Month: September 2014 | Page 4

10 September, 2014

Here’s how India’s government unwittingly aids the growth of ponzi schemes

Over the last few years a spate of Ponzi schemes have come to light. These include Sahara, Saradha Chit Fund, Rose Valley Hotels and Entertainment and most recently PACL. A Ponzi scheme is essentially a fraudulent investment scheme in which money brought in by new investors is used to redeem the payment that is due to existing investors.
The instrument in which the money collected is invested appears to be a genuine investment opportunity but at the same time it is obscure enough, to prevent any scrutiny by the investors. So PACL invested the money it collected in agricultural land. Rose Valley, Sahara and Saradha had different businesses in which this money collected was invested.
These Ponzi schemes managed to raise thousands of crore over the years. In a recent order against PACL, the Securities and Exchange Board of India(Sebi) estimated that the company had managed to collect close to Rs 50,000 crore from investors. Sahara is in the process of returning more than Rs 20,000 crore that it had managed to collect from investors, over the years.
The question is how do these schemes manage to collect such a large amount of money. A June 2011, news-report in The Economic Times had estimated that PACL had managed to collect Rs 20,000 crore from investors at that point of time. This means that since then the company has managed to collect Rs 30,000 crore more from investors. An April 2013 report in the Mint quoting state officials had put the total amount of money collected by the Saradha at Rs 20,000 crore.
These Ponzi schemes have managed to collect a lot of money in an environment where the household financial savings in India have been falling. Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc.
The latest RBI annual report points out that “the household financial saving rate remained low during 2013-14, increasing only marginally to 7.2 per cent of GDP in 2013-14 from 7.1 per cent of GDP in 2012-13 and 7.0 per cent of GDP in 2011-12…the household financial saving rate [has] dipped sharply from 12 per cent in 2009-10.”
While the household financial savings have dipped, the money collected by Ponzi schemes has grown by leaps and bounds. What explains this dichotomy? Some experts have blamed the low penetration of banks as a reason behind the rapid spread of Ponzi schemes in the last few years. K C Chakrabarty, former deputy governor of the Reserve Bank of India, in September 2013 had pointed out that only 40,000 out of the 6 lakh villages in India have a bank branch.
Hence, investors find it easier to invest their money with Ponzi schemes, which seem to have a better geographical presence than banks. While this sounds logical enough, the trouble with this reasoning is that the bank penetration in India has always been low. It clearly isn’t a recent phenomenon. So, why have so many Ponzi schemes come to light only in the last few years?
Another reason offered is that the rate of return promised by these Ponzi schemes is high and is fixed at the time the investor enters the scheme. This is an essential characteristic of almost all Ponzi schemes. Take the case of Rose Valley. The return on the various investment schemes run by the company varied from anywhere between 11.2% to 17.65%.
In case of PACL The Economic Times report referred to earlier pointed out that “If a customer puts down Rs 50,000 for a 500 square yard plot, he or she can expect to get back Rs 1,01,365 in six years, or Rs 1.85 lakh in 10 years.” This meant a return of 12.5% and 14% on investments. An April 2013 report in the Business Standard pointed out that the fixed deposits of Saradha “promised to multiply the principal 1.5 times in two-and-a-half years, 2.5 times in 5 years and 4 times in 7 years.” This basically implied a return of 17.5-22%.
It is clear that returns promised by these Ponzi schemes have been significantly higher than the returns available on fixed income investments like fixed deposits, small savings schemes, provident funds etc., which ranged between 8-10%. Given this, it was the greed of the investors which drove them to these Ponzi schemes, and in the end they had to pay for it.
Again that would be a simplistic conclusion to draw. Rose Valley was paying 11.2% on one of its schemes. PACL was offering 12.5%. This returns weren’t very high in comparison to the returns on offer on other fixed income investments.
In fact, most Ponzi schemes tend to offer atrociously higher returns than this. Charles Ponzi on whom the scheme is named had offered to double investors’ money in 90 days. Or take the case of the Russian Ponzi scheme MMM, which came to India sometime back. Its sales pitch was that Rs 5000 could grow to Rs 3.4 crore in a period of twelve months. Speak Asia, a Ponzi scheme which made a huge splash across the Indian media a few years back, promised that an initial investment of Rs 11,000 would grow to Rs 52,000 at the end of an year. This meant a return of 373% in one year. Another Ponzi scheme Stock Guru, offered a return of 20% per month for a period of up to 6 months.
In comparison, the returns
offered by the likes of Rose Valley, Saradha, Sahara and PACL are very low indeed. But investors have still flocked to them. In fact, in its order against PACL, Sebi estimated that the company had close to 5.85 crore investors. So, the question is why are so many people investing money in such schemes?
The answer lies in the high inflation that has prevailed in the county since 2008. For most of this period the consumer price inflation and food inflation have been greater than 10%. In this scenario, the returns on offer on fixed income investments have been lower than the rate of inflation. Hence, people have had to look at other modes of investment, in order to protect the purchasing power of their accumulated wealth. A lot of this money found its way into real estate and gold. And some of it also found its way into Ponzi schemes. This is the “real” reason behind the explosion in the kind of money that has been raised by these Ponzi schemes.
But why is the rate of interest on offer on fixed income investments been lower than the rate of inflation? This is where things get really interesting. Take a look at the graph that follows. The government of India since 2007-2008 has been able to raise money at a much lower rate of interest than the prevailing inflation. The red line which represent the estimated average cost of public debt(i.e. Interest paid on government borrowings) has been below the green line which represents the consumer price inflation, since around 2007-2008.

How has the government managed to do this? The answer lies in the fact that India is a financially repressed nation. Currently banks need to invest Rs 22 out of every Rs 100 they raise as deposits in government bonds. This number was at higher levels earlier and has constantly been brought down. Over and above this Indian provident funds like the employee provident fund, the coal mines provident fund, the general provident fund etc. are not allowed to invest in equity. Hence, all the money collected by these funds ends up being invested in government bonds.
As the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework points out “Large government market borrowing has been supported by regulatory prescriptions under which most financial institutions in India, including banks, are statutorily required to invest a certain portion of their specified liabilities in government securities and/or maintain a statutory liquidity ratio (SLR).”
This ensures that there is huge demand for government bonds and the government can get away by offering a low rate of interest on its bonds. “The SLR prescription provides a captive market for government securities and helps to artificially suppress the cost of borrowing for the Government, dampening the transmission of interest rate changes across the term structure,” the Expert Committee report points out.
The rate of return on government bonds becomes the benchmark for all other kinds of loans and deposits. As can be seen from the graph above, the government has managed to raise loans at much lower than the rate of inflation since 2007-2008. And if the government can raise money at a rate of interest below the rate of inflation, banks can’t be far behind. Hence, the interest offered on fixed deposits by banks and other forms of fixed income investments has also been lower than the rate of inflation over the last few years.
This explains why so much money has founds its way into Ponzi schemes, even though the rate of return they have been offering is not very high in comparison to other forms of fixed income investment. To conclude, the government of India has had a significant role to play in the spread of Ponzi schemes.

A slightly different version of this article appeared on Quartz India on September 10, 2014

(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected])

10 September, 2014

Power crisis won’t be solved anytime soon: Why it’s difficult to turnaround the coal sector

Vivek Kaul

In a column in The Indian Express published on September 9, 2014, Neelkanth Mishra, India Equity Strategist for Credit Suisse pointed out that “a large number of your power plants are running with less than four days worth of coal inventory…Even a flash strike would cripple India, let alone a prolonged confrontation.”
This when India has the third largest coal reserves in the world. Despite the enormous reserves we are unable to produce enough coal to meet the demand. During this financial year the demand for coal is expected to be at expected to be at 787 million tonnes. The supply is expected to be at 590 million tonnes.
The government of India had expected this rise in demand and in 1993 decided to give out coal blocks to public sector as well as private sector companies. The idea was that these companies will also produce coal and the country would have enough coal to meet the demand. These coal blocks had geological reserves amounting to 44.8 billion tonnes.
A bulk of these mines were given out starting in 2004, after the Congress led United Progressive Alliance came to power. The Screening Committee route which was used to give away these blocks was deemed to be fairly arbitrary by the Supreme Court in a recent judgement: “The entire exercise of allocation through Screening Committee route…appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected. There is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment. The project preparedness, track record etc., of the applicant company were not objectively kept in view.”
Given this, the Supreme Court deemed these allotments to be “illegal”.
On September 8, 2014, the government told the Supreme Court, that it had no objection if all the 218 coal blocks that were allocated through this route to the public sector as well as private sector companies are cancelled. Around 31 coal blocks that had been allocated currently produce coal.
At close to 53 million tonnes in 2014-2015, these blocks will produce around 9% of the country’s total coal production of around 590 million tonnes. If the licenses given to these blocks are cancelled, there will be a huge coal shortage. In a previous piece I had estimated that importing this coal from Indonesia will cost around Rs 17,300 crore, pushing up the power tariffs further.
One suggestion that has been put forward is that the government owned Coal India Ltd should take over the functioning these coal mines and ensure that the production does not stop. This seems to be a sensible thing to do, once the intricacies of who gets to keep the profits made from the coal being mined out of these mines, is decided.
Further, these coal blocks are likely to be auctioned in the days to come. As the PTI reports “According to sources, the Ministry of Power and Coal is planning to auction the blocks, allocation of which may be scrapped by the apex court, by the end of the fiscal. “The entire process of coal block auction will take at least 6 months,” the source said.””
While theoretically this sounds the best way forward, auctions may not be so easy to carry out. The Coal Block Auction draft guidelines were released on April 4, 2011. And nothing has happened since then. One reason obviously is the lack of work culture that prevailed during the previous Congress led UPA government. But there is more to it than just that.
As Neelkanth Mishra of Credit Suisse wrote in a research note released in March 2014 “The government has been planning to conduct coal block auctions for close to three years now (see link), but despite repeated pronouncements of it being a few weeks/months away, there has been little progress. In our view, the challenge is inadequate prospecting—the ministry may be apprehensive of the winning private bidder in an auction managing to increase reserves estimates within a short time frame. Such a development would create negative press and possibly trigger anti-corruption investigations. Thus, blocks are unlikely to be auctioned till reserves have been updated.”
This needs to be explained in a little more detail. The Geological Survey of India first carries out what is known as promotional drilling. This gives sort of a quick and dirty estimate of the total amount of coal reserves in a block. It is followed by detailed drilling carried out majorly by the Central Mine Planning Design Institute(CMPDI), one of the subsidiaries of Coal India. The Mineral Exploration Corporation also chips in. This round of drilling gives an exact estimate of the quantity of coal in the blocks along with other characteristics like quality, depth, gradient of coal seams, the ash content, volatile matter, water content etc. These parameters are used to prepare the proect report.
CMPDI currently is understaffed to carry out this exercise quickly enough. Experts believe that in order to carry out this exercise completely, it will take many years. Also, without a proper estimate of the amount of coal that can be mined out of a block, it is risky for the government to auction the block, given that it could later lead to litigation. Hence, it is important this exercise be completed properly. The mining of coal from these blocks can take a few more years after the completion of this exercise. Estimates suggest that it takes 10-12 years to get a coal mine going.
In fact, this mess could have been avoided if the coal blocks would have been allotted through competitive bidding, from the very beginning. In August 2004, PC Parakh had proposed to Manmohan Singh (who had taken over as coal minister after Shibu Soren resigned) that the allocation of coal blocks should be done through competitive bidding.
In fact, even before Manmohan Singh had taken over as coal minister from Soren, Parekh had called for open house discussion of the stakeholders in June 2004. This included the business lobbies FICCI, CII and Assocham. Several other ministries whose companies had applied for coal blocks were invited. So were private companies.
Parakh writes that most of the invitees were not in favour of competitive bidding for coal blocks. As he writes in Crusader or Conspirator—Coalgate and Other Truths “not many participants were enthus
iastic about open bidding. Their main argument was that the cost of coal to be mined would go up if coal blocks were auctioned.”
Due to this and other reasons, the coal sector has landed up in a huge mess. And given the lack of supply of coal, power plants are not working to their full capacity. “Plant load factors for thermal power plants have been plummeting, and would be below 60% (i.e. going back to levels seen in the mid-1990s) if one includes capacity completed but not commissioned,” writes Mishra.
It is unlikely that the coal production and hence, power production are going to go up dramatically any time soon. The least that the government can do is to prevent further damage and act quickly to get the sector up and running, over the next five years that it is in power.

The article originally appeared on www.Firstbiz.com on September 10, 2014.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

9 September, 2014

Big Retail is no monster: By not allowing FDI, BJP proves it’s a party of traders

Vivek Kaul

In a press conference to mark the 100 days of the Narendra Modi led National Democratic Alliance (NDA) government, commerce minister Nirmala Sitharaman said “We are clear that FDI will not be allowed in multi-brand retail trade….There is no ambiguity. There is no confusion on this.”
This decision makes no sense from multiple angles. The big fear is that all the foreign companies that might come into India through the multi-brand retail route or big retail as it is better known as, will source their products from China.
But the thing is even without the presence of foreign companies in big retail, goods are being sourced from China. If a foreign player in big retail can source products from China, so can Indian companies.“Made in China” is a part of our lives now. The pitchkaris used in Holi and the statues of Lakshmi and Ganesh, without which no Diwali celebration is complete, are also being sourced from China. A lot of the electronic products that we buy are Made in China. Some of India’s biggest mobile phone brands source their products from China, and simply brand it and sell it in India.
As Professor Rajiv Lal of Harvard Business School said in an interview to Forbes India “without the presence of big retail, if Indian companies are already sourcing from China, and the Indian consumer does not mind them sourcing from China, then what are we talking about.”
The other big fear is that foreign players in big retail will destroy the Indian players in the market. Evidence from other emerging markets suggests otherwise. Pankaj Ghemawat, Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, Spain, in an interview to Forbes India argued that much of the fear about FDI in retail is exaggerated, because even with full liberalisation, foreign retailers would hardly come to dominate the Indian market.
“Retail is a very local business, where an intimate understanding of customers, real estate markets, and so on, is essential to success,” he said. He cited a recent estimate that 40 foreign players account for only about 20% of organised retail in China, to suggest that foreign and domestic retail could thrive side-by-side in India.
“Foreign retailers don’t always win out against domestic rivals,” he added. “Electronics retailers Best Buy from the US and Media Markt from Germany both shut down their stores in China in the last few years. They just couldn’t compete with local rivals Gome and Suning, which had greater domestic scale and business models more attuned to the Chinese market. Home Depot also exited China in 2012. But Chinese consumers gained anyway – competition against foreign retailers spurred locals to improve customer service, one of their weak points.”
Also, as Ghemawat says retail is a very local business. And this is something that foreign companies trying to build economies of scale do not always take into account. In his book Redefining Global Strategy, Ghemawat points out a very interesting story. “As the former head of the company’s German operations, now shut down, plaintively observed, “We didn’t realise that pillowcases are a different size in Germany.””
The third fear is that the big retail will end up destroying the kirana shops. As Anthony Bianco writes in The Bully of Bentonville – How the High Cost of Wal-Mart’s Everyday Low Prices is Hurting America “It (Wal-Mart) grows by wrestling businesses away from other retailers large and small. In hundreds of towns and cities, Wal-Mart’s entry put ailing …shopping districts into intensive care and then ripped out the life-support-system.”
Nevertheless what is true about the United States cannot be true for the rest of the world as well. The kirana shops in India work on very low margins, something which big retail may not always be able to compete with. As Lal put it in the Forbes India interview “If you look at the kirana stores they operate at a gross margin of 15-18%. Now if you look at the cost structure of an organised retailer it is much more than 15-18%, and unless the organised retail can set themselves up in a way that they can actually do a lot of savings in the supply chain, they cannot compete with the kirana store.” And that explains to a large extent why most of the big Indian retail players have been losing money over the years. They just can’t compete with the cost at which the kirana shop can operate.
As Lal elaborated further “If you look at organised retail, you look at the cost of real estate, electricity, labour ,energy, taxes etc, these are all things that the kirana store does not worry about. If you put that all together it leads to a significant cost structure.” Hence, the fear of big retail destroying kirana shops is overdone.
Ghemawat feels that there is a lot that India can learn from China on the big retail front. The country started opening up its retail sector to FDI in 1992, initially with various restrictions, but ultimately allowed 100% FDI in 2004. This benefited them with foreign players bringing in new management practices along with supporting technology and investment capital. Further, the foreign retailers began sourcing goods from China and exporting them, and helped Chinese exports grow. This is likely to happen in the Indian case as well, if big retail is allowed to set up shop here.
The other big advantage of big retail is that it has the ability to create jobs at a reasonably fast pace. This point becomes even more important given that India hasn’t had a manufacturing revolution. Big retail can create a lot of jobs for the huge amount of semi-skilled work force in the country. As Lal put it “Big retail also employs a lot of people. The bottom line is that I really don’t think organised retail can grow at a speed relative to the economic growth of a country that it can lead to a loss of jobs. And second if you take a look at most of these kirana stores, their children do not want to continue this lifestyle. They want to go to school, get educated and get better jobs. So, the question is whose jobs are we protecting?”
Given these reasons, big retail is not exactly the monster it is often made out to be. Hence, its fear is overdone. To conclude, in the past, the Bhartiya Janata Party has often been categorised as a party of traders (i.e. banias), who are also supposedly the biggest financiers of the party as well. By not allowing FDI in retail the party is essentially living up to that image.

The piece originally appeared on www.FirstBiz.com on September 9, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

5 September, 2014

ECB joins the money printing party and launches QE lite

Vivek Kaul

The European Central Bank (ECB) led by Mario Draghi has decided to cut its main lending rate to 0.05% from the current 0.15%. It has also decided to cut the deposit rate to –0.2%.
European banks need to maintain a certain portion of their deposits with the ECB as a reserve. This is a regulatory requirement. But banks maintain excess reserves with the ECB, over and above the regulatory requirement. This is because they do not see enough profitable lending opportunities.
As of July 2014, the banks needed to maintain reserves of € 104.43 billion with the ECB. Banks had excess reserves of € 109.85 billion over and above these reserves. The ECB was paying a negative interest rate of –0.1% on these reserves. Now it will pay them –0.2% on these reserves. This means that banks will have to pay the ECB for maintaining reserves with it, instead of being paid for it.
These rate cuts have taken the financial markets by surprise. When the ECB had last cut interest rates in June earlier this year, it had indicated that would go no further than what it had at that point of time. Nevertheless it has.
So what has prompted this ECB decision? In August 2014, inflation in the euro zone (countries which use euro as their currency) dropped to a fresh five year low 0.3%. In fact, in several countries prices have been falling. From March to July 2014, prices fell by –1.5% in Belgium, –0.4% in France, –1.6% in Italy and –1% in Spain.
In an environment of falling prices, people tend to postpone their purchases in the hope of getting a better deal in the future. This, in turn, impacts business revenues and economic growth. Falling business and economic growth leads to an increase in unemployment. And this has an impact on purchasing power of people.
Those unemployed are not in a position to purchase beyond the most basic goods and services. And those currently employed also face the fear of being unemployed and postpone their purchases. The rate of unemployment in the euro zone stood at 11.5% in July 2014. This has improved marginally from July 2013, when it was at 11.9%. The highest unemployment was recorded in Greece (27.2 % in May 2014) and Spain (24.5 %).
Hence, the ECB has cut interest rates in the hope that at lower interest rates, people will borrow and banks will lend. Once this happens, people will borrow and spend money, and that will lead to some economic growth. But is that likely the case?
The numbers clearly prove otherwise. In June 2014, the ECB decided for the first time that it would charge banks for maintaining excess reserves with it. In April 2014, the excess reserves of banks with the ECB had stood at € 91.6 billion. The hope was that banks would withdraw their excess reserves from the ECB and lend that money. The excess reserves have since increased to € 109.85 billion. What does this tell us? Banks would rather maintain excess reserves with the ECB and pay money for doing the same, rather than lend that money.
The ECB had cut the interest rate on excess deposits to 0% in July 2012. Hence, the negative interest rate on excess deposits has been around two years, without having had much impact. In fact, the loans made to companies operating in the euro zone is currently shrinking at 2.3%.
Also, banks always have the option of maintaining their excess reserves in their own vaults than depositing it with the ECB. They can always exercise that option and still not lend. Interestingly, in July 2012, the central bank of Denmark had taken interest rates into the negative territory. The lending by Danish banks fell after this move.
The Draghi led ECB has also decided to crank up its printing press and buy bonds, though it refused to give out the scale of the operation. The ECB plan, like has been the case with other Western central banks, is to print money and pump that money into the financial system by buying bonds. This method of operating has been named “quantitative easing” by the experts. The Federal Reserve of United States, the Bank of England and the Bank of Japan have operated in this way in the past.
The hope as always is to ensure that with so much money floating around in the financial system, banks will be forced to lend and this, in turn, will rekindle economic growth.
The ECB has plans of printing money and buying covered bonds issued by banks as well as asset backed securities(ABS). Covered bonds are long-term bonds which are “secured,” or “covered,” by some specific assets of the bank like home loans or mortgages. The ABS are essentially bonds which have been created by “securitizing” loans of various kinds.
The size of the ABS market in Europe is too small, feel experts, for these purchases to have much of an impact. Nick Kounis, an economist at ABN Amro told the Economist that “the likely size of possible purchases would be €100 billion to €
150 billion.” This is too small to make any difference. Bonds covered by home loans and worth buying could amount to another € 500 billion.
Further, the buying of ABS is unlikely to begin at once. As Ambrose Evans-Pritchard of The Telegraph put it on his blog “Buying may not begin in earnest until early next year since the ABS market is not ready.”
All this makes Evans-Pritchard conclude that “this would be a form of “QE lite” but it would be trivial compared with the huge operations of the Bank of Japan and the US Federal Reserve, together worth €120bn a month at their peak.”
If the ECB has to launch a serious form of quantitative easing it needs to be buying government bonds. But any such move is likely to be opposed by the Bundesbank, the German central bank. As the Economist put it “such an intervention would be bitterly opposed by the Bundesbank on the grounds that it would redistribute fiscal risks among the 18 member states that belong to the euro.”

The article was published on www.FirstBiz.com on Sep 5, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

2 September, 2014

How politicians, banks and builders conspire to keep real estate prices high

“Sex sells,” is an old adage in show business and advertising. If I were to come up with a similar sort of statement when it comes to writing on business and economics it would have to be “real estate sells.” An article on the real estate scenario in India has more chances of being read than anything else.

People who make a living from the real estate industry, be it brokers, real estate consultants or builders, like to tell us time and again that real estate prices are only going to go up. So, it’s time that we forgot about all other ways of spending money and bought a house.
Various reasons are offered, right from shortage of land(they are not making any more of it) to now that Narendra Modi has become the prime minister, everything is going to be fine. In my previous pieces on real estate (you can read a few of them here and here) I have tried to expose several myths that over the years have come to be associated with the sector.
In this piece we will just look at one data point that tells us loud and clear that real estate prices should not be going up, as has been justified by those make a living from real estate, time and again. Look at the following chart:

City	Quarters to Sell Unsold Inventory
Mumbai	12
National Capital Territory	9
Pune	Approx 7.5
Bangalore	7
Hyderabad	8—8.5
Chennai	7
Source: Knight Frank India Real Estate Outlook

“Quarters-to-sell(QTS) can be explained as the number of quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter,” the India Real Estate Outlook Report brought out by Knight Frank points out.

What this shows us clearly is that there is a huge amount unsold inventory when it comes to residential apartments across metropolitan India. In fact, what is worse is that this number has been going up over the last few years.

The above table shows us the quarters-to-sell unsold inventory in Mumbai. This stands at 12 in June 2014. What this means is that it will take close to three years to sell the current accumulated inventory of unsold homes in Mumbai. This number was at 5 in December 2011. Hence, Mumbaikars are going slow when it comes to buying homes is a conclusion that can be easily drawn. And that is not surprising given the astronomical prices that builders want for a home in the maximum city.
Here is a similar table for the National Capital Territory (i.e. Delhi and its adjoining areas).

The quarters-to-sell unsold inventory in the NCR in June 2014 stood at a little over nine. This means that it will take a little over two years to sell all the unsold residential apartments in NCR. The number had stood at around 6 in June 2012.
If we look at this graph for other cities like Bangalore, Hyderabad, Pune etc, it is along similar lines, though the curve may not be as upward sloping as it is in the case of Mumbai and NCR.
Take the case of Bangalore where the curve is kind of flat. This tells you that people in Bangalore haven’t slowed down on buying residential homes at the same rate as people in Mumbai and NCR have. Hence, the quarters-to-sell unsold inventory has more or less hovered around 6.

Indeed, what these graphs clearly tell us is that the supply of residential apartments in India’s biggest cities has clearly been more than their demand. And given this Mumbai has 2,13,742 residential apartments which have been built but not sold. The same number in NCR stands at 1,67,000.
Hence, between two of India’s biggest residential markets, the total number of unsold homes stands a little over 3.8 lakhs. In total, the sales fell by 27% during the first six months of 2014, in comparison to the same period last year. Nevertheless, those associated with real estate expect prices to continue to go up. The Knight Frank report forecasts that the real estate prices in Mumbai will “ increase for the entire year (2014) [by] 10.1%.” An increase in prices is forecast for NCR and other cities as well.
The point here is that with so many unsold homes, how can housing prices continue to go up, unless they are rigged? Further real estate
developers are sitting on a huge amount of debt. As a recent report in the Business Standard pointed out “At end of March 2014, the country’s top listed developers were sitting on Rs 39,772 crore of debts.”
As we know most real estate developers in India are not listed on the stock market. Hence, the total amount of their debt must be considerably higher than Rs 39,772 crore. So how are real estate developers going to repay this debt unless they get around to selling the homes they have built? One answer is that they keep launching newer projects, raise money and use that money to repay their previous debt. (I discuss this in detail here). And then launch newer projects to collect money to build their previous projects. So the cycle works.
But in the recent past the number of new launches has been falling. During the first six months of 2014, the number of new launches fell by 32% in comparison to the same period last year, the Knight Frank report points out. Hence, new launches as a source of funds seems to have slowed down, but they do bring in some money nonetheless.
Another possible explanation is lending by banks. Bank lending to the commercial real estate sector has been growing at a much faster rate than overall lending. Between July 26, 2013 and July 25, 2014, lending by banks to commercial real estate grew by 18.2%. In comparison, the overall lending grew by just 11.3%.
With newer launches slowing down, the only possible explanation for this lending is that banks are essentially giving fresh loans to real estate companies so that the companies can repay their old loans. This has allowed real estate companies to not cut prices on their unsold inventory. If bank loans had not been so forthcoming, the real estate companies would have to sell off their existing inventory to repay their bank loans. And in order to do that they would have to cut prices.
Further, most real estate companies as we know are a front for politicians. During the Congress led United Progressive Alliance, a huge number of scams and a lot of corruption happened. Hence, the conspiracy theory I would like to offer here is that the money that politicians got through various rounds of corruption during the UPA rule has also found its way into the real estate market. This has allowed real estate companies to continue holding prices at high levels, despite supply far outstripping demand.
As I mentioned in the previous piece I wrote on real estate, real estate consultants make money from real estate companies and hence, it is but natural for them to keep telling us that prices will continue to go up. Nevertheless, data from the International Monetary Fund shows that real estate prices in India between the period January to March 2014, fell by 9%. This was the most in a sample of 52 countries. (Click here for table) The IMF of course does not have an incentive to ensure that real estate prices in India continue to remain high.
To conclude dear reader, if you still have the money to buy a house, this is the time to drive a hard bargain.

The article originally appeared on www.Firstbiz.com on September 2, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)