Farm loan waive offs are really not a solution, only temporary relief


On June 11, 2017, Devendra Fadnavis, the chief minister of Maharasthra, decided to follow his Uttar Pradesh counterpart, Yogi Adityanath, in waiving-off loans to farmers in Maharashtra. The loans of small and marginal farmers have been waived off with immediate effect.

As far as other farmers are concerned, a committee has been set up to decide on a criteria for a further waive off. Initial estimates being made in the media suggest that this loan waiver will cost the Maharashtra government anywhere between Rs 25,000 crore to Rs 30,000 crore.

The union finance minister Arun Jaitley has refused to finance farm loan waive offs of the state governments. Given this, the government of Maharashtra will have to finance this waive off on its own, in order to repay the banks which have given these loans.
How will this impact the finances of the government of Maharashtra? In 2017-2018, the government of Maharashtra was expected to run a fiscal deficit of Rs 37,789 crore or 1.53 per cent of the GDP. Fiscal deficit is the difference between what a government earns and what it spends. (The source of all the numbers reflecting the financials of the Maharashtra government is

The loan waive offs to the farmers is expected to cost the farmers Rs 25,000 crore to Rs 30,000 crore. The state will have to finance this through borrowing more and this will add to the fiscal deficit of the state. At the upper level of Rs 30,000 crore, this would mean that the fiscal deficit would jump to Rs 67,789 crore or 2.74 per cent of the state gross domestic product (GDP), if everything else remains the same.

Even with the farm loan waiver the state’s fiscal deficit will be well within the 3 per cent limit that had been prescribed by the 14th Finance Commission. Having said that this borrowing will not do any good to the overall borrowings of Maharashtra.

In 2017-2018, the total debt of the government of Maharashtra is expected to be a little over Rs 4.13 lakh crore. The farm loan waiver will add another Rs 30,000 crore to this. In absolute terms, Maharashtra is the most indebted among all states in the country.

Though when expressed as a percentage of the state’s GDP, this comes to around 18 per cent of the state’s GDP, which is not very high in comparison to other states.

While the finance minister Arun Jaitley has stayed away from financing the farm loan waive offs of state governments, the question is does it really matter? The central government actually guarantees the debt taken on by the state government. Hence, in effect, the borrowings of the state governments are also effectively liabilities of the central government.

The only thing that Jaitley’s stance does is that it keeps the fiscal deficit of the central government under control. But the overall fiscal deficit of the central government and the state governments does go up, and that is the figure that matters.

The overall fiscal deficit of states has been a reason for worry in the recent past. In 2013-2014, the overall fiscal deficit of the state governments stood at 2.2 per cent of the GDP. This jumped to 3.6 per cent of the GDP in 2015-2016 before falling to 2.9 per cent of the GDP in 2016-2017.

With states like Maharashtra and Uttar Pradesh before it, waiving off loans to farmers, the overall fiscal deficit of the states, will go up again in 2017-2018. More states are expected to follow suit. Demands are already being made in states like Punjab and Tamil Nadu for farm loan waivers. Given that several states have already waived off loans to farmers, other states will find it difficult not to waive off loans, as and when the demands start coming in.

This will push up the overall fiscal deficit of the nation.

When governments borrow more, they crowd out private borrowing and in the process, push up interest rates. While, the likelihood of something like this happening immediately are low because the growth in private borrowing remains slow. But as and when the economy picks up, there will be a problem.

Also, newsreports suggest that farmers have now started defaulting on their loans in expectation of the government of the state that they live in, waiving off their loan. In economics, this is termed as a moral hazard.

The economist and former Vice-Chairman of the Federal Reserve of the United States, Alan Blinder, writing in After the Music Stopped, says that “the central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it”. In this context, it means farmers defaulting on their loans in expectation of them being waived off. It also leads to a deterioration in the credit culture, with farmers being expected their debts to be waived off even in the future.

Also, waive offs do not solve any of the structural problems of Indian agriculture. The biggest problem of Indian agriculture is that it employs many more people than it should. Agriculture employs close to half of India’s workforce and contributes around 14 per cent of the GDP. Clearly, people need to be moved away from agriculture. But for that low-skill jobs need to be created elsewhere, which is not happening.

Further, the average plot size on which agriculture is carried out over the years, has fallen dramatically over the years, making agriculture unviable in many cases. But it’s not easy to buy or sell agri land, given the change in land usage norms, or even otherwise. This makes it difficult for farmers to unlock some value of their land and raise the capital for doing something else.

Also, it does not help that infrastructure to sell and store agriculture produce in the country remains pathetic. Take the case of pulses. 2016-2017 was a year of bumper production in pulses, with the production going up by more than 35 per cent. But with very little storage facilities, farmers have had to make distress sales and the price of pulses has fallen by 19.5 per cent in May 2017, in comparison to the same period last year.

Unless, these wrongs are set right, waive offs of loans to farmers are only going to offer temporary relief to the farmers, and things will be soon back to as they were earlier.

The column appeared in on June 14, 2017

RERA: There’s no way home prices will go up anytime soon


The Real Estate (Regulation and Development) Act, 2016 (RERA), came into force on May 1, 2017. After this those who make their living in the real estate industry have been suggesting that real estate prices will go up in the days to come.

The logic being offered is that this will be because of compliance costs of RERA which the buyers will ultimately have to pay for.

Given that India does not have any data which agglomerates real estate prices at the country level, those connected with the real estate industry can get away with such statements, because no one else has any idea anyway.

Data from PropEquity Research shows that unsold home inventories stood at close to 4.72 lakh units in the top eight cities across India, as on March 31, 2017. These are homes that have been built but not been sold.

During the period January to March 2017, the inventory of unsold homes came down by 3.12 per cent. Despite this fall, the unsold inventory overhang continues to be huge, across the country. Data from PropEquity suggests that overhang is 60 months in Noida, 43 months in Mumbai, 38 months in Chennai and 30 months in Bengaluru.

If this unsold inventory has to be sold, the home-prices cannot go up from where they are, RERA notwithstanding. The fact that so much inventory has accumulated in the first place tells us very clearly that people are not buying homes to begin with. The only reason for this is that homes across urban India are fairly expensive in comparison to the capacity of people to pay.

This is obvious from the rental yield (annual rent divided by the market price of the home). Typically, the rental yield currently varies between 1.5-2 per cent. This basically means that in order to buy a home right now, one has to pay 50 to 67 times the annual rent. This tells us very clearly that it makes more sense to rent a home and at the same time that home-prices are very expensive. Of course, rental housing comes with its own set of issues in India, with insecure landlords being the biggest one.

Data from PropEquity suggests that property prices fell by 1.7 per cent for January to March 2017. This is clearly not enough. If this inventory overhang has to clear, prices need to fall further. What will force the builder’s hand further is that with RERA in place, new launches to raise finance for previously delayed projects or to pay off debt, will not so be easy, anymore.

A careful look at home loan data of 2016-2017 also suggests that home-prices have fallen.

In 2015-2016, only 16.8 per cent of the home loans given by banks were given to the priority sector. A housing loan of up to Rs 28 lakh in a city with a population of 10 lakh or more, which finances the purchase of a home with a price of up to Rs 35 lakh, is categorised as a priority sector housing loan.

In 2016-2017, 23 per cent of the home loans given by banks were given to the priority sector. This basically means that banks are giving out more sub Rs 28 lakh home loans for financing more homes worth less than Rs 35 lakh, than they were in the past.

This basically means that home-prices have either come down or builders are building more of sub Rs 35 lakh homes. Either ways, this is a good trend. It is not so obvious given that no agency agglomerates real estate prices in India at a national level. But the home loan data from banks clearly suggests this.

Last week, Keki Mistry, the bossman at HDFC, the largest housing finance company in the country suggested that given the low interest rates and the time correction of prices that has happened, it is a good time to buy a house.

Of course, for a home loan lender, it is always a good time to buy a house. What does Mistry mean by time correction of prices? He basically means that even though home-prices haven’t fallen much in absolute terms, they have fallen once we adjust for inflation.

It is worth re-stating here that if the builders have to sell off their unsold inventory of homes, they need to cut prices. Even if they manage to hold on to the current prices, they will not be in a position to increase prices, over the next few years. Hence, the time correction of prices is likely to continue. Given this, those who want a home to live-in and are in a position to continue to wait, should do that.

As far as interest rates are concerned, what Mistry forgot to mention is that home loans have a floating rate of interest, which keeps changing. Hence, over the 15-20 year term of a home loan, interest rates can and will vary. And given this, low interest rates initially, does not make much of a difference in the overall scheme of things. What is needed are lower home-prices.

The column originally appeared on  on May 9, 2017

Now that RERA is a reality, should you buy an under-construction property?


The Real Estate (Regulation and Development) Act, 2016, or RERA for short, has come into effect from May 1, 2017.

With this happening, the question on everybody’s lips is, should we buy an under-construction property? If you plan to buy a home to live in, an under-construction property makes sense because it comes cheaper than a finished one. If you plan to buy home as an investment, given that an under-construction property is cheaper, the returns are always better, depending how early in the construction stage you make the investment.

But that it the theoretical part of it. It comes with the assumption that the builder will deliver the property for which you have paid, and he will deliver it on time. The problem is that this does not always turn out to be the case. Many people in the Delhi National Capital Territory region and other parts of the country, have found this out in the last few years.

In the process, they have ended up paying EMIs on the home loans they had taken to fund their home purchase and the rent on the home in which they continue to live in. The homes they had hoped to live in are nowhere in sight.

But all this happened in era when there was no RERA. Now we have RERA. The real estate sector in the country up until now had next to no regulation from the point of view of the buyer. Buying a house required a lot of leap of faith and prayers at the same time.

The RERA essentially has these five basic purposes: a) to make sure that home that has been bought is delivered on time. b) to make sure what has been promised has been delivered with respect to the actual size of the house, the facilities etc. c) to make sure that the money taken from the buyer is used to build what has been promised and is not diverted to something else, as many builders tend to do. They tend to raise money for one project and then use it to finance another project. d) to make sure that the many permissions required to build a housing project are in place. e) to make sure that if any changes are made to the project, they have the approval of the majority of the buyers.

RERA also makes it mandatory for state governments to set up a real estate regulator. As the Act states that: “Any aggrieved person may file a complaint with the Authority [i.e., the real estate regulator of a particular state] or the adjudicating officer, as the case may be, for any violation or contravention of the provisions of this Act.”

What this basically means that if the builder takes the buyer for a ride, he can approach the real estate regulator and hope to set things right. This is precisely why there have been a flood of acche din articles in the media saying how RERA is going to save the day for real estate buyers.

There are multiple problems here:

a) While RERA is a central Act, land is a state subject. Hence, states are allowed to make the operational rules to implement RERA. Given the nexus that prevails between state level politicians and builders, state governments have already started diluting the basic spirit of RERA. In particular, an effort is being made to ensure that the ongoing projects are not brought under the ambit of RERA. This basically means that many buyers who are currently in trouble will not be able to benefit from this Act.

b) Only three states (Maharashtra, Rajasthan and Madhya Pradesh) have set up regulators up until now. Hence, the process of setting up a regulator is going to take some time.

c) It is important to understand that regulators don’t start becoming effective from day one. Take the case of the Securities and Exchange Board of India, the stock market regulator. It was set up in 1992 and in 1994 the vanishing companies scam, one of the biggest stock market scams, happened. This was followed by the Ketan Parekh scam in 1999-2000. Hence, it takes time for regulators to mature.

d) Also, it is important to know that the regulators don’t necessarily bat for the consumers. The Insurance Regulatory and Development Authority(IRDA) of India, the insurance regulator, for a very long time, turned a blind eye to all the misselling carried out by the insurance companies. It kept clearing investment plans which worked well for the insurance agents but not for the consumers who had bought them. The point being whether real estate regulators bat for the consumers or the builders, remains to be seen. Also, this is something that may vary from state to state.

To conclude, there are many practical things which continue to remain unclear as of now. Hence, if you are looking to buy a home to live in, it makes sense to still buy a fully finished one, rather than something which is under-construction. This may mean compromising on the size or the location, perhaps, but what you will get in return is peace of mind. And nothing is more important than that.

The column originally appeared on Business Standard The column originally appeared on Business Standard online on May 3, 2017.

Decoding Cash Withdrawal Fee: Do Private Banks Want Only Millennials as Customers?



If you are the kind who likes to visit his or her bank branch regularly to withdraw or deposit cash, the message from the big three new generation private sector banks (ICICI Bank, HDFC Bank and Axis Bank) is very clear. They do not want you to come visiting their branches. Or at least not very regularly.

Starting March 1, 2017, HDFC Bank, will charge you a minimum of Rs 150 in case you carry out more than four cash transactions (withdrawals as well as deposits) a month in your home branch. In case of Axis Bank and ICICI Bank, the charge has been in effect from early January 2017, when it was re-introduced. While ICICI Bank allows the first four transactions to be free, in case of Axis Bank the limit is set at five transactions.

The move is likely to impact senior citizens and others who are still not used to the idea of withdrawing money from an ATM or carrying out digital transactions using their debit cards, the most.

Also, the banks will charge Rs 5 per Rs 1,000 as a fee in order to allow you to withdraw or deposit cash, once the number of free transactions has been exhausted. This essentially means a charge of 0.5 per cent. This is subject to a minimum charge of Rs 150 for every transaction. Hence, the 0.5 per cent charge actually comes into effect only if you withdraw or deposit more than Rs 30,000 (Rs 150 divided by 0.5 per cent) at one go.

Now what is the logic of having a minimum charge of Rs 150, which is not low by any stretch of imagination? The idea is basically to tell the bank customers to come to the branch only if a substantial amount of cash needs to be withdrawn or deposited, even after the free transactions have been exhausted.

Let’s say you want to withdraw Rs 5,000 from the bank. This would mean paying the bank a charge of Rs 150 or 3 per cent of the withdrawn amount. Hence, it would just make sense to go to the ATM and withdraw the money, free of cost, and not drop-in at the branch.

From the point of view of the bank, this move makes immense sense, given that the cost of servicing a customer at the branch is the highest. A  November 2015 report in The Hindu points out: “On an average, a branch banking transaction costs a bank about Rs 40-50 per customer, while an internet or mobile transaction brings down the costs to Rs 15-30 per customer.”

Also, the move suggests that the new generation private sector banks are only looking for a certain kind of customer, the one who does not want to come to the branch.

As R Gandhi, one of the deputy governors of the Reserve Bank of India had said in an August 2016 speech: “There is a new generation of young people (known as millennials). They have different expectations and their ways of interacting with banks are also different. They prefer not to come to banks for banking services. Rather they would prefer to avail the services through online and social media based platforms.” This is the kind of customer that the new generation private sector banks want.

If you are the kind who likes to visit his bank branch regularly, then you are clearly not welcome at new generation private sector banks. Public sector banks are the place for you.

Post script: Kotak Mahindra Bank, the fourth largest new generation private sector banks, will do the same as the Big three when it comes to cash transactions, from April 1, 2017, onwards. The details can be checked out here.

The column was originally published on Business Standard online on March 3, 2017

Coalgate: Why govt needs to plan for repercussions from SC’s final decision

coalVivek Kaul

More than a week back, the Supreme Court declared 218 coal blocks allocations made to private sector and public sector companies since 1993 as illegal. These blocks were allocated by the government over the years through the screening committee route.
The Court found the process of allocation of these blocks to be suffering “from
the vice of arbitrariness”. Hence, it went ahead and deemed them to be illegal. On September 9, 2014, it reserved its final decision on the matter.
The attorney general Mukul Rohatgi told the Court that the “
illegal allocations must go”. Nevertheless, he also requested that the Court could consider saving 40 coal mines which were already producing coal and six blocks which were on the verge of starting production. “Only a pocket of some 46 units can be saved,” Rohatgi told the Court.
The mines already in operation are expected to produce 53 million tonnes in 2014-2015, or around 9% of the country’s total coal production of around 590 million tonnes. The blocks allocated by the government through the screening committee route are for captive use. Hence, the company owning a mine is allowed to use the coal that it produces for the production of power or steel or cement. Any extra production that is not used needs to be handed over to the local subsidiary of Coal India Ltd.
A report in the Business Standard points out that the coal being produced in the 40 mines already in operation was being used to produce “26,000 Mw of power output and 12 million tonnes of steel.” Hence, it is in the interest of the nation that these mines need to continue production, even after the licenses issued to them are cancelled.
It will not be easy to replace this production by importing coal. Our ports will have a tough time handling this additional quantity of coal that will have to be imported. Over and above that, the Indian Railways is not exactly geared to be able to transport this coal from the ports to different parts of the country where it is required. The added infrastructure that will be required to handle the additional imports cannot be created overnight. Further, sourcing more than 50 million tonnes of coal from the international market will not be easy, and will push up the international price of coal.
And that explains to a large extent why Rohatgi told the Court that these mines need to be saved.
The question to ask here is why are some coal blocks been producing coal and others are not? The straightforward answer is that these blocks were allocated earlier than others and as a result commenced mining coal faster. As Senior counsel Dushyant Dave, appearing for one of the private parties, told the court that if the Court were to distinguish between 46 mines already producing coal or on the verge of producing it and other mines, it “distorts the level playing field”.
The Court will have to keep this factor in mind while making the final decision. If the Court decides to cancel all the coal-blocks then the government needs to ensure that the production in the mines already under operation does not stop. In order to do this Rohatgi suggested to the Court that if all the blocks are cancelled then Coal India should be allowed to operate the mines already under operation. Or the companies which own the block currently should be allowed to operate till the government auctions the mine.
Allowing Coal India to operate seems like a good idea on paper. Nevertheless, a few issues need to be figured out first to help Coal India seamlessly takeover these mines, once their licenses are cancelled. Coal India is a for profit enterprise and hence, it needs to be figured out who will bear the cost of operation during the period Coal India runs these mines. Further, will it be allowed to keep the profits it makes during the period it operates the mines? What if it makes losses on these mines?
As mentioned earlier these mines are captive mines which supply to other units primarily producing coal and power. Hence, during the period Coal India takes over these mines it will have to make arrangements for transporting coal from the mine to the unit where it will be used. These arrangements need to be figured out.
Further, Coal India will have to transfer its own employees to run these mines. Again, a lot of manpower in coal-mines is statutory and cannot be just transferred overnight, until a replacement is found.
Coal India’s production target for 2014-2015 stands at 507 million tonnes. As mentioned earlier, the 40 captive mines already under operation are likely to produce 53 million tonnes in this financial year. This amounts to around 10.5% of Coal India’s production. Hence, the number of employees that Coal India would have to depute to these mines would be a significant number. Given this, if the government is serious about this option, it should start with the groundwork on this front without waiting for the final decision from the Supreme Court. This can help save time and ensure that the production of coal continues.
Over and above this, companies which have been operating the mines have already invested a significant amount of money into these mines. If these mines are taken away from them, it is bound to put financial pressure on them and in turn, on banks which have loaned money to these companies. Nevertheless, if justice is to be delivered, this is something that cannot be avoided.
To conclude, the government needs to start working on a plan on how it will keep the production of coal going, if the Supreme Court decides to cancel all blocks that were allocated through the screening committee route.
The article originally appeared at on September 11, 2014

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