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Housing & real estate, telecom negatives present challenges

SERVICES: Phased start in metros, low cap proposed for FDI in retail

Business Standard 

The Economic Survey, while recognising the importance of the services sector (it accounts for 59 per cent of gross domestic product), has raised concern over several components in it. Three months after the government rolled back its decision to allow 51 per cent foreign direct investment (FDI) in multi-brand retail, the survey referred to it as a major challenge before the sector.

FDI in retail could begin in a phased manner in the metros, the survey suggested, a day ahead of the Budget. Though it did not specify the details, experts said the government document hinted at a low FDI cap, perhaps one of 26 per cent. It has also talked of “incentivising” mom-and-pop stores (kirana shops) “to modernise and compete effectively with retail shops, foreign or domestic”.

While agricultural marketing could improve immensely with the growth in modern retail trade, the revenue to the government could also increase. Currently, the retail sector is largely unorganised and has low tax compliance, it argued.

Reacting to the portion in the survey relating to FDI in retail, Purnendu Kumar, senior vice-president (retail), Technopak, said, “This is something similar to what was articulated earlier — issues like better integration with farmers leading to better pricing for them and quality storage leading to lower wastages. It needs to be seen how the government would be able to execute this, considering the Congress party does not account for the majority on its own.” Incentivising small traders was a welcome step, but the details were not available, Kumar said.

Karandeep Singh, chief financial officer, Flipkart, a leading online retail chain, said, “While the future is promising, it will be realised only if the government acts on some of the guidelines provided in the survey.” According to Singh, opening up FDI in retail and continuing to make the infrastructure sector attractive for investments were critical to creating more jobs and having a multiplier impact on the economy.

In the services sector, the housing & real estate sector was projected as a major worry. From a share of 10.6 per cent of the gross domestic product (GDP) in 2010-11, it now accounts for just five per cent of the GDP, the survey said. After growing at 10.4 per cent in 2008-09, growth in this sector decelerated to 7.8 per cent in 2009-10 and 6.9 per cent in 2010-11.

Anshul Jain, chief executive, DTZ India, a global real estate consultancy, agreed. He said, “Definitely, there is cause for worry. Real estate is second only to the agricultural sector, in terms of employment generation. Till the time interest rates do not start their climb down, there is little cheer for the real estate sector.”

Without mentioning the 2G spectrum scam, the survey pointed to the negatives in the telecom sector, a part of the services sector. Once an international success story, with growth next to only to China’s, India’s telecom story may be losing out due to the “recent court cases”, the survey said. “The sentiment in this sector could be lifted by further reforms, which could include rationalisation of the multiple levies and taxes,” it said.

The performance of the shipping industry was also seen as a concern. “Indian shipping companies faced problems of restricted cash inflows in 2011-12, owing to very low charter hire and freight rates in all the segments. These difficult economic conditions have been prevailing since 2008, albeit with small windows of relief in 2011-12,” it said.

Anil Devli, chief executive officer, Indian National Ship Owners’ Association, said, “Shipping has been awarded a critical infrastructure status by countries; we have not realised its importance in the supply chain. This is a good time to buy ships and modernise our fleets, for which we need cash and capital. There should be some specialised shipping financing scheme.”

The services sector’s share in GDP has fell from 58 per cent in 2010-11 to 59 per cent in 2011-12, with a growth rate of 9.4 per cent, a little higher than 9.3 per cent in the previous year, the survey said. The combined FDI share in the services sector stands at 41.9 per cent of cumulative FDI equity inflows between April 2000 and December 2011. If the construction sector is included, the share of services in FDI inflows is 48.4 per cent.

Pointing to the fact that India’s services sector was resilient, even during the tumultuous years of the global economic crisis, maintaining steady growth of about 10 per cent, the survey said the slight moderation to 9.4 per cent should not be seen as a cause of worry. “It (the moderation) is due to the steep fall in growth of public administration and defence services, reflecting the government’s fiscal consolidation.”

At 11.2 per cent, growth in “trade, hotels & restaurants, transport, storage and communication” was robust, the survey said. Growth in the retail sector was expected to be more robust in 2012-13, it said. “With the hardening of interest rates, the real worry would be with the real estate/ownership of dwellings and business services segment, the growth of which started decelerating, and construction services,” it added.

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First Published: Fri, March 16 2012. 00:08 IST