Category: The Daily Reckoning | Page 3

14 December, 2015

One reason why the Real Estate Bill is likely to fail

In Friday’s column I summarised the salient features of the Real Estate Bill. It is clearly a well-intentioned law which seeks to solve the problems faced by consumers when buying a home to live in. But is it the panacea it is being made out to be? I have my doubts on that.

Over the last few days there have been many articles and columns in the media saying that the Real Estate Bill is going to bring acche din for the home buyers.

If you had just read the press release of the government on the union cabinet clearing the Bill and accepting the recommendations of the Select Committee of the Rajya Sabha, you would have come to a similar conclusion.

But after reading the comments of the Select Committee of the Rajya Sabha as well as the Bill, it is safe to say that the acche din for the home-buyers will take some time to come, if they do come at all.

Further, at the very beginning I would like to repeat what I said in my last column, the Bill is very well worded and has solutions for almost all the problems that home-buyers face while dealing with real estate companies. Nevertheless, there are problems with real estate that go beyond the Bill and the Bill at best when it becomes an Act only takes care of some of the issues concerning the real estate sector.

Among others, AW Rabi Bernard of the AIADMK and Naresh Agarwal of the Samajwadi Party dissented to the report submitted by the Select Committee of the Rajya Sabha to which the Bill had been referred to in May earlier this year.
Agarwal in his dissent note said that: “Central government cannot enact any law on the subjects relating to the States and if it does so, it would be treated as interference in the jurisdiction of the states.”

Bernard makes a similar point in his dissent note when he says that the central government should have sent the Real Estate Bill as a model bill to the states which could have then enacted their own bills to regulate the real estate sector. Bernard also said that the Bill casts undue responsibilities on the state government. If cooperative federalism is the way forward, then this clearly is not a bad idea.

The broader point which dissent notes of both Bernard and Agarwal make is that real estate is a sector which needs to be regulated by the state government. In fact, the Bill envisages the same thing. It calls for a real estate regulator (the Real Estate Regulatory Authority to be very precise) to be set up in every state and union territory. And ultimately the success of the Bill as and when it becomes an Act depends on how seriously the respective state governments implement it.

Further, the Select Committee of the Rajya Sabha met the real estate promoters during the course of deliberating over the Bill. In their submission to the Select Committee the real estate promoters were critical on “the delays caused in obtaining the various approvals before starting any real estate project”. Some of the real estate promoters pointed out that it took years to obtain necessary approvals. This ultimately delayed the project and added to its cost as well.

The promoters also told the Select Committee that they should not be held responsible for delays in handing over homes on account of inaction or delayed action of the state governments.

While I have no soft corner for real estate promoters but this is indeed a genuine problem that needs to be sorted if home-buyers need to receive homes they have bought on time. As a recent news-report in the Mint pointed out: “Developers need about 54 to 60 approvals before starting to build, a process that can stretch on for years. They need permissions ranging from an “Ancient Monument” approval to ensure that no monuments of historical significance are near the proposed project, to clearance from the Tree Authority, which must ascertain how many trees, if any, will be cut as a result of construction.”

The Select Committee of the Rajya Sabha in its report talks about single window clearance from the state government to facilitate development of the real estate sector. And how will this be achieved? Section 32(b) of the Bill talks about the real estate regulator in order to facilitate the growth and promotion of a healthy, transparent, efficient and competitive real estate sector, should be making recommendations to the appropriate state government on creation of a single window system ensuring time bound project approvals and clearances for timely completion of real estate projects.

I guess there is nothing beyond this the Real Estate Bill can really do. So it ultimately boils down to the state governments whether they are in the mood to give a single window clearance for real estate projects.

How good are the chances of something like that happening? The entire process of clearing a real estate project through the various stages is a good money making exercise for both state level politicians as well as bureaucrats. So the economic incentive is clearly against a single window clearance. Also, much of the money thus raised is used to fight elections at the state level. The builder-political nexus is a huge source of finance to fight elections at the state level for politicians. Will this nexus break down?

Further, many politicians at the state level are real estate promoters (or builders) themselves or if not promoters they have others operating as fronts. Given this, why would they want a transparent and an efficient real estate sector, when the opaqueness and inefficiency benefits them the most.

So the Real Estate Bill as and when it becomes an Act will definitely move things forward from the consumer point of view. Nevertheless, it is clearly not the panacea that it is being made out to be. Many more things need to be done in order to clean up the real estate sector in this country starting with the cleaning up of political funding.

And that, as I keep saying, is easier said than done.

The column originally appeared on The Daily Reckoning on December 14, 2015

11 December, 2015

All you wanted to know about the Real Estate Bill but were afraid to ask

On December 9, 2015, the union cabinet led by Prime Minister Narendra Modi approved the Real Estate (Regulation and Development) Bill, 2015, as reported by the Select Committee of Rajya Sabha.

In May earlier this year, the bill had been sent to a Select Committee of the Rajya Sabha. The union cabinet has accepted all the suggestions made by the Select Committee. The Bill will now be put up before both the houses of Parliament.

So what does the Bill have to offer? The real estate market in India is an excellent example of information asymmetry where one side has much more information than the other. In this case, the real estate promoters and the real estate agents have much more information than the home-buyers. Even getting something as basic as the going price of an apartment in a given area is very difficult.

The Rajya Sabha Select Committee on the Bill met real estate consumers and this is what it had to say in its report: “These consumers were unanimous in their submission that they have no means to know about the real status of the project for example whether all the approvals have been obtained, who is holding the title of the land, what is the financing pattern of the project and what has been the past record of the builder etc.? As a result, they invested their money without having any information about the project. In many cases, they were not given what was promised to them and in almost all cases the project was delayed.”

The Bill seeks to tackle this information asymmetry and the fact that the real estate sector does not have any single regulator regulating it. The Bill talks about setting up of a real estate regulator (Real Estate Regulatory Authority to be very precise) in every state and union territory. A real estate promoter needs to register a project with the real estate regulator before he starts selling or advertising it.

Projects with the area of land proposed to be developed exceeding five hundred square metres or where more than eight apartments are to be developed, need to be registered with the real estate regulator of the state they are based in.

The application to the regulator needs to be accompanied with details like the real estate projects already launched by the real estate promoter in the past five years. It also needs to be mentioned whether these projects have been completed or are still under development. If the projects has been delayed, the reasons for the delay need to be mentioned.

Over and above this an authenticated copy of the approvals and commencement certificate from the competent authority also needs to be submitted. Other important details like land title, the layout plan for the proposed project, the location details of the project, also need to be submitted to the regulator.

After an approval is granted by the real estate regulator, the real estate promoter will have to upload all these details on to the website of the real estate regulator. Any advertisement of the project should have the precise link to the project details as well.

At the time of booking and issuing an allotment letter to the buyer, the promoter needs to make available to the buyer, the time schedule of completion of the project, including the provisions for civic infrastructure like water, sanitation and electricity.

Many real estate companies over the years have sold homes without the basic amenities in place. In some cases, housing societies have even lacked a water connection and have needed to get water delivered through water tankers almost on a daily basis for years. The Real Estate Bill hopes to correct this. It also hopes to correct the information asymmetry that prevails in the sector up until now.

The Bill also allows any real estate buyer to file a complaint against the real estate promoter or real estate agent with the real estate regulator in case any violation of the provisions of the Bill as and when it becomes an Act.

A major problem with the sector has been a delay in the delivery of homes. One of the major reasons this happens is because real estate companies announce a new project, raise money and then use that money either to complete an earlier project or pay off debt.

This has led to a situation where many projects have been delayed endlessly given that the trick of starting a new project and raising money doesn’t seem to be working anymore. The Bill seeks to correct this situation. The real estate promoter needs to maintain 50% or “such higher percent, as notified by the appropriate government” of the amount raised from the buyers of homes, in a separate bank account.

This money can be only used for the cost of construction and can be withdrawn by the real estate promoter in proportion to the percentage of completion of the project. This is one of the major clauses in the Bill and if implemented correctly can bring huge relief for the buyers.

This clause has been diluted. In the original version of the Bill, the promoter needed to maintain 70% of the amount raised in a separate bank account. The reason offered for this dilution is that in many cases land prices form a major part of the project and maintaining 70% of the money raised in a separate bank account isn’t the best way forward.

Further, up until now the buyer while buying a home had no clue about what exactly was the area that he was paying for. The Bill defines the term carpet area exactly as: ““carpet area” means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.” Again, if implemented well this clause can bring huge relief to home buyers.

Real estate agents will also need to register with the regulator. This is another good move where not anyone and everyone will jump into become a real estate agent or a broker, as is the case currently.

Also, currently the real estate promoters keep changing the plans as they keep building the project. Once the Bill becomes an Act, this may no longer be possible. Any alterations to sanctioned plans, layout plans and specifications of the buildings or the common areas within the project will need written consent of at least two-thirds of the buyers other than the promoter, who have bought apartments in the building.

This is another buyer friendly measure. On a jovial note what this means is that real estate promoters will have to stop advertising all those swimming pools which are planned at the time a project is launched but never get built.

Up until now buyers have had to pay a huge rate of interest every time they miss a payment to the real estate promoter. But the promoters never pay or at least don’t pay the same high rate of interest, if there is any delay on their part. The Bill essentially calls for the same rate of interest to be paid by the real estate promoter as well as the buyer in the eventuality of a default on either side.

Further, if the promoter violates any one of the provisions under section 3 of the Bill he shall be punishable with imprisonment for a term which may extend up to three years or a fine which may extend up to a further 10% of the estimated cost of the project, or with both. Section 3 of the Bill basically deals with the real estate promoter having to register with the real estate regulator before launching a project and then following a series of buyer-friendly steps.

On paper, the Bill seems to be well thought out and takes care of the all the issues that buyers have had with real estate promoters in the years gone by.

Nevertheless, the implementation of the Bill as and when it becomes and Act, will be carried out at the state government level. And whether state governments carry out the implementation in true letter and spirit remains to be seen. I have a few reservations regarding the implementation of the Bill when it becomes an Act, which I shall discuss in a column next week.

Postscript: The Rajya Sabha website has uploaded the Select Committee’s recommendations as well as the Real Estate Bill in a scanned format instead of uploading the proper report.
If Digital India is the way forward this is clearly not done. Information needs to be made available to everyone in the most accessible way. Hope the concerned authorities are listening.

The column originally appeared on The Daily Reckoning on December 11, 2015

10 December, 2015

Why oil prices have fallen below $40 per barrel

A few months back I wrote a series of columns on oil. In these columns, I maintained that it is very difficult to predict the price of oil over the long term, given that there are way too many factors involved, other than just demand for and supply of the commodity. At the same time I said that in the short-term the price of oil will continue to go down. And that is precisely what has happened.

Data from the Petroleum Planning and Analysis Cell (PPAC) tells us that as on December 8, 2015, the price of the Indian basket of crude oil stood at $ 37.34 per barrel. In fact, during the course of this week, oil prices have touched a seven year low.

What is happening here? The Organization of the Petroleum Exporting Countries (OPEC), an oil cartel of some of the biggest oil producers in the world, met last Friday on December 4, 2015.

The statement released by OPEC after the meeting as usual was very general in nature. It said: “emphasizing its commitment to ensuring a long-term stable and balanced oil market for both producers and consumers, the Conference [i.e. OPEC] agreed that Member Countries should continue to closely monitor developments in the coming months.”

What does this “really” mean? In the past, the OPEC has adjusted its oil production depending on oil demand. If the demand was high, it increased production so as to ensure that oil prices did not go up too much. This was done in order to ensure that other forms of energy did not become viable. If the demand was low, it cut production in order to ensure that oil prices did not fall too much.

In the last one year, OPEC has abandoned this strategy primarily on account of all the oil that is being produced by the shale oil companies in the United States. As shale oil started to hit the market, the OPEC countries started to lose market share. Hence, they decided not to cut production any further, and try and maintain market share, even if that meant low oil prices.

The major producers within the OPEC (the likes of Saudi Arabia, Kuwait and Iraq) produce oil at anywhere between $9 to $20 a barrel. It costs anywhere between $29 to $90 per barrel to produce shale oil, as per the International Energy Agency (IEA).

Hence, the idea was to engineer low oil prices and in the process make shale oil unviable and help OPEC countries maintain their market share. Nevertheless, despite low oil prices, the US shale oil industry is not shutting down at the rate it was expected to, when the price of oil started to fall, around a year back.
And this explains why OPEC continues to produce oil full blast. It wants to kill the US shale oil industry. Further, what the OPEC’s statement released last Friday really means is that the cartel will maintain its production at over 31.5 million barrels per day. In fact, members of the OPEC have always known to cheat on the side and produce more than their allocated quotas. Hence, the daily production is likely to be more than 31.5 million barrels per day.

As the newsagency Bloomberg reported: “There’s as much as 2 million barrels of oversupply in the market, and OPEC’s meeting on Friday means “everyone does what they want,” Iran’s Oil Minister Bijan Namdar Zanganeh said in Vienna on Dec. 4.”

Take a look at the following two charts from the International Energy Agency. One is a chart showing the World Oil Supply. And the other shows World Oil Demand.

As per the chart, the World Oil Supply during the period July to September 2015 was at 96.9 million barrels per day. The demand on the other hand was lower than the supply at 96.35 million barrels per day.

The OPEC oil supply during the period July to September 2015, went up in comparison to the period April to June 2015. The OPEC production between April to June 2015 was at 31.5 million barrels per day. Over the next three months it jumped to 31.74 million barrels per day. Hence, OPEC contributed significantly to the jump in global oil supply.

In fact, the production of OPEC is likely to increase in the months to come as the sanctions on Iran are lifted and the country is allowed to export more oil.

Over and above this, the global oil inventory is at a record high. As a recent IEA report points out: “Stockpiles of oil at a record 3 billion barrels are providing world markets with a degree of comfort. This massive cushion has inflated even as the global oil market adjusts to $50/bbl oil. Demand growth has risen to a five-year high…with India galloping to its fastest pace in more than a decade. But gains in demand have been outpaced by vigorous production from OPEC and resilient non-OPEC supply – with Russian output at a post-Soviet record and likely to remain robust in 2016 as well. The net result is brimming crude oil stocks that offer an unprecedented buffer against geopolitical shocks or unexpected supply disruption.”

As the report further points out: “The stock overhang that first developed in the US on the back of soaring North American crude production, has now spread across the OECD. Since the second quarter, inventories in Asia Oceania have swollen by more than 20 million barrels. In Europe, record high Russian output and rising deliveries from major Middle East exporters are filling the tanks.”

What this clearly means is that oil prices are likely to stay low over the next few months. Further, the forecast is for a fairly mild winter in Europe as well as North America. This means that the demand for diesel, which is the fuel of choice for heating in Europe as well as North East America, is unlikely to go up at a rapid rate. The stockpiles of diesel are at a five-year high.

The column originally appeared on The Daily Reckoning on December 10, 2015

9 December, 2015

Why post graduates and PhDs want to be peons

At a recent literature festival two well-respected veteran journalists were a part of a discussion. During the course of the discussion one of them said that he was travelling through Bihar recently, in the run up to the state assembly elections held in October and November, earlier this year. And he was surprised to know that in Bihar a job actually means a government job. To this the other senior journalist added that it means the same in other parts of the country as well.

This at a very basic level explains the fascination a large part of India has for government jobs. It is another extension of what we like to call a mai-baap sarkar.

In fact, over the years, reports have regularly appeared in the media about people with post graduate degrees, engineering degrees, MBAs and even PhDs, applying for jobs at the lowest level in the government.

Take the recent example from Uttar Pradesh. For a 368 posts of grade IV staff (peons) at the state Secretariat, the Uttar Pradesh government received 23.25 lakh applications. This included around 250 PhDs, 25,000 post graduates and 1.52 lakh graduates. “If we start interviewing such large number of applicants, it will take more than two years to complete the process,” a state government official told The Indian Express.

If 23.25 lakh people are applying for 368 jobs, it clearly shows the sad state of job creation in the state of Uttar Pradesh. What is even more surprising is that people with good degrees have applied.

Nevertheless what happened in Uttar Pradesh is not an isolated example and has been happening in other parts of the country as well. Take the case of Rajasthan University which sometime in 2011 wanted to employ 15 peons. It got 3000 applications for it. The Vice Chancellor of the University told NDTV that the university had received applications from: “candidates who’ve done PhD, MPhil, MBA and Msc…We are really surprised to get applications from such highly-qualified people.”

Or take the recent case in Chhattisgarh where 75,000 applications were received for 30 posts of peons in the Directorate of Economics and Statistics of the Chhattisgarh. The applicants included post graduates in arts and sciences and engineers as well, a news-report said.

What explains this trend? Lack of jobs is one answer. The fascination for government jobs and the job security that comes with it, is another. The fixed hours that government jobs have to offer is another possible reason. But there is a fourth answer to this as well. At lower levels, the government jobs are much better paying than the private sector. And there is data to back it up.

As the Report of the Seventh Pay Commission points out: “To obtain a comparative picture of the salaries paid in the government with that in the private sector enterprises the Commission engaged the Indian Institute of Management, Ahmedabad to conduct a study. According to the study the total emoluments of a General Helper, who is the lowest ranked employee in the government is Rs 22,579, more than two times the emoluments of a General Helper in the private sector organizations surveyed at Rs 8,000-9,500.”

Hence, the IIM Ahmedabad study “on comparing job families between the government and private/public sector has brought out the fact that…at lower levels salaries are much lower in the private sector as compared to government jobs.”

This explains why so many people end up applying for jobs of peons with the government. The economic incentive is at work. It also explains why so many people with degrees end up applying for low-end jobs with the government. Over and above the salary, any money from corruption can also be added to the kitty.

Further this is not a recent phenomenon and has been at work for a while now. As Professor R Vaidyanathan of IIM Bangalore put it in 2008: “Most of the discussion on the emoluments of the government employees focuses on the senior level positions like that of Secretary etc. But more important is the positions at the lower end of the hierarchy. There was an interesting news item sometime ago about there being over 11,000 applicants for just three posts of peons advertised by the Haryana Electricity Regulatory Commission.”

So what is happening in 2015 was also happening in 2008. As Vaidyanathan writes: “This is hardly surprising considering the lower the category of position in government the larger is the number of aspirants. The salary and perks in government are significantly higher than those of the private sector at the lower levels. Reports suggest that post-implementation of the Pay Commission report [the Sixth Pay Commission i.e.], the lowest-level worker will get more than Rs 10,000 per month as pay. In the private sector, a peon or similar-category position might fetch around Rs 3,000 or at best Rs 5,000. An important consideration is the hours of work involved.”

Another point that needs to be discussed here is that we are producing many more engineers and MBAs than can be possibly absorbed in adequate jobs. As Akhilesh Tilotia writes in The Making of India: “An analysis of the demand-supply scenario in the higher education industry shows significant capacity addition over the last few years: 2.4 million higher education seats in 2012 from 1.1 million in 2008.” In 2016, India will produce 1.5 million engineers. This is more than the United States (0.1 million) and China (1.1 million) put together.

The number of MBAs between 2012 and 2008 has also jumped to 4 lakh from the earlier 1 lakh. Also, the quality of many of these engineers and MBAs is not up to the mark. As Tilotia writes: “India faces a unique situation where some institutes (IITs,IIMs, etc.) are intensely contested while a large number of the recently-opened institutes struggle to fill seats…With most of the 3 million people wanting to pursue higher education now having an opportunity to do so, the big question that should…be asked…are all these trained personnel required? Our analysis seems to suggest that India may be over-educating its people relative to the current and at least the medium-term forecast requirement of the economy.”

And this to some extent also explains why people with good education degrees apply for jobs of peons.

The column originally appeared on The Daily Reckoning on December 9, 2015

8 December, 2015

Why it is easier to acquire land in Gujarat & Punjab than Bihar, Kerala & Bengal

Land acquisition has been a tricky subject in the country of late. The issue has been discussed threadbare in the media over the last few years. But one point seems to have been missed out on. I came across this rather basic and very interesting point in Sanjoy Chakravorty’s book The Price of Land—Acquisition, Conflict, Consequence.

In this book published in 2013, Chakravorty uses data from the 2005-2006 agriculture census. I will use data from the 2010-2011 agricultural census in this column and make the same points that Chakravorty is making.

The basic point that Chakravorty makes is that it is easier to acquire land in states where the average landholding is larger in comparison to states where the average landholding is smaller. As Chakravorty points out: “In Kerala, where 96 per cent of all landholding are marginal, the average marginal holding size is 0.35 acres [the actual number is around 0.34 acres. The writer seems to have rounded it off to 0.35 acres]. In Bihar, where almost 90 per cent of all holdings are marginal, the average marginal holding size is 0.62 acres.”

How do things look if we were to use data from the 2010-2011 agricultural census? The above paragraph would read like this: “In Kerala, where 96 per cent of all landholding are marginal, the average marginal holding size is 0.33 acres. In Bihar, where almost 91 per cent of all holdings are marginal, the average marginal holding size is 0.61 acres.”

As we can see the numbers haven’t changed much between 2005-2006 and 2010-2011.
Chakravorty further points out: “In both these states [i.e. Bihar and Kerala] the marginal holdings make up little over half of all agricultural land area. In Tamil Nadu, Uttar Pradesh and West Bengal, over 75% of all landholdings are marginal. It may be very difficult to bring these lands to the market.”

In Bihar farmers with marginal landholders own 57% of all agricultural land. In Kerala, the number as of 2010-2011 stands at 58.6%. In Tamil Nadu, Uttar Pradesh and West Bengal, 90%, 79% and 82% of all landholdings are marginal.

What this means is that the moment a large amount of land needs to be acquired for an infrastructure project or setting up a factory or a mine, a large number of landholders need to be dealt with. In many cases, some arm of the government (state or central) wants to acquire land for private businesses. And this is not easy.

Further, many other states like Gujarat, Rajasthan and Punjab have larger average landholdings. As Chakravorty writes: “From the smallest landholders(marginal farmers in Kerala, averaging 0.35 acres per holding) to the largest (50 acres in several states, even larger in some), it is not difficult to see how a price such as Rs 10 lakh per acre can be perceived very differently by different landholders based on the size of their holdings. For example, an average large landowner in Gujarat would be paid more than Rs 4 crore for his land (because the average large landholding size in the state is over 41 acres), whereas the average marginal landowner in Kerala would be paid Rs 3.5 lakh.”

How do things look if we use 2010-2011 agriculture census data? The average large landowner in Gujarat owns around 52 acres. Hence, at Rs 10 lakh per acre he would be paid Rs 5.2 crore. In fact, even if we look at marginal landowner in Gujarat things are much better. The marginal landowner in Gujarat owns around 1.2 acres. At Rs 10 lakh per acre the payment is Rs 12 lakh. In Kerala, the average marginal landowner owns 0.33 acre as per the latest agriculture census, and this amounts to a payment of Rs 3.3 lakh. In Bihar with an average size of 0.61 acres, the payment would be Rs 6.1 lakh.

In fact, Punjab is another state where the average marginal landholding is significantly large. The average size in case of marginal landholding in Punjab is 1.5 acres. At Rs 10 lakh per acre, this would involve a payment of Rs 15 lakh. The average size of a landholding in Punjab is around 9.3 acres. And at Rs 10 lakh per acre, it would involve a payment of Rs 93 lakh.

Given this difference in average landholding size, it is easier to acquire land in parts of the country where average the landholding size is larger because that ultimately leads to higher payments. As Chakravorty writes: “Based on this information on land distribution alone, it is possible to conclude that land acquisition is likely to very difficult in some states; Kerala, Bihar, and West Bengal top this list. It is also likely to be significant challenge in Tamil Nadu and Uttar Pradesh, and to a lesser extent, in Andhra Pradesh and Assam.”

In fact, information is available even at a district and sub-district level. Given this, identifying parts of the country where land fragmentation is lower and hence, land acquisition should be easier. Nevertheless as Chakravorty puts it: “This is not hard to do because the information already exists. Having this information should make the task of identifying land for acquisition easier, but to the best of my knowledge, has never been done.”

This is not surprising given that there was very little resistance to forceful land acquisition carried out by the government up until very recently. But now that is no longer possible, hence, more out of the box solutions need to be looked at.

The column originally appeared on The Daily Reckoning on Dec 8, 2015