Politics

In a Country of 10 crore Urban Households, Builders Sold 2.62 Lakh Homes Last Year  

I recently wrote a column in the Mint newspaper titled India and China: A tale of ghost towns in two gigantic countries. This piece is an extension of a small part in that column. Ideally, you should read the column before reading this piece, nevertheless, this piece stands on its own as well.

The real estate rating and research firm Liases Foras recently put out some interesting data in a report titled, Residential Real Estate Market Report. Let’s look at this pointwise.

1) The home sales in the top 60 cities in India in 2020 stood at 2.62 lakh units. This was down 31% from 2019, when it had stood at 3.77 lakh units.

2) The sales in tier I cities (Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai Metropolitan Area, National Capital Region, Pune) stood at 1.85 lakh units in 2020, down 32% from sales in 2019 when 2.75 lakh units had been sold.

3) The sales in tier II cities in 2020 stood at 76,603 units down 25% from 2019 when 1.03 lakh units had been sold.

4) The overall unsold housing inventory was down 6% to 12.52 lakh units in 2020, against 13.32 lakh units in 2019. The value of homes sold in 2020 stood at Rs 1.73 lakh crore, whereas the value of the inventory outstanding is at around Rs 8.65 lakh crore. At this rate, it will take five years to sell the current inventory (Rs 8.65 lakh crore divided by Rs 1.73 lakh crore).

Of course, this does assume that no new construction will happen over the next five years, which is a wrong assumption to begin with. Hence, the current inventory will take longer than five years to sell, unless sales pick up at a dramatic rate, which as far as I see it is unlikely to happen, given the state of the economy and the general purchasing power of Indians, which the real estate industry never seems to take into account.

Let’s use this data and make some assumptions to explain all over again why the Indian real estate industry is in a mess and what can be possibly done to revive it.

1) In 2020, a total of 2,62,055 homes were sold across the top 60 cities in India with the total value of these sales being Rs 1,72,770 crore. This means that the average price of a home sold stood at Rs 65.92 lakh (Rs 1,72,770 crore of sales divided by 2,62,055 homes sold). In comparison to 2019, the average home price has barely fallen. In 2019, the average home price was Rs 65.96 lakh (Rs 2,48,861 crore of sales divided by 3,77,295 homes sold).

Let me not analyze this number further and make a few adjustments first.

2) Let’s consider the tier I and tier II cities separately. The average home price in tier I cities in 2020 was at Rs 74.37 lakh (Rs 1,37,921 crore of sales divided by 1,85,452 homes sold). The average home price in tier I cities in 2019 was Rs 73.57 lakh (Rs 2,02,089 crore of sales divided by 2,74,680 homes sold).  In tier I cities, despite home sales crashing by 32% in terms of number of units sold, the average home price has gone up marginally. There can be various local reasons for it which the overall average won’t reveal, but on the whole it is safe to say that real estate sales don’t seem to follow the basic law of demand in India. They never have and which is why the sector has been in a mess for more than half a decade now.

3) Within tier I cities, let’s make one more adjustment by first checking what was the average home price in Mumbai Metropolitan Region (MMR), which tends to be higher than other parts of the country, simply because prices in Mumbai city tend to be very high. The average home price in MMR in 2020 was Rs 94.98 lakh (Rs 46,043 crore of sales divided by 48,479 homes sold). The average home price in 2019 had stood at Rs 99.11 lakh (Rs 67,938 crore of sales divided by 68,543 homes sold). Hence, the price in MMR has come down by 4.2% on an average between 2019 and 2020.

4) Now let’s calculate the average price of a home in non MMR tier I cities. The average home price in a non MMR tier I city in 2020 stood at Rs 67.07 lakh (Rs 91,878 crore of sales divided by 1,36,973 homes sold). The average home price in a non MMR tier I city in 2019 had stood at Rs 65.08 lakh (Rs 1,34,151 crore of sales divided by 2,06,137 homes sold). Hence, the average home price in non MMR tier I city in 2020 has gone up by a little over 3%.

5) Now finally let’s look at the average home price in a tier II city. The average home price in a tier II city in 2020 stood at Rs 45.49 lakh (Rs 34,849 crore of sales divided by 76,603 homes sold). The average price in 2019 had stood at Rs 45.58 lakh (Rs 46,772 crore of sales divided by 1,02,615 homes sold). Given this, the average home price in tier II cities has barely moved between 2019 and 2020.

What does all this data tell us?

1) At the risk of sounding as cliched as I can sound and have been sounding for years, the price of real estate in India is too high. Of course, we are looking at average prices here, but do take into account the fact that even in tier II cities the average home price is close to Rs 50 lakh.

In a tier I city without Mumbai, the average home price is close to Rs 67 lakh. Of course, there are tier I cities, like Pune and Ahmedabad, where the average price is closer to Rs 50 lakh. But even that is very high when one takes into account the fact that the per capita gross national disposable income in 2020-21 is expected to be around Rs 1.46 lakh.

Thus, the per capita household disposable income amounts to Rs 7.3 lakh (given that there are five people in an average Indian household). What needs to be kept in mind here is that this is the mean income of a household or the average income of an Indian household and not the median income or the income of an average Indian household. Hence, the income of the an average Indian household must be much lower than Rs 7.3 lakh per year.

2) Clearly, the real estate builders are building homes only for a certain section of the population, the very rich. And that has limited their market. In 2001, the number of urban households had stood at 5.58 crore. In 2011, this had jumped by 41.3% to 7.89 crore. Looking at this data, it is safe to say that by 2021, the number of urban households would have crossed 10 crore. Let’s assume it is at 10 crore households, which I think is a reasonable assumption to make, given that the number of actual households should be much greater looking at the past trend and increasing urbanisation.

3) A bulk of these 10 crore households would be living in the top 60 cities of urban India. In these cities, in 2020, a total of 2.62 lakh new homes were sold by builders. In 2019, the number was at 3.77 lakh homes. Let’s further assume that Liases Foras probably does not capture all the new homes being sold by builders across these 60 cities. Even if the homes sold were double of this number, they are barely a very small fraction of less than 1% of the total number of households in urban India. And this is true not just about 2020, it is equally valid for 2019, a non-covid year.

Of course, not all homes sold are new homes. People who have bought homes as an investment in the past and are now selling them, also need to be considered. There is no data available for this, but even if there was, the prices at which these homes were sold couldn’t have been significantly different from the new homes being sold by builders, hence, limiting their affordability.

4) As I had said in my Mint piece earlier this week, India needs real affordable housing, homes which can be built and sold profitably in the range of Rs 5-20 lakh in Indian cities. Of course, these homes will be smaller in size, but they will be definitely much better and more humane than living in slums. And imagine if something like this takes off, what it could do to economic activity in a post covid world. Building of real estate leads to a lot of economic activity. Every apartment requires, cement, bricks, sand, steel, pipes etc. It also requires people to take on home loans.

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. The multiplier effect is huge.

Also, real estate is one sector which can create a lot of semi-skilled and unskilled jobs, very quickly, thus help people move away from agriculture, which tends to employ more people than is economically feasible.

5) Of course, this is easier said than done. First, it needs the real estate industry to consider the idea of doing business profitably at a much lower price, which it currently doesn’t seem to have got its head around to. Over the past few years, the real estate industry has maintained that it is difficult to cut prices given that input costs have gone up over the years.

It recently blamed the steel and the cement sector for driving up real estate prices. The cement industry has responded by saying: “only Rs 150/sq. ft of built up area constitutes cement costs. The amount being so low … is this not hoodwinking gullible consumers?”

I am no civil engineer and have absolutely no idea about what it costs to build a building, an apartment and so on. But what I do understand is that if real affordable housing has to become the order of the day, home prices need to come down and come down dramatically.

6) One thing holding back affordable housing is the cost of land in and around big cities. At the heart of this is the issue of Change in Land Usage (CLU). Agricultural land beyond a certain size cannot be owned, as per the land ceiling regulations. This limit varies from state to state. What this does is that it limits the amount of land available in cities unless the state government intervenes. And the moment that happens, the cost of the land starts to go up.

7) The central government and the state governments own a massive amount of land in Indian cities, which is lying unused. Over the years, some of it can be made available for real affordable housing. Of course, wherever there is land and there are politicians, there is scope for corruption (I really have no answer for this, honestly).

8) In a recent research report, IIFL securities looked at the cost of redevelopment projects in Mumbai. The figure that caught my eye is that the construction cost is 30.8% of the total cost. So, whatever the real estate industry might say, the construction costs forming less than a third of the overall cost, are really not the problem. I guess in non-redevelopment projects the construction cost as a proportion might be more, but even with that the problem is somewhere else.

It is the remaining charges that need to be brought down. Interestingly, charges related to the government in different ways (everything from floor space index charges to staircase premium to taxes to liaison cost) made up for around 40% of the overall cost. Clearly, the government is the problem here. The dependence on revenue from real estate for state governments needs to come down.

9) I am not an expert on this, but I do feel that this is an idea that needs to be made to work and there are experts out there who can look at it in a more detailed and feasible way.

To conclude, the problems holding back Indian real estate are huge and it will be very tough to sort them out. But as the corporates like to say in adversity there is opportunity. And real affordable housing is a huge opportunity, only if someone can figure out how to run a profitable business at lower costs. As the late Professor CK Prahalad would have said there is a fortune to be made at the bottom of the pyramid.

Land acquisition mess: Will the real Narendra Modi please stand up?

narendra_modiVivek Kaul

The Narendra Modi government seems to have agreed to drop the politically unpopular clauses in the Bhartiya Janata Party’s version of the land acquisition bill. This is not a move in the right direction.

One of the key planks of Narendra Modi’s electoral campaign for the 2014 Lok Sabha elections was economic development and job creation. In a country where most electoral rhetoric has been based around “garibi hatao”, this was like a breath of fresh air.

And given that 13 million Indians are entering the job market every year, creation of new jobs should be one of the top priorities of any government.
What also needs to kept in mind is the fact that the average holding size of agricultural land has come down over the years.  As per Agriculture Census 2010-11, small and marginal holdings of less than 2 hectare account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. This could have only gotten worse since 2010-11. And what this means people need to be moved away from agriculture into other areas where they can make a living.
How does a country like India create jobs? As Cambridge University economist Ha-Joon Chang writes in Bad Samaritans—The Guilty Secrets of Rich Nations & the Threat to Global Prosperity: “History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services.”

An important part of building a vibrant manufacturing sector is the ease with which land can be acquired. Over and above this, the quality of physical infrastructure (roads, railways, ports etc.) in India remain abysmal. If this infrastructure has to improve, the ease of land acquisition remains very important.
Narendra Modi became the prime minister of India on May 26, 2014. One of the things he did at the very beginning was to try and figure out what were the factors holding back investment in India. The answer that he got was the Land Acquisition Act of 2013 was one of the key reasons holding back investment.

In fact, the latest economic survey released in February earlier this year pointed out that “land acquisition” was a top reason for 161 stalled government projects. The Survey also pointed out: “India’s recent PPP [public-private partnership] experience has demonstrated that given weak institutions, the private sector taking on project implementation risks involves costs (delays in land acquisition, environmental clearances, and variability of input supplies, etc.).”

Arvind Panagarya the vice-chairman of the NITI Aayog in a recent speech said: “The Land Act, 2013 is an onerous Act under which by all calculations it will take up to five years for acquiring land assuming that all steps progress smoothly,” Panagariya said.

The question is what led to the Land Acquisition Act 2013? Before 2013, the process of land acquisition in India was governed by the Land Acquisition Act 1894. This was a law introduced during the time when the British ruled India and it managed to survive for more than 65 years after India attained independence from the British in 1947.

Given that the law was passed during British times it essentially ensured that the government could acquire land for almost any purpose and pay a pittance for it. As Jairam Ramesh and Muhammed Ali Khan write in Legislating for Justice—The Making of the 2013 Land Acquisition Law: “The 1894 Act was a comparatively short legislation that left much to the discretion of the acquiring authorities.”

The government basically acquires land from the public for what it calls “public purpose”. Given this, it is very important to define the term public purpose properly. But as Ramesh and Khan write: “‘Public Purpose’ which was the raison d’etre for any acquisition initiated was drafted in such wide terms that essentially any activity could be constituted as public purpose, as long as the Collector [of the district where the land was being acquired] felt it did…’Public

Purpose’ became what ever the Government or acquiring authority defined it to include.”
And if this wasn’t enough, a 1984 amendment to the 1894 Act allowed the government to “acquire lands for a public purpose ‘or for a private company’”. So, as per the 1894 Act the government could acquire land even for a private company. This clause was at the heart of the nexus that evolved between builders and politicians, over the years.

Given this, such a law had to be done away with it. This finally happened in 2013. The land acquisition law that was brought in was towards the other extreme, and seems to have made land acquisition almost next to impossible. (For those interested in the entire procedure, they should read Ramesh and Khan’s book, to realise how complicated and time taking the 2013 law is).

The 2013 law calls for consent from 70% of families in case of public private partnership projects and 80% if the land is being acquired for a private company. A social impact assessment also needs to be carried out. This assessment needs to answer questions like whether the “proposed acquisition serves public purpose” and “whether land acquisition at an alternate place has been considered and found not feasible”.

As mentioned earlier, after coming to power, the Modi government figured out that land acquisition law of 2013 was acting as a substantially barrier to investment. It brought in The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Ordinance, 2014, which made a few changes to the 2013 Act. The ordinance was signed by President Pranab Mukherjee on December 31, 2014.

In the ordinance the requirement of getting prior consent from those affected has been done away in certain cases. As Swaminathan Aiyar writes in a column in The Economic Times: “It substantially diluted the clauses relating to a social impact assessment and consent of 70-80% of people affected. It provided exemptions for 1 km on either side of railway and industrial corridors, rural infrastructure, affordable housing, and PPP infrastructure projects.”

This was a step in the right direction to get investment going again. Land required for the defence, electrification, affordable housing, and industrial corridors etc., also needed to be made available as soon as possible. Also, Ramesh and Khan write: “The law was drafted with the intention to discourage land acquisition.

It was drafted so that land acquisition would become a route of last resort.” Ramesh was a key player behind the Act.
A land acquisition Act which discourages land acquisition cannot be of much help to an economy which needs to create jobs for 13 million individuals entering the work force every year.

Now with the government planning to go back to the 2013 law the status quo will return. If Arvind Panagariya is right in estimating that it will take five years to acquire land then there is no way that the Narendra Modi government is going to get around to delivering its promise on creating jobs and economic development.

Also, Modi’s pet “Make in India” programme is unlikely to get anywhere. You can’t make in India without being able to get land to set up the necessary infrastructure.

Aiyar summarised it the best when he said: “[Modi] seems happier coining slogans than in implementing tough decisions.” Tough decisions on the economic front is what this country needed. Alas, it is not going to get them even under Modi, who for a while flattered to deceive. And by the time the 2019 Lok Sabha election is here, “garibi hatao” might be the order of the day again.

It is worth asking here, if the plank of economic development and jobs, was also an electoral jumla? From how things are going right now, that is how it seems like.

To conclude, the Narendra Modi that we saw in the run-up to the 2014 Lok Sabha elections was a different man, from the Narendra Modi we are seeing now. Will the real Narendra Modi please stand up?

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
The column originally appeared on Firstpost on Aug 5, 2015

Learn from 2014: How the Modi govt can tame food prices

foodVivek Kaul

Earlier this month, the the India Meteorological Department(IMD) forecast that the monsoon will be deficient this year. It said that the monsoon will be 88% of the long-term average. This number is lower than the 93% of the long-term average number, the IMD had forecast in April, earlier this year.
The IMD also said that the probability of a deficient monsoon was as high as 66%. The nation’s weather forecaster uses rainfall data for the last 50 years to define what is normal. If the rainfall forecast for the year is between 96% and 104% of the 50 year average, then it is categorised as normal. A forecast of between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.
Hence, a forecast of 88% of the long-term average means that the monsoon will be deficient this year. Further, with the rainfall being forecast as likely to be deficient, the fear is that food prices will start to go up during the months to come.
Data from the World Bank suggests that only around 35.2% of agricultural land in India was irrigated in 2010. The bank defines irrigated land as “areas purposely provided with water, including land irrigated by controlled flooding.” This number is a little dated but does tell us that a major part of Indian agriculture continues to remain dependent on rainfalls.
And if rainfalls turn out to be deficient chances are there will be an impact on agricultural production and in the process push up food prices. At least that is how things look theoretically. Nevertheless, things may not be as bad as they are being made out to be.
During 2014 monsoon season, the country as a whole received rainfall which was 88% of the long-term average. Hence, the rainfall last year was deficient. In fact, if we look at the numbers region-wise, the rainfall was around 79% of the long-term average in north-western India. States like Punjab, Haryana and Uttar Pradesh which produce a major part of food grains produced in India, come under this region.
Despite this, the impact on production was limited because these states have access to irrigation. As a recent report by Crisil Research titled A washout monsoon forecast, we cut GDP growth by 50 bps points out: “Given their reasonably high irrigation levels, agricultural production in Punjab (98% of total area cultivated has irrigation), Haryana (85%) and Uttar Pradesh (76%) were less affected by deficient rainfall last year.”
The question is how effective will the irrigation systems be the second time around. “Even with good irrigation cover in these states, two consecutive years of weak rainfall would bring down the effectiveness of irrigation systems…Ground water is recharged mainly through rainfall. As per IMD, rainfall deficiency in Punjab was 50% and Haryana at 56% last year. As a result, with agriculture relying more on ground water, two consecutive years of weak monsoon will have a significant impact on kharif crops. Plus reservoir storage levels in some states are alarmingly low,” Crisil Research points out. Given this, there will be some impact on agricultural production.
Hence, the government needs to act decisively and quickly to ensure that food prices do not go. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note titled RBI signals no more cut; we still see room: “In 2002 and 2004, cumulative rainfall was down 19 % and 14% respectively, but thanks to an effective undertaking by the government that saw large scale disbursement from the government’s food stocks, inflation remained under control.”
In fact, the Narendra Modi government did the same thing when it came to power in May last year. 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.
As Baig and Das point out: “Last year, a late start of the monsoon rains resulted in a sharp spike in food prices during July (+3.6% month on month). Food prices generally tend to be high in July, but the spike in 2014 was striking. The newly elected government responded with a number of administrative measures (open market sale of key foodgrains, crackdown on hoarders, imposing restriction on stocking limits of key vegetables etc.), which helped food prices to eventually ease from September onward.”
Also, imports will help, given that global food prices are at a six year low. As Crisil Reearch points out: “Importing some commodities will be useful, especially because global food prices have slumped to a six-year low following a bounteous output – international prices of oil seed prices for instance are down 24% year-on-year.”
While prices of food grains can be contained by releasing government stock into the open market, such a thing is not possible in case of vegetables, given their short shelf life. Hence, it is important that the government cracks down on hoarders, like it did last year.
As Ashok Gulati, former Chairman of the Agricultural Costs and Prices, wrote in a column inThe 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.”
While onions can be stored, this may not be true for most other vegetables. Also, a lot of vegetable produce goes bad before it reaches the market, hence, “lowering transportation losses will be crucial”.
Further, there will be great pressure on the government to increase the minimum support prices on agricultural crops. That is one sure fire way of pushing up food inflation.
It is worth remembering here that not many farmers benefit from the minimum support price system. The government announces the minimum support price of 24 agricultural crops, but largely buys, only two, wheat and rice, through the Food Corporation of India and other state procurement agencies.
The Shanta Kumar committee report points out that the total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies was 5.21 million. “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 report points out.
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, not all wheat and paddy is sold to procurement agencies at the minimum support price.
Once these factors are taken into account the minimum support price system doesn’t benefit many farmers and causes food inflation. Hence, it is important that the government stays away from the temptation of increasing minimum support prices by a big amount, something that it did last year as well.
To conclude, in order to control food inflation, it is important that the government do same things that it did last year.

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

The column originally appeared on Firstpost on June 11, 2015

How the Congress party got corporates addicted to govts buying land for them


One of the main questions that has been asked in the current controversy surrounding the issue of land acquisition is—why does the government need to buy land? Jairam Ramesh and Muhammad Ali Khan try and answer this question in their new book Legislating for Justice—The Making of the 2013 Land Acquisition Law. 

As they write: “Acquisition of property is founded upon the universally recognized principle of ‘Eminent Domain’.” And what is Eminent Domain? “[It] is the power of the Government…to take over resources for the greater national good. At its most basic Eminent Domain refers to the inherent authority of the Government to acquire private property on the payment of fair compensation for a use that benefits public at large,” explain the authors.

Further, a lot of public infrastructure gets built because of Eminent Domain. As Ramesh and Khan write: “Without the power of Eminent Domain, the Government could not establish the infrastructure that we rely on—roads, hospitals, airports, public schools, common facilities such as warehouses for farmers, playgrounds for children all are made possible through the use of Eminent Domain.”

So far so good. But why does the government have to acquire land for private companies? Before I get to answering this question, it is important to realize that the land acquisitions carried out by the government in India can essentially be divided into two eras—those carried out before 1991, the year of the economic reforms, and those carried out after.

As Michael Levien of the Johns Hopkins University writes in a recent research paper titled From Primitive Accumulation to Regimes of Dispossession: Six Theses on India’s Land Question: “Since 1991, India has passed from a regime that dispossessed land for state-led industrial and infrastructural expansion to one that dispossesses land for private—and increasingly financial—capital. Between 1947 and 1991, the Indian state largely dispossessed land for public-sector projects to expand the industrial and agricultural productivity of the country. The main forms of this dispossession were public sector dams, steel towns, industrial areas, and mining.”

But that changed after the economic reforms of 1991, when the private sector began to play a more active and larger role in the Indian economy. The economic reforms unleashed the Indian IT and BPO industry. These sectors had an unending appetite for land and the government helped them by acquiring land for them.

Gradually, public-private partnerships became the preferred method for building physical infrastructure. And this led to the government acquiring more land for private firms. In fact, as Levien points out: “Crucially, compensating private infrastructure investors with excess land and/or development rights became an increasingly popular method of cost recovery in these arrangements—whether for roads, airports, or affordable housing (Ahluwalia 1998; IDFC 2008, 2009). Infrastructure investment thus became a vehicle for private real estate accumulation, culminating with Special Economic Zones in the mid-2000s.”

Hence, land became a sort of a currency for the government. Also, given that the government could acquire land for private firms, it is obvious that a lot of politicians must have made a lot of money as well.

Nevertheless, the question is how did the government get around to acquiring land for the private sector? Before the 2013 land acquisition law was passed, land acquisition in India was governed by the Land Acquisition Act 1894—a law from the time when the British ruled India.

In fact, an amendment made in 1984 to the 1894 Act expanded the government’s ability to “acquire lands for a public purpose ‘or for a private company’”. This amendment allowed the government to acquire land for private companies. And it is worth reminding the readers, those were the days when the Congress party ruled the country.
It was this amendment which was abused by the various state governments around the country to acquire land for private companies. This amendment allowed the government to acquire land from farmers at cheap rates and then sell it on to private companies at a significantly higher price.

The ‘Yamuna Expressway’ is a very good example of this, where the land was acquired by the Uttar Pradesh from farmers and then sold on to private parties at multiple times the price the farmers had been paid for it.

As Ramesh and Khan point out: “In 2009, the Uttar Pradesh Government had indeed acquired land as part of a concession agreement and then resold it to Jaypee associates group as part of a bundling project for the construction of the Yamuna Expressway. There was no legal bar on doing so under the old law [i.e. the 1894 Act].” Further, the purpose for which the land was acquired could be changed as well.

The corporates preferred the government acquiring land for them and then selling it to them at a higher price because of several reasons. Land records in India are poorly maintained and purchase of land can easily be challenged in court at a later date.

As Nitin Desai writes in a recent column in Business Standard: “Many companies want the government to acquire land for them…as to have the assurance that their right of ownership cannot be challenged by some new claimant.”

Further, as Ramesh and Khan point out: “After the initial round of consultations in July-August 2011, it was also acknowledged that land values are, on an average, a sixth of their represented or book value as drawn out in the circle rate. As one moved away from urban centres the disparity became more striking with land records not having been updated for decades in some parts of the country.”

As per the 1894 Land Acquisition Act the government had to compensate the owner of the land at market value. But given that the government land records were infrequently updated, the government on many occasions got away with paying a pittance in comparison to the ‘real’ market value.

Even if the government were to then sell on the land to a corporate firm at a higher price, the firm would still get a good deal because of the huge differential between the price as per the government land record and the real market price.

Another reason corporates liked to outsource the land acquisition process to the government lay in the fact that the 1894 Act had an ‘urgency’ clause. As Ramesh and Khan write: “Section 17 of the Land Acquisition Act, 1894 was used to forcibly disposes people of their land in a frequent and brutal fashion by suspending the requirement for due process…Section 5A…allowed for a hearing of objections to be made but put no responsibility on the Collector to take those claims into consideration.”

So people could complain, but it was up to the Collector whether he wanted to listen to them or not. Further, the definition of urgency was also left “to the authority carrying out the acquisition.”  This clause allowed the collector to “take possession of the land within fifteen days of giving notice”. He could take possession of a building within 48 hours of giving notice. No private company could hope to acquire land at such a quick pace.

The irony is that the 1894 Land Acquisition Act was allowed to run for almost 66 years after independence. The Congress party ruled the country in each of the decade after independence and chose to do nothing about it. Under the 1894 Act the government could acquire land in a jiffy, without adequately compensating the land-holder. When the Act was finally replaced, what came in its place has made it next to impossible to acquire land.

In fact, Ramesh and Khan,rather ironically admit to that in their book, when they write: “The law was drafted with the intention to discourage land acquisition. It was drafted so that land acquisition would become a route of last resort.”

To conclude, as far as the land acquisition process is concerned, it is safe to say that we have jumped from the frying pan into fire.

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

The column originally appeared on Firstpost on May 28,2015 

Arvind Subramanian: when economists start talking like politicians, we have a problem


During the course of the last financial year, the finance minister Arun Jaitley, repeatedly kept asking the Reserve Bank of India (RBI) to start cutting the repo rate. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

The RBI finally cut the repo rate twice between January and March 2015. But this hasn’t been enough to get bank lending to start growing at a much faster pace. As of the end of October 2014, lending by banks over a one year period had grown by 11.2%. As of March 20, 2015, lending by banks over a one year period had grown by 8.6%. This, despite the fact that the RBI cut the repo rate twice between January and March by a total of 50 basis points (one basis point is one hundredth of a percentage) to 7.5%.

As I have often explained in the past, a fall in interest rate does not always spur consumption or lead to increased borrowing by corporate firms. As John Kenneth Galbraith points out in The Economics of Innocent Fraud: “If in recession the interest rate is lowered by the central bank, the member banks are counted on to pass the lower rate along to their customers, thus encouraging them to borrow. Producers will thus produce goods and services, buy the plant and machinery they can afford now and from which they can make money, and consumption paid for by cheaper loans will expand.”

But things play out a little differently in the real world. “The difficulty is that this highly plausible, wholly agreeable process exists only in well-established economic belief and not in real life. The belief depends on the seemingly persuasive theory and on neither reality nor practical experience. Business firms borrow when they can make money and not because interest rates are low,” Galbraith points out.

Also, by taking about the RBI needing to cut the repo rate, over and over again, the impression that the finance ministry tries to send out is that the RBI is holding back economic growth. And that is really not true. If India has to grow at a much faster rate, then interest rates are just a very small part of the overall puzzle.
There is a lot that needs to be set right at the level of the government—from reforming labours laws to improving the ease of doing business to ensuring that the subsidies offered by the government reach the right people and are not stolen as they go down the system.

Over and above this, there are many projects stalled due to land acquisition issues, lack of environmental clearance or simply the fact that the firm carrying out the project is highly indebted. There is nothing that the RBI can do about these things. It can just hope to set interest rates.

Subramanian also went on to say that: “China is now cutting the interest rate quite aggressively in response to its growth slowing down…We need to respond accordingly.” This is a convenient use of facts as they are.

The People’s Bank of China has cut interest rates thrice since November 2014. In November last year, the Chinese central bank cut the one year benchmark deposit and lending rates by 25 basis points and 40 basis points to 2.75% and 5.6% respectively. There was another small change it carried out, which Subramanian did not talk about in the general statement that he made.

As Wei Yao of Societe Generale points out in a research note she wrote in November: “Along with the rate cut, the People’s Bank of China also lifted the upper limit that commercial banks can offer above the benchmark deposit rates to 1.2 times from 1.1 times. That is, the maximum permitted rate for 1-year deposits was 3.3% (3%*1.1) and is still 3.3% (2.75%*1.2). Given that commercial banks have been losing deposits recently, they will probably choose to stick to the upper bound.”

And what about lending rates? “As for lending rates, the lower bound to the benchmark lending rates was removed more than a year ago. In theory, there is no hard restriction stopping commercial banks from lowering loan rates anytime or by any amount. Therefore, the benchmark lending rate cut is also nothing more than a suggestion,” wrote Wao.

In end February 2015, the People’s Bank cut interest rates again. This time the one year benchmark deposit rate was cut to 2.5% from the earlier 2.75%. Further, the Chinese central bank increased the upper band of bank deposit rates from 1.2 to 1.3 times of the benchmark rates. What did this mean? “As a result, the maximum one year deposit rate that commercial banks can offer is now 3.25% (2.5%*1.3), only 5 basis points lower than the previous level of 3.3% (2.75%*1.2),” wrote Wao.

Earlier this month (May 2015), the People’s Bank cut the one year benchmark deposit rate again by 25 basis points to 2.25%. Nevertheless as Wao writes: “After the cut, the benchmark one-year deposit rate is now at 2.25%, but the ceiling is lifted to 1.5 times of the benchmark, up from 1.3 times previously. Hence, the maximum rate that banks can offer has actually increased from 3.25% (=2.5%*1.3) to 3.375% (=2.25%*1.5), which is even higher than the level (3.3%) at the beginning of this easing cycle.”

Hence, even though the People’s Bank of China has cut the one year benchmark deposit rate by 75 basis points since November 2014, the maximum rate that a bank can pay on its deposits has actually marginally gone up to 3.375% from 3.3% in November. In that sense, there has been no real cut in interest rates.

Now contrast this with India, where the RBI has cut the repo rate by 50 basis points since January to 7.5%. A 50 basis point cut is not very different from a 75 basis point cut. Further, deposit rates in India unlike China are not controlled by the central bank and many banks in India have reduced fixed deposit rates.

Though the cut in deposit rates has not been followed by a cut in interest rate on loans. In late April, the minister of state for finance, Jayant Sinha, had pointed out that, only 21 out of the 91 scheduled commercial banks in the country had cut their lending rates, after the RBI cut its repo rate twice.

To conclude, what this tells us is that Subramanian’s statement was too general to have been made of an economist of his stature. I wouldn’t have been surprised if Jaitley or Sinha would have made such a statement. But coming from an economist of Subramanian’s calibre, this is unacceptable. Also, the ministry of finance needs to realize that people who run the RBI know their job well and it is best if they are left to themselves to do it properly.


The column originally appeared on The Daily Reckoning on May 28, 2015