Why has Narendra Modi changed his Mann Ki Baat on land acquisition


In a column I had written for Firstpost on February 27, 2015, I had suggested that the prime minister Narendra Modi should use the platform of mann ki baat on All India Radio to explain to the people of this country why the Land Acquisition Act of 2013, needed changes.

Modi addressed the issue in the mann ki baat programme on March 22, 2015. He explained why the The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Ordinance, 2014, which made changes to the Land Acquisition Act of 2013, was needed.

The Article 123 of the Constitution empowers the President to promulgate an ordinance if the Parliament is not in session, provided he is convinced that the situation demands so. Further, an ordinance is valid upto six weeks from the date on which the next session of the Parliament starts. After that it lapses. There is no upper limit to the number of times an ordinance can re-promulgated. The land acquisition ordinance issued by the Modi government has been re-promulgated thrice. It is valid up until today (i.e. August 31, 2015), when it will be allowed to lapse.

Modi made this announcement over the mann ki baat programme aired yesterday. As he said: “Tomorrow [August 31, 2015] the Land Bill will lapse and I have agreed to it. The government will not repromulgate [an] ordinance, but will include 13 points to reform the land acquisition law to benefit farmers.”
There has been much criticism of the Modi government, from those on the left, as well as those on the right. The jhollawallahs feel that the Modi government is kow-towing to the corporate crowd, which finances the Bhartiya Janata Party (not that it does not finance the Congress and other parties). Those on the right believe that it is not the job of the government to be acquiring land.

The issue is a little more complicated than that.  Land is not just needed by the private parties, it is also needed by the government for projects which are of national importance and which seek to improve the quality of life of the people of this country.

In a recent interview to The Indian Express, Mangu Singh, Managing Director of the Delhi Metro was asked how does the Delhi Metro manage land acquisition: “Fortunately, so far there hasn’t been any case where we require private land under the new Act (Land Acquisition, Rehabilitation and Resettlement Act, 2013), because we also believe it is almost impossible to acquire land under the new Act.”

In fact, this is something that even Jairam Ramesh, the brain behind the 2013 Land Acquisition Act also admits to. As he writes in Legislating for Justice—The Making of the 2013 Land Acquisition Law along with Muhammad Ali Khan: “The law was drafted with the intention to discourage land acquisition. It was drafted so that land acquisition would become a route of last resort.” In fact, for anyone who really wants to understand how complicated the process of land acquisition actually is under the 2013 Act, should read Ramesh and Khan’s book. It is not surprising that Singh of Delhi Metro believes that it is impossible to acquire land under the new Act. And he doesn’t work for a greedy corporate.

For a country which has nearly 13 million people entering the workforce every year and which has aspirations of “making things,” a law which discourages acquisition of land really cannot be the best way to move forward. No country has gone from being developing to being developed without the expansion and success of its manufacturing sector. And any manufacturing enterprise needs some land.

Further, the physical infrastructure in the country from roads to rail to ports are all creaking. Nearly 70 years after independence many villages in the country do not have access to electricity. All this needs land.

Another fundamental point that the jhollawallahs need to understand that nearly half of the country’s population is engaged in agriculture producing only around 18% of the country’s gross domestic product (GDP). While it is one thing romanticising agriculture, there is a fundamental problem here. There are many more people working in agriculture than required. This means that people needed to be moved out of agriculture. The situation gets even worse once you take into account the fact that most people who work on farms don’t totally depend on income from the farm. Only 17 percent of them survive entirely on money from their farm. So most farmers need to make ends meet by doing other odd jobs.

When Modi had addressed the country through the mann ki baat programme in March earlier this year, he had addressed this issue when he had said: ““In every household, the farmer wants only one son to stay in farming. But he wants other children to get out there and work because he knows that in order to run a household in this day and age different endeavours need to be made.” He then went to say that given this scenario what is wrong with the government acquiring land for building an industrial corridor and ensuring that jobs are created in the vicinity of where farmers live.

The point being that Modi had sold the land acquisition ordinance as something that would benefit the farmers. Now five months later, he has withdrawn the ordnance and even sold this move as being beneficial to farmers. How can that be possible?

The question is why has Modi taken a u-turn on the land acquisition issue after expending so much political capital behind it? A simple answer is the up-coming assembly election in Bihar. Other than the fact that Bihar sends 16 members to the Rajya Sabha, the election is also seen as a sort of a vote on Modi’s time in office since May 2014. It is being seen as a vote on whether people still believe in Modi’s promise of “acche din”.

The Bhartiya Janata Party and the National Democratic Alliance do not have the numbers required in the Rajya Sabha to push through key economic legislation. To get members in the Rajya Sabha, the BJP plus NDA first needs to win state assembly elections. The Rajya Sabha members are elected by the members of state assemblies.

The trouble is this focus on state assembly elections will continue for the next couple of years with elections in key states like West Bengal, Tamil Nadu and Uttar Pradesh coming up over the next few years. Hence, compromises on the economic reform front will keep happening.

Chances are the BJP plus NDA might win some of the assembly elections and end up with the numbers they require in the Rajya Sabha. But by then will there be enough time left for the Modi government to deliver even a small part of the “acche din” they had sold to the people of this country? For that to happen, the government needs to create conditions which lead to the creation of jobs. That isn’t happening at this point of time.

The three key economic reforms it was believed Modi would push through were: land reforms, labour reforms and the goods and services tax. Land reforms have been put on the back burner. Labour reforms never really took off (there have been some minor moves in Rajasthan and Madhya Pradesh, two states which barely have any industry). And so many compromises have been made in the bid to get it passed, that it is better that the Goods and Services Tax does not get passed in its current shape.

If they continue going the way they currently are, Modi and BJP might end up with a majority in the Rajya Sabha, only to lose to the 2019 Lok Sabha elections.  And that is something the country cannot afford. Because then the BJP will behave like the Congress is now.

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

The column originally appeared on Firstpost on August 31, 2015

Spoof: Tracking the Sensex Crash in a Biz Channel


What follows is a figment of the author’s imagination

 In the office of a ing business news channel:

“Okay, we go in with the dark look today,” said the shift editor of the business news channel. The BSE Sensex had fallen by more than 1000 points.
“Dark look?” asked the female anchor.
“Are you carrying a change of clothes?” he asked her.
“Yes, kind of,” she replied.
“Your clothes are too bright for today’s show. Makes you look too happy. Wear black!”
“The investor is unhappy today. You also need to look unhappy. Also, that lipstick is too bright.”
“Eh? I just bought it yesterday.”
“And hope you are carrying that kajal thingie. Make your eyes look dark.”
“Dark?” the female anchor asked again.
“Yes, I want that lack of sleep kind of look. You know slightly unkempt,” the editor said. “And why did you have to shampoo your hair today.”
“Shampoo?” the female anchor asked, all confused.
“Yes, messy hair goes very well with a falling stock market,” he explained.
As soon as he had finished saying this, the male anchor walked in.
“Hello, boss,” he said. “Aaj kya karne ka hai?” The male anchor was an old pro at these things.
“Fold your shirt sleeves. And loosen the tie,” replied the editor.
“Ah, now you have that hard-working look,” said the editor. “Just right for the day.”
“Yes, I know,” replied the male anchor. “Worked so well for us in 2008. The investors really bought into it. They really thought I was working so hard to save their money that I did not have time to wear my tie properly.”
“And what angle should we take boss?” the female anchor butted in.
Kya yaar! This is the problem with these new girls,” said the male anchor. “Never seen a proper bear market.”
“Sorry?” the female anchor turned around towards the male anchor and asked.
“It’s simple,” said the editor.
“What’s simple?” she asked again.
“Every time the market falls, we sell it as a ‘good time to buy’ opportunity.”
“Why not?” the male anchor butted in.
“That’s the business model yaar,” explained the editor, who was slightly irritated by then. “All our advertisers, from insurance companies to mutual funds to stock brokerages will only keep making money if the stock market keeps going up.”
“Ah,” exclaimed the female anchor.
Tubelight jal gaya!” said the male anchor.
“Yes. And they will keep advertising only if the keep making money,” continued the editor. “Okay, now let’s get onto the job.”
In the studio, some 30 minutes later.

“We have with us today, the technical analyst Mr Pehlaj Guglani. Sir, where do you think the market is headed?” asked the female anchor.
“You know there is a resistance at 26,420 points. Or actually there is a support. And when the resistance meets the support, the stock market will start to rally again because the JET indicator is looking very robust. You know the whole country of the system is juxtapositioned by the haemoglobin in the atmosphere because you are a sophisticated rhetorician intoxicated by the exuberance of your own verbosity,” said the technical analyst.
“Sorry Sir, but what does that mean?”
“Talk less, invest more.”
“Oh,” replied the female anchor.
“We also have with us today Mr Tarun Sabharwal, who is a fund manager,” said the male anchor. “Where do you think the market is headed Sir?”
“That is not important,” replied Sabharwal. “What goes up, comes down, only to go up again. The investors should realise there is a sale on at lower prices and they should buy. If they can buy things on Flipkart and Amazon sales, they should definitely be buying here as well.”
“Sir where do you think the stock market is headed?” persisted the male anchor.
“You see, Modi ji is doing a lot of good things for the country. And I can safely tell you that by next August the market will touch 35,000.”
“How sir?” asked the female anchor.
“Modi ji will ensure that,” said the fund manager, knowing fully well no one was going to remember what he said, even if the Sensex did not touch 35,000 points one year later.
Meanwhile, the editor is getting bored with this conversation and tells the anchors over the teleprompter to get back to the technical analyst.
“Mr Nehlani, what are your targets for this week?” asks the male anchor.
“Oh, I think if the Sensex crosses 26,420 then it will touch 27,308. And if it does not cross 26,420, then it can fall to 25,768.”
“What should an investor do then?”
“If he believes in the first forecast, the investor should then buy stocks. If he believes in the second forecast, he should sell them.”
Meanwhile, the editor is thoroughly bored with the responses. The female anchor has smudged her kajal and needs a touch up. An ad break is taken.

The investor’s house:

Kya Ramnik bhai, aaj to stok market gir gaya,” Choksi bhai tells Raminik bhai.
Yes. Yes,” replies Ramnik bhai.
“Oh, but why do you have the television on mute?”
Arre, bus bhav dekhne ka tha.
Sun ne ka nahi?”
Sab upar se jaata hai re!”
Koi stok tip hai to bata na?”

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

The column was published on Aug 28, 2015 on MxMIndia.com

No jobs, no sales: Everything is going wrong with real estate

After a brief break, I am back to writing on by favourite topic of real estate. In The Daily Reckoning edition published on January 22, 2015, I had discussed the job creating potential of real estate.

The construction sector benefits tremendously if the real estate sector is doing well and creates a huge number of semi-skilled jobs. This works the other way round as well. When the real estate sector is not doing well, there are not enough jobs going around in the construction sector.

And this is precisely what seems to be happening. A Reuters news-report points out that “more than half a million workers let go from sites around India’s capital in the last 18 months.” In fact, many labourers who work on construction sites in Delhi are migrant labourers who essentially come from the poorer states of Uttar Pradesh, Bihar and Jharkhand.

As the Reuters reports: “In Patna, the state capital, eight out of 20 labourers contacted by Reuters had this year made the 1,000 kilometre (600 mile) trip back from Delhi because they could not find work – pressuring salaries in a region where wages are already low.”

What is happening here? The real estate consultant Knight Frank in a recent research report had pointed out that there were around 7 lakh unsold homes in eight cities (Delhi-NCR, Mumbai Metropolitan Region, Bengaluru, Pune, Kolkata, Chennai, Hyderabad and Ahmedabad).

“Current unsold inventory levels stand at over 7 lakh units; would take over 3 years to exhaust,” the report pointed out. Liases Foras, another property consultant, puts the inventory in the major cities as of the end of June 2015, a little higher at 41 months, up 24% from last year.

Given the fact that homes are not selling, new launches have declined by 40% to 95,400 units during the first six months of 2015.
And this possibly explains why there is a job crisis in the construction sector. When real estate companies are not able to sell what they have already built, there is no point in continuing to build new homes. With new homes not being built at the same rate as they were in the past, the total amount of construction has come down dramatically, leading to a job crisis in the sector.

How can this disconnect be corrected? How can jobs be created in the construction industry that services the real estate sector? For this to happen new homes need to be built, only then can construction jobs come back in the real estate industry.

For new homes to be built, the unsold homes in the eight big cities and all over the remaining part of the country need to be first sold. And for that to happen prices need to come down so that homes become affordable. A major reason why homes are not selling right now is because they are exorbitantly priced and way beyond what most people can afford.

The real estate companies are not willing to accept this and cut prices. In a recent press release, the real estate lobby, the Confederation of Real Estate Developers Association of India (CREDAI) said: “it would be prudent to say that from the developers side a substantial reduction in prices has already happened across the country and any further decrease in sale prices would be a deterrent for the growth of a sector that contributes so much to the economy and employment at large.”

The real estate lobby feels that home prices cannot be cut because input prices have risen over the last few years. CREDAI President Geetamber Anand told PTI that “housing prices have gone down by 15-20 per cent on an average in last two years across India, while input costs have risen by 15-20 per cent.”

A similar feeling was echoed by Knight Frank Chairman Shishir Baijal who told the Business Standard that: “Input costs, including that of land, have gone up over the past few years. There is no scope for a serious correction in prices.”

Input costs may have risen, but is that a good enough reason for not cutting prices? The real estate companies may as well continue building homes at prices, which no one will buy. At the end of the day any product has to be priced at a level which the end consumer is willing to pay. This is a basic way in which any business works.

This logic did not apply to the real estate sector up until now because there was massive investor demand. This included people who had black money to park as well as others who were taking on home loans to invest in second and third homes. With returns from real estate more or less remaining flat over the last couple of years, the number of buyers in this category has come down dramatically. The Reuters story referred to earlier points out: “A law to clamp down on “black money” flows that fund as much as a third of real estate deals is further squeezing demand.”

I really don’t know where Reuters got hold of the one-third ratio, but there is enough anecdotal evidence to suggest that investor money coming into the sector has come down dramatically. The real estate consultants have also made this point. Given this, the only prospective buyers left in the market are those who want a home to live-in and they are in no position to pay the kind of money the real estate industry wants them to.

So, as I keep saying, the real estate sector is not going to revive without a massive price cut. Having said that, the CREDAI had an intelligent suggestion to make for once as well. The real estate lobby said in a press release that: “The onus is now upon the state government to rationalise taxes, ready reckoner rates and streamline the approval process to bring down property prices and provide relief to home buyers.”

In many parts of the country real estate transactions are not happening simply because the circle rates are higher than the prevailing market price of real estate. And this has led to the transactions in the real estate market coming to a complete standstill. People are not buying and selling homes because of this.

The area where real estate is bought or sold has a circle rate decided by the state government. The circle rate is the minimum value at which the actual transfer of a property between a seller and a buyer should take place. Hence, the buyer of the property pays stamp duty to the state government on the circle rate.

This is something that the state governments can correct by bringing down circle rates. But the question is will they do that? And if yes, how quickly?

The column originally appeared on The Daily Reckoning on Aug 28, 2015

Why the State Bank of India is in love with home loans

In yesterday’s edition of The Daily Reckoning
, I had discussed why teaser rate home loans are a bad idea. Arundhati Bhattacharya, the chairperson of the State Bank of India (SBI), recently put forward the idea that the country’s largest bank should be allowed to launch teaser rate home loans.

As I had explained yesterday, teaser home loans are essentially home loans in which the interest rate is fixed in the initial years and is lower than the normal floating interest rate on a home loan. The lower interest rate is limited only to the first two-three years after which the loan is priced at the prevailing interest rate on home loans.

The question is, why does Bhattacharya want to launch teaser rate home loans? Let’s look at some numbers of SBI. As on June 30, 2015, the bank had given out home loans worth Rs 1,63,678 crore, having grown by a robust 13.5% since June 30, 2014.This, when the overall domestic lending grew by a much slower 5.38%.

Between June 30, 2014 and June 30, 2015, the bank gave out home loans worth Rs 19,468 crore. Where did the overall lending stand at? The total domestic lending of the bank grew by Rs 54,255 crore during the same period. Hence, home loans formed a massive 35.9% of the total lending that SBI has done within India, between June 2014 and June 2015.

To rephrase the earlier sentence, more than one third of all domestic lending of SBI, over the last one year, has been in the form of home loans. For a diversified bank, which is not just a home loan company, this skew is way too pronounced.

Nevertheless, even after this, why does Bhattacharya want to give out more home loans, by launching teaser rate home loans? In order to answer this question I would need the average home loan size of SBI. I found two newsreports, which gave me two very different numbers. One report published in October 2014, quoted a senior SBI executive said that the average home loan size in case of SBI was at Rs 30-32 lakh. Another report published in April 2015 said that the average home loan size in case of SBI was at Rs 20 lakh.

The second number seems to me more believable given that the average home loan size of HDFC is Rs 23.4 lakh (HDFC shares its average home loan size every quarter). My guess is that the average home loan size of SBI would be a little lower than that of HDFC, given its better reach.

So we will work with an average home loan size of Rs 20 lakh. The next number needed is that home loan to value ratio, at the time the loan is given out. I couldn’t find that number for SBI (dear reader, hope you understand how difficult it is to get numbers on anything in India, despite the improvement over the years).

The number in case of HDFC is 65%. What this means is that on an average HDFC gives 65% of the market value of a home being bought, as a home loan.  If we work with this number, the average market price of a home that SBI is giving a loan against is around Rs 31 lakh (Rs 20 lakh divided by 0.65). But this does not take one factor into account.

Almost no real estate deal in India is carried out totally in white money. There is a portion of black money that inevitably needs to be paid. It is very difficult to arrive at an all India number, but my guess is that 75:25 is a good conservative ratio to work with. This means that 75% of the value of the home is paid in white and the remaining in black.

Once this factor is taken into account the market price against which a home loan is given, shoots up to around Rs 41 lakh (Rs 31 lakh divided by 0.75). What does this mean? This means that the loan to value ratio is a little under 50% (Rs 20 lakh expressed as a percentage of Rs 41 lakh).

Hence, giving out home loans is a very safe form of lending. In fact, it is the safest form of lending. For mid-level companies, bad loans were at 10.3%. So for every Rs 100 that SBI gave as loans to mid-level companies, a little over Rs 10 wasn’t repaid.

For, retail loans the bad loans were at 1.17%. The bank does not give a separate number for home loans. Auto loans, education loans and personal loans, are the other forms of retail loans. The default rates in case of these loans is likely to be higher. Hence, the bad loans case of home loans should be lower than 1.17%.

The bad loans in case of HDFC amount to 0.54% of the total loans. What this means clearly is that almost no one who takes on a home loan defaults on it. Given this, it is not surprising that Bhattacharya wants to be allowed to launch teaser rate home loans. It is better for her to do that than be lending to corporates. As Bhattacharya had said: “This is one portfolio where NPAs are the lowest.”

The fundamental problem with teaser rate home loans is that a bank cannot be allowed to give out a loan at a rate of interest lower than its base rate or the minimum interest rate a bank charges its customers. Also, they cannot really be compared to normal home loans, given that the chances of the EMI jumping up in the years to come is significantly higher in case of teaser home loans. And that is a risk that Bhattacharya probably hasn’t taken into account.

The column originally appeared on The Daily Reckoning on August 27, 2015

The Chinese are discovering that the stock market falls as well

chinaThe Shanghai Stock Exchange Composite Index is one of the premier stock market indices in China, like the Bombay Stock Exchange Sensex is in India. And it is not having a good time of late.

Between August 20, 2015, and today, the index has fallen by 21.8%. On August 20, the stock market opened at 3744.25 points. As of close today, it was down to 2927.29 points.

In the aftermath of the financial crisis which started in September 2008, the Chinese government resorted to bubbles to keep the economy growing. First there was an infrastructure bubble, which was followed by a property bubble and then a stock market bubble.

Between June 2013 and June 12, 2015, the Shanghai Composite Index rose 153.5%. The government successfully managed to divert a part of around $20 trillion savings into the stock market, and pushed it to astronomical levels. This was just as the property bubble was starting to burst. Since peaking in June 2015, the stock market has fallen by 43%, wiping off a major portion of the gains (as the old adage goes, a 50% fall, wipes a 100% gain). In order to prevent the fall, the Chinese government has done many things.

It has pushed big government financial institutions (or their equivalents of Life Insurance Corporation of India) to buy shares in the stock market. Investors who own more than 5% of shareholding in any company have been banned from selling these shares for a period of six months. Initial public offerings have been banned as well, so that investors invest only in the shares that are already listed and this pushes up the stock market. Many shares have not been allowed to trade at various points of time, as well.

Further, continuing with these measures, the People’s Bank of China, the Chinese central bank unleashed another round of easy money, yesterday. It cut the reserve ratio requirement (RRR or what we call cash reserve ratio or CRR in India) by 50 basis points (one basis point is one hundredth of a percentage) to 18% for most big banks.

This cut will be effective as of September 6, 2015, and is expected to add 700 billion yuan (or around $109 billion at today’s exchange rate of one dollar equals 6.42 yuan). Over and above this, the one year deposit and lending rates were cut by 25 basis points, to their lowest level ever.

The idea is to flood the financial system with “easy money”, and hope that some of it goes into the stock market and the market rallies all over again. The trouble is that Chinese politicians are not democratically elected and in order to appear credible they need to ensure that the Chinese economic growth story continues, as it has all these years.

As John Plender writes in Capitalism: Money, Morals and Markets:  “Unelected Chinese politicians may put the interests of the Communist Party elite before those of the nations. Their legitimacy, after all, rests chiefly on the continuation of high rates of economic growth.” Ensuring that bubbles continue are an important part of this story. Any bubble burst will drive down economic growth. The economic growth has already fallen from more than 10% to around an “official” rate of 7%.

What has helped the Chinese government up until now, is the belief among the Chinese that the government can engineer any economic outcome that it wants. And it is this belief that has allowed the Chinese government to engineer the economic outcome that it wants. Nevertheless, in the process it has ended up with big bubbles—be it in the stock market, the property market, infrastructure, or total amount of debt in the financial system.

The interesting bit is that the Shanghai Composite Index barely responded to yesterday’s decision of the People’s Bank of China to cut the reserve ratio requirement. The index fell by 1.27% during the course of the day today. Of course, if the reserve ratio requirement had not been cut, the market would have fallen more.

The point is that the Chinese over the last one week have discovered that the stock market does not always go where the government wants it to go. And it can have a mind of its own. The market simply does not keep going up, it falls as well.

The situation is a tad similar to what happened when the erstwhile Soviet Union was just coming out of communism and its people were essentially shocked at encountering a system that functioned according to a completely different set of rules.

This is best explained by a question that the British economist Paul Seabright was asked by the director of bread production of the city of St. Petersburg. This gentleman was trying to understand how the new system (which wasn’t like the old system) worked.

As Felix Martin writes in Money—The Unauthorised Biography, the director of bread production asked Seabright, “Please understand that we are keen to move toward a market system … but we need to understand how such a system works. Tell me, for example who is in charge of the supply of bread to the population of London?”

In this context, the point is that the Chinese government would like its people to believe that it is in-charge of the stock market, but it seems to be gradually losing control over it. And that can’t possibly be a good thing for either the Chinese or the world at large.

The column originally appeared on Firstpost on August 26, 2015

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