Analysis

Why are more than 10 million homes vacant in India?


India-Real-Estate-Market

Dear Reader,

If you ever go to New Delhi, try taking a drive through the sub-city of Dwarka and you will see miles and miles of built homes with nobody living in them. You can see a similar sight in large parts of the National Capital Region (NCR) around New Delhi.
In fact, Anshuman Magazine, chairman and managing director of CBRE South Asia Pvt. Ltd., in a recent article pointed out that “around 12 million completed houses” are “lying vacant across urban India”.
A similar point is made by Akhilesh Tilotia in his book The Making of India—Gamechanging Transitions, where he states that India has more homes than households. As he writes: “India’s households increased by 60 million to 247 million from 187 million between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million to 331 million from 250 million. The urban increases is telling: 38 million new houses for 24 million new households.”
And despite this, there is a huge shortage of housing in urban India. As the latest Economic Survey, a document which is released every year a day before the annual budget of the government of India, points out: “At present urban housing shortage is 18.8 million units [i.e. homes].”
So what is happening here? Many of these homes have been bought as investments by people who have “extra” money to invest. A substantial portion (no one knows how much) of this is black money on which taxes haven’t been paid. Hence, homes have been bought but nobody is living in them.
Further, the dynamics of real estate sector in India have so evolved that builders like catering only to the richer segment of the population. Also, the price levels have now gone even beyond this section of the population.
But the shortage in housing is at the lower income levels. “95.6 per cent [of housing shortage] is in economically weaker sections (EWS) / low income group (LIG) segments,” the Economic Survey points out. Tilotia points out that: “70% of the urban housing shortage arises from the bottom four deciles of households whose ability to pay is severely constrained.” He estimates that unmet needs in India are at price points of Rs 0.5-Rs 1 million. The real estate companies due to various reasons are not interested in satisfying this unmet demand.
A recent research report by real estate rating and research firm Liases Foras points out that the average price of a home in the Mumbai Metropolitan Region, as of March 31, 2015, was Rs 1.3 crore. The numbers for Bangalore and Delhi are Rs 86 lakh and Rs 74 lakh respectively. Given these high prices, it is not surprising that the housing demands of a large segment of population are going largely unmet.
Hence, it is not surprising that as per the 2011 Census, 13.7 million households in cities live in slums. The number of people living in these slums is around 65 million and forms around 17.4% of the urban population. As per the Census, Visakhapatnam with 44.1% of its population living in slums comes right at the top. Mumbai, with 41.3% of the population living in slums comes in third. Kolkata with 31.9% of its population living in slums is eight on the list.
Further, the number of people living in urban slums may be understated. This is primarily because the 2011 Census was carried out only in what are known as statutory towns. These are towns which have some sort of an elected local body.
A Times of India newsreport points out that India has a total of 7935 towns. Of this 4041 are statutory towns. The remaining do not have an elected local body. Nevertheless, they fulfil the criteria of being urban, and the Census classifies them as census towns. The census towns were not considered for counting slums. These towns have a total population of more than 5 crore and substantial part of that population is living in slums.
Further, other estimates put the slum population living in Indian cities at a much higher level. A 2012 newsreport quotes S. Parasuraman, director of the Tata Institute of Social Sciences in Mumbai as saying: “Nearly 60 percent of Mumbai’s slum population lives in 8 percent of land.” The Census number as mentioned earlier is at 41.3%. These differences apart, what this clearly tells us is that with so many people living in slums, India has a huge urban housing shortage.
So what is the way out of this? The government needs to start doing something about it sooner rather than later. Maybe it can learn a thing or two from the South Korean government, which in the late 1980s built around 2 million homes of which around 0.9 million were built around the capital city of Seoul, as Tilotia points out.
In order to do this, the government will have to first and foremost sort out the mess that currently surrounds the process of land acquisition. Further, these homes will have to be built on the periphery of cities, backed up by a good transportation system, so that people can travel to work. The outdated floor space index laws controlled by real estate lobbies (which are often fronts for politicians) will need a thorough re-look. These laws essentially deal with how much area can be built-up, given the size of the plot on which a building is being built. So, if the FSI allowed is 2, then on a plot of 1000 square metres, the building being built can’t have a built-up area of more than 2000 square metres.
If all this is not done there will be more trouble ahead, as more and more of Indian population moves to Indian cities, in the years to come. As the Economic Survey points out: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.”
What this means is that if affordable housing doesn’t become the order of the day, the slumification of India will continue. And that is not a happy thought.

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

The column was originally published on BBC.com on May 21, 2015 

One year later: A mixed bag of acche din for the aam aadmi

narendra_modiMost communication that works is essentially so simplistic that even a school going child can understand it. Narendra Modi’s pitch in the 2014 Lok Sabha elections: “acche din aane waale hain, hum Modi ji ko laane waale hain,” was one such example.
It was so good that one year later, people still remember it and given half an opportunity ask: “kahan hain acche din?(where are the happy days?)” That’s the thing with communication which is dumbed down to a level of a school child—it works, but it also leads to people asking questions in the days to come.
On May 26, 2015, the Narendra Modi government will complete one year and it is time to ask that proverbial question: “have the good days come?” In this column I will try answering that question from the point of view of the aam aadmi or the common man.
Inflation as measured by the consumer price index averaged a very high 10.2% between 2007 and 2013. In April 2014, before Narendra Modi was sworn in as the prime minister, the consumer price index inflation was at 8.59%. By April 2015, this number had fallen to 4.87%.
More often than not, the credit for this tends to go to the Reserve Bank of India. But what one needs to keep in mind is the fact that food products constitute nearly half of the consumer price index. And there is no way that the RBI can influence food prices.
Several steps taken by the Modi government helped on this front. One of the first decisions made by the government was to release 5 million tonnes of rice into the open market from the stocks maintained by the Food Corporation of India. News reports suggest that eventually only around 2 million tonnes was sold. But just the news that the government was selling was enough to contain inflation.
Active steps were taken by the government to contain rapidly rising onion prices as well. As Ashok Gulati, former Chairman of the Agricultural Costs and Prices, wrote in a recent column in The Financial Express: “A slew of measures were announced by the government to contain the damage from surging food inflation. It not only restricted exports of onions but also imported onions and dumped them in major onion markets at prices below import cost. It also used the stick and raided many onion traders/hoarders.” And that clearly helped.
Over and above this, the minimum support price(MSP) of rice was raised by only Rs 50 per quintal or 3.8% to Rs 1360. The MSP is the price at which the government buys rice from the farmers, through the Food Corporation of India(FCI) and other state government agencies. This increase of 3.8% was much lower than the average increase of 9% per year in the MSP of rice since 2007-2008.
These measures helped to control food inflation. Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011).
Further, Rahul Gandhi said in a farmer’s rally recently that the Congress government had raised the MSP of rice and wheat, the Modi government hadn’t. What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares. Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most.
Hence, on the food inflation front, the Modi government has been able to deliver acche din for the aam aadmi.
What are the other benefits that the aam aadmi has got over the last one year? In the two budgets that the finance minister Arun Jaitley has presented, the total deductions allowed under some of the most important sections of the Income Tax Act have been increased. The deduction under Section 80C has been increased from Rs 1 lakh to Rs 1.5 lakh. The deduction allowed on a home loan on a self-occupied property has been increased to Rs 2 lakh from Rs 1.5 lakh earlier. The deductions allowed for the payment of medical insurance premium has been increased from Rs 15,000 to Rs 25,000.
The Modi government has also been very aggressive on the financial inclusion front with the Jan Dhana Yojana. The government claims to have opened 15 crore bank accounts which allow account holders an overdraft of Rs 5000. This is a near saturation coverage. Nevertheless, 70% of these accounts remain dormant. What this tells us is that the communication around the Jan Dhana Yojana still remains weak.
While this is a good move at the individual level, the scheme clearly isn’t financially viable and the government hasn’t made it clear as to who will bear the cost of servicing all these accounts. As Diwakar Gupta, former Managing Director of the State Bank of India, told Sreenivasan Jain of NDTV, no-frills banking “will never be profitable for banks. SBI has opened 3.6 crore accounts and the balance in them is Rs1,400 crore. So, it’s an average of Rs 400 per account. The bank on Rs 400 a year will make Rs 12. The cost of just putting it (the account ) on the core banking system, answering few questions, depositing, withdrawing, paying, reconciling all are significantly higher.”
Further, interest rates and EMIs have fallen a little over the last one year, but not significantly enough to get people to borrow and spendi at the same rate as they were in the past. Also, affordable housing in cities and town continues to remain a dream. The Economic Survey estimates that the shortage of urban homes stands at 1.88 crore units.
There has been no improvement on this front in the last one year. While, no one expects the government to solve the housing problem in one year, no concrete plan has been put forward either. Also, while the government keeps talking about a crackdown on black money that has left the shores of the country, but there is no talk about a crackdown on the massive amount of black money that lies within the country and a massive amount that continues to be generated.
A large part of this money gets invested into real estate, thus driving up prices. A FICCI report on black money published in February 2015 points out: “The Real Estate sector in India constitutes for about 11 % of the GDP15 of Indian Economy, as these transactions involve high transaction value. In the year 2012-13, Real Estate sector has been considered as the highest parking space for black money.”
Only, once this nexus is broken down will affordable housing become the order of the day. Further, while corruption at the top-echelons of the government may have fallen, at lower-levels it is business as usual. Also, one of the main things promised in Modi’s campaign was the creation of jobs. Things are yet to move on that front.
Long story short—Narendra Modi has managed to deliver on some of the “acche din” hype that it had managed to build in the run up to the 2014 Lok Sabha elections. It has fallen short on many fronts as well. But given the hype was so simplistic that was inevitable.

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

The column originally appeared on Firstpost on May 21, 2015

Now a govt red carpet for those who have black money hidden abroad

rupee
Last week the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015. This Bill up until now was referred to as the foreign black money Bill. Now it has become an Act.
The Act allows the government to tax those who have undisclosed foreign income and assets at the rate of 30%. No exemptions or deductions as per the Income-Tax Act 1961 will be allowed. Over and above a tax of 30%, there will also be a penalty of three times the amount of tax.
However, the government plans to offer a compliance window. This window will allow those with undisclosed foreign assets and income to declare them, pay a tax of 30% and a penalty of 30% and not face any prosecution.
In fact, The Economic Times reported on May 18, 2015 that: “The income-tax department is likely to set up two centres, in Delhi and Mumbai, to process claims from those with dodgy overseas wealth to declare.”
The cells in Mumbai and Delhi will be manned by senior tax officials whose job will be to ensure that those who come out and declare their undisclosed foreign income and assets are not harassed. It is being suggested that individuals will be allowed a period of two months to declare their undisclosed foreign income and assets and up to a period of six months to pay the tax on it.
In simple English, what this means is that the government is essentially laying out a red carpet for those who haven’t paid income tax on the money that they have earned over the years, created black money and managed to divert that money out of the country.
The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.”
The wealth that has been accumulated in this way “may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption,” the white paper goes on to suggest.
Of course this wealth that has been accumulated through tax evasion has “neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”
And it is these people who will now be welcomed with open arms by the government. The justification offered will be that “but, we are fining them 30% over and above the 30% tax”. Yes, but how does this decision make look the minuscule portion of Indians who have been paying their income-tax honestly over the years.
The annual report of the ministry of finance points out that in a country with a population of more than 120 crore, the number of income tax assessees in the 2013-2014 stood at a mere 4.7 crore. And by laying out the red carpet for the tax cheats, what message is the government sending out to the 4.7 crore individuals who have been paying their taxes? This is not the best way to go about trying to increase the number of people who pay income tax. In fact, the annual report of the ministry of finance points out that between April and December 2014, just 24.35 lakh fresh assessees were added. The point being that the rate of growth of tax compliance is anyway very slow and on top of that if the government keeps welcoming those who have black money, what future does tax compliance really have in this country?
Instead of welcoming the tax cheats, the government should be naming and shaming them. Steve Levitt and Stephen Dubner make this suggestion in an American context in their new book When to Rob a Bank…And 131 More Warped Suggestions And Well Intended Rants: “Maybe it’s time…to launch a War on Tax Cheats. What if they could demonize the tax cheats so thoroughly, emphasizing that the “tax gap” (the difference between taxes owed and money collected) is about the size of the federal deficit…Maybe they could put pictures of tax cheats on milk cartons, on flyers at the post office, even on America’s Most Wanted.” Why can’t something along similar lines be tried in India, instead of bailing out the tax cheats?
Further, between April and November 2014, the income-tax department seized assets worth Rs 538.23 crore only. This is hardly anything given the huge amount of black money floating around in the country. And given this, the government should be concentrating its resources in unearthing black money in the country, instead of welcoming those who have accumulated black money over the years.

The column originally appeared on The Daily Reckoning on May 20, 2015

When US can’t get its black money back, does India have a chance?

rupee
Over the week, the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015, which up until now has been better know as the foreign black money Bill. Now it has become an Act. The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.”
In my past columns on DailyO I have maintained that while chasing black money that has left the shores of the country might seem possible it is not feasible. The reason for this is fairly simple. The money could be absolutely anywhere in the world.
In India, we like to believe that the money is stashed away in Swiss Banks. But that isn’t the case. Data released by the Swiss National Bank, the central bank of Switzerland, suggests that Indian money in Swiss banks was at around Rs 14,000 crore in 2013. In 2006, the total amount had stood at Rs 41,000 crore.
There are around 70 tax havens all over the world and the black money that has left the shores of this country could be stashed almost anywhere. An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland, beyond the reach of any tax authorities. A 2013 estimate in The Economist pointed out: “Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.” Some of this money definitely originated in India.
And given that the black money that has left India could be absolutely anywhere, chasing it isn’t the best way of going about things. There would be more bang for the buck by concentrating on black money that is still in the country.
This, in short is the argument I have made against trying to get the black money that has left the Indian shores, back to India. A standard response to this on the social media is that if the United States can do it why can’t we. So here is the answer.
The foreign black money Act passed by the Parliament this week is inspired by the Foreign Account Tax Compliance Act (FATCA) of the United States. This Act was passed in 2010. The Act was brought in after it was revealed that Swiss banks were helping American citizens hide their earnings.
As per the Act, American taxpayers are required to file a new form (Form 8938) declaring their foreign financial assets with a value greater than $50,000. This form needs to be filled up along with the annual tax return. If the taxpayer does not file the Form 8938 , he can face a fine of $10,000, which can go up to $50,000 for subsequent offences. Any tax payer who pays lower tax because he does not disclose foreign financial assets could be subject to a penalty of 40%.
The provisions of the foreign black money Act passed by the Parliament are along similar lines. One of the provisions of the Act allows undisclosed foreign income as well as assets to be taxed at the rate of 30%, without allowing for any exemptions or deductions which are allowed under the Income-Tax Act, 1961. This will be accompanied by a penalty equal to three times the amount of tax.
Getting back to FATCA—as per the Act, every financial institution outside the United States needs to figure out whether it has American citizens as clients. Having done that it needs to report the information to the Internal Revenue Service of the United States.
Due to this, the conventional view now seems to be coming around to the idea that tax havens are now cooperating with the United States and handing over information regarding their clients to the United States.
Hence, the question is, if the United States can do it, why can’t India? And the answer lies in the fact that the United States is a global superpower. In 2013, the military expenditure of the United States amounted to $640 billion. This was nearly 36.5 percent of the global military expenditure of $1.75 trillion. In comparison, the total budget for the Indian defence services in 2015-2016 is around $2.5 billion.
With so much money being spent by the United States, the military apparatus of the United States can drop bombs anywhere in the world at a few hours’ notice. As David Graeber writes in Debt: The First 5000 Years: “The U.S. Military … maintains a doctrine of global power projection: that it should have the ability, through roughly 800 overseas military bases, to intervene with deadly force absolutely anywhere on the planet.” It is this military might of the United States that has led to the tax havens cooperating with it.
Nevertheless, as the Americans like saying: “show me the money”. Or to put it simply, how much revenue has the Internal Revenue Service of the United States managed to collect because of FATCA? Jane G. Gravelle writing in a research paper titled Tax Havens: International Tax Avoidance and Evasion for the Congressional Research Service estimates that FATCA is expected to “have a relatively small effect, $8.7 billion over 10 years, when compared with estimated costs of international evasion of around $40 billion a year.” So on an average the United States expects to recover $870 million per year, when the international tax evasion by Americans is around $ 40 billion per year. Hence, the recover rate for FATCA is 2.2%.
What this clearly tells us is that even the United States does not expect much out of FATCA, initially. This, despite being the only global superpower. In this scenario, how much chance does India have of recovering the black money that has left its shores?
As Bob Dylan once said(or should I say sang): “The answer my friend is blowin’ in the wind”.

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

The column appeared on DailyO on May 14, 2015

Less than 5.8% of farmers benefit from the minimum support price system

agriculture

Towards the end of April, the Parliament’s Committee on agriculture made a rather bizarre commendation to the government. “The committee urged that steps should be taken to fix remunerative pricing with 50% profit margin over cost of production for all the 24 crops without any further delay as recommended by this committee,” the committee said.
What does mean? The committee has basically recommended that the government should ensure that the minimum support prices that it declares for various agricultural crops should give the farmers a profit of 50% over their cost of production. The government declares minimum support prices for 24 agriculture crops which include rice paddy, wheat, jawar, bajra, maize, ragi, pulses, oilseeds, copra, cotton, jute, sugarcane, and tobacco.
Even though it declares the minimum support price for 24 crops it primarily buys only rice and wheat from farmers through the Food Corporation of India(FCI) and other state procurement agencies.
Why do I say that the suggestion of the Parliament’s Committee on agriculture is bizarre? The answer to this question lies in the Report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar Committee Report). The report makes some interesting points using data from the 70th Round of NSSO (National Sample Survey Organisation) on The Key Indicators of Situation of Agricultural Households.
As per this survey there are 90.2 million agricultural households in India. From this, during the period July to December 2012, only 18.67 million households reported selling paddy. Of this number only 13.5% sold to a procurement agency (i.e. either FCI or other state procurement agencies). This essentially means that only 2.52 million households sold paddy to the procurement agency. Of this who sold to a procurement agency only 27% of their sales were at the minimum support price.
Between January and June 2013, 5.46 million households reported selling paddy. Of this only 10% or 0.55 million households sold to a procurement agency. And of those who sold to a procurement agency only 14% of their sales were at the minimum support price.
The situation is similar when it comes to wheat. As per the survey, between January and June 2013, 13 million households reported the sale of wheat, but only 16.2% reported to have sold wheat to a procurement agency. Of those who sold to a procurement agency, only 35% of their sales happened at the minimum support price.
So what does this mean? The total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies works out to 5.21 million. As the Shanta Kumar Committee Report points out: “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013).”
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, as mentioned earlier not all wheat and paddy is being sold to procurement agencies at the minimum support price.
After taking these factors into account, the number of direct beneficiaries from the minimum support price announced by the government and the procurement system set up to buy paddy and wheat, comes out to be even lower than 5.8% of the agricultural households.
As the Shanta Kumar Committee Report puts it: “The direct benefits of procurement operations in wheat and rice, with which FCI is primarily entrusted, goes to a miniscule of agricultural households in the country.”
Further, the procurement benefits large farmers in a few selected states like Punjab, Haryana, Andhra Pradesh and lately from Madhya Pradesh and Chhattisgarh. Large farmers are the luckiest of the lot—they have a ready made customer in the form of the government for what they produce and they don’t need to pay any income tax either. What muddles the situation further is that in some states, the procurement agencies buy nearly 70-90% of the wheat and rice and literally crowd out the private sector.
This crowding out leads to food prices going up. Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares.
Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most. Didn’t the Parliament committee on agriculture consider this, before making the recommendation that it did? If yes, why do they want to make things difficult for a major section of the population, by recommending what they have? Or are MPs too close to large farmers that benefit the most from rising minimum support prices?
The grain bought by the government is sold through the public distribution system (PDS). This grain is sold at extremely subsidized prices. Rice is sold at Rs 3 per kg and wheat is sold at Rs 2 per kg. The trouble is that the PDS is terribly leaky. As per NSSO 2011 the PDS leakage is 46.7%. This means that of every 100 kgs of grain distributed through the PDS, 46.7 kgs hits the open market. This is not surprising given the huge gap in prices between grain sold through the PDS and that sold in the open market. In fact, in some states the leakage is as high as 70-90%.
And this led the Shanta Kumar Committee to ask: “Given such large leakages, one must question the reasons behind this, and whether it is worth keeping FCI pouring grains into a system that fails to deliver.”
To conclude, the question to ask is—what is the point in keeping such a wasteful system going? The trouble is that its become too much of a holy cow for the government to do anything about.

The column originally appeared on The Daily Reckoning on May 12, 2015