Rajasthan’s Land Bill Unlocks Dead Capital And It Should Be Replicated In Other States


On April 4, 2016, the Rajasthan assembly passed the Rajasthan Urban Land (Certification of Titles) Bill. This legislation will give a statutory backing to land records. In the process Rajasthan became the first Indian state to enact a law on property titles.

Indeed, this is a big move. What we have in India up until now is what urban planner Swati Ramanathan calls presumed ownership. In a recent column in Mint she explains this: “What we have in India today is a system of “presumed ownership”. The notion that a “sale deed” is proof of ownership is misplaced. The registration of property at the stamps and registration department merely acknowledges that a transaction has taken place between two parties. It does not verify or guarantee that the seller is indeed the indisputable owner, nor that the buyer is now indisputably the new owner.” This explains why so many property cases end up in court. With clear property titles, this is less likely to happen.

With the Bill being passed, the Rajasthan government will have to get around to setting up the Urban Land Title Certification Authority.

Anyone who wants a land title will have to apply to this authority. The act of applying for a title to this authority is voluntary. As the Section 23 of the Bill points out: “As soon as may be, after the receipt of application…the Certification Authority shall scrutinize the information and the documents furnished by the applicant and seek their verification from the relevant record maintained by the State Government or any other authority to satisfy himself about the veracity of the information and authenticity of such documents.

If the Land Title Certification Authority is satisfied “about the veracity of the information and authenticity of such documents” it will certify the “status of applicant as lawful holder of title of the urban land specified in the application.” This initial provisional certificate will be valid for a period of two years.

If during the period of two years no counter claim or objection is received by the Land Certification Authority, it will after the two years are over, issue a permanent certificate of title for the land. The state government shall stand as a “guarantor for the genuineness and authenticity of the title”.

This data will be maintained on the Computerized Land Evaluation and Administration of Records (CLEAR), a central system of electronic data storage. If the entire system works as it is envisaged to, then the number of property disputes are likely to come down, given that people will have a clear title to the land that they own. This will be guaranteed by the state government.

Clear titles will also lead to the unlocking of what the Peruvian economist Hernando de Soto calls dead capital.  De Soto essentially points out that in the Western countries, land and buildings are also used as capital because land titles are clear. This is not in the case in developing countries like India. He calls these assets in developing countries “dead capital”.

As he writes in The Mystery of Capital—Why Capitalism Triumphs in the West and Fails Everywhere Else: “Why can’t buildings and land elsewhere in the world also lead this parallel life?…My reply is: Dead capital exists because we have forgotten that converting a physical asset to borrow money to finance an enterprise for example – requires a very complex process.

The presence of clear land titles essentially simplifies the entire idea of being able to borrow against what Soto calls dead capital. As he writes: “Any asset whose economic and social aspects are not fixed in a formal property system is extremely hard to move in the market. How can the huge amounts of assets changing hands in a modern market economy be controlled if not through a formal property process?

The lack of a formal property process hurts. As de Soto writes: “Without such a system, any trade of an asset, say a piece of real estate, requires an enormous effort just to determine the basics of the transaction: does the seller own the real estate and have the right to transfer it? Can he pledge it? Will the new owner be accepted as such by those who enforce property rights?

In this scenario, it becomes difficult to sell land/building as well as raise capital by borrowing against it. Once the titles become clear and the government guarantees it, the problem gets solved.

Akhilesh Tilotia makes a similar point in his book The Making of India. As he writes: “Hernando de Soto…points out that many small entrepreneurs lack legal ownership of their property, making it difficult for them to (1) obtain credit to expand or (2) sell their business when either they or their businesses have run the course. The existence of such massive exclusion generates two parallel economies: legal and extra-legal. An elite minority enjoys the economic benefits of law and globalization, while a majority of the entrepreneurs are stuck in poverty, where their assets languish as dead capital.”

This can be corrected with a proper system of land titles. As Tilotia writes: “India, with its 120 million small and marginal cultivators and 8.5 million retail(mom-and-pop) outlets requires strong land title records to help these entrepreneurs to prosper and gain benefits of economic growth.

If what has started in Rajasthan spreads to other parts of the country including rural India, there are other benefits as well. The average size of agricultural land-holding has been falling over the decades. As per Agriculture Census of 2010-11: “The average size of holdings for all operational classes (small & marginal, medium and large) have declined over the years and for all classes put together it has come down to 1.16 hectare in 2010-11 from 2.82 hectare in 1970-71.”

As the same land is divided between more and more family members over the generations the average holding has fallen dramatically. Further, 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.

Clear land titles can play a part here. As de Soto writes: “In a developed country, the farmer’s son who wishes to follow in his father’s footsteps can keep the farm by buying out his more commercially minded siblings. Farmers in many developing countries have no such option and must continually subdivide their farms for each generation until the parcels are too small to farm profitably.”

Clear land titles can clearly help India’s 120 million small and marginal cultivators.

To conclude, it is important that what has started in Rajasthan starts to spread in other parts of the country as well and other states get around to passing a similar law.

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

The column originally appeared on Swarajya Mag on April 14, 2016

Vijay Mallya Is Just A Small Part Of The Big Banking Problem


If media coverage were to be a reflection of the scale of any problem, then it can safely be said that Vijay Mallya has all alone been responsible for the crisis in the Indian banking sector.

But that is clearly not the case.

Mallya owes Indian banks around Rs 9,000 crore. This is a very small amount when we look at the total amount of money owed by various corporates to Indian banks. The minister of state for finance Jayant Sinha shared some interesting data in a written reply to a question in the Lok Sabha, on March 11, 2016.

The accompanying table shows us how big the problem of banks’ lending to corporates actually is.

Rs. in Crore
Corporate Lending
YearGross AdvancesGross NPAsGNPA Ratio
2015-16 (till Dec. 15)38,41,8362,60,6536.78


The gross non-performing ratio has more than doubled between 2012-2013 and December 15, 2015. It has jumped from 3.22% to 6.78%. The gross non-performing ratio is essentially obtained by dividing gross non-performing assets by gross advances or total loans given by the banks, in this case to corporates.

And how do we define gross non-performing assets? As the per the Reserve Bank of India: “An asset…becomes non performing when it ceases to generate income for the bank.” When the corporate borrower stops paying interest and repaying the principal on a loan(a loan is an asset for a bank), the bank typically allows for a grace period of 90 days. After this grace period is over, the bank categorises the loans as a non-performing asset and starts setting aside money (or making provisions) for it. The total sum of such loans forms the gross-non-performing assets.

It is worth remembering here that a loan being categorised as a gross non-performing asset does not mean that all is lost for the bank when it comes to that particular loan. The bank can recover money from the asset that has been offered as a collateral against the loan. Of course this is not as straightforward as it sounds.

In Mallya’s case, he has also given personal guarantees to banks while taking loans for Kingfisher Airlines. Mallya owes around Rs 9000 crore to banks. This is a very small amount if one compares it to the gross-non-performing assets of corporate lending carried out by banks.

As on December 15, 2015, it was at Rs 2,60,653 crore. Mallya’s Rs 9,000 crore works out to around 3.5% of the total corporate gross non-performing assets. The percentage would be even more lower if we compare it to the total gross non-performing assets.

Also, Credit Suisse in a report released in October 2015 identifies some of the biggest corporates who are having a tough time repaying the money they have borrowed from banks. The Credit Suisse analysts (Ashish Gupta, Kush Shah and Prashant Kumar): “Going through the annual reports available for ‘House of Debt’ companies, we find instances where auditors have highlighted that the company has been in default for a period of up to 360 days. According to their auditors report, eight of the ten ‘House of Debt’ groups were in default last year. Total debt with these companies in default was at US$53 billion (~48% of total debt with the groups) of which US$37 billion were reported to be in default for 0-90 days by the auditors.

The corporates which form the House of Debt group are as follows—Adani Group, Essar Group, GVK group, GMR group, Jaypee Group, JSW Group, Lanco Group, Reliance ADAG, Vedanta Group and Videocon Group.

Hence, the point is that the mess in the Indian banking sector is substantially bigger than just Vijay Mallya. It’s just that Mallya with his flashy lifestyle has become the poster boy for these corporates who have borrowed from banks and are now not in a position to repay.

The finance minister Arun Jaitley has been very vociferous about Mallya and has said: “The facts are very clear: Every government agency will take strong action against him. Banks will go all out to recover every single penny.”

Indeed, that is great. Nevertheless, the question is why just Mallya? What about the other corporates who have borrowed from banks and are now not repaying their loans? They owe the banks close to Rs 2,51,000 crore. Mallya owes just Rs 9,000 crore.

Why is the same aggression missing when it comes to the other borrowers?

The nation wants to know.

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

The column originally appeared on Swarajya Mag on March 22, 2016

Mr Jaitley, Until When Will Govt Continue To Support Public Sector Banks?

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
The Economic Survey released on February 26 had a very interesting number in it. It pointed out that between 2009-2010 and the first half this financial year, the government had infused a capital of Rs 1.02 lakh crore into public sector banks.

And it ain’t done with it as yet. As finance minister Arun Jaitley said in his budget speech earlier today: “We are now confronted with the problem of stressed assets in Public Sector Banks, which is a legacy from the past. Several steps have already been taken in this regard…To support the Banks in these efforts as well as to support credit growth, I have proposed an allocation of Rs 25,000 crore in 2016-17 towards recapitalisation of Public Sector Banks. If additional capital is required by these Banks, we will find the resources for doing so. We stand solidly behind these Banks.

This means that the government will continue to pour money into public sector banks. Jaitley has clearly said that the government will invest as much money as it takes in order to recapitalize public sector banks.

The stressed loans of public sector banks as on September 30, 2015, stood at 14.2% of the total loans. Hence, for every Rs 100 of loans given by public sector banks, Rs 14.2 has either been declared to be a bad loan or has been restructured. In March 2015, the stressed assets were at 13.15%.

A restructured loan essentially implies that the borrower has been given a moratorium during which he does not have to repay the principal amount. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased.

Further, the public sector banks have been under-declaring their level of bad loans by restructuring loans and kicking the can down the road. Nearly 40% of the restructured loans have gone bad over the last two to three years. This means many restructured assets will continue to go bad in the years to come.

With bad loans and restructured assets accumulating the public sector banks will continue to need fresh infusion of capital. Also, estimates made by the PJ Nayak Committee suggests that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The committee further said 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.”

The government on the other hand estimates that “the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore.”

Both the estimates are very large and have the potential of really screwing up the fiscal deficit number of the government in the years to come. Fiscal deficit is the difference between what a government earns and what it spends.

This is a clear impact of the government continuing to own 27 public sector banks. Narendra Modi in the run up to the 2014 Lok Sabha elections had promised “minimum government maximum governance”. This promise has clearly gone out of the window. It is visible in the fact that the government continues to own so many public sector banks.

The tendency in the government is to look at shares of public sector companies as family silver. And given the bad state of the stock market currently, this family silver cannot be sold.

But the trouble is that any government can only do so much. And given the problems that the Indian economy is currently facing, this government is clearly overextending itself in trying to save each and every public sector bank.

Jaitley also taked about operationalising the Bank Bureau Board in 2016-2017. This Bureau expected to search and select heads, wholetime directors and non-executive chairmen of public sector banks. The idea is to professionalise the public sector banks.

Jaitley further said: “The process of transformation of IDBI Bank has already started. Government will take it forward and also consider the option of reducing its stake to below 50%.” Does this mean privatisation of IDBI Bank? It doesn’t seem like that.

Recently, IDBI Bank made public, plans of raising Rs 1500 crore from the Life Insurance Corporation(LIC) of India. LIC currently owns 7.25% of the bank. With this new issue of shares, the LIC holding in the bank will increase to around 19%. If this is the route that Jaitley plans to reduce the stake of the government below 50% in IDBI Bank, then this can’t be really called privatisation. It is essentially moving money from one arm of the government to another arm, something the Congress led UPA government used to specialize in.

The moot question is why does the government need to own 27 public sector banks? It’s social sector obligations can easily be fulfilled by continuing to own SBI and a few other banks, depending on which bank is strong in which part of the country.

In his speech Jaitley also talked about bringing a comprehensive legislation for tackling the Ponzi scheme menace, though he did not use the word Ponzi anywhere. It is difficult to comment on this right now given that no details are known. Nevertheless, it will be interesting to see how different this new legislation will be from the ones already in place and whether it will actually lead to the number of Ponzi scheme launches coming down.

Jaitley also talked about the government facilitating the deepening of corporate bond market, in his speech. This is something several finance ministers have talked about in the past. He also talked about amending the RBI Act 1934 to provide a statutory basis for Monetary Policy Committee. Once the Committee is in place the decisions on repo rate changes will be made by the Committee, instead of just the RBI Governor, as is currently the case.

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

The column originally appeared on SwarajyaMag on February 29, 2016

Modi govt is still paying for the over-borrowing sins of UPA


The finance minister Arun Jaitley managed to balance his numbers and meet the fiscal deficit target of 3.9% of gross domestic product (GDP) that he had set for this financial year. He has also projected a fiscal deficit of 3.5% of GDP for the next financial year, 2016-2017.

In the budget speech made last year, Jaitley had said that the government will achieve a fiscal deficit of 3.5% of GDP in 2016-17; and 3% of GDP in 2017-18.
In order to project a fiscal deficit of 3.5% of GDP, Jaitley has made extremely optimistic assumptions on the revenue receipts front (basically the income of the government) and understated the likely expenditure.

Having said that he is also facing the problem of excess borrowing carried out by the previous Congress led United Progressive Alliance government. These borrowings are now maturing and need to be repaid.


In Rs crore2013-2014(Actuals)2014-2015(Actuals)2015-2016 (Revised estimates)2016-2017 (Budget estimates)
1. Repayment of debt162976207517250709284694
2. Total Interest Payments374254402444442620492670
3. Total Debt Servicing(1+2)537230609961693329777364
4. Revenue Receipts1014724110147312060841377022
5. Nominal GDP11272764124882051356719215065010
Debt Servicing Ratio (3/4)52.94%55.38%57.49%56.45%
Debt Servicing Ratio(3/5)4.77%4.88%5.11%5.16%

Source: www.indiabudget.nic.in


As can be seen from the accompanying table, the repayment of maturing debt as well as the total interest that needs to be repaid on outstanding has been going up over the last few years.

How does the debt servicing number look? Debt servicing is defined as the amount of money a government spends towards repaying the debt as well as paying interest on the outstanding debt.

Any budget number should not be looked at in an absolute sort of way. Hence, in this case we look at the debt servicing ratio. This ratio is obtained by dividing the money spent towards debt servicing by the revenue receipts i.e. the income of the government. What the table clearly tells us is that the debt servicing ratio of the government has worsened over the years.

In 2013-2014, the debt servicing ratio was at 52.94%. In 2016-2017, it will be at 56.45%.

We can also calculate the debt servicing ratio as a percentage of the nominal GDP. It is clear from the table that this ratio has worsened as well over the years.

The actual number will turn out to be higher than this, given that Jaitley has made extremely optimistic assumptions when it comes to the growth in revenue receipts.

Further, the government expects to earn Rs 56,500 crore through the disinvestment route in 2016-2017. It expects to earn Rs 36,000 crore by selling stakes in the companies it owns. And it expects to earn Rs 20,500 crore by selling stakes in companies in which it has a minor share. This is referred to as strategic disinvestment.

The interesting thing is that 2015-2016, the government expects to earn only Rs 25,312 crore through the disinvestment route. A major portion of this has been picked up by the Life Insurance Corporation (LIC) of India. Not a single rupee has been earned through the strategic disinvestment route.

After taking this into account, it is safe to say that the government has made a fairly aggressive assumption on what it wants to earn through the disinvestment route. The chances of these numbers materialising in reality are low.

Hence, the debt servicing ratio is likely to higher in 2016-2017. This is majorly because of the huge expansion in government expenditure carried out by the previous Congress led UPA government. A higher expenditure meant a greater fiscal deficit, which in turn means more borrowing to finance the expenditure. Fiscal deficit is the difference between what a government earns and what it spends.

In 2007-2008, the fiscal deficit of the government was at 2.7% of the GDP. This jumped to 6.4% of the GDP in 2009-2010. In 2011-2012, the number was at 5.7% of the GDP. These huge fiscal deficits were financed through higher borrowing. And this borrowing now needs to be repaid. Meanwhile, the interest payments have also increased as the debt keeps accumulating.

This is one reason behind why Jaitley has made optimistic revenue receipt projections in the budget and understated the expenditure majorly. He needed to do this in order to come up with a 3.5% of GDP fiscal deficit number.

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

The column originally appeared on SwarajyaMag on March 1, 2016

Economic Survey: Indian Companies Are Trapped In A Chakravyuha


The Economic Survey released before the budget is brought out by the chief economic adviser to the ministry of finance. Arvind Subramanian is the current chief economic adviser.

In the second chapter of the Economic Survey of 2015-2016, Subramanian makes a very interesting point: “The Charkravyuha legend from the Mahabharata describes the ability to enter but not exit, with seriously adverse consequences. It is a metaphor for the workings of the Indian economy in the 21st century.”

What he means here is that Indian companies continue to operate, irrespective of the fact whether they make money or not. In a free market as firms innovate and grow, they end up pushing out other firms which shut down. But that doesn’t seem to be happening in India.

As the Survey points out: “In principle, productive and innovative firms should expand and grow, forcing out the unproductive ones. So surviving firms should be much larger than new ones…In the US the average 40-year old plant is 8 times larger (in terms of employment) than a new one. Established Mexican firms are twice as large as new firms. But in 2010 India the average 40-year-old plant was only 1.5 times larger than a new one.”

In fact, the situation has deteriorated since the late 1990s. In 1998-99, the ratio of the average 40-year-old plant in comparison to the new ones was 2.5. What this tells us is that “there are not enough big firms and too many firms that are unable to grow, the latter suggesting that there are problems of exit.”

What this basically means is that firms which should be shutdown are not shutting down due to various reasons. Hence, there is an exit problem. A situation that is best expressed by the Hotel California song, sung by The Eagles: “You can check out any time you like, but you can never leave.” As the Survey points out: “India unlike many countries seems to have a disproportionately large share of inefficient firms with very low productivity and with little exit.”

The public sector enterprises lead the pack. The accumulated losses of sick public sector enterprises as of 2013-2014 had stood at Rs 1.04 lakh crore. Then there is the civil aviation sector (read Air India) which has seen losses for seven straight years in a row. In 2013-2014, the losses were at Rs 2,400 crore.

Over and above this there are power distribution companies owned by various state governments with accumulated losses of Rs 2.3 lakh crore. Also, there is the problem of public sector banks, which have seen a fresh infusion of capital of Rs 1.02 lakh crore between 2009-2010 and the first half of this financial year.

What this tells us is that many firms which should have been shut down long back are still in operation. In case of public sector enterprises, it is because of the government continuing to bail out these firms. As the Survey points out: “Exit is impeded often through government support of incumbent, mostly inefficient, firms. This support—in the form of explicit subsidies (for example. bailouts) or implicit ones (tariffs, loans from state banks)—represents a cost to the economy.”

What does this mean? It means that the government keeps loss making firms going by bailing them out. The trouble is that every extra rupee that the government spends on the bailout of these firms by taking on their losses, it has to borrow. And for every rupee that the government borrows, there is one rupee less for the private sector to borrow.

This means that the accumulated losses of Rs 1.04 lakh crore of public sector enterprises is money that the private sector could have borrowed. It also means that Rs 1.02 lakh crore spend through the fresh infusion of capital into public sector banks is money that the private sector could have borrowed.

If the government borrows more, it means there is less for the private sector to borrow, and in the process it has to pay a higher rate of interest than it typically would in case of lower borrowing by the government. This essentially leads to “greater interest costs and reduced private sector investment activity”.

Also, in a capital scare country like India, misallocation of capital to keep loss making companies running, is not quite the best thing to do.

It raises the question as to why does the government keep running loss making public sector enterprises? It also raises the question as to why does the government need to own more than twenty-five public sector banks?

Thankfully, the Narendra Modi government has made some effort towards sorting out the mess in the power distribution companies through the UDAY scheme.  Some efforts have also been made towards sorting out the mess in the public sector banking space in the country, though clearly a lot more needs to be done.

But rather ironically the government continues to run loss making public sector enterprises. It continues to own telephone companies, an airline, hotels, a company which makes scooters and a company which used to make bicycles. It also owns a major stake in the country’s biggest cigarette company. How bizarre can it really get?

This also goes totally against the idea of minimum government and maximum governance that Narendra Modi had put forward in the run up to the Lok Sabha elections in 2014, but has since abandoned. One of the main reasons the government has held back in shutting down these companies is that it doesn’t want a run-in with the trade unions, which can get nasty.

Nevertheless, as the Survey points out: “In many cases where public sector firms need to be privatized, the problems of exit arise because of opposition from existing managers or employees’ interests. But in some instances, such action can be converted into opportunities. For example, resources earned from privatization could be earmarked for employee compensation and retraining.”

Also, many public sector enterprises have a large amount of land which can be monetized. This money can go into the government kitty and be used for the development of physical infrastructure. It can also be used to offer the employees an attractive compensation, so that they don’t come in the way of the government shutting down the firms.

As the Economic Survey points out: “Most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks and made into vehicles for promoting the ‘Make in India’ and Smart City campaigns. If the land is in dense urban areas, it could be used to develop eco-systems to nurture start-ups and if located in smaller towns and cities, it could be used to develop sites for industrial clusters.”

This suggestion makes a lot of sense. I hope Narendra Modi has found time to at least read this part of the Economic Survey.

The column originally appeared on Swarajya Mag on February 26, 2016


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