When you tune
in to a new FM, you hope to hear a different song.
So far, tuning in to what the new Finance Minister (also known as "FM") has to say - sadly - makes one hear the same old songs and tunes sung by the previous FM. It is uncommon that such warring individuals and political personalities should have such a common view on so many varied topics.
Whether it is on getting black money back to India - or on the right of a sovereign nation to tax its citizens retrospectively - not much seems to have changed. This FM is singing the same ragas as the previous FM.
Even the promises of "reforms are around the corner" or "I wish I could do more for the middle class" are dull notes full of crackle and repeated by previous FMs. Static from a bygone era that we wish to eradicate along with a party that has long lost its way.
To top it all, the continuous nagging of the Reserve Bank of India to cut interest rates is a mantra that seems to emanate irrespective of whether the FM is standing on the hills of the Vindhyas or the summits of the Himalayas.
Eventually every FM wants the RBI to do the dirty work to propel the economy to a higher level of growth - they ignore the simple levers under their control to boost GDP.
So far, tuning in to what the new Finance Minister (also known as "FM") has to say - sadly - makes one hear the same old songs and tunes sung by the previous FM. It is uncommon that such warring individuals and political personalities should have such a common view on so many varied topics.
Whether it is on getting black money back to India - or on the right of a sovereign nation to tax its citizens retrospectively - not much seems to have changed. This FM is singing the same ragas as the previous FM.
Even the promises of "reforms are around the corner" or "I wish I could do more for the middle class" are dull notes full of crackle and repeated by previous FMs. Static from a bygone era that we wish to eradicate along with a party that has long lost its way.
To top it all, the continuous nagging of the Reserve Bank of India to cut interest rates is a mantra that seems to emanate irrespective of whether the FM is standing on the hills of the Vindhyas or the summits of the Himalayas.
Eventually every FM wants the RBI to do the dirty work to propel the economy to a higher level of growth - they ignore the simple levers under their control to boost GDP.
so-called free market economy, the "price" of a
product is eventually determined the supply and the demand and supported by a
"cost of production plus normal profit".
Real estate seems to be a product whose price is determined more by "who the real estate developer knows" rather than by any demand/supply equation.
Consider this: there is an estimated 650 million square feet or some 650,000 unsold, vacant apartments lying around the Indian economic landscape.
There is demand: millions of people wish to buy homes.
But the homes are not affordable - they are expensive.
The prices are beyond the reach of the buyer.
In any "free market", the price of this commodity (real estate) would have declined till a point was reached when people could afford it - transactions would increase, and the supply would evaporate as demand kicked in.
But real estate has not seen any significant price decrease, as such.
Transaction volumes have declined. But prices have remained at "elevated" levels.
Real estate developers are in no pressure to sell.
They have borrowed money from the banks (or made their suppliers borrow money from the banks).
The banks are mostly PSU banks.
PSU banks are owned by the government.
The government is run by politicians.
Politicians are partners with many real estate developers - or directly and indirectly own real estate firms.
So, if a PSU bank asks for the loan from a developer to be repaid on a due date, it is possible that a politician makes a phone call and tells the Chairman of the PSU bank - or the loan officer - to roll over the loan.
Maybe, by now, the PSU bank knows that the loan must be automatically renewed and rolled over.
Real estate seems to be a product whose price is determined more by "who the real estate developer knows" rather than by any demand/supply equation.
Consider this: there is an estimated 650 million square feet or some 650,000 unsold, vacant apartments lying around the Indian economic landscape.
There is demand: millions of people wish to buy homes.
But the homes are not affordable - they are expensive.
The prices are beyond the reach of the buyer.
In any "free market", the price of this commodity (real estate) would have declined till a point was reached when people could afford it - transactions would increase, and the supply would evaporate as demand kicked in.
But real estate has not seen any significant price decrease, as such.
Transaction volumes have declined. But prices have remained at "elevated" levels.
Real estate developers are in no pressure to sell.
They have borrowed money from the banks (or made their suppliers borrow money from the banks).
The banks are mostly PSU banks.
PSU banks are owned by the government.
The government is run by politicians.
Politicians are partners with many real estate developers - or directly and indirectly own real estate firms.
So, if a PSU bank asks for the loan from a developer to be repaid on a due date, it is possible that a politician makes a phone call and tells the Chairman of the PSU bank - or the loan officer - to roll over the loan.
Maybe, by now, the PSU bank knows that the loan must be automatically renewed and rolled over.
The real estate developer is in no pressure to reduce the
price of the unsold property.
They can wait - there is no money to be repaid to the bank.
To set this imbalance straight, the Finance Minister, the "owner" of PSU banks, should send out a one-line diktat: No loans to real estate developers must be renewed or rolled over.
Guess what would happen?
The free markets would work.
Knowing that there are loans to be repaid, developers would reduce prices to clear the unsold stock of 650,000 apartments.
Or, they could default and allow the banks to take over their projects as collateral for the bad loans.
The banks could auction the properties seized.
Individuals would buy the homes they need.
At prices they can afford.
They would then furnish these homes and buy white goods like refrigerators and ovens - maybe even a new 2-wheeler or car. Finally, after hearing speeches about the promised Ache Din, the general population would finally experience it!
All this economic activity from real estate will add over 2% to GDP (see Table 1).
They can wait - there is no money to be repaid to the bank.
To set this imbalance straight, the Finance Minister, the "owner" of PSU banks, should send out a one-line diktat: No loans to real estate developers must be renewed or rolled over.
Guess what would happen?
The free markets would work.
Knowing that there are loans to be repaid, developers would reduce prices to clear the unsold stock of 650,000 apartments.
Or, they could default and allow the banks to take over their projects as collateral for the bad loans.
The banks could auction the properties seized.
Individuals would buy the homes they need.
At prices they can afford.
They would then furnish these homes and buy white goods like refrigerators and ovens - maybe even a new 2-wheeler or car. Finally, after hearing speeches about the promised Ache Din, the general population would finally experience it!
All this economic activity from real estate will add over 2% to GDP (see Table 1).
Table 1: How Ache Din can boost India's GDP by 2%
|
Unsold Inventory (mn sq feet)
|
650
|
|
Avg size of apartment (sq feet)
|
1,000
|
|
Apartments unsold (number)
|
650,000
|
|
Selling price of each apartment (Rs per sq ft)
|
3,500
|
|
A: Value of all unsold apartments (Rs mn)
|
2,275,000
|
|
Money spent on furnishing each apartment (Rs / sq ft)
|
1,000
|
|
B: Money spent on furnishing all apartments (Rs mn)
|
650,000
|
|
C = A + B: Value of spending, if all apartments are
sold and furnished (Rs mn)
|
2,925,000
|
|
in USD billion
|
47.18
|
|
As a % of GDP
|
2.36%
|
Source: Estimates from various sources
and internal assumptions
With unsold inventory cleared out, sensible real estate developers looking to earn "normal profits" would build more homes adding to demand for cement and steel - and creating jobs.
The virtuous cycle would renew the economy.
No, Mr Finance Minister, if you wish to boost GDP don't ask the RBI to cut interest.
Instead, look inward and stop the PSU banks from lending money to real estate developers and their vendors.
Force the real estate developers to slash prices to spur demand and generate cash flow to repay their loans.
That will boost the economy - way beyond what a RBI cut would do.
It is time to sing a new tune and take on the powerful real estate - political establishment.
Are you up to it?
The above is from "The Honest truth" by Ajit Dayal of Equitymaster, to wwho I subscribe.
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