Long term solutions and one quick fix

The Dream Team of Manmohan Singh, P. Chidambaram, and Montek Singh Ahluwalia have brought India within reach of a nightmare.

The focus of this troika has wrongly been on:

growth as a quantitative number, as opposed to growth as a legitimate market-driven means to uplift a majority of Indians;

a call to revive the animal spirits, as opposed to building a fair and just society; and flashing statistics to prove their success, when all qualitative indicators of life in India have been heading south.

The further shame is that the Dream Team got caught up in the folly of the BRIC reports authored by a team of dreamers from Goldman, Sachs. For all its marketing blitz, the BRIC report was an exercise in building a laughable xl sheet. A key finding: India was on its way to being a super power just because we had a young population. But the Dream Team, dined and wined by those who attended elite educational institutions as they did, began to believe this false prophecy. As part of the egoistic advertising of the India Dream, Incredible India, and Resurgent India (and, yes, the BJP had its India Shining moment of stupidity), the troika spent too much time with western investors and too little time touring the Indian landscape and addressing the problems within India.

Marked to market

The constant westward looking glances of this troika were akin to a puppy dog looking for someone to pat their back and fondle their neck. And, yet, they were not elected by the western investment banks and nor were they elected to represent the Indian super-rich. Their actions over the past few years have been far from building a just society: rather than punishing those responsible for some of the most outrageous scams and thefts in India's economic history, the Dream Team - and many politicians across the spectrum - have sought ways to defuse the seriousness of the theft. (Before the BJP jumps on this to make some political gain, they need to be reminded of the various scams that BJP politicians have been involved in. The difference between the BJP and the Congress is that the BJP still sends their children to local schools while the Congress has sent their heirs to study at the elite schools of the west. In the hallowed halls of these great western campuses, the young er turks have learnt the art of sophisticated theft from their class mates - many of whom have joined the Wall Street firms where they are given a platform to perfect it.)

A series of speeches over the past one year gave a momentary pause to the disillusionment with the Great India Story. That circle is now complete: Goldman Sachs has pretty much disowned India (now classified as an "underweight") and the very audiences that the Dream Team tried to placate are dumping the Indian currency.

Stock markets have behaved a lot better and foreign investors have not dumped Indian shares. Despite the sharp fall in the BSE-30 Index on August 16, the Indian stock markets are still 9.6% higher than where they were on August 1, 2012 - when Chidambaram came in as Finance Minister to replace Pranab Mukherjee, since demoted to the role of President. That relative calmness in the stock markets could change. The Finance Minister - and his weekly speeches - gave some reassurance to the jittery foreign investors. Speeches may help markets stay calm and may even help markets recover for a while (see Graph 2). Eventually, the ability to quote famous poets and philosophers needs to be followed up by action. Though there some action (the increase in the price of petrol and diesel), it was not enough. The issue of deflecting any action on corruption and protecting the rich at the cost of a broader good still seem to be the pet policies of this government. When measured in USD, the BSE-30 Index has slipped by -1.8% since Augus t 1, 2012 while the MSCI Emerging Markets has gained +3.4%.

Within this obsession of a market meltdown, there is a need to recognise that there are other countries whose currency has been whacked. The shame is that India - given its domestic economic potential - could have been saved this comparison to Brazil, South Africa, Japan and Australia.

A quick fix for immediate, broader growth

So, how can the government revive growth - without surrendering the "capitalist path" and without enriching the crony Indian businessmen grovelling for favours at their doorsteps?

The quick fix solution is to ask all government owned PSU banks to recall their loans to property developers when they fall due and not to roll them over. The act of rolling over the debt has given the property developers (most have some connection with some politicians) the ability to hold on to their stock of unsold property - and has led to a situation where they even have the shamelessness to increase prices! The objective of the capitalist developer is to (rightly) sell at the highest price. Of course, if this was indeed a free market, the money owed to the bank by the developer would have been called in by the ban k. To repay the bank loan the developer would have to sell the p roperty at whatever price he could get. This would ensure that property becomes affordable again. But we don't live in a capitalist society; we live in a crony-capitalist India. Those with connections get what they want - the rest have to bear the cost of passing on extra profits to the crony-capitalists.

According to various news reports, there are some 4,00,000 residential apartments of various sizes and prices lying unsold across India. Assuming these were approximately 800 square feet in size and had an average price tag of Rs 3,000 per square foot, that would amount to a total of Rs 9,60,000 crore in stuck value. This is about 1% of India's GDP which, for now, is showing up in a PSU bank as a loan to developers and subsidising the developers desire to sell in the future at a higher price for a larger profit. This Rs. 9,60,000 crore also represents a potential pool of money that would start a multiplier effect. If the buyers -with down payments and mortgages - were allowed to buy properties and then start buying furniture, TVs, and household goods for these new homes...maybe another 0.5% of GDP could be added from the "extras" we buy when we purchase a new home.

The Finance Minister has the power to tell the PSU banks not to renew loans to property developers or to property investors. "Unsold" properties will then be available for sale - at lower prices, because developers will be forced to sell at any price to raise the cash to repay the loans. From the banks' perspective, loans given to property developers will be repaid and loans given to individuals to buy homes will increase by a similar amount. While there will be no increase in bank loans (alas, the Dream Team will not have a rosy growth statistic to share at the next speech they give in a western country), the qualitative aspect of life will increase significantly. People who want homes will actually get a chance to own them - at affordable prices.

Gold may, as the Finance Minister says, be a "useless metal" but property unsold is a larger burden on society. Gold is owned by millions as a protection against bad government and bad governance (and we are witnessing an era of that), property is being hoarded by a few hundred developers for their benefit - using the money from millions of depositors in PSU banks!

A recovery in growth rates of India's GDP would attract foreign investors and strengthen the stock markets and the Indian Rupee. This time it would be different. Because the benefit of that growth in GDP is being felt by the buyers of property, not by the supra-normal profits gifted to the developers and their politician partners.

The long run solutions remain the only true solutions The immediate order to PSU banks to shut off the capital to real estate developers will see a surge in local consumption and boost growth. But this is a one-off.

The long term challenges for India are many. A few that need to be focused on are:

1. Minimising corruption in politics, in the bureaucracy, and in business;

2. Continue to find ways to subsidise the poor who cannot afford the basics (with corruption minimised, more money will flow to where it is needed);

3. Developing the villages and districts as alternate places to live to prevent urban migration;

4. Focus on public transportation, and not on private vehicles like cars (gold may be useless but it is worth something, though once you burn oil it is worth zero); 5. Give domestic retail investors the confidence to return to the Indian stock markets.

India is not in a crisis.

We have been lulled into following the questionable policies adopted by our central and state governments. The real issues have been brushed aside and our silence has allowed them to be brushed aside. Wearing an arm band and lighting a candle is not how policies are changed. Forcing the issues and confronting your elected representatives is what will start the long process of change. Until then be prepared to be whipsawed between surging and falling markets.

The above is from the Honest Truth by Ajit Dayal of Equitymaster.

His views match mine in many respects.

You will note that his # 1 priority is Minimising corruption in politics, in the bureaucracy, and in business;

The Aam Aadmi Party aims to eliminate it altogether or at least 65% as Anna had said.