start of 2021, various key construction projects have been announced to expand infrastructure and help achieve important business goals. They include:
- Announced on January 13 – a land parcel of 0.5 million sq. ft. to be added to the Mindspace Business Park REIT, which is a prominent Real Estate Investment Trust.
- Announced on January 22 – the Government of Gujarat will launch eight new industrial estates in eight districts to boost manufacturing capacity of micro, small, and medium-sized enterprises (MSMEs), including manufacturing products like medical devices, auto ancillary goods, engineering, and food products.
- Announced on February 2 – proposal of the Jal Jeevan Urban Mission to provide water supply through functional taps to all households in 4,378 statutory towns to meet one of the key UN Sustainable Development Goals (SDG Goal-6: Clean Water and Sanitation).
The government had previously announced a goal of creating affordable housing in all urban areas by 2022. All of these would require massive injection of foreign capital and flexible investment structures. The government estimates that it will require FDI worth US$777 billion for infrastructure development.
Meanwhile, the COVID-19 pandemic put economic activity on hold for long periods last year, disrupting growth patterns and resulting in mass job losses in key sectors, including in construction, which sees heavy participation of migrant labor across the country.
To revive prospects for a national economic rebound and ease investment facilitation, the Indian government is reportedly proposing allowing limited liability partnerships (LLPs) to invest in the construction of townships, hotels, hospitals, and roads.
Currently, to invest in India’s construction sector, foreign investors are expected to commit to a three-year lock-in period before exiting. Allowing the participation of LLP firms could attract greater FDI.
India’s Union Budget 2021 announcements relating to the construction industry
To successfully attract future foreign investments, Finance Minister Nirmala Sitharaman in her Union Budget 2021 prioritized the following areas to showcase the government’s interest in achieving India’s infrastructural goals:
- Allocation of INR 500 billion (US$6.85 billion) to the Ministry of Housing and Urban Development.
- Allocation of INR 275 billion (US$3.76 billion) to the Pradhan Mantri Awas Yojana, which aims to provide urban housing for all by 2022.
- Allocation of INR 137 billion (US$1.88 billion) to the Smart Cities Mission, which aims to promote ‘smart cities’ that provide their citizens with core infrastructure, decent quality of life and a clean and sustainable environment.
- Allocation of INR 23 billion (US$315 million) to the Swachh Bharat Mission (Urban), which aims to embark on a campaign for a clean urban India by improving sanitation and public health, removing the practice of manual scavenging etc.
- Allocation of INR 99 billion (US$1.36 billion) to the Swachh Bharat Mission (Rural), which aims to embark on a campaign for a clean rural India by improving sanitation and public health, removing the practice of manual scavenging etc.
Opportunities for foreign investors
Foreign investors should note the following factors that will drive the investment viability of India’s construction sector:
- Continuous increases in the demand for infrastructure and real estate.
- The real estate sector expected to be valued at US$1 trillion by 2030 and is expected to contribute approximately 13 percent to the country’s GDP by 2025.
- The country’s urban population is expected to be 50 percent of the total population by 2025.
India hosts numerous projects that foreign investors can choose to invest in. Popular examples include the development of residential and commercial buildings, transport infrastructure, as well as maintaining efficient systems of water supply and sewerage. More recently, the focus has turned to constructing green buildings by using sustainable and environment-friendly materials and renewable-based technologies as part of the smart city development program.
Foreign investment participation
Foreign companies currently invested in India, include:
- Alstom, France
- Aqualyng, Norway
- Ascendas, Singapore
- Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ) GmbH, Germany
- Hines, USA
- Hydro-Comp, South Africa
- The Trump Organization, USA
- Veolia, France
National Infrastructure Pipeline (NIP) – key growth driver
The National Infrastructure Pipeline (NIP) is India’s biggest infrastructure project, to be carried out for a period of five years since its public announcement in 2019. The project aims to provide Indians with world-class infrastructure, improve the quality of life, as well as attract foreign investments in capital projects.
NIP has aimed to create a ‘harmonized master list of infrastructures’ by aggregating all the available information (provided by ministries, state governments, and private sector) about infrastructure sub-sectors and record all greenfield and brownfield projects whose costs exceed INR 1 billion (US$13.71 million). Investment projects under NIP cover transport, logistics, energy, communication, water and sanitation, commercial infrastructure, and social infrastructure. Sub-sectors within these sectors include roads and bridges, railways, urban transport, airports and aviation infrastructure, ports, and shipyards.
Currently, under the NIP framework, there are 7,552 projects across 34 sub-sectors, out of which 1,754 are in the process of development; in total, the projects are estimated to be worth US$1,814 billion.
For foreign investors, the NIP has designed ‘Marquee Opportunities’, which refer specially curated strategic partnership opportunities that each investor can closely investigate to decide which project fits them best. These projects are available for comparison across different sectors and sub-sectors.
The following table describes the 42 marquee projects that are available across five sectors.