Mr Chief Economic Advisor, Printing Money is Always a Bad Idea.

The Economic Survey for 2020-21 was published yesterday. I wrote a summary of the survey titled 10 major points made by the Economic Survey.

It wasn’t possible to even speed-read the whole Survey quickly, hence, I missed out on a few points, and am writing about them here. This piece is a follow up and I strongly recommend that you read the first piece before reading this one.

Let’s look at some important points made in the Survey.

1) The spread of corona has led to a massive economic contraction this year. While the growth is expected to bounce back over the next few years, the impact of this year’s contraction isn’t going to go away in a hurry.

As per the Survey, if India grows by 12% in 2021-22 and 6.5% and 7%, in 2022-23 and 2023-24, respectively, the Indian economy will be at around 91.5% of where it would have possibly been if there would have been no covid and no economic contraction, and India would have continued to grow at 6.7% per year on an average, as it has in the five years before 2020-21.

At 10% growth in 2021-22, and 6.5% and 7% growth in 2022-23 and 2023-24, respectively, the Indian economy will be at around 90% of where it could have possibly been, the Survey points out.

This is an important point that we need to understand. While, 2021-22 might see a double digit growth, covid has put us back by more than half a decade, if we look at trend growth.

2) The Economic Survey recommends money printing to finance higher government expenditure. Call me old school, but I always feel uncomfortable when economists recommend outright money printing to fund government expenditure. Of course, there is always a theoretical argument on offer.

The Survey refers to a speech made by Patrick Bolton, a professor of business at Columbia University in New York, to make the money printing argument and why money printing, where an excess amount of money chases a similar amount of goods and services, doesn’t always lead to inflation.

As the Survey points out:

“Printing more money can result in inflation and loss of purchasing power for domestic residents if the increase in money supply is larger than the increase in output….Printing more money does not necessarily lead to inflation and a debasement of the currency. In fact, if the increased money supply creates a disproportionate increase in output because the money is invested to finance investment projects with positive net present value.”

What does this mean in simple English? The Survey is essentially saying that if the printed money is well utilised and put into projects which are beneficial for the society, it benefits everyone, and doesn’t lead to inflation.

The trouble is a lot of things sound good in theory. One of the major things that the bad loans crisis of Indian banks teaches us is that the Indian system cannot take a sudden increase in investments. There is only so much that it can handle and that’s primarily because there is too much red tapism and bureaucracy involved in getting any investment project going. We are still dealing with the fallout of this a decade later.

Also, how do the government and bureaucrats ensure that the amount of money being printed is just enough and will not lead to inflation. (Central planning keeps coming back in different forms).

The government can print money and spend it. This can ensure one round of spending and the money will land up in the hands of people. Also, as men spend money, this money will land up with shopkeepers and businesses all over the country. The shopkeepers may hold back some of the cash that they earn depending on their needs.

The chances are that most of this money will be deposited back into bank accounts. In the normal scheme of things, the banks would lend this money out. In difficult times, banks are reluctant to lend. Hence, they end up depositing this money with the RBI. The RBI pays interest on this money. As of yesterday, banks had deposited Rs 5.6 lakh crore with the RBI. This is money they have no use for, or to put it in technical terms, this is the excess liquidity in the system.

Money printing will only add to this excess liquidity. Ultimately, for the economy to do well, people and corporates need to be in a state of mind to borrow and banks in the mood to lend. Printing money cannot ensure that.

Over and above this, money printing can and has led to massive financial and real estate bubbles, in the past few decades. This is asset price inflation. While this inflation doesn’t reflect in the normal everyday consumer price inflation, it is a form of inflation at the end of the day. And whenever such bubbles burst, which they eventually do, it creates its own set of problems.

Given these reasons, the chief economic advisor Krishnamurthy Subramanian’s recommendation of money printing by the government is a lazy idea which hasn’t been thought through. (For a detailed argument against money printing, please read this).

 

3) During the course of this financial year, banks have gone easy on borrowers who haven’t been in a position to repay.

Technically, this is referred to as regulatory forbearance. In this case, the central bank, comes up with rules and regulations which basically allows banks to treat borrowers in trouble with kids gloves. One of the learnings from the bad loans crisis of banks has been that regulatory forbearance of the Reserve Bank of India, India’s central bank, went on for too long.

The banks are yet to face the negative impact of the covid led contraction primarily because of regulatory forbearance. The banking system should be facing the first blows of the economic contraction. But that hasn’t happened, thanks to the Supreme Court and regulatory forbearance. The Supreme Court, in an interim order dated September 3, 2020, had directed the banks that loan accounts which hadn’t been declared as a bad loan as of August 31, shall not be declared as one, until further orders. Hence, the balance sheets of banks as revealed by their latest quarterly results, seem to be too good to be true.

The Survey suggests that an asset quality review of the balance sheets of banks may be in order. As it points out: “A clean-up of bank balance sheets is necessary when the forbearance is discontinued… An asset quality review exercise must be conducted immediately after the forbearance is withdrawn.”

This is one of the few good suggestions in the Survey this year and needs to be acted on quickly, so as to reveal the correct state of balance sheets of banks. The Survey further points out: “The asset quality review must account for all the creative ways in which banks can evergreen their loans.” Evergreening involves giving a new loan to the borrower so that he can pay the interest on the original loan or even repay it. And then everyone can just pretend that all is well.

In fact, even while making a suggestion for an asset quality review, the Survey takes potshots at Raghuram Rajan and the asset quality review he had initiated as the RBI governor in mid 2015.

4) Another point made in the Survey is to ignore the credit ratings agencies and their Indian ratings. As the Survey points out: “The Survey questioned whether India’s sovereign credit ratings reflect its fundamentals, and found evidence of a systemic under-assessment of India’s fundamentals as reflected in its low ratings over a period of at least two decades.”

This leads the Survey to conclude: “India’s fiscal policy must, therefore, not remain beholden to such a noisy/biased measure of India’s fundamentals and should instead reflect Gurudev Rabindranath Thakur’s sentiment of a mind without fear.”

While invoking Tagore, the Survey basically recommends that India’s government borrows more money to spend, taking into account “considerations of growth and development rather than be restrained by biased and subjective sovereign credit ratings”. (On a slightly different note, who would have thought that one day an economist would invoke Rabindranath Thakur’s name to market higher government borrowing).

Whether, the ratings agencies correctly rate India based on its fundamentals is one issue, whereas, whether it makes sense for India to ignore these ratings and borrow more, is another.

As the Survey points out: “While sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy, opaque and biased credit ratings damage FPI flows.” (FPI = foreign portfolio inflows).

What this means is that any further cut in credit rating can impact the amount of money being brought in by the foreign investors into India’s stock and bond market. In particular, it can impact the long-term money being brought in by pension funds.

While, the Survey doesn’t say so, it can possibly impact even foreign direct investment.

So, the point is, why take unnecessary panga, for the lack of a better word, with the rating agencies, at a point where the economy is anyway going through a tough time.

In another part, the Survey points out: “Debt levels have reached historic highs, making the global economy particularly vulnerable to financial market stress.”

5) Given that, tax revenues have collapsed, government borrowing money to finance expenditure has gone up dramatically during the course of this year. As the Survey points out:

“As on January 8, 2021, the central government gross market borrowing for FY2020-21 reached Rs 10.72 lakh crore, while State Governments have raised Rs 5.71 lakh crore. While Centre’s borrowings are 65 per cent higher than the amount raised in the corresponding period of the previous year, state governments have seen a step up of 41 per cent. Since the COVID-19 outbreak depressed growth and revenues, a significant scale up of borrowings amply demonstrates the government’s commitment to provide sustained fiscal stimulus [emphasis added] by maintaining high public expenditure levels in the economy.”

Fiscal stimulus is when the government spends more money in order to pump up the economy in a scenario where individuals and corporates are going slow on spending. The total government spending during April to November 2020 stood at Rs 19.1 lakh crore. It has risen by just 4.9% in comparison to April to November 2019. Given that inflation has stood at more than 6% this year, this can hardly be called a fiscal stimulus.

To conclude, economic surveys in the past, other than offering a detailed assessment on the current state of the Indian economy, also used to do some solid thinking about the future or stuff that needs to be done on the economic front.

Over the past few years, a detailed reading of these Surveys suggests that they have become yet another policy document which feeds into government’s massive propaganda machinery, albeit in a slightly sophisticated way.

IMF Says India Will Be Fastest Growing Economy in 2021, And That’s Good News, But…

The International Monetary Fund (IMF) in the World Economic Outlook update for January 2021, has forecast that the Indian economy will grow by 11.5% in 2021.

If this happens, it will be the fastest that the Indian economy has ever grown. It will also be the first time that the Indian economy will grow in double digits. (Actually, the country did grow by greater than 10% in 2010-11, but that was later revised by the Modi government, once a new set of gross domestic product (GDP) data was published).

The following chart plots the GDP growth over the years. The GDP is the measure of an economic size of a country.

Source: Centre for Monitoring Indian Economy.

It is interesting that the Indian GDP has grown by more than 9% only twice previously, and both these occasions were before the 1991 economic reforms. The economy grew by 9.15% in 1975-76 (post the first oil shock) and 9.63% in 1988-89. Post 1991, the country grew the fastest in 1999-00 when it had grown by 8.85% (after the American sanctions).

Also, among the selected economies for which IMF published data, India will be the fastest growing economy in the world in 2021. China comes in second at 8.1%.


Source: International Monetary Fund.

India growing by 11.5% in 2021 is indeed a big deal, there is no denying that. But there are a few factors that need to be kept in mind here.

First and foremost is the base effect. Before I go into highlighting the base effect in this context, let’s first understand what it means.

Let’s say the price of a stock in 2019 was Rs 100. In 2020, it falls by 50% to Rs 50. In 2021, it is expected to rise to Rs 75. This means a gain of Rs 25 or 50% per share. If we just look at prices of 2020 and 2021, the stock has done fantastically well and gained 50%.

But what we also need to keep in mind is the stock price in 2019, when it was at Rs 100. It then fell massively by 50% to Rs 50 and rose from there. Hence, the stock price rose from a much lower-base. And this lower base was responsible for a gain of 50%. Further, in 2021, the stock continued to be lower than its 2019 price. This is base effect at play.

One way to look at base effect is to look at the GDP growth/contraction forecast by IMF for 2020.

Source: International Monetary Fund.

As can be seen from the above chart, the IMF expects the Indian GDP to have contracted by 8% in 2020. Hence, in 2020, the Indian economy will be among the worst performing economies in the world. Given this, a 11.5% growth in 2021, will come on a massively contracted GDP in 2020. This is a point that needs to be kept in mind.

Also, all the countries which have done worse than India have a per capita income larger than that of India. In that sense they are economically much more developed than India is and their pain of contraction is much lesser than that of India, given that these countries already have access to the most basic economic necessities in life, which many Indians still don’t.

Let’s go into a little more detail on this point. While the IMF publishes real GDP growth data (which we have been discussing up until now), it doesn’t publish constant price GDP, which adjusts for inflation, in a common currency like the US dollar.

To get around this problem, let’s use the constant price GDP data published by the World Bank. On this we apply, the  GDP contraction/growth rates as forecast by the IMF. As per the World Bank, the Indian GDP in 2019 (in constant 2010 $) was $2.94 trillion. In 2020. A contraction of 8% in 2020 would mean a GDP of $2.70 trillion in 2020. A 11.5% rise on this would mean that the Indian GDP is expected to touch $3.01 trillion in 2021, which is around 2.4% better than the GDP in 2019.

Hence, in that sense, the slowing Indian economic growth for the last few years, followed by the covid contraction, has put the Indian economy back by two years. Of course, it can be argued that every country has gone through this. Indeed, that’s true, but that doesn’t make our pain any better.

Also, before saying stuff like India will grow faster than China in 2021, please keep in mind the fact that the Chinese GDP in 2019 was $11.54 trillion (World Bank data), which is much more than that of the India’s GDP.

In 2020, the Chinese economy was expected to grow by 2.3%. This means that the Chinese GDP in 2020 would have grown to $11.81 trillion. In 2021, the Chinese GDP is expected to grow by 8.1% to $12.76 trillion. This means an increase in GDP of $0.95 trillion in just one year. If we compare this increase with the expected Indian GDP of $3.01 trillion in 2021, what it means is that China will end up adding 31.6% of the India’s economy in just one year. Or to put it simply, China will add a third of India’s economy in just one year.

It also means that between 2019 and 2021, the Chinese economy is expected to grow by $1.22 trillion ($12.76 minus $11.54 trillion). During the same period, the Indian economy is expected to grow by $ 0.07 trillion ($3.01 trillion minus $2.94 trillion). Please keep these facts in mind before saying that in 2021 India will grow faster than China.

Between 2019 and 2021, the gap between India and China has grown even bigger and that is a fact that needs to be kept in mind. All numbers and figures need some context, otherwise they are useless and as good as propaganda, which I think will happen quite a lot during the course of the day today.

If you have already read the newspapers and the websites on this issue, you might have seen that almost all of them say that India will grow faster than China in 2021. But almost  no one bothers to mention the fact that China grew faster than India both in 2019 and 2020. Or the fact that China is growing on a significantly larger base (the most important point when we are talking percentages).

At the risk of repetition, you won’t see any such analysis appearing in the mainstream media. So, kindly continue supporting my work. Even small amounts make a huge difference.

Sensex@50,000 points and Some Basic 5th Standard Maths That Some Journalists Still Need to Learn

Early morning today, the BSE Sensex, India’s most popular stock market index crossed 50,000 points during intra day trading.

Not surprisingly, this led to the bubbly being opened on the social media and business TV. These are celebrations which will be carried into the newspapers appearing tomorrow morning. This is hardly surprising given that every time the Sensex has crossed one of these major landmarks, the media has gone crazy celebrating it.

And I don’t have a problem with it, given that the media is in the business of cashing in on good sentiment or to put it more precisely, creating good sentiment and then cashing in on it. The days of what bleeds that leads, are long gone.

One of the ways of celebrating is through graphics and data. One such graphic was shared by the Twitter handle of Business Today. It basically plots the number of days the Sensex has taken over the years to move 10,000 points in the upward direction.

Hence, it plots the number of days, the Sensex took to cross the first 10,000 points, then move from 10,000 points to cross 20,000 points and so on, and finally, to move from 40,000 points to cross 50,000 points.

This is how it looks like.


Looking at the above chart, Business Today concludes that the Sensex moving from 40,000 points to crossing 50,000 points has been the fastest, as it has happened in just 415 days. This, as we can see, is the least number of days. The next fastest was between 10,000 points and crossing 20,000 points, which took 432 days, which is seventeen days more.

Yay, and that is a cause for huge celebration. Okay, Business Today, didn’t say that, I added it.

During the course of my nearly 18 years of writing for the business media, I have seen a lot of stupid charts and data being used to make a point, but this takes the cake.

Why? Simply because it doesn’t take fifth standard percentages into account.

The BSE Sensex is an index. Every index has a base value. The base value of the BSE Sensex is 100. So, when the BSE Sensex first rose from 100 points to 10,000 points in 5,942 days, it meant a rise of 9,900 points or 99 times the original value of 100 or 9900%.

In comparison, the rise between 40,000 points and 50,000 points is just 25%. So, what are we really comparing? Who are the editors clearing such graphics? Why are people being misled on such simple data points?

The question is how do we analyse this properly. The right way to do this is look at the average jump in percentage terms per trading session, in each bracket. So how do we calculate this? The Sensex moved up 9,900% in 5,942 sessions, when it crossed the first 10,000 points. Hence, it moved around 1.67% per trading session on an average (9,900% divided by 5,942 trading sessions), during the period .

Further, the Sensex moved 25% in 415 sessions, when it moved from 40,000 points to cross 50,000 points. Hence, it moved 0.06% on average per trading day (25% divided by 415 trading sessions), during the period. So, the movement of the Sensex between 40,000 points to crossing 50,000 points has been much slower than crossing the first 10,000 points.

Here is how the proper chart looks like.


What does this tell us? It tells us that the first 10,000 points were achieved the fastest. This was followed by the movement between 10,000 points and 20,000 points, where the average gain was 0.23% per trading session. The movement between 40,000 points and 50,000 points at 0.06% per trading session comes third.

Sorry for belabouring on this rather basic point but I get really irritated when people use mathematics and data to mislead, sometimes not even knowing that they are misleading.

On Test Cricket

-- Bade Ghulam Ali Khan. 

— Bade Ghulam Ali Khan. 

It’s the morning after.

Yesterday, the Indian cricket team managed to pull off its most famous Test match win ever, the recency effect of it notwithstanding. In the truest sense of the term, it was a fine Ocean 11’s kind of heist which went right down to the wire, and not the tacky Dhoom type.

The sun is just about getting ready to peep out of the clouds. While a whole host of things remain to be done, I am reluctant to start my workday given that I am still brimming with excitement over yesterday’s win.

And in this situation who wants to write yet another piece on what the government should do in the next budget. (For those who don’t know me, I make a living out of writing on economics and finance).

As I process yesterday’s win and get ready for the boring, mundane day that lies ahead, Ustad Bade Ghulam Ali Khan is singing his legendary thumri ka karun sajni aaye na balam. It took me years to reach a level where I could appreciate the brilliance of Khan sahab’s singing.

My interest in music started with listening to Hindi film music on Vividh Bharti. Over the years, thanks to my father and a few neighbours, I graduated to listening to Jagjit Singh sing ye kagaz ki kashti ye baarish ka paani.

And then it was Ghulam Ali singing faasle aise bhi honge ye kabhi socha na tha.

It continued with Mehdi Hasan singing ranjish hi sahi dil hi dukhane ke liye aa.

And I thought I had reached the peak of listening prowess when I heard Akhtari Bai Faizabadi sing wo jo humme tumme karar tha, tumhe yaad ho ke na yaad ho.

The greatness of these singers notwithstanding, everything fell flat once I had heard Ustad Bade Ghulam Ali Khan sing ka karun sajni aaye na balam.  Of course I am mixing genres of music here, but that’s the way it is and I can’t do anything about it.

So what’s the point here? It took me years of listening to music patiently and spending all the time that I did, to reach a stage where I could appreciate Khan sahab’s singing. It didn’t happen in a day or even a year or two, it took decades.

Imagine what would have happened, if someone had introduced me to Khan sahab’s singing in the 1990s. I would possibly have turned around and said what rubbish is this. It’s so slow. And he sings the same thing over and over again. Have you heard Kumar Sanu sing maine pyar tumhi se kiya hai, maine dil bhi tumhi ko diya hai?

But then I was still maturing as a listener. Appreciating good things in life takes time. It takes decades to develop some taste, if at all that happens.

The question is, why have I been going on and on about Bade Ghulam Ali Khan sahab in a piece supposedly on Test cricket. Let me explain.

Watching Test cricket for me is an experience similar to listening to Khan sahab sing ka karun sajni aaye na balam. I wasn’t always up for it.

My first memory of watching cricket goes back to India winning the World Championship of Cricket in 1985. Doordarshan had just come to Ranchi, the city I was born and brought up in, only a few months earlier on October 2, 1984, and we had bought our first TV on December 25, 1984 (It was an Uptron).

I don’t have many memories of the 1987 Reliance World Cup other than India losing the semi-final to England in Mumbai. For days at end there were rumours of Dilip Vengsarkar having opted out of playing in the semi-final because Sunil Gavaskar wanted India to lose, since he didn’t want to play the final scheduled in Kolkata (then Calcutta).

The 1992 Benson and Hedges World Cup was the first cricket World Cup I saw in colour and on cable TV. My memories of it are limited to India losing to Australia by one run, thanks to a stupid rain rule, which would eventually also cost South Africa a place in the finals. I still remember the looks on the face of Brian McMillan and Dave Richardson, the South African batsman at the crease, when the rain rule revised South Africa’s target to 22 runs to get from one ball.

The 1996 World Cup was when things got really personal. We were not supposed to lose.  But then despite the bowling heroics of Javagal Srinath who got rid of both Sanath Jayasuria and Romesh  Kaluwitharana very quickly, Sri Lanka went on to win the semi-final, once the pitch started spinning like a top during the Indian innings and our batting simply collapsed after Sachin Tendulkar got out, as was often the case in those days.

My final memory of that lousy day is that of Vinod Kambli slowly walking off the Eden Gardens with tears in his eyes, once the match referee Clive Llyod decided to call off the match and award a victory to Sri Lanka, due to crowd trouble.

The pain that followed was very personal. After the game got over, I walked around aimlessly for at least two hours in the colony we used to live in, trying to process what had just happened. It simply didn’t make any sense. How could India lose?

After that loss, over the years, things became less personal when it came to cricket. The main reason for it was the rise of cable TV and the fact that the live cricket broadcast became more and more ubiquitous. The popularity of cable TV and ODI cricket went hand in hand, with each feeding in on the other.

The law of diminishing marginal utility was also at work and the continuous live coverage of cricket, made it like just another game, you watched, you forgot and you moved on. The value of the game wasn’t quite the same. As the supply of cricket increased, the enjoyment with each extra game being played, came down.

In fact, the rise of T20 cricket led to my emotions getting totally detached from the game. My mother used to watch soap operas while having dinner (now she watches Netflix), and I watch IPL, when it is on. These days I watch the Aussie Big Bash League while having lunch.

Cricket, like soap operas for my mother, became another time filler for me.

Then things started to change in 2012, when I quit my full-time journalism job and went freelance. This is when I seriously started watching Test cricket because I finally had the time to watch a game which unfolds itself leisurely over a period of five days. Until then I used to follow Test cricket but post 2012, I started seriously watching it.

And like I took time to appreciate the singing of Bade Ghulam Ali Khan sahab, it took me time to appreciate Test cricket, and when I did, boy did I enjoy it. I had go through watching a lot of 50 over cricket, international T-20 cricket, league T-20 cricket and first class matches, to finally start appreciating Test cricket. It was a proper process.

Much of T-20 cricket to me is timepass and to put it honestly, given a choice, I would rather spend time eating the original Indian timepass, the humble moongphali, than watch T-20 cricket.

A simple reason why I find Test cricket more enjoyable is because the game is much more balanced, with the bowlers getting almost an equal chance as batsmen.

Like it is in ODI cricket, the quota of overs a bowler can bowl is not limited. This means the best bowlers in a team can keep bowling as long as their body allows them to. Among the Aussie fast bowlers, Pat Cummins bowled the most overs in the fourth innings at Brisbane. Not surprisingly, he is the world’s number one rated fast bowler. And his bowling made the game as enjoyable as the Indian batting.

What also helps is the fact that in Test matches, the pitches, drop-in or otherwise, are a little more bowler friendly, unlike ODI matches where some of the pitches are like Mumbai’s cemented Marine Drive or even more aptly the Khan Abdul Ghaffar Khan Road, which is better known as the Worli Seaface and where I ideated a bulk of this piece.

Second, there are no limits to the way a captain can place his fielders. He is free to place all his fielders on the boundary line, if a batsman is going crash, boom and bang. Fielding restrictions make many a modern day batsman look so much more better than he actually is.

Oh and in Test cricket boundaries are not brought in, or at least not as much as they are in 50 over and 20 over cricket, where many a mishit by batsmen goes for a six. Hence, finger spinners have a better chance in Test cricket.

And finally, I love the slowness with which the game unfolds and builds pace. On a good day, watching Test cricket is like reading a great Scandinavian police procedural where things unfold at a leisurely pace, the story builds up and then it climaxes with every random bit coming together.

Like yesterday’s Test match, if Cheteshwar Pujara hadn’t taken all the blows and tired out the Aussie bowlers, they wouldn’t be bowling the lollypops they did later in the day, in particular Mitchell Starc. Imagine, Josh Hazelwood finally bowled a full toss which Rishabh Pant straight drove for four and India won the game.

And before that, if Washington Sundar and Shardul Thakur hadn’t put on the 123 runs they did, there would have been no chance of the world watching the heroics of Shubman Gill and Pant.

Of course, all this needs time and the mental energy to constantly follow the game over five days or the time that it lasts, and rise and fall with its ups and downs. How do you do that while holding on to a proper job? How do you invest your emotions in cricket 100%?

One reason why the recent India-Australia series has been so closely followed is because most people are still working from home and given that there is always an opportunity to switch on the TV and watch the game, while pretending to work. I am really not sure if the series would have been as exciting as it has turned out to be, if covid hadn’t forced people to work from home. Test cricket, unlike ODI cricket, needs a lot of attention. And attention and being at office don’t always go together.

All this comes from a true blue Indian Test cricket fan. I don’t watch tennis simply because no Indian really plays the singles game well enough. I don’t watch football either because I find it hypocritical, living on Linking Road in Mumbai and supporting Liverpool or living in Malleswaram in Bengaluru and going gaga over Manchester United.

In the end, the India Australia Test series has led to a lot of talk about the revival of Test cricket. But that is not going to happen simply because people don’t have the time. The rat race, even though at the end of it you are still a rat, is more important, and why shouldn’t it be.

So that still leaves me with the memories and memories are all I have. And as Pant hit the winning boundary, which I later realised Sanjay Manjrekar on air thought was just a single run, Bade Ghulam Ali Khan sahab was still singing ka karun sajni aaye na balam.

Test cricket and Khan sahab where both on a loop!

10 Things You Need to Know About Indian Real Estate in 2021

If you are the kind who follows the business media closely, you would probably be thinking that for the last few months all people have done across India is buy homes to live in. But is that really true? The short answer is no, though sales did pick up during October to December 2020, in comparison to the three month period before that. But whether that was pent up demand or genuine demand coming back, only time will tell.

A thriving real estate sector really helps the overall economy grow at a fast pace. But given the mess that the Indian real estate sector has been in for many years, and the fact that the deep state of Indian real estate won’t allow market forces to work to help clean it up, that isn’t really going to happen.

Let’s look at the issue in more detail.

1) As per the annual roundup of residential real estate published by PropTiger Research, sales in 2020 contracted by 47% to 1.83 lakhs across eight large cities (Delhi NCR, Mumbai, Pune, Ahmedabad, Chennai, Bengaluru, Hyderabad, Kolkata).

In short, 2020 was a bad year for real estate. Having said that, sales during October to December 2020 picked up and 58,914 units were sold, which was 68% more in comparison to the number of units sold during July to September 2020. In comparison to October to December 2019, sales were down 27%, during the period.

Of course, the real estate sector wants us to believe that demand is back and all is well with the sector. Nevertheless, this jump in sales can be because of pent up demand. Whether it sustains in the months to come remains to be seen. This is an important caveat to keep in mind.

2) More than half of these sales have happened in Mumbai and Pune. The reason offered for this is the cut in stamp duty carried out by the state government. The Maharashtra government cut the stamp duty applicable on real estate transactions from 5% to 2%. This was applicable until December 31, 2020.

The stamp duty cut driving up builder sales, is true to some extent. Given that the price of an apartment in a city like Mumbai runs into crores, even a 3% saving on the price runs into a decent amount of money. But more than the stamp duty cut, a substantial drop in prices, especially for homes priced at more than Rs 2 crore, is the main reason for the sales in the city picking up.

Independent real estate expert Vishal Bhargava has pointed this out in the past in his columns (Those who like to follow Mumbai’s real estate scene, should seriously read all that Vishal writes).

Of course, you haven’t read about this in the mainstream media simply because the mainstream media depends on advertisements from real estate companies and needs to keep driving the notion that real estate prices don’t fall, over and over again. (Another reason you need to support my work).

One reason for a fall in prices is the fact that businessmen who run small and medium enterprises have been facing a tough time since covid broke out. And they are looking at alternate avenues to raise money to keep their businesses going. This includes selling the real estate assets they have accumulated in the past. There is some distress sale as well.

Also, other than Mumbai and Pune, the other six cities account for less than half the sales. This tells us clearly that real estate sales in these cities are at best sluggish.

3) The clearest trend in the PropTiger data is that 48% of the sales have been for apartments selling at a price of less than Rs 45 lakh. What this tells us is that high prices remain the biggest challenge of owning a home in India. It also tells us that while home prices haven’t really fallen, on the whole across India, despite the lower demand, the demand that remains is primarily at the lower end of the price spectrum. Hence, the market has corrected itself in its own way, despite home prices not coming down in absolute terms. This is an important lesson that the real estate industry needs to learn.

Also, 74% of the sales have happened for home prices of less than Rs 75 lakh.

4) As far as prices are concerned, the PropTiger report points out: “Weighted average prices for new launched projects across the top-eight cities remained stagnant in the past few quarters, with prices moving in close ranges.”

This is something that is also reflected in Reserve Bank of India’s 10 city house index, though the cities tracked by this index are not the same as the cities tracked by PropTiger.

Source: Centre for Monitoring Indian Economy.

The cities tracked by the RBI’s 10-city house index are Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Ahmedabad, Lucknow, Kanpur, Jaipur and Kochi. The index tells us that the average one-year return of owning real estate in India during the period July to September 2020, stood at 1.13%. This is the lowest since the index came into existence. The index also tells us that the return on real estate during 2020 has been marginally negative.

What this means is, and as I have often said in the past, Indian real estate is going through a time correction and not a price correction. The inflation seen over the last two years has been around 6% per year on an average. This means in real terms, the prices have already corrected by more than 12%, over a two year period.

5) This trend is likely to continue given the huge amount of inventory that remains piled up with builders. The overall inventory stock is at 7.18 lakh units across eight cities as per PropTiger. It has come down from 7.91 lakh units in 2019, simply because builders aren’t launching as many new projects as they used to.

Having said that, with the sales slowing down, at the current sales pace it will take around 47 months to clear the remaining inventory. Even though all this inventory is not ready to move in, a significant portion is. Also, it is worth remembering that the prospective buyers have a choice when it comes to buying a home. Over the years, investors across the country have ended up buying a huge number of homes in the hope of a price appreciation. Many of these homes have remained locked and are available for sale.

As Bhargava wrote in a recent column: “Resale transactions are traditionally 2/3rd of the market.” Even if this proportion were to come down, resale transactions of locked homes will continue to form a significant chunk of the market, making it difficult for builders to cut down their inventory quickly. Also, even if builders don’t offer ready to move in homes, there is a significant supply that will keep coming in from individuals who have bought real estate as an investment over the years.

6) Homes priced below Rs 45 lakh form 48% of the inventory. What does this tell us? It tells us that the real demand for homes is at a price even below Rs 45 lakh, probably below Rs 25 lakh. This is something that the builders need to keep in mind. It may not work in a city like Mumbai, where land available is limited and expensive, but it will definitely work for the other seven cities that PropTiger tracks and other parts of India, where cities can expand in all directions and land is really not an issue.


7) It is worth remembering here that builders have benefitted because of the Reserve Bank of India allowing banks and non-banking finance companies, to restructure commercial real estate loans.

As former RBI governor Urjit Patel writes in Overdraft—Saving the Indian Saver:

“In February 2020, ‘living dead’ borrowers in the commercial real-estate sector – under a familiar guise (‘a ghost from the past’, if you will) viz., ad hoc ‘restructuring’ – have been given a lifeline. It is estimated that over one-third of loans to builders are under moratorium.”

Patel does know a thing or two about banks and lending and hence, needs to be taken seriously. It remains to be seen for how long will the RBI continue supporting the builders. The longer, the RBI supports the builders, the longer they can hold on to a significant price cut. This also means that inventory will take longer to clear and home prices will continue to stagnate. It is all linked.

8) At a macro level this means that the ability of real estate to create jobs for the unskilled and the semi-skilled, will continue to remain limited. It is also worth remembering that real estate as a sector can have a huge multiplier effect on the overall economy.

The real estate sector has forward and backward linkages with 250 ancillary industries. This basically means that when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well.

If this were to happen, the Indian economy would really benefit in the post-covid times. But sadly it won’t, given that the deep state of Indian real estate which includes, builders, banks and politicians, will make sure that the sector is continued to be treated with kids gloves and any problems which could lead to a price cut, are kicked down the road. Trying to maintain the status quo in the sector is not helping the Indian economy.

9) Dear reader, some of you by now must be like all this gyan is fine, but tell me one simple thing, should I buy home or should I hold on to my money. The answer as always is, it depends. It is worth remembering here, that what we can possibly do with our money is a very individual thing.

If you are looking to buy a home to live in and have the capacity to pay an EMI and arrange for a down-payment, then this is a good time as any to buy a home. Owning a house has its own set of advantages. Parents and in-laws feel you have settled in life. There is no danger of the landlord acting cranky. And once you have children it gives them some kind of stability with friends, activities as well as the school they go to. Of course, address proofs don’t need to change, every time you move house.

Having said that do keep in mind that we live in tough times and the negative economic impact of covid is yet to go away. Also, there can be further cycles of the spread of the virus. Before taking on a home loan, ensure that you have some money in the bank to be able to continue paying the EMI in case you lose your source of income.

When it comes to investing in a house, it continues to remain a bad idea on the whole. Of course, there will always be some good opportunities and some distress sales happening.

10) Finally, everyone who makes a living out of selling real estate will spend 2021 trying to tell us that demand is coming back, people are buying homes, new trends are springing up and all is well.

As PropTiger points out:

“By making bare the limitations involved in other investment assets, the pandemic has forced people to rethink their investment strategies, tilting it in favour of home ownership.”

This is basically rubbish which has been written well. Why would anyone in their right mind during tough economic times, invest a large part of their savings and/or take on a large loan to buy an illiquid asset?

Some people who can afford it, may have definitely bought new homes in order to adjust to the new reality of work from home, but beyond that the proposition that PropTiger is making, remains a difficult one to buy.

If it were true, some of the massive amount of easy money that is currently floating around in the financial system, would have gone into real estate as well. But given that sales have crashed 47% during 2020 tells us that it clearly hasn’t.

In fact, the outstanding home loans of banks between March 2020 and November 2020 have gone up by just Rs 44,463 crore. This is around two-fifths of the increase (38.7% to be precise) in outstanding home loans of Rs 1,14,636 crore seen between March 2019 and November 2019. This is despite the fact that home loan interest rates have come down to as low as 7%.

So, people are generally being careful when it comes to buying a home by taking on a loan and that is the right strategy to follow at this point of time.