Of budget, black money and housing

India-Real-Estate-MarketVivek Kaul

Arun Jaitley’s second budget as finance minister was slightly high on the policy front. One of the things that Jaitley talked about was tackling the black money menace in the country. This was the first time anyone from the Modi government has talked comprehensively about the black money within the country. Before this, the entire focus was on getting back the black money which has left the shores of the country. Focusing on black money in the country makes more sense simply because it would be easier to recover.
Jaitley announced a spate of measures in the budget to curb domestic black money (though he announced many more to curb black money leaving the country). He said: “a new and more comprehensive Benami Transactions (Prohibition) Bill will be introduced in the current session of the Parliament…This law will enable confiscation of benami property and provide for prosecution, thus blocking a major avenue for generation and holding of black money in the form of benami property, especially in real estate.”
The finance minister also said that the Income Tax Act would amended to “prohibit acceptance or payment of an advance of Rs 20,000 or more in cash for purchase of immovable property.” How will this provision be implemented remains to be seen.
Further, quoting of the permanent account number(PAN) has been made mandatory for purchase or sale exceeding the value of Rs 1 lakh. This is a good move. In fact, it would have been an even better move if Aadhar cards were made compulsory for real estate transactions, given that it is a tad easier to fudge the PAN card in comparison to the Aadhar card.
The ministry of finance now also plans to use technology to improve tax enforcement. As Jaitley said: “To improve enforcement, Central Board of Direct Taxes(CBDT) and Central Board of Excise and Customs(CBEC) will leverage technology and have access to information in each other’s database.”
The move to leverage technology is very interesting. In the February 2013 budget speech, the then finance minister P Chidambaram had estimated that India had only 42,800 people with a taxable income of Rs 1 crore or more. Contrast this with the fact that more than 30,000 luxury cars are sold in India every year. Both Audi and Mercedes sold more than 10,000 cars in India in 2014.
What this clearly tells us is that a lot of Indians are not paying their taxes properly. And technology can help in narrowing down who these people are.
Income on which taxes are not paid ends up as black money. A lot of black money that is generated finds it’s way into real estate in
benami form. This is the major reason why real estate prices do not fall, despite sales having come to a standstill for a while now.
Further, once black money enters real estate it tends to generate more black money. Consider this—an individual buys a house for Rs 50 lakh, of which he pays 30% or Rs 15 lakh in black. The proportion could be higher or lower depending on which part of the country the individual is in. The black money portion tends to be on the higher side in the national capital territory. The same cannot be said about cities like Bangalore.
Getting back to the example. Let’s say a few years later the price has gone up to Rs 1 crore. The individual now sells the home and gets Rs 30 lakh in black, which is 100% more than what he started with. This amount then finds its way back again into real estate.
This phenomenon has led to a situation where a huge portion of the homes being built are just being built so that investors can hide their black money. This essentially ensures that those who want to buy homes to live in simply can’t afford them. As the latest Economic Survey points out: “The widening gap between demand and supply of housing units and affordable housing finance solutions is a major policy concern for India. At present urban housing shortage is 18.8 million units of which 95.6 per cent is in economically weaker sections (EWS) / low income group (LIG) segments and requires huge financial investment to overcome.” The housing shortage in rural India stands at 43.1 million homes.
A recent report by Liases Foras, a real estate research and rating company, put the weighted average price of a flat in Mumbai at Rs 1.32 crore. For the National Capital Territory the price was around Rs 75 lakh. Even in a smaller metro like Pune, the average price was around Rs 57 lakh.
Most Indians can’t afford these kind of prices. Akhilesh Tilotia in his new book
The Making of India, makes an estimate of the price range at which homes will be affordable: “A large portion of the unmet housing needs are at an economic value of Rs 5-10 lakh. Assuming that households of five members can crowd into space of between 250-400 sq ft, housing stock in the range of Rs 1,250-Rs 4,000 per sq ft will be needed.” What this clearly shows is that homes that are currently being built in cities are way beyond what most people can afford.
And this explains why “real estate and ownership of dwelling” constitute only “7.8 per cent of India’s GDP in 2013-14”. In comparison, as data from the National Housing Bank shows, China was at 20%, Malaysia at 29% and the United States at 81%. This number needs to go up in the years to come. And the only way that is possible is if affordable homes become available.
In order to ensure that the nexus between real estate and black money needs to be broken down, so that builders start making homes for people to live in. Whether Jaitley’s efforts bear some fruit remains to be seen, given that many real estate companies are essentially fronts for politicians to hide their ill-gotten wealth.
The last financial year’s Economic Survey made a very interesting point: “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.” If affordable homes are not built, where will all these people live?

The column originally appeared in the Daily News and Analysis dated Mar 3, 2015 

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected]

Pahlaj Nihalani : Living in glass houses and throwing stones at others

pahlaj
Pahlaj Nihalani, the censor board chief, has aspirations of becoming the conscience keeper of the nation. The former film producer has issued a list of Hindi and English cuss
words that will be banned from films.
Earlier this year Nihalani had told
The Times of India that “there is too much nudity on television and internet and it should be controlled,” going beyond his brief as the censor chief. He had followed this with an interview to The Hindu in late January where he had said that he did not “mind being called conservative” if it was “in national interest”. “The censor board is very liberal. But what is the modern generation watching? We are giving them the license to see anything. How is this projecting our culture?” Nihalani had added in the interview.
The irony is that all this comes from a man who gave Hindi cinema some of its crassest songs. Nihalani produced a film called
Andaz in 1994, which was directed by David Dhawan. The movie had songs with lines like khada hai khada hai khada hai, roz karenge hum ku ku and main maal gaadi tu dhakka laga (later changed to ye maal gaadi tu dhakka laga). Any one who understands a little bit of Hindi will know what exactly these songs are trying to suggest. They clearly were not in national interest.
Before
Andaz, Nihalani had produced Aankhen which released in 1992. This movie had a song with the line “khet gayil baba bazaar gayil ma, akeli hu ghar ma tu aaja balma”. The song starts with the heroine Shilpa Shirodkar lifting her ghagra to reveal her thigh. It is followed by the heroine and a string of women extras gyrating their chests and doing other suggestive movements.
Aankhen also had another superhit song called O Lal Dupatte Waali Tera Naam to Bata. This song had the heroes Govinda and Chunky Pandey chasing the heroines Ritu Shivpuri and Raageshwari. Somewhere midway through the song the heroines sing the line “har ajnabi ke liye ye khidki nahi khulti” and in a very suggestive way slightly raise the hemline of their white mini skirts. This clearly wasn’t a good projection of Indian culture that Nihalani now seems to be so passionate about now. Nihalani might defend himself by saying that these songs were a part of a phase in Hindi cinema where double meaning songs ruled. Subhash Ghai’s Khalnayak had the superhit choli ke peeche kya hai. Sawan Kumar Tak’s Khalnayika went a step further and had a song called choli ke andar kya hai. Prakash Mehra’s Dalal had chadh gaya upar re aatariya par lautan kabootar re. So, Nihalani in a sense was doing what everyone else was doing during that era.
But all these years later he has changed, he might tell us. As a line attributed to the British economist John Maynard Keynes goes: “When the facts change, I change my mind. What do you do, sir?”
Nihalani might have changed his mind but he needs to do a few things to change the facts, so that we can believe him. He should re-censor the films he produced and drop the songs which go against Indian culture and national interest, to start with. Further, in this era of remakes, if he ever chooses to remake or sell the rights of his biggest hit
Aankhen, he should insist that the remake won’t have the khet gayil baba bazar gayil ma song. This should set an excellent precedent. Nihalani would be then putting his money where his mouth is.
Until he does that, it is worth remembering a dialogue written by Akhtar-Ul-Iman and spoken by Raj Kumar in the 1965 superhit
Waqt, which goes like this: “Chinoi Seth…jinke apne ghar sheeshe ke hon, wo dusron par pathar nahi feka karte(Chinoi Seth…those who live in glass houses don’t throw stones at others).” Nihalani, being a film producer, would have hopefully heard of this.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])
The column originally appeared in the Daily News and Analysis(DNA) on Feb 17, 2015 

No more Rajagopals

R Gandhi, one of the deputy governors of the Reserve Bank of India (RBI), gave a very interesting speech titled Indian PSU Banking Industry: Road Ahead in Kolkata last week.
As a part of the speech he presented a table (a part of which is reproduced below) which shows how public sector banks (PSBs) are lagging behind their new generation private sector counterparts, on all parameters. 

 Public sector banks New generation private sector banks 
Year201220132014201220132014
Return on Equity 16.5515.319.7115.3816.8117.06
Return on Assets 0.90.80.51.631.761.83
Net Profit Margin 9.258.275.415.3415.816.68
Net Interest Margin 2.842.642.483.223.463.56
Staff Expenses / Total Income 10.7410.4810.998.978.397.96
Source: Reserve Bank of India

The new generation private sector banks generate better returns for their shareholders, operate at better margins and surprisingly even have a lower staff cost as a proportion of the total income they make, in comparison to public sector banks.
While one expects these banks to have done better than public sector banks, when it comes to returns to shareholders as well as operating margins, one did not expect them to have lower staff expenses as a proportion of their total income. That indeed is a major surprise.
There are multiple reasons for this difference in performance. First and foremost, private banks do not have to deal with political pressure to make loans to favoured individuals and companies.
Take the case of Lanco Infratech, a company, whose founding chairman Lagadapati Rajagopal was a member of the last Lok Sabha from the Congress party. This company, as on March 31, 2014, had total loans amounting to a whopping Rs 34,877 crore. Against this the company had an equity of only Rs 1,457 crore, meaning a debt equity ratio of 24:1.
To put in a simple way, the situation is similar to you and I approaching a bank for a home loan for a home priced at Rs 50 lakh. The bank agrees to give us a home loan of Rs 48 lakh and we need to put in only Rs 2 lakh from our end(which is essentially what equity is) to buy the home. This would mean a personal debt equity ratio of 24:1.
Of course, no bank would do this and would ask for a downpayment of at least 20% of the home price or Rs 10 lakh in this case. But public sector banks did not operate in a similar way when it came to giving out loans to crony capitalists. Crony capitalists got away without putting much of their own money at risk.
And the public sector banks are paying for the same now. The financial stability report released by the Reserve Bank of India (RBI) late last month put the stressed advances of public sector banks at 12.9% of their total loans. For private sector banks the same number was at 4.4%.
The financial stability report further points out that: “Among bank groups, exposure of public sector banks to infrastructure stood at 17.5 per cent of their gross advances as of September 2014. This was significantly higher than that of private sector banks (at 9.6 per cent) and foreign banks (at 12.1 per cent).” It is well known that many crony capitalists in India operate in the infrastructure sector. The higher exposure to this sector has led to higher stressed advances as well.
Interestingly, the government conveyed to the public sector banks at a recent retreat in Pune that it would not interfere in their commercial decisions.
“The banks/financial institutions should take all commercial decisions in the best interest of the organization without any fear or favour,” the government said.
If the government sticks to this decision the performance of public sector banks is bound to improve in the days to come. India does not need any more Lanco Infratechs and its Rajagopals. As RBI governor Raghuram Rajan put it in a recent speech, India is “a country where we have many sick companies but no “sick” promoters.” If public sector banks need to do well this needs to be corrected in order to ensure that big business does not take them for a ride in the years to come.
It needs to be pointed out here that employees of public sector banks are selected through highly competitive exams and they are not any lesser than their private sector counterparts. Hence, they have the ability required to figure out which loans to give and which to avoid, if they are allowed to operate on their own without any political interference.
Nevertheless, public sector banks need to put a proper performance appraisal system in place, something that their private sector counterparts already have. As RBI deputy governor Gandhi said in his speech: “The Performance Appraisal System (PAS) needs a complete revamp. Currently the PAS makes no meaningful distinction between individuals for identifying or deploying talent, skills and / or specialisation; nor does it guide determining compensation.”
In fact, stock options play a very important role in retaining and motivating managerial talent to perform better at new generation private sector banks. The government needs to seriously take a look at introducing stock option plans linked to performance, in public sector banks as well.
Further, the government currently owns 25 public sector banks (which includes the State Bank of India and its five associates). There is no reason as to why the government should own 25 banks. It is time that the government got around to selling at least 15 of the smallest banks. That would leave five big banks and SBI and its associates.
The money thus generated could be used to fund a part of the public infrastructure that India badly requires. This topic is a political hot potato and sooner the government starts work on it, the better it is going to be for it.
This will also save the government from another major headache. The PJ Nayak committee report released in May 2014, estimated that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.”
The report further points out that “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.”
This is not exactly a small amount and by selling 15 banks this won’t totally be government’s headache any more. Further, by concentrating on the largest banks, the government can ensure that these banks are better capitalized in the days to come and can strongly work towards government’s projects like financial inclusion.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The article originally appeared in the Daily News and Analysis on Jan 20, 2015

A day ahead, who is Chidambaram fooling?

P-CHIDAMBARAMVivek Kaul 

An important part of finance minister P Chidambaram’s job for a while has been to keep telling us that “all is well” on the economic front.
He continued with this on the last day of the financial year when he said “the Indian economy is now stable and the fundamentals have strengthened.” The statement was in response to 18 questions on the economy posed by former finance minister and BJP leader Yashwant Sinha.
So how strong is the Indian economy? “We have contained inflation. Our biggest success is containing fiscal deficit,” said Chidambaram.
But how do the numbers stack out? In February 2014, inflation as measured by the consumer price index was at 8.1%. It has come down from levels of greater than 10%. The primary reason for the same has been a rapid fall in food prices. Food products make up for around half of the consumer price index. The question is how much credit for the fall in food prices goes to the government? Not much. Also, it is worth reminding here that unseasonal rains and hailstorms in parts of the country have damaged crops, and this is likely to push up prices again.
If we look at non fuel-non food inflation, or what economists refer to as core inflation, it stood at 7.9% in February 2014. This number has barely budged for a while now. Non fuel-non food inflation takes into account housing, medical care, education, transportation, recreation etc.
What about the fiscal deficit? “We will end FY14[period between April 2013 and March 2014] with a fiscal deficit of 4.6%, as planned,” Chidambaram said. Fiscal deficit is the difference between what a government earns and what it spends.
But how has this target been met? A lot of expenditure has simply not been recognised. Oil subsidies of Rs 35,000 crore have not been accounted for. Estimates suggest that close to Rs 1,23,000 crore of subsidies (oil, fertilizer and food) have been postponed to next year. A March 4 report in this newspaper pointed out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax.
On the income side, public sector banks have been forced to give huge dividends to the government despite not being in the best of shape. Coal India Ltd has paid the government a dividend and a dividend distribution tax of close to Rs 19,600 crore. India has the third largest coal reserves in the world but still needs to import coal. Shouldn’t this money be going to set up new coal mines? Neelkanth Mishra and Ravi Shankar of Credit Suisse point out in a recent report titled 
Elections: Much Ado about Nothing dated March 19, 2014 that “True utilisation in thermal power generation is below 60%, near 20-year lows (reported plant load factor is 65%).” This is because we don’t produce enough coal that can feed into the power plants.
Getting back to Chidambaram, he further said “The CAD has contracted. We have added to reserves. FY14 CAD is likely to be about $35 billion.” The current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances.
This has largely happened because of two things. The government has clamped down on legal gold imports. But anecdotal evidence suggests that gold smuggling is back with a huge bang. This has a huge social cost. Also, over the last few months non gold non oil imports have fallen due to sheer lack of consumer demand. And that surely can’t be a good thing.
Chidambaram also expects “spirited growth going forward”. The finance minister has been spinning this yarn for a while now. In early February he had said that the economy will grow by 5.5% in this financial year.
Growth during the first three quarters of the financial year has been less than 5% (4.4% in the first quarter, 4.8% in the second quarter and 4.7% during the third quarter). A simple back of the envelope calculation shows that the economy will have to grow by 8.1% in January to March 2014, for the Indian economy to grow by 5.5% during 2013-2014. You don’t need to be an economist to realise that this is not going to happen.
Interestingly, in July 2013 Chidambaram had said that “People should remember India continues to be the second fastest growing economy after China.” By January 2014 this statement had changed to ““India remains one of the fast growing large economies of the world.” What happened in between? A whole host of countries in our neighbourhood have been growing faster than us. This includes countries like Cambodia, Philippines, Indonesia, Sri Lanka and even Bangladesh.
Given these reasons, it is fair to say that Chidambaram was cracking an April Fools’ joke, a day early.

The article appeared  in the Daily News and Analysis dated April 1, 2014
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected]

Post interim budget, the threat of a downgrade remains

standard and poor'sVivek Kaul
On February 28, 2013, the finance minister P Chidambaram, presented the budget for the financial year 2013-2014 (April 2013 to March 2014). In this, he projected a fiscal deficit of Rs 5,42,499 crore or 4.8% of the gross domestic product (GDP). Fiscal deficit is the difference between what a government earns and what it spends, expressed as a percentage of the GDP.
All through the year, Chidambaram maintained that come what may the government won’t cross the fiscal deficit of 4.8% of the GDP. In the end he stood by his promise, but only on paper. The fiscal deficit for 2013-2014 is now estimated to be at Rs 5,24,439 crore or 4.6% of the GDP.
It was important that the government did not cross the target of 4.8% of the GDP that it had set, given the threat of a downgrade from international rating agencies.
The rating agency Standard and Poor’s (S&P) currently rates India as BBB-. This is rating is the lowest rating in the investment grade. If India were to be downgraded, its rating would fall to BB or the first stage of the junk status.
This would mean that a lot of foreign investors would have to sell out of the Indian bond market as well as the Indian stock market,given that they are not allowed to invest in countries with a junk rating. This would lead to huge pressure on the rupee as foreign investors cashing out will convert their rupees into dollars.
In fact, in November 2013, S&P had maintained the “negative” outlook on India. This meant that there were chances of a downgrade, over the next 12 months. As the rating agency had said in a release “The central government’s budget balance[i.e. the fiscal deficit], however, tells only part of the Indian fiscal story. Using a broader measure of general government deficits, we project a 7.2% of GDP deficit for fiscal 2014, to which one should add 1-2 percentage points of GDP deficits for the unprofitable portions of the consolidated public sector, including state electricity boards and oil-marketing companies.”
Keeping this definition of fiscal deficit in mind, how has the finance minister P Chidambaram done? It is safe to say that the fiscal deficit of 4.6% of the GDP is at best a hogwash. In order to arrive at that number, the finance minister has under-budgeted for petroleum, food and fertilizer subsidies in a major way. Estimates suggest that payment of more than Rs 1,20,000 crore worth of subsidies has been postponed to the next year.
Take the case of petroleum subsidies. Chidambaram had budgeted Rs 65,000 crore towards it. The number has now been increased to Rs 85,480 crore. Of this amount, a substantial chunk has gone towards payments of petroleum subsidies that should have been paid in 2012-2013( April 2012 and March 2013) but were postponed to 2013-2014.
In fact, data released by the Ministry of Petroleum and Natural Gas in early February shows that the oil marketing companies have reported under-recoveries ofa total of Rs 1,00,632 crore during the first nine month of 2013-14 (April-December) on the sale of diesel, PDS Kerosene and cooking gas. Hence, the Rs 85,480 crore budgeted towards oil subsides is clearly not enough.
On the earnings side, Chidambaram has indulged in massive asset stripping to match his numbers. He has forced public sector banks, which are in a financially fragile state, to pay interim dividends of close to Rs 27,000 crore. ONGC and Oil India Ltd have been forced to pick up shares worth Rs 5,000 crore in the loss making Indian Oil Corporation, a company which no private investor wants to touch. And the government has also managed to get more than Rs 19,000 crore from Coal India, as dividend and dividend distribution tax.
Anyone who understands some basic accounting will tell you that using assets to pay for regular expenditure is never a great idea. Rating agencies like S&P obviously understand this. And that is why it had said in November 2013 that using broader measures, the fiscal deficit comes to greater than 7.2% of the GDP. In that sense, the deficit of the government is clearly greater than the 4.6% of the GDP that it has arrived at, once the accounting shenanigans are taken into account.
Given that, the threat of a downgrade remains. As S&P had said in November “we expect to review the rating on India after the next general elections when the new government has announced its policy agenda.” The agency plans to look at the fiscal policy of the next government as well, among other things. Given the mess the current fiscal policy is in, it will be very difficult for the next government to do much about it. The only way out is to slash government expenditure massively. And that is easier said than done.

 The article originally appeared in the Daily News and Analysis (DNA) dated February 18, 2014 
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected]