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Easynomics: India needs a vibrant real estate and construction sector written by Vivek Kaul, published in Bangalore Mirror. January 15, 2020

In 2019-20, India&rsquos economic growth is expected to be at 4.98%, the lowest since 2008-09, when the economy had grown by 3.09%.

 

Construction is one of the most important sectors contributing to Indian economic growth. In 2019-20, it is expected to grow at 3.16%, the slowest during the years Narendra Modi has been the prime minister. In fact, the share of construction in the Indian economy peaked at 9.59% in 2011-12. In 2019-20, it is expected to be at 8.03%.

 

The multiplier effect in case of construction in general and real estate in particular, is huge. As Richard Davies writes in Extreme Economies: &ldquoBuilders need to spend money on materials such as bricks, wood and electrical wire, and they [have] to pay wages of the workmen who use them. All this generates incomes for companies &ndash the builders&rsquo merchant, the concrete supplier and the haulier &ndash and for the tradesmen such as the bricklayer, joiner and electrician. Once the job is finished, new house has been produced.&rdquo

 

What this basically tells us is that any construction doesn&rsquot just benefit the builder or the company carrying out that construction, but many other companies and tradesmen involved with the construction. In the Indian case any construction leads to creation of jobs for a huge number of manual labour.

 

Of course, once these companies and individuals and companies earn money, they spend it. This benefits other people given that one man&rsquos spending is another man&rsquos income.

 

As Keith Wardrip, Laura Williams and Suzanne Hague write in a research paper titled &lsquoThe Role of Affordable Housing in Creating Jobs and Stimulating Local Economic Development: A Review of the Literature&rsquo: &ldquoDuring the construction of affordable housing &mdash or any kind of housing, for that matter &mdash the local economy benefits directly from the funds spent on materials, labour, and the like. If the builder is purchasing windows and doors from a local supplier, the supplier may have to spend money on materials and hire additional help to complete the order &ndash examples of indirect effects. Finally, the construction workers, glass cutters and landscapers are likely to spend a portion of their wages at the local grocery store or shopping mall, which illustrates induced effects.&rdquo

 

This is how the multiplier effect works and helps the economy grow. In fact, the chain doesn&rsquot stop working once the house has been built. When a house is being built there is demand for everything from bricks, sand, steel, cements, wood, etc. Once a house is built there is demand for furniture, carpets, home furnishing, and so on. There is a lot that is needed to build a home out of a house.

 

Of course, most people buying house take a home loan. This helps banks and housing finance companies. As Davies writes: &ldquoConstruction means a rush of the three types of activity &ndash producing, earning and spending &ndash that contribute to the gross domestic product (GDP).&rdquo The GDP is a measure of the economic size of a country.

 

The fact of the matter is that economic development strategy of a nation needs to align itself with its natural competitive advantage, which, in the Indian case, is the large pool of unskilled labour which is already available and, at the same time, is continually entering the workforce all the time.

 

Real estate and construction sectors can be a huge job generators, given that they can generate low-skill jobs of manual labour. But, for that to happen, the housing sector needs to be revived. For the housing sector to be revived, it is essential that home prices, which have been out of whack for a long period of time, come down.

 

For the price anomaly to be corrected, the nexus between politicians and builders needs to end. The system of electoral financing needs to evolve and move away from the way it currently is. The rules and regulations governing the building of homes need to be simplified, to ensure that much bigger players can enter the market. Currently, the sector is plagued by too many small players, who just can&rsquot achieve any scale.

 

And all this is easier said than done.

 

(Vivek Kaul is the author of the Easy Money trilogy).