100 days of Modi govt: It’s been ekdum thanda on the economic front

narendra_modiVivek Kaul

In an essay titled Political Leadership (The Oxford Companion to Politics in India edited by Niraja Gopal Jayal and Pratap Bhanu Mehta) historian Ramachandra Guha writes about the various styles of political rhetoric: “The modern idiom is often expressed through a rhetoric of hope—the offer of a better and fuller life, whether expressed in material terms or otherwise. The traditional idiom, on the other hand, privileges a rhetoric of fear—warning the members of a caste, or religion, or region, that they would be swamped by their enemies if they do not bind together.”
Indian politics, over the last seven decades since independence, has largely been fought on what Guha calls the traditional idiom of fear. Given this, Narendra Modi’s campaign in the run up to and during the 16th Lok Sabha elections came as a breath of fresh air. Modi campaigned around the idiom of hope. “
Acche din aane waale hain,” was the line that he tried to sell to the voters of this country. And voters bought it lock, stock and barrel, giving an absolute majority to the Modi led Bhartiya Janata Party(BJP). This was the first time that a single party other than the Congress got an absolute majority in the Lok Sabha.
Once the majority was in place, the hope among analysts, economists and everybody who had some sort of an opinion on Modi and his politics, was that he would push big bang economic reforms, like the kind that had happened in 1991, when the Indian economy was thrown open to the world. Nevertheless, nearly 100 days since the Modi government assumed power on May 26, 2014, nothing of that sort seems to have happened. This is not to say that no economic reform has happened. The government allowed 100% foreign direct investment(FDI) in several areas in the railways sector. It notified that the FDI limit in the defence sector would be increased to 49% from the current 26%, through the approval route. At the same time it has cleared the FDI limit in the insurance sector to be increased to 49% from the current 26%. Further, land acquisition laws put in place by the Congress led UPA government are set to undergo a transformation.
But other than the “proposed” change in land acquisition laws these are not big bang reforms exactly. This is minor tinkering at best. The union budget presented by Arun Jaitley lacked a vision of what the Modi government plans on the economic and the financial front over the next five years. Also, it continued with the unrealistic estimates of both revenues and expenditure made by the previous finance minister P Chidambaram.
Given this, it is highly unlikely that the fiscal deficit number projected by Arun Jaitley and his team is a realistic one. In that sense Jaitley has continued the process of projecting lower expenditure and higher revenue, started by Chidambaram.
Also, like Chidambaram, Jaitley has started to suggest that the Reserve Bank of India (RBI) should start to cut interest rates.
But as I explain here, there is very little that the RBI can do to cut interest rates. Interest rates will only come down once the government starts to manage its fiscal defict, borrower lesser and leave more money on the table for everyone else to borrow. Fiscal deficit is the difference between what a government earns and what it spends. The government spends it through borrowing money.
Over and above this, there has been almost no talk about what the government plans to do on the Goods and Services Tax(GST) and the Direct Taxes Code (DTC) front. These are two big bang economic whose implementation has been pending over the last few years.
In his independence day speech Modi announced that his government was doing away with the Planning Commission. There is no doubt that it was an institution that had outlived its utility, nevertheless, with what and how does the government plan to replace it. More than two weeks after the independence day speech, there is almost no clarity on this front. As economist Bibek Debroy,
wrote a recent column in The Economic Times “We are in end-August. In 2014-15, what happens to the (central assistance) money disbursed to states through the Planning Commission? Will that be released in December 2014 to be spent by March 2015?”
Oil prices have been falling for a while now. Given this, it was widely expected that the government would use this lucky streak to move towards market determined price for diesel and do away with some of the “under-recoveries” that the Oil Marketing Companies have to face everytime they sell diesel, cooking gas and kerosene. It was also expected that the cooking price would be raised by an equal amount every month and the “under-recoveries” on it would be done away with over a period of time. But nothing of that sort has happened.
Also, no moves have been made to sort out the food subsidy mess that the country finds itself in.
A recent new report pointed out “Food corporation of India has informed the food ministry that dues on the food subsidy have piled up to Rs 50,000 crore at the end of 2013-14 over the last three-to-four years as it has not been allocated enough funds.” This is something that needs to be sorted out immediately.
A possible explanation for economic reforms being put on the back-burner being bandied around by Modi sympathizers has been that economic reforms will start streaming in after the Maharashtra elections are done with. The government does not want to make any publicly unpopular decisions before the Maharashtra elections are over. The thing is that state assembly elections will keep happening all the time. After there Maharashtra there is Bihar in 2015. And by the time the state assembly elections are over, the next Lok Sabha elections will be upon us. The government, like most other governments in the past, is likely to get into the election mode by 2017, two years before the next Lok Sabha elections are due. So, when will it actually get around to implementing any big-bang economic reforms is a question worth asking? Given this, the explanation does not really make much sense.
If the government is serious about economic reforms, the best time to do it is now. These are the early days for the government and it still has a lot of leeway to push through these reforms. An excuse offered here is that the Modi government does not have a majority in the Rajya Sabha and hence, legislation required to push through these reforms can get stuck there. This is indeed true, but then the government also has the option to call a joint session of Parliament and pushing through these reforms.
To conclude, it is worth pointing out what Guha writes about being the bane of almost all the governments in India over the last 25 years, before the Modi government came to power: “[The] deepening of Indian democracy has come at a cost, namely that there is now no political leader who can really think of or act for the country as a whole. When a single party was dominant at the Centre, it was possible to design long range policies; now, when the government is constituted by a coalition of a dozen or more parties, each representing a specific sectarian interest—these based variously on caste, language, region, or religion—its policies are determinedly short-term, aimed at placating or satisfying one or other of those interests.”
Modi doesn’t have to go through all this. His government has absolute majority on its own and it can use this opportunity to push through economic reforms, which will be beneficial for India in the days and years to come.
The article originally appeared on www.FirstBiz.com on September 1, 2014
(Vivek Kaul is the author of the
Easy Money trilogy. He tweets @kaul_vivek)

Properties shouldn’t get expensive: Real estate consultants are just rigging home prices

India-Real-Estate-Market

Vivek Kaul

The American author Upton Sinclair once said that “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
This seems to be true about the “so called” real estate consultants who operate in this country. Their main job it seems is to bring out a research report every few months, where the conclusion is that “real estate prices will continue to go up”.
This despite the fact when their own data contradicts this conclusion. Let’s take the case of a recent research report titled
India Real Estate Outlook brought out by Knight Frank. The report takes a look at the real estate scenario prevailing across some of the biggest cities in India.
In the case of Mumbai, the report points out that there is a huge demand-supply gap. The unsold inventory of residential apartments in the city stands at 2,13,742 units. In June 2014, the quarters-to-sell ratio stood at 12.
“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 report points out.
What this means is that it will take close to three years to exhaust the existing number of unsold residential apartments in Mumbai, if people continue to buy homes at the rate they have been in the preceding two years. What is interesting is that the unsold inventory has gone up dramatically over the last few years. In December 2011 the number had stood at five, the report points out. This means that in December 2011, it would have taken around one year and three months to dispose of the inventory of unsold residential apartments in Mumbai. By June 2014, the number had increased to three years.
What this tells us is that the supply of residential apartments in Mumbai is substantially more than their demand. And anyone who understands basic economics will know that in order to clear this inventory the real estate companies need to cut prices, so that people come out and buy these unsold apartments.
Nevertheless, the
Knight Frank report goes around to conclude that “On the residential price front…the forecasted increase for the entire year (2014) is 10.1%.” It goes on to explain the reasons for this forecast. “This period [the first six months of 2014] has seen significant completion of transit infrastructure that has the potential to alter the dynamics of the region’s property market,” the report points out. The Versova-Ghatkpoar Metro, the Eastern Freeway and the Santacruz-Chembur Link Road are some of these projects.
The report writers forget(or rather ignore) a rather fundamental point here about how markets operate. Markets start factoring in information well in advance. They don’t wait for a particular development to be completed before factoring in that information into the price. An excellent example of this are the real estate prices in parts of Navi Mumbai, which are close to the proposed new airport. The airport is nowhere in the picture, but prices have been driven up for years, around this story.
Hence, the infrastructure that the report points out to, has already been there in the minds of people for a while now. And if they had been so impressed by it, they would be buying homes, and the quarters-to-sell ratio would have come down. Now that as the report points out, hasn’t happened, making the point irrelevant. Another reason, which is a favourite with most research report writers these days, has also been offered. Now that Narendra Modi is in power, things will improve and people will buy more homes.
As mathematician John Allen Paulos writes A Mathematician Plays the Stock Market “Because so much information is available…something insightful sounding can always be said.” But what sounds insightful need not be correct.
The question that the research report does not answer is: why have the real estate prices in Mumbai going up, despite the fact that people haven’t been buying residential apartments. The Residex Index of National Housing Bank points out that real estate prices in Mumbai have risen by 18.7% between the end of December 2011 and March 2014. This despite the fact that the inventory of unsold residential homes has been growing dramatically. In this scenario, where people are not buying as many homes as are being produced, prices should have been falling and not going up.
The reason for this is straightforward. The real estate market in India is rigged in favour of real estate companies and politicians who are the real owners of these companies.
There is no free market in real estate. Most real estate companies are fronts for politicians. What makes this very clear is the fact that even though there are thousands of real estate companies operating across India, there is not a single pan India real estate company.
And these politicians and their real estate companies have an incentive in holding the prices to be high. They operate as a cartel to do that. Of course, no real estate consultant can “afford” to talk about these reasons given that they make their money from real estate companies. And real estate companies would want its consultants to keep constantly mouthing the lines that “prices will
continue to go up”. The research reports brought out by these real estate consultants play precisely that role. They help in managing the price expectations in the minds of prospective buyers.
Whenever such a report is released, its splashed all over the media. The media, in turn, because it depends on advertising from real estate companies, tends to highlight the price escalation and the sales will increase part (or they just don’t bother to read beyond the press release). They don’t bother to ask the most fundamental question: If there is so much inventory, why are prices going up? Take the case of South Mumbai. As the report points out “the
inventory level in the South Mumbai market will take the maximum time of 18 quarters (4.5 years) to sell. The age of inventory, calculated as the time elapsed since launch, is also the longest, at 15 quarters.” So why are prices still rising is something that no one has bothered to ask?
This is how real estate consultants help real estate companies manage price expectations in the minds of prospective consumers. So, the next time you read a report saying real estate prices will go up, check for the source. If a real estate consultant is saying so, the information needs to be taken with a pinch of salt. As Guy Sorman writes in 
An Optimist’s Diary “Economic actors don’t all have the same information at their disposal. Without institutions to improve transparency, insiders can easily manipulate markets.” This is precisely what is happening in India—the insiders have managed to take all of us for a ride.

The article originally appeared on www.Firstbiz.com on Aug 30, 2014

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