Month: January 2015

Oil and dollar: Why Obama’s love for Taj lost out to Saudi King’s death

Obama

Barack and Michelle Obama were supposed to be in Agra on January 27, 2015, visiting the Taj Mahal. Instead they will now be going to Saudi Arabia to pay respects to  King Salman bin Abdulaziz, the recently crowned King of Saudi Arabia and the family of the late King Abdullah bin Abdulaziz, who died on January 23. Bloomberg reports that keeping with religious tradition, Abdullah was was quickly and quietly buried on the day he died.
A newsreport in The Indian Express points out that the “Supreme Court had earlier directed all visitors to the Taj Mahal to disembark at the Shilpgram complex, 500 metres away, and board an electric vehicle to the entry gate.” This was deemed to be a security risk by the Secret Service that guards President Obama and hence, the visit was cancelled.
This reason has since been denied by the White House. A more plausible reason lies in the shared history of Saudi Arabia and the United States. As Adam Smith (George Goodman writing under a pseudonym) writes in Paper Money: “In 1928, the Standard Oil Company of California, Socal, had failed to find oil in Mexico, Ecuador, the Philippines, and Alaska. As a last resort, it bought concession from Gulf on the island of Bahrain, twenty miles off the coast of Saudi Arabia, and found some oil. Socal sought out Harry St. John Philby, a local Ford dealer…who was a friend of the Saudi finance minister, Sheikh Abdullah Sulaiman…For 35,000 gold sovereigns, Socal got the concession for Saudi Arabia. Sheikh Abdullah Sulaiman counted the coins himself. Socal’s Damman Number 7 struck oil at 4,727 feet in 1937.”
This is how Saudi Arabia’s journey as an oil producer started. The United States was the world’s largest producer of oil at that point of time, but its obsession with the automobile had led to a swift decline in its domestic reserves.
President Franklin D. Roosevelt realized that a regular supply of oil was very important for America’s well-being. Immediately after attending the Yalta conference in February 1945, Roosevelt travelled quietly to the USS Quincy, a ship anchored in the Red Sea. Here he met King Ibn Sa’ud of Saudi Arabia, the country which was by then home to the largest oil reserves in the world. Ian Carson and V.V. Vaitheeswaran point this out in their 2007 book, Zoom—The Global Race to Fuel the Car of the Future.
Car production had come to a standstill in the United States during the course of the Second World War. Automobile factories became busy producing planes, tanks, and trucks for the War. Renewed demand was expected to come in after the end of the War. Hence, the country needed to secure another source for an assured supply of oil.
So, in return for access to the Saudi Arabian oil reserves, King Ibn Sa’ud was promised full American military support to the ruling clan of Sa’ud. It is important to remember that the American security guarantee made by President Roosevelt was extended not to the people of Saudi Arabia nor to the government of Saudi Arabia but to the ruling clan of Al Sa’uds.
Over the years, Saudi Arabia further returned the favour by ensuring that Organization of the Petroleum Exporting Countries (OPEC) continued to price oil in terms of dollars despite the fact that it was losing value against other currencies, especially in the 1970s.
Attempts were made by other members of the OPEC to price oil in a basket of currencies, but Saudi Arabia did not agree to it. This ensured that oil continued to be the international reserve and trading currency. Most countries in the world did not produce oil and hence, needed dollars to buy oil. This meant that they had to sell their exports in dollars in order to earn the dollars to buy oil.
If Saudi Arabia and OPEC had decided to abandon the dollar, it would have meant that the demand for the dollar would have come crashing down, as countries would no longer need dollars to pay for oil. Hence, oil will continue to be priced in dollars as long as Al Sa’uds continue to rule Saudi Arabia because they have the security guarantee from the United States.
Further, Saudi Arabia remains a close ally of the United States despite the fact that the late Osama bin Laden was a Saudi by birth. Osama was the son of Mohammed bin Awad bin Laden and his tenth wife, Hamida al-Attas. The senior bin Laden was a construction magnate who was believed to have had close ties with the Saudi Royal family.
Since 2008, a lot of shale oil has been discovered in the United States and the production of oil in the United States has gone up by four million barrels per day to nine millions barrels per day, with almost all of the increase coming from increased production of shale oil. This is only a million barrels per day lower than the daily oil production of Saudi Arabia.
Given this, why does the United States still need to continue humouring Saudi Arabia? It is now producing enough oil on its own. James K. Galbraith has an answer for it in The End of Normal: “There is no doubt that shale is having a strong effect on the American economic picture at present…But the outlook for sustained shale…production over a long time horizon remains uncertain, for a simple reason: the wells have not existed long enough for us to know with confidence how long they will last. We don’t know that they won’t; but also we don’t know that they will. Time will tell, but there is the unpleasant possibility that when it does, the shale gas miracle will end.”
Jeremy Grantham of GMO goes into further detail in a newsletter titled The Beginning of the End of the Fossil Fuel Revolution (From Golden Goose to Cooked Goose: “The first two years of flow are basically all we get in racking…Because fracking reserves basically run off in two years and can be exploited very quickly indeed by the enterprising U.S. industry, such reserves could be viewed as much closer to oil storage reserves than a good, traditional field that flows for 30 to 60 years.” The process used to drill out shale oil is referred to as fracking.
Hence, shale-oil might turn out to be a short-term phenomenon. As of now shale oil is not going to replace cheap traditional oil, which is becoming more and more difficult to find. As Grantham points out: “Last year for example, despite spending nearly $700 billion globally – up from $250 billion in 2005 – the oil industry found just 4½ months’ worth of current oil production levels, a 50-year low!”
It is worth remembering that the United States consumes 25 percent of the world’s daily production of oil and half of its daily production of petrol, or what Americans call gasoline. The fact that it is using way too much oil becomes even more obvious given that it has only five percent of the world’s population. Given this, it still needs Saudi Arabia.
Hence, the Obamas need to go to Saudi Arabia and offer their condolences on King Abdullah’s death as soon as possible. The Taj Mahal will have to wait.

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

The article originally appeared on www.Firstpost.com as on Jan 26, 2015 

In the long term, will “easy money” come from China as well?

chinaVivek Kaul

The Chinese economic growth for 2014 was at 7.4%, a tad lower than the official target of 7.5%. This is the slowest rate that the country has grown at in 24 years.
In the aftermath of the financial crisis that started in September 2009, the Chinese government pushed the banks to ramp up lending. In a recent piece for the Wall Street Journal, Ruchir Sharma of Morgan Stanley estimates that “since 2008 the money supply has nearly tripled to $20 trillion” in China. Sharma further writes that China ordered up “new spending” which totalled to “12% of GDP, by far the biggest stimulus of this period.”
This helped the Chinese economy to keep growing at a fast rate in the aftermath of the financial crisis, even though growth in most of the other parts of the world collapsed. The trouble was that a lot of this money went towards creating infrastructure which was not required in the first place. It also led to a huge property bubble.
As Sharma puts it: “This decay is symbolized by the bridges, apartment complexes and half-empty shopping malls rising across China—many of them wasteful projects that were hurriedly seeded in 2009 and will sap growth in the future. The message: When the state spends in haste, it will repent at leisure.”
At the same time the productivity of Chinese capital has been coming down. It now takes more capital and more loans to get the same amount of economic growth going than it did in the past. In a recent study carried out by two economists working with the Chinese National Development and Reform Commission (NDRC), a top economic planning and regulatory agency in China, came up with some interesting results.
The study found that China’s incremental capital output ratio has risen dramatically over the years. It averaged at 2.6 for the period between 1979 and 1996. It has since jumped to 4 between 1997 and 2013. What this means is that before 1997 it took an average investment of $2.6 to get $1 of GDP growth going. Since 1997, it has taken an average investment of $4 to get $1 of GDP growth going.
The economists also found that the delivery rate of completed capital projects has come down dramatically over the years. The number stood at 74-79% in the late 1990s and has since fallen to around 60%, implying that 40% of the Chinese investment projects have either not been completed or did not finish on time.
The negative effects of the spending binge are now starting to be felt. As Wei Yao of Societe Generale wrote in a recent research note titled China: deceleration as usual, easing as routine and dated January 20, 2015: “More strikingly, property investment growth collapsed to -1.9% year on year from +7.6% year on year, the first contraction in 18 years! Construction data further confirmed that developers are struggling. New starts remained in deep contraction, falling 26.1% year on year; growth of floor space under construction fell below 10% year on year for the first time since mid-2000; and completion growth plummeted to 1.2% year on year from 11.4% year on year in the previous month.”
The non performing loans of banks are also rising at a rapid rate. As Yao wrote in another note dated November 20, 2014, and titled China: easing by not easing: “The non performing loan stock has been growing at a 35% clip this year. Smaller banks have seen faster deterioration, with non performing loans rising 50% year on year. The worse is still to come and banks know it.”
All this does not augur well for the Chinese economy and the government is trying to initiate what economists call a “soft landing”. This may also include ensuring that the Chinese economy does not grow as fast as it was in the past.
As Li Baodong, a Vice Foreign Minister, told reporters after the latest economic growth numbers came out: “China has entered a new normal of economic growth…That is to say we are going through structural adjustment and the structural adjustment is progressing steadily.”
This is a clear hint of the fact that the Chinese government is neither looking at spending more nor pushing banks to lend more, in order to push up the falling economic growth. “The chance of aggressive policy easing remains small,” writes Yao.
The trouble is that the Chinese investment forms a major part of the investment happening all over the world. As Sanjiv Sanyal of Deutsche Bank Market Research writes in a recent research note titled The Capital of China is Moving: “China’s domestic investment currently accounts for a disproportionate 26 per cent of world investment, up from a mere 4 per cent in 1995. In contrast, the United States saw its share peak at 35 per cent in 1985 but now accounts for less than a fifth.”
Why is Chinese investment such a dominant part of total global investment? “China’s dominance is driven by the fact that it saves and invests nearly half of its $10.5trillion economy,” writes Sanyal.
But it is becoming more and more difficult to fruitfully deploy $5 trillion (around half of $10.5 trillion). This is primarily because the “country…already has brand new infrastructure, suffers excess manufacturing capacity in many segments and is trying to shift to services, a sector that requires less heavy investment.”
This means that Chinese investment will go down in the coming years. Hence, if the Chinese savings rate continues to remain the same or does not fall at the same rate, it will lead to surpluses.
Chances are that the Chinese savings rate will not decline primarily because China is ageing at a very rapid rate. “The experience of other ageing societies such as Germany and Japan is that investment rates fall faster than savings rates,” writes Sanyal.
In another research note Bretton Woods III and the Global Savings Glut published in October 2013, Sanyal explains this theory in detail. Sanyal basically says that when people are young, their spending needs are greater. Hence, they need to borrow money in order to consume and/or build assets (like homes). But, as they age, their savings rise and they build up a stock of wealth, which they spend in their old age. Countries work along similar lines. Basically, what this means is that as a country ages (with the average age of its population rising), it tends to save more.
By 2030, China would go from being significantly younger to the United States to becoming significantly older to it, with a median age above 40. The excess savings that will be generated need to be absorbed somewhere.
A lot of this money is likely to find its way into the United States, feels Sanyal. And this might help the US government to continue borrowing from foreign countries. It would also keep interest rates low and help Americans keep their excess consumption going by borrowing. “The next round of global economic expansion may require the United States to revert to its role as the ultimate sink of global demand,” wrote Sanyal in the October 2013 note.
In his latest note Sanyal also states that the United States “has the necessary scale to absorb China’s surplus and the poor state of its infrastructure provides many avenues for fruitful deployment of capital.” Nevertheless, he goes on to write that “history suggests that some of this cheap money would inevitably find its way into trophy assets and bubbles.”
As far as theories go, this one sounds pretty logical. Let’s see how it goes. That only time will tell.

(The column appeared on www.equitymaster.com as a part of The Daily Reckoning as on Jan 23, 2015)

What Narendra Modi can and should do for Indian real estate

narendra_modi
I am getting into a habit of writing trilogies. This is my third column this week on real estate, after writing three columns on oil sometime back. And I decided to write this column after a friend asked me to “stop ranting” and come up with something constructive instead. So here we go.
First and foremost it is important to realize why a healthy real estate sector is necessary for economic growth. Real estate has tremendous forward as well as backward linkages, which leads to what economists refer to as the “multiplier” effect.
The multiplier effect can be both direct as well as indirect. The direct effect comes from the demand in the construction sector for products from other sectors. A house that is being built needs cement, wood, glass, bricks, sand, electrical equipment etc.
As Fatih Terzi and Fulin Boren write in a research paper titled An Analysis of the Development Between Housing and Economic Development: “The multiplier effects of housing [come] through the creation of investment in other sectors generated by the demand in the construction sector for their products. The builders buy raw materials for the building and hire transport to move them.” These are essentially referred to as backward linkages.”
Then there are forward linkages as well. “The occupants of the houses buy furnishings and fittings, and pay for maintenance, all of which creates paid employment and the use of materials,” write Terzi and Boren.
The indirect effect comes because of the money being spent in the local economy by those benefiting from the direct effect of construction of homes. As Keith Wardrip, Laura Williams, and Suzanne Hague write in a research paper titled The Role of Affordable Housing in Creating Jobs and Stimulating Local Economic Development: A Review of the Literature: “During the construction of affordable housing — or any kind of housing, for that matter — the local economy benefits directly from the funds spent on materials, labor, 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 – 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.”
One estimate puts the number of total such linkages to 270. Given these reasons a vibrant estate sector is a necessity for a vibrant economy. In fact, a study commissoned by HUDCO found that housing came third among 14 major sectors, in terms of the linkages that it had with other sectors. This tells us how closely linked a vibrant real estate sector is to the overall economy.
The latest Economic Survey of the government makes this point as well when it states: “Housing activities have both forward and backward linkages which not only contribute to capital formation, generation of employment, and income opportunities but also to economic growth. Estimates show that every rupee invested in housing and construction adds 78 paise to the GDP.”
Nevertheless, these linkages come into play only when homes being built are also being sold. But as we saw in the column published on January 19, 2015, that doesn’t seem to be the case. Most homes being sold in cities are way beyond what most people can afford. In fact, a friend on reading the January 19 column quipped, “forget taking on a loan to buy a home, how many people even have enough money to make the 20% down payment required on the home”. Typically, most banks finance up to 80% of the home price. The remaining money needs to be made by the borrower of the loan as a downpayment.
Given this, affordable housing is something that should be a huge priority for the government. The Report of the Steering Committee on Urbanization released in November 2012 points out: “approximately 24 percent of India’s urban population resides in slums. The proportion of slum dwellers in large metropolitan areas is higher. For example, according to Census 2011, 66 percent of the population in Mumbai Metropolitan Region (MMR) lives in slums.”
Further, “not all slum dwellers are poor but the extreme scarcity of housing for low income groups has led to them living in slums.” Living in slums also leads to inadequate access to basic sanitation facilities and potable water.
The issue of affordable housing becomes even more important when one takes into account the fact that the number of people living in cities is going up day by day. “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030. The present urban housing shortage is 18.78 million units of which 95.6 per cent is in economically weaker sections (EWS) / low income group (LIG) segments and requires huge financial investment,” the Economic Survey points out.
So, the question is what can the Narendra Modi government do to making housing more affordable? The solutions on offer are not easy to implement. Neither can they change things overnight. Nevertheless, the work needs to start someday and the sooner it starts the better it will be.
The situation can be improved significantly if some of the land that the government has been sitting on can be made available for affordable housing. KPMG in a report titled Affordable Housing – A key growth driver in the real estate sector points out “The government holds substantial amount of urban land under ownership of port trusts, the Railways, the Ministry of Defence, land acquired under the Urban Land (Ceiling and Regulation) Act, the Airports Authority of India and other government departments.”
The question is will this happen? More land in the market will lead to land prices falling. And this is something politicians will not like given that their ill-gotten wealth is held through benami land as well as real estate. As Bombay First points out in a report titled My Bombay My Dream “Government and the land mafia in fact do not want more land on the market: after all, you make more money out of the spiralling prices resulting from scarcities than you could out of the hard work that goes into more construction.”
Nevertheless the basic issue is the huge amount of black money that comes into the real estate sector. If real estate has to become affordable something needs to be done on this front. While the Narendra Modi government has been very aggressive about getting back all the black money that has gone abroad, they haven’t said much about trying to recover the black money that is there in the country.
This money would be considerably easier to recover vis a vis the black money that has already left the shores of the country. Also, in this day and age a lot of information technology can be used to figure out who are the individuals who are not paying taxes.
The government can learn from what happened in Greece. In order to recover black money, the Greek government used Google Earth to track those who have swimming pools and then cross indexed their address with the amount of tax they are paying. Ideas along similar lines which use information technology extensively in order to identify people who are not paying the correct amount of income tax, need to be come up with.
In the February 2013 budget speech, the then finance minister P Chidambaram had estimated that India pointed out that only 42,800 people in India had a taxable income of Rs 1 crore or more.
This in a country where 27,000 luxury vehicles are sold every year. Self employed professionals like property dealers, doctors, etc., need to be made to pay their fair share of income tax.
Of course, the income tax department does not have the resources to go after everybody. Hence, it is necessary that a few pilot projects may be implemented in different parts of the country and depending on results things can be taken forward.
I am no expert on real estate but I am sure that there are lots of other things that can be done to break the backs of those who are pouring their black money into real estate. The only thing required is the political will. The question is does Narendra Modi have that will? The nation wants to know.

(The column appeared on www.equitymaster.com as a part of The Daily Reckoning, as on January 22, 2015)

The IMF growth forecast for India needs to be taken with a pinch of salt

imf-logoVivek Kaul

“The only function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith


Every bull market needs a story. In fact, different phases of the same bull market need different stories.
The latest story to hit the Indian stock market is that India will grow faster than China in 2016. This economic forecast has been made by the International Monetary Fund (IMF) in the World Economic Forum Outlook Update which was released yesterday (January 20, 2015). In this update, the IMF expects India to grow by 6.5% against China’s 6.3%.
This forecast is along the lines of another forecast made by the World Bank on January 14, where it said that India will grow by 7% in 2017-2018. It expects China to grow by 6.9% during the course of that year.
The IMF offers reasons as to why it sees growth in China slowing down from 7.8% in 2013 to 6.3% in 2016. “Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation,” the IMF states.
For India, the IMF states that the “weaker external demand” will be “offset by the boost to the terms of trade from lower oil prices and a pickup in industrial and investment activity after policy reforms.”
As far as justifications are concerned, you cannot get more general than this. Having said that, this bit of news drove the BSE Sensex to rally by 1.84% to close at 28,784.67 points on January 20. The foreign insitutional investors who have been at the forefront of driving the Indian stock over the last few years, bought stocks worth Rs 1275.59 crore. The domestic insitutional investors, who on most days do the opposite of what the FIIs are doing sold stocks worth Rs 761.7 crore.
With India likely to grow faster than China in the years to come, it is but natural that FIIs want to bet their money on India. Nevertheless, the question is, should the IMF forecast on India (or even their forecasts in general) be taken so seriously?
IMF forecasts in general have a certain amount of optimism bias built into them. As Chris Giles wrote in the Financial Times in October 2014: “Between 2011 and 2014, these forecasts have averaged 0.6 percentage points higher than the outturn…In the very laudable exercise to examine what went wrong, the fund discovered about half of its errors came from predicting greater strength in Brics countries – Brazil, Russia, India and China – than occurred.”
So, in the recent years the forecasts made by IMF have been going wrong big time. In fact, in the aftermath of the financial crisis, the forecasts have been going wrong since 2009. As Alex Christensen writing in a June 2014 article for Global Risk Insights points out: “Every year since 2009, the IMF has overestimated the growth of not only the US but also of Europe and the world…Since 2009, when economic prospects looked dour, these forecasts have consistently been too optimistic. In 2010 and 2011, the IMF projected the world to catch up to the pre-crisis GDP trend by 2015. Now, it projects that world output will still be 4% lower than the pre-crisis trend in 2018.”
What these insights tell us is that IMF forecasts usually turn out to be wrong. In fact yesterday’s outlook release was an update on forecasts first made in October 2014. And sample what IMF had to say in this release: “Global growth in 2015–16 is projected at 3.5 and 3.7 percent, downward revisions of 0.3 percent relative to the October 2014 World Economic Outlook (WEO). The revisions reflect a reassessment of prospects in China, Russia, the euro area, and Japan as well as weaker activity in some major oil exporters because of the sharp drop in oil prices.”
In a period of less than four months the IMF has had to revise the global growth numbers majorly. Taking these factors into account, it is safe to say that IMF’s forecast for India growing at 6.5% in 2016 will turn out to be wrong. And given this, this and other forecasts made by the IMF need to be taken with a pinch of salt.

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

The article originally appeared on www.firstpost.com on Jan 21, 2015

Busting a few more real estate myths

India-Real-Estate-MarketVivek Kaul

The last column on real estate which appeared on January 19, 2015, stuck a chord with a lot of readers. Given that, I thought it made sense to dwell a little more on this topic and the “spin” that real estate wallahs try to give it.
One logic that I have heard being given over and over again is that India has too little land and too many people. Given this, real estate prices can never fall. They will only keep going up ad infinitum and hence, you need to invest in real estate and earn a perpetual return. This is the most widely used logic to justify high real estate prices in the country. But a little bit of number crunching basically tells us that there is nothing right about this theory.
Let’s look at India has “too many people” theory first. As per the 2011 census, India has an average of 382 people living per square kilometre. When it comes to density of population India is ranked 33rd in the world. Let’s compare this with Japan. The country has 336 people living per square kilometre and is ranked 39th in the world.
Japan had a huge real estate boom in the 1980s. The boom came to an end towards the end of the 1980s and prices fell big time after that. As George Akerlof and Robert Shiller point out in Animal Spirits: “Urban land prices…in Japan (where land is every bit as scarce as it is in other countries)…fell 68% in real terms in major Japanese cities from 1991 to 2006.” And if real estate prices could fall in Japan, which has a slightly lower population density than that of India, they can in India as well.
Even in India real estate prices have fallen in the past. It’s just that people don’t rememember about it anymore. As Manish Bhandari of Vallum Capital wrorte in a report titled The End game of speculation in Indian Real Estate has begun: “The previous deleveraging cycle in year 1997-2003 witnessed price correction by more than 50% in Mumbai Metro Region (MMR) property.” And this was just a little over a decade back. Bull markets lead to bad memories and theories justifying high prices.
In fact, real estate prices have been falling in some parts of the country. A December 2014 newsreport in The Economic Times suggested that “secondary market prices of properties in posh South Delhi localities have fallen 25-30 per cent over the last one year as a pileup of inventory and need for money turn many investors into desperate sellers.” “Compared with peak prices, the discount is as much as 40 per cent, say brokers,” the report added.
Another important point here is that the consumer sentiment seems to be turning against real estate. Recently a buyer sentiment survey was carried out by IIM Bangalore and Magicbricks. A report on the survey in The Economic Times said that: “[The survey] orecasts that the homebuyers expect real estate prices to drop over the next six months. In fact, the aggregate Housing Sentiment Index (HSI), measured across the 10 cities, dropped sharply by 29% in the 3rd quarter of 2014-15 to 81. (An HSI score of 100 suggests the prices would remain static).”
Now compare this with another survey that the business lobby ASSOCHAM had got done in June 2013, which said: “Over 85 per cent of urban working class prefer to invest in real estate saying it is likely to fetch them guaranteed and higher returns.” So, the sentiment clearly seems to be changing. And there is no greater danger to the price of an asset class than changing sentiment of those who want to invest in it.
The second theory offered is that India has very little land to house its huge population. Again a little number crunching tells us that this is not correct. The Indian Institute for Human Settlements in a report titled Urban India 2011 esimates that “the top 10 cities are estimated to produce about 15% of the GDP, with 8% of the population and just 0.1% of the land area.”
Economist Ajay Shah in a May 2013 column in The Economic Times did some number crunching to show that India has enough land to house its millions. As he wrote “A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India’s land area assuming an FSI(floor space index) of 1. There is absolutely no shortage of land to house the great Indian population.”
One corollary of this theory is that as cities expand they will take away land from agriculture and that will create a problem as well. Again this is a specious argument. Data from World Bank shows that around 60.3% of India’s land area is agricultural land. The bank defines agricultural land as “share of land area that is arable, under permanent crops, and under permanent pastures.”
In fact, only the United States has more agriculural land than India. As India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry points out: “At 157.35 million hectares, India holds the second largest agricultural land globally.” Only, the United States has more agricultural land than India. Take the case of China. India has more arable land than China. This, despite the fact its total area is only a little over 34% that of China.
Hence, agricultural land near the cities can easily be diverted towards construction of more housing without it having any signficant impact on agricultural production.
The basic problem lies in the fact that too much black money has gone into real estate and has driven up prices ( as I wrote in the last column) to previously unimaginable levels. This has led to builders and politicians who back these builders to sit on a huge amount of unsold inventory instead of cutting prices to clear it. They have got used to these high prices. Also, so much money has already been made that sitting on inventory till prices start to recover, doesn’t seem like a bad idea at all to them.
As an article in The Caravan magazine pointed out few years back: “There isn’t a bubble of real homes…If all these apartments were actually built, and built fairly to schedule, I guarantee you that they would find real buyers. The demand is out there. But there is a huge bubble in imaginary homes.”
And this is because the ill-gotten wealth of politicians and their cronies has found its way into the sector through “benami” means over the years. However, there continues to be demand for reasonably priced property even in big cities. Only if there was someone trying to fulfill this unmet consumer demand.
To conclude, it is worth sharing this example that Ruchir Sharma talks about in his book Breakout Nations: “Lately Indian businessmen have been regaling one another with accounts of a leading politician from Mumbai who is known to have amassed a huge wealth through property deals. At a private screening of a new Bollywood movie, this politician asked the producer to replay a particular song-and-dance number, over and over. When the producer asked if he was taken with the leading lady, the politician said no, he was eyeing the location and wondering where the producer had found such an attractive stretch of open space in Mumbai.”
And this is where the real problem lies. 

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning on Jan 21, 2015