Of Falling Real Estate Prices, Dr Arvind Panagariya and the Art of Continuing to Suck Up

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Dr Arvind Panagariya, the former vice-chairman of the Niti Aayog, today in a column titled Demonetisation: Evaluating the Critics, in the Business Standard, writes: “The second avenue through which demonetisation has directly expunged unaccounted wealth is real estate…Unsurprisingly, an attack on unaccounted cash struck at the heart of this black wealth by cutting real estate prices by a quarter.”

There are multiple questions that this statement raises:

1) What is the source for this data? This isn’t exactly a conversation between two property dealers, or two prospective real estate buyers, who can quote any offhand numbers, while having a conversation. This is a statement being made by someone who was at the top of an economic institution run by the Indian government. This is a statement by an economist working in a top university in the United States.

Also, if real estate prices have fallen by 25 per cent after demonetisation, why isn’t this visible in official data sources. Take the case of Reserve Bank of India’s All India House Price Index, which has been plotted as Figure 1.

Figure 1: 

Figure 1 clearly shows that housing prices across the country have been on their way up. There has “clearly” been no dip, as Dr Panagariya claims. How do things look if we plot one-year return instead of index values? Let’s take a look at Figure 2, which does that.

Figure 2: 

Figure 2 tells us clearly that the one-year return in real estate has been falling over the last six and a half years. This trend started much before demonetisation took place. Also, how have the returns been post demonetisation? Between the end of December 2016 and June 2017 (the latest data available), real estate prices as per the All India House Price Index have gone up by 4.3 per cent. The returns between September 2016 and June 2017, have been 6.9 per cent.

Other than RBI’s All India House Price Index, there is NHB’s Residex. As of now this index has data only up to March 2017. And the one year median return between March 2016 and March 2017, as per this index, across 49 cities, was 2.8 per cent. This is very low. But where is the 25 per cent fall that Dr Panagariya has written about?

2) For a moment let’s assume that Dr Panagariya is right and real estate prices have fallen by 25 per cent. If real estate price all across the country have fallen by 25 per cent on an average, then there will be cities/town/localities where the price has fallen by more than 25 per cent. Which are these places? Can Dr Panagariya provide us with a list? This would make for a super investment right now.

Let’s say there is this town where real estate prices have fallen by 50 per cent post demonetisation. It is worth remembering that a 50 per cent loss wipes off a 100 per gain. (If the price of an asset moves from Rs 50 to Rs 100 that makes for a 100 per cent gain. When it falls back to Rs 50 that is a 50 per cent loss). If there exists such a town, it would make for a great real estate investment right now. Can Dr Panagariya provide us with names of a few such places?

3) Also, if prices have fallen by 25 per cent, why are real estate transactions not happening? Why has the total number of unsold homes of real estate companies, only continued to grow? It is worth remembering here that a 25 per cent fall within a time period of a year, is a huge fall. Falls like these in case of real estate, only happen once in a few decades. And if something like this has happened, as Dr Panagariya claims, then why aren’t people buying? Interest rates on home loans have also fallen post demonetisation.

Take a look at Figure 3. It plots the growth in home loans outstanding with banks.

Figure 3: 

Figure 3 clearly shows that the growth in home loans outstanding has fallen post demonetisation. What this means is that people are not buying as many homes as they were in the past. If prices have fallen by 25 per cent post demonetisation, people would have bought homes and the curve in Figure 3 would slope upwards i.e. people would take on more and more home loans to buy homes.

4) Further, if real estate prices have fallen by 25 per cent, as claimed by Dr Panagariya, it is time that the state governments cut the ready reckoner rates on which stamp duty needs to be paid, by a similar proportion. This should be fairly easy given that BJP governments govern most of the big states across India and a direction from the PMO should be suffice to get them to do the needful. But nothing of that sort has happened. Why hasn’t this been done till date, is a question that only Dr Panagariya can answer.

5) To conclude, it is safe to say that Dr Panagariya has just made up this data, in order to justify demonetisation. It’s a sad day today, when an Indian economist, working in one of the best American universities has had to fudge data in order to please his former political bosses.

The irony is that Dr Panagariya is no longer a part of the government. And he doesn’t really need to say things which do not hold up against data, unless, he is looking for another stint with the Modi government. That changes things.

The column originally appeared on November 13, 2017.

Demonetisation–The Unanswered Question

Time flies.

It has been one year since that fateful day last year, when prime minister Narendra Modi, suddenly announced that Rs 500 and Rs 1,000 notes, would be useless, in a matter of few hours.

Modi was lauded for this “brave” decision. In a country, where politicians do not like to take decisions, here was one politician who had decided to make one.

The trouble is that nobody told us on what basis had the decision been taken. Every decision, has consequences, especially a decision as disruptive as demonetisation turned out to be. And given this, there has to be some logic behind why the decision was made in the first place.

It doesn’t take rocket science to understand that if 86.4 per cent of the currency in circulation is made useless overnight, in a country where 80-98 per cent of the transactions happen in cash (depending on which estimate you would like to believe), the buying and selling of things is bound to crash. When economic transactions crash, it leads to a slowdown of the overall economy, which is precisely what happened in India.

As Jean Drèze writes in Sense and Solidarity—Jholawala Economics for Everyone: “For instance, a study by Nidhi Aggarwal and Sudha Narayanan… shows that mandi arrivals of non-perishable agricultural commodities crashed across the board within a week of demonetisation. The declines range from 23 per cent for cotton to 87 per cent for soybean.”

This happened because agricultural markets in India operated in cash and with no cash around, the farmers were in no position to sell what they had produced. The onion market in Lasalgaon (near Nashik, and India’s largest onion market) continues to face this problem, a year later.

Many informal markets crashed in the aftermath of demonetisation and haven’t been able to revive again. The growth of the non-government part of the economy, which forms close to 90 per cent of the economy, for the period April to June 2017, fell to a little over 4 per cent, in the aftermath of demonetisation.

On top of that the total amount of deposits with banks increased dramatically and because of that the interest rates crashed. This hurt many people (especially senior citizens) who depend on interest from deposits for their survival. It also hurt those who use fixed deposits to save for the long-term. At the same time, the fall in interest rates did not lead to an increase in bank lending. In fact, bank lending in the aftermath of demonetisation has crashed.

The question that remains is on what basis was the decision to demonetise taken? Was there any logic to it or was it just taken on a whim? The closest answer to this has come from Arjun Meghwal, a junior minister in the Modi government. He told the Lok Sabha in February 2017: “RBI held a meeting of its Central Board on November 8, 2016. The agenda of the meeting, inter-alia, included the item: “Memorandum on existing banknotes in the denomination of Rs500 and Rs1000 -Legal Tender Status.””

Meghwal passed the buck on to the Reserve Bank of India (RBI). A Right to Information query was filed with the RBI by a correspondent of the Press Trust of India (PTI). In the query, the central bank was asked to provide the minutes of the meeting in which the decision to demonetise Rs500 and Rs1,000 notes was taken. Over and above this, it was also asked to share its correspondence with the Prime Minister’s Office (PMO) and the Finance Ministry, on the issue of demonetisation.

The RBI replied: “The information sought in the query carries sensitive background information including opinions, data, studies/ surveys etc. made prior to the completion of the process of withdrawal of legal tender character of Rs500 and Rs1,000 notes… Disclosure of such information would detriment economic interest of the country from the viewpoint of the objectives sought to be achieved by such decision.”

Basically, the RBI refused to answer the RTI query. And a year later, we still don’t know on what basis was demonetisation carried out.

The column originally appeared in the Bangalore Mirror on November 8, 2017.

Demonetisation’s negative impact on economy is not done yet, it will continue; be warned

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In a few days, the first anniversary of demonetisation will be here. The Narendra Modi government will continue doing what it has done in the last one year—give demonetisation a positive spin.

But how can a decision which made 86.4 per cent of the currency in circulation, useless overnight, in a country where 80-98 per cent of the transactions were carried out in cash (depending on which estimate you would like to believe), be a positive one?

Let’s take a look at Figure 1. It basically plots the annual growth in non-oil non-gold non-silver imports.

Figure 1:
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What does Figure 1 tell us? First, it tells us that the annual growth in non-oil non-gold non-silver imports had been rather subdued since January 2015. In fact, it has been in the negative territory several times, especially in a few months before November 2016, when demonetisation was announced.

But after November 2016, the growth in non-oil non-gold non-silver imports simply took off and reached a peak of 42.5 per cent in April 2017. This basically means that these imports where 42.5 per cent higher in April 2017 in comparison to April 2016.

What does this tell us? It tells us that a significant portion of the consumer demand post demonetisation has been fulfilled through higher imports. So far so good.

Demonetisation basically disrupted and destroyed supply chains, both in the formal as well as the informal economy. With supply chains being destroyed, the supply of domestic goods has been replaced by imports and has not been fulfilled through the production of domestic firms.

It is worth remembering here that imports are a negative entry into the gross domestic product (GDP) formula.
Y = GDP
C = Private Consumption Expenditure
I = Investment
G = Government Expenditure
NX = Exports minus imports

Hence, if imports grow at a faster pace than exports, they pull down the GDP to that extent. Exports during this year (between April to September) have gone up by around 10.9 per cent in comparison to last year. Imports are up by 22.3 per cent. Given this, it is not surprising that the economy has slowed down. The economic growth for the non-government part of the economy, which forms around 90 per cent of the economy, was around 4.3 per cent, for the period between April to June 2017. This was more than 9 per cent in early 2016.

Hence, demonetisation has played a huge role in slowing down economic growth. And this is tragic given that one million Indians are entering the workforce every month. In fact, it has also rendered a standard tactic in reviving economic growth, pretty much useless.

Allow me to explain. When countries are not doing well on the economic front, the standard prescription offered by economists is for the government to spend more. When the government spends more, the extra spending becomes somebody’s income. When that income is spent, businesses benefit, and the economy revives.

The trouble is that in the current situation if such a prescription is applied on India (actually to some extent it already has been), the government spending will eventually create consumer demand, a substantial portion of which will be fulfilled through imports. Imports, as we have already seen, are a negative entry into the GDP formula. Given this, a fiscal expansion instead (the act of government spending more) of creating faster economic growth might just slow it down.

The point being that we aren’t done yet with the negative effects of demonetisation. There’s more to come.

The column originally appeared on Firstpost on November 3, 2017.

The Real Brave-hearts are Those Who Still Have Deposits in IDBI Bank

IDBI-Bank-Careers-Mumbai-3
IDBI Bank is the worst performing public sector bank when it comes to its gross non-performing advances or bad loans. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more.

As on September 30, 2017, the bad loans rate of the bank stood at 24.98 per cent. This basically means that the borrowers have defaulted on nearly one-fourth of the loans given by the bank. Now take a look at Figure 1. It plots the bad loans of IDBI Bank over the last three years.

Figure 1: 

The bad loans rate of IDBI Bank has jumped from around 5 per cent to around 25 per cent, over a period of just three years. What is happening here? What this tells us is that initially the bank did not recognise bad loans as bad loans. It probably did that by restructuring loans (i.e. giving the borrowers more time to repay or decreasing their interest rate or by simply postponing their repayment) or by issuing fresh loans to borrowers in a weak position, so that they could repay the loans that were maturing. In the process, the recognition of bad loans as bad loans was avoided.

Of course, any bank can’t perpetually keep kicking the can down the road, and after a point of time must do the right thing. IDBI Bank is now doing the right thing of recognising bad loans as bad loans and given this it has such a high bad loans rate. Given that, one-fourth of the loans advanced by the bank have been defaulted on, it is worth asking whether this bank should be in the business of banking at all.

Nevertheless, the more important issue here is how do depositors view this bank. The best way to find this out is to look at the total amount of deposits the bank still has. Take a look at Figure 2, which plots that.

Figure 2: 

What does Figure 2 tell us? The total deposits of the bank have fallen after peaking in December 2016. Nevertheless, the total deposits with IDBI Bank are still higher than they were three years back. Hence, the conclusion that we can draw here is that while bad loans of the bank have gone up from 5 per cent to 25 per cent over a period of three years, the total deposits with the bank are still at the level they were.

Why is this the case? Why would you continue banking with such a bank? First and foremost, this faith comes from the great faith in the government. The government will not allow any bank to go bust. Fair enough. But why wait for that to happen? Typically, when a bank lands up in major trouble, the government tends to merge it with a bigger bank and thus the depositors continue to be safe. Nevertheless, such a merger is never smooth and there might be a brief time period when the full money deposited in the bank cannot be withdrawn. Hence, liquidity can become an issue.

Also, it is worth remembering here that IDBI Bank is not a small bank. It is a relatively big bank and had total assets of close to Rs 3,61,768 crore, as on March 31, 2017. This means that if the government were to decide to merge it with another bank, the balance sheet and the profit and loss account of the combined entity, will be another big mess.

Secondly, many people are simply unaware of how badly the bank is placed. This lack of knowledge about their financial activities is a general trend among many people in this country. We spend more time gossiping and worrying about the state of the nation, than the state of our own finances.

Thirdly, many people locked in their fixed deposits at high interest rates, a few years back. In the aftermath of demonetisation, interest rates have crashed as banks have been flush with funds that were deposited and at the same time their lending has crashed. Given this, even if some individuals understand the riskiness of the situation, they really can’t do much about it. In case they were to break their fixed deposits and move it to other banks, they would earn a much lower rate of interest.

And at that lower rate of interest, they would simply not be in a situation to meet their monthly expenses. This is another negative impact of demonetisation at play, with people having to continue to bank with risky public sector banks, which includes IDBI Bank.

While, some people are simply stuck with IDBI Bank, there are others who can easily move their money to other public sector banks, like State Bank of India, Vijaya Bank, Indian Bank, Syndicate Bank etc., which are in a comparatively much better position.

But given that they have chosen not to, they are the real brave-hearts.

The column originally appeared on November 6, 2017.

Will Narendra Modi Win 2019?

narendra modi
The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 71st Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2017.

I am writing this on Sunday, October 22, 2017. The prime minister Narendra Modi will visit Gujarat the third time this month. In the runup to the state assembly elections, he will inaugurate and lay the foundation stones to a number of projects.

The prime minister’s multiple visits to Gujarat have led to the question—is the BJP on a weak wicket in Gujarat? A strong anti-Bhartiya Janata Party (BJP) front seems to be emerging in the state. The leader of the other backward classes(OBCs) Alpesh Thakor is expected to join the Congress on October 23, 2017. Hardik Patel, the leader of the Patidar Patels, through his tweets seems to have indicated his preference for the Congress, though some of his aides have joined the BJP. Also, Patel currently is not old enough to fight elections.

On the flip side, Gujarat (unlike many other Indian states) has always been a two-horse race between the BJP and the Congress. And in this race, the Congress has gone nowhere in the recent decades. It’s vote share has moved between 33-38 per cent of the votes polled and hence, India’s grand old party has not managed to displace the BJP. The extra 5 per cent vote that the Congress would need to give tough competition to the BJP, have never really come.

How will things turn out this time around? Honestly, I am not a political analyst and don’t know the answer to this. But what I do know is that the BJP has built a formidable election management system under its president, Amit Shah.

Prashant Jha in his new book How the BJP Wins—Inside India’s Greatest Election Machine describes this election management system in detail. And after reading this book I can say with reasonable confidence that displacing BJP at the state level (in the various assembly elections scheduled up to 2019) and in the Lok Sabha elections scheduled in 2019, will be no cakewalk.

This, despite the fact, that the Modi government has managed to screw up the economy big time through the disastrous decision to demonetise Rs 500 and Rs 1,000 notes, and a terrible implementation of the Goods and Services Tax.

I will not get into the details of the election management system of the BJP that Jha writes about in his book, given that a single Letter cannot do justice to it. Hence, dear reader, if you do have the time and the inclination, do check out the book.

Nevertheless, in this Letter I will talk about the factors that go in favour of the BJP and Modi, and the factors that go against them, when they fight an election in the days to come and this includes the Lok Sabha elections of 2019. Let’s look at these factors one by one.

1) Let’s start with the performance on the economic front. The promised acche din are nowhere in sight. In fact, the informal part of the economy which forms around 40 per cent of the GDP and employs more than three-fourths of the labour force, has collapsed. Economic growth has collapsed from more than 9 per cent to now less than six per cent. As far as the non-government part of the economy is concerned, which forms close to 90 per cent of the economy, it is now growing at just 4.3 per cent. So, there clearly are issues on the economic front. Having said that the government has time up until 2019 to set it right.

2) Also, more importantly does economic performance of the nation, really matter to the core supporters of Modi and the BJP. Or are they simply happy with the stand that the government is taking on the Ram temple in Ayodhya and all the rhetoric that surrounds the protection of the cow.

This will be a really important factor in any election. It remains difficult to figure out to what portion of the voters are these issues important. Not surprisingly, a narrative is already being built around these issues, for the core support base. And as May 2019 approaches, things could get murkier on this front.

As Evan Davis writes in Post Truth—Why We Have Reached Peak Bullshit and What We Can Do About It: “Like-minded groups of individuals share a narrative about many things… These narratives are sometimes true, sometimes not, but they are often like stereotypes… Once embedded in our minds though, they can easily gain excessive traction and trample over truth as willing believers put too much weight on propositions that conform to their narrative without looking for evidence in support of them.

3) Further, it is worth asking whether voters vote based on the economic policy being practiced by the government. As Davis writes: [The] argument that who you are matters more than the substantive point you are making is especially true about politicians. Voters focus on character rather than policy partly because they are better able to judge character and are relatively uninformed on policy… So, for a politician, having a good reputation is worth a hundred quick victories in specific arguments.”

Modi’s personal brand still remains strong, though it may have been battered a bit. Over and above this, his brand will always be compared to those he is competing against and on that Modi wins hands down.

4) Expanding on the third point, the question is who will be the leader of the opposition parties. Will it be Rahul Gandhi? Or will it be a leader like Mamata Banerjee? As Jha writes in How the BJP Wins: “Will Rahul Gandhi accept a regional leader? Will a powerful regional leader like Mamata Banerjee accept a Rahul Gandhi?

It will be imperative for the united opposition (if anything like that emerges) to have a consensus candidate and fight their elections under him, because a presidential style contest is likely to emerge, in the fight against Modi.

5) Other than choosing the right candidate, the opposition parties will have to build a credible narrative around him and what they have to offer. The narrative will be necessary to expand the core base. Just saying that we are there to displace Modi is unlikely to work. As Jha writes: “If ‘remove Modi’ is the only message, and the glue that binds them together, then they have a problem. Modi will project it, much like Indira Gandhi did, as a battle between him – a man committed to removing India’s poverty, man committed to India’s vikas – against a conglomeration of small, scattered, disparate units – united only by their hatred for him.”

6) Also, do these parties have the organisational muscle to take on the organisational muscle of the BJP and the Rashtriya Swayemsevak Sangh (RSS). The BJP always had access to the organisational muscle of the RSS, but the Sangh in the past, has not always deployed those resources totally, to help the BJP. That has changed now because of the personal relationship that Modi shares with the Sangh boss Mohan Bhagwat.
Narendra Modi was practically brought up in the RSS. And as Jha writes: “To top it all, Modi’s mentor in the Sangh happened to be Bhagwat’s father.” How do you tackle an equation like this?

7) In many states, like Gujarat, Rajasthan, Madhya Pradesh, Chhattisgarh and Karnataka, any election will be a direct contest between the Congress and the BJP. Does the                Congress have the organisational strength to take on BJP and the RSS?

The bigger problem for the Congress is that it does not have full time politicians at the top. Narendra Modi and Amit Shah are full time politicians. They don’t have any other interests in life. The same cannot be said about the Congress leadership. Whatever people might say about the recent revival of Rahul Gandhi, he just doesn’t inspire enough confidence. I am just waiting for him to take his next holiday at a point of time, when he should be in the country.

The Congress Party for the last many years has always been led by a Gandhi. The Gandhis brought in the votes. But now that is no longer the case. So, the question that is being asked can a non-Gandhi lead the Congress. For a moment, let’s assume that the Gandhis take a backseat. Will the other leaders of the Congress be ready to work under the leadership of a non-Gandhi? I don’t think so. Without, the Gandhis at the top, the glue that holds the party together, the party is likely to break up and if not that the factionalism is bound to increase dramatically.

8) A big advantage that the Modi government has, and which the opposition doesn’t, is that it can use the official machinery in its favour. Recently, the Election Commission announced the election dates for the assembly elections in Himachal Pradesh, but did not do so for the assembly elections in Gujarat and offered a very flimsy reason for it. This gave Modi and the BJP more time to launch more new projects in the state and offer more sops to the voters, something they wouldn’t have been able to do, if the election dates would have been announced.

Over and above this, the government (like the previous governments) can continue using taxpayers’ money to keep building their brand. They can also announce waive offs closer to the election date. I have a feeling that sometime in late 2018, early 2019, a big Mudra loan waive off is on its way. More than 9 crore Mudra loans have been distributed till date. And any waive off of these loans, will give a huge push to the electoral chances of the BJP in 2010, given that it will impact 45 crore individuals in total (assuming a family of 5 per household) are likely to be impacted by the move.

9) Up until now, I have offered reasons which go for the BJP. Now that doesn’t mean that all is well with the BJP. The section of the population is clearly not happy with the economy not doing well. A million youth are entering the workforce every month and the job scene continues to remain bad. The trouble is that the government is simply unwilling to recognise this problem and keeps talking about self-employment opportunities that it has created. These claims are rarely based on any data. The problem with trying to be too clever all the time is that ultimately you get found out. This something that the BJP leaders need to seriously think about.

So, it remains to be seen whether this issue emerges as a strong political issue. It further remains to be seen whether the opposition parties are able to tap into the frustration of the youth who are entering the workforce and not been able to find decent jobs.
Many land owning communities like Marathas, Jats, Patidar Patels and Kapus, have launched protests in the recent past, demanding reservations in government jobs. This remains a tricky issue to handle.

10) In states like Uttar Pradesh, where the BJP has done well, it has built a broad coalition of castes. In Uttar Pradesh, along with the support of upper castes, the BJP was able to reach out to backwards particularly those who did not like the rise of the Yadavs under the previous regime, and the Dalits, particularly those who did not like the rise of the Jatavs under Mayawati. The trouble is that the any government has only so many resources to share and distribute.

As Jha writes: “Caste groups end up competing with each other for state patronage, resources, access to power. There are limited opportunities available and so certain caste groups and, within the caste groups, certain individuals end up cornering more than their share of positions… A road is constructed or schemes are more effectively implemented depending on whether the constituents of that village are supporters of the regime in power. Given weak institutions, access to political power often determines if a person of a specific caste has access to the local police station.”

If sabka saath sabka vikaas has to become a reality, then the current governance structures will have to be changed. Local police officials need to respond to various complaints, irrespective of the caste of the individual making the complaint.  This remains very difficult to implement.

Already, in Uttar Pradesh there are accusations of Thakurs, the caste to which chief minister Yogi Adityanath belongs to, taking over the police administration.

11) For a very long time, the BJP was a party supported by the upper castes and the business castes. Under Modi and Shah, the support base of the party has expanded and includes a large section of the poor as well. While, this has benefitted the party tremendously, the party organisation hasn’t changed to reflect this new reality. As a top BJP leader told Jha: “The party organisation has still not transformed itself. At the moment the party’s character and the PM’s support base may slowly diverge. You cannot have an SUV driving rich contractor as your district president if your target is the poor voter.”
This can lead to a situation where the party’s political messaging is neither here nor there.

To conclude, these are the factors which will matter in the runup to the 2019 elections. While, BJP is on weaker wicket in comparison to 2014, a small industry seems to have emerged in writing off the electoral chances of BJP in 2019, on the basis of a few recent losses in assembly, Lok Sabha, and a few other smallish elections. But they are really jumping the gun, on the basis of very little evidence.

The BJP’s election machinery is very strong, and it will take on these defeats in its stride.

The column was originally published in Equitymaster on Nov 1, 2017.