Of Falling Real Estate Prices, Dr Arvind Panagariya and the Art of Continuing to Suck Up


Dr Arvind Panagariya, the former vice-chairman of the Niti Aayog, today in a column titled Demonetisation: Evaluating the Critics, in the Business Standard, writes: “The second avenue through which demonetisation has directly expunged unaccounted wealth is real estate…Unsurprisingly, an attack on unaccounted cash struck at the heart of this black wealth by cutting real estate prices by a quarter.”

There are multiple questions that this statement raises:

1) What is the source for this data? This isn’t exactly a conversation between two property dealers, or two prospective real estate buyers, who can quote any offhand numbers, while having a conversation. This is a statement being made by someone who was at the top of an economic institution run by the Indian government. This is a statement by an economist working in a top university in the United States.

Also, if real estate prices have fallen by 25 per cent after demonetisation, why isn’t this visible in official data sources. Take the case of Reserve Bank of India’s All India House Price Index, which has been plotted as Figure 1.

Figure 1: 

Figure 1 clearly shows that housing prices across the country have been on their way up. There has “clearly” been no dip, as Dr Panagariya claims. How do things look if we plot one-year return instead of index values? Let’s take a look at Figure 2, which does that.

Figure 2: 

Figure 2 tells us clearly that the one-year return in real estate has been falling over the last six and a half years. This trend started much before demonetisation took place. Also, how have the returns been post demonetisation? Between the end of December 2016 and June 2017 (the latest data available), real estate prices as per the All India House Price Index have gone up by 4.3 per cent. The returns between September 2016 and June 2017, have been 6.9 per cent.

Other than RBI’s All India House Price Index, there is NHB’s Residex. As of now this index has data only up to March 2017. And the one year median return between March 2016 and March 2017, as per this index, across 49 cities, was 2.8 per cent. This is very low. But where is the 25 per cent fall that Dr Panagariya has written about?

2) For a moment let’s assume that Dr Panagariya is right and real estate prices have fallen by 25 per cent. If real estate price all across the country have fallen by 25 per cent on an average, then there will be cities/town/localities where the price has fallen by more than 25 per cent. Which are these places? Can Dr Panagariya provide us with a list? This would make for a super investment right now.

Let’s say there is this town where real estate prices have fallen by 50 per cent post demonetisation. It is worth remembering that a 50 per cent loss wipes off a 100 per gain. (If the price of an asset moves from Rs 50 to Rs 100 that makes for a 100 per cent gain. When it falls back to Rs 50 that is a 50 per cent loss). If there exists such a town, it would make for a great real estate investment right now. Can Dr Panagariya provide us with names of a few such places?

3) Also, if prices have fallen by 25 per cent, why are real estate transactions not happening? Why has the total number of unsold homes of real estate companies, only continued to grow? It is worth remembering here that a 25 per cent fall within a time period of a year, is a huge fall. Falls like these in case of real estate, only happen once in a few decades. And if something like this has happened, as Dr Panagariya claims, then why aren’t people buying? Interest rates on home loans have also fallen post demonetisation.

Take a look at Figure 3. It plots the growth in home loans outstanding with banks.

Figure 3: 

Figure 3 clearly shows that the growth in home loans outstanding has fallen post demonetisation. What this means is that people are not buying as many homes as they were in the past. If prices have fallen by 25 per cent post demonetisation, people would have bought homes and the curve in Figure 3 would slope upwards i.e. people would take on more and more home loans to buy homes.

4) Further, if real estate prices have fallen by 25 per cent, as claimed by Dr Panagariya, it is time that the state governments cut the ready reckoner rates on which stamp duty needs to be paid, by a similar proportion. This should be fairly easy given that BJP governments govern most of the big states across India and a direction from the PMO should be suffice to get them to do the needful. But nothing of that sort has happened. Why hasn’t this been done till date, is a question that only Dr Panagariya can answer.

5) To conclude, it is safe to say that Dr Panagariya has just made up this data, in order to justify demonetisation. It’s a sad day today, when an Indian economist, working in one of the best American universities has had to fudge data in order to please his former political bosses.

The irony is that Dr Panagariya is no longer a part of the government. And he doesn’t really need to say things which do not hold up against data, unless, he is looking for another stint with the Modi government. That changes things.

The column originally appeared on November 13, 2017.

Big Govt is a Huge Negative for Economic Growth


These days, Jawaharlal Nehru, gets blamed for a lot of what is wrong with India. This includes the fact that many countries which attained independence around the same time as India did, grew much faster than India has.

The trouble is that this argument is not totally correct. These days Nehru tends to get blamed even for the economic mess created by his daughter Indira Gandhi. Between 1950-1965, the economic growth of India was 4.1% per year, on an average. Nehru was the prime minister between 1947 and 1964.

Between 1965 and 1981, the economic growth was 3.2% per year on an average. For most of this period, Indira Gandhi was the prime minister. As Arvind Panagariya writes in India—The Emerging Giant: “She [i.e. Indira Gandhi] nationalized the major banks, oil companies, and coal mines. She imposed tight restrictions on operations of foreign companies…She introduced tight ceilings on urban landholdings and effectively outlawed layoffs of workers…Many of the restrictions introduced during this era proved politically difficult to undo later, and some of them continue to harm growth today.”

All these things slowed down Indian economic growth considerably. As Rakesh Mohan and Muneesh Kapoor write in an IMF working paper titled Pressing the Indian Growth Accelerator: Policy Imperatives: “The slowdown in growth during the 1965-81 period, ‘the darkest in the post independence economic history of India’, can be attributed to the various restrictive policy actions put in place during this period that effectively closed the Indian economy and slowed down Indian economic growth, just when various East Asian countries were opening up and accelerating their growth.”

Long story short—as the government grew bigger, the economic growth of the country slowed down majorly. In fact, while the economic growth between 1965 and 1981, slowed down to 3.2% per year, the growth between 1965-1966 and 1974-1975 had been even slower at just 2.6%. This when the population growth was at 2.3%.

As Panagariya writes: “While the government understandably did not publicly acknowledge that it had gone too far in restricting industrial activity, it quietly began to ease up controls through administrative measures. These measures included capacity expansion, increase in the threshold level of investment below which no license was required, delicensing in selected sectors, and permission to change the product mix within existing authorised capacity.”

These changes started to happen in the mid-1970s and were expanded on between 1979 and 1984. The economic growth averaged at 4.8% per year between 1981-1982 and 1987-1988. Over the ten-year period of 1981-1990 it averaged at 5.4%.

The trouble was that in the second half of the 1980s, a good portion of the economic growth was financed by borrowing from abroad. This ultimately led to the economic crisis of 1991 and which finally led to economic reforms being initiated by the Narsimha Rao government with Manmohan Singh as the finance minister.

In fact, economic growth since then has been higher than 5% in almost all years. Next month, it will be 25 years since India saw the first wave of economic reforms. And 25 years after economic reforms were first initiated one lesson that we can draw is that big government hurts economic growth.

As the National Manufacturing Policy of 2011 pointed out: “On an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. Apart from facing multiple inspections, these units have to file sometime as many as 100 returns in a year. This kind of compliance burden puts-off young entrepreneurs and they are not willing to take up an entrepreneurial role. As a result, a large number of people who could have been self employed and would contribute to further employment and enhance economic activity, end up accepting jobs much below their potential.”

This is something that needs to be corrected. The Modi government has taken a few steps on this front, but a lot more needs to be done to unravel the big government that India inherited from Indira Gandhi. This is necessary for job-creating economic growth to happen.

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

The column originally appeared on Bangalore Mirror on June 15, 2016

The Middle Class Indian Man and His Search for a Benevolent Dictator





India needs a benevolent dictator.”

I have heard this being said over and over again, over the years.

Usually, the person saying it is a man.

Usually, he is a successful corporate type who is in the habit of driving his team to meet unreasonable goals set by the organisation.

Usually, he doesn’t like to take no for an answer.

Usually, he is looking to encash his ESOPs at the end of the year.

Usually, you will hear him say things like, this year we did Turkey, next year we plan to do New Zealand.

Usually his heart is in the right place. It beats for his country. It wants the country to do well. And in the process, he ends up saying the nonsense that he does.

In some cases, he is a Non-Resident Indian, living in the United States, the oldest and one of the most successful democracies in the world. In some cases, he is someone who has lived through Indira Gandhi’s emergency between 1975 and 1977 and is nostalgic about it.

“You know, trains ran on time,” he says. I don’t know if they did, but at least that is the argument that is offered.

And in some other cases, he opens the argument with the line: “Look at Singapore”.

So what is this Look at Singapore argument? Allow me to explain. As Arvind Pangariya writes in India—The Emerging Giant: “Countries, such as the Republic of Korea, Taiwan, Singapore Hong Kong, and the People’s Republic of China…have attained high rates of growth under authoritarian regimes.

India on the other hand almost always been a democracy since its independence in 1947. And on top, it has been one of the few countries which has managed to be a democracy almost all along. As Panagariya writes: “Along with Costa Rica, Jamaica, and Sri Lanka, India is only one of the four developing countries to have had democratically elected governments throughout the second half of the twentieth century and beyond…The remaining three countries…are all relatively tiny. The brief period of emergency rule—from June 26, 1975, to March 21,1977—in India may be viewed as representing a break in its democratic tradition.”

The people who argue in favour of benevolent dictators have basically this to say—countries in Asia that have done well, are those which have had autocratic regimes. India lost out because it was a democracy.

As Ruchir Sharma writes in Breakout Nations: “Of the eight countries that quadrupled their incomes between 1950 and 1990, two (Taiwan and Singapore) were ruled by dictators during the entire period, one (South Korea) was ruled by a dictator during most of it, two (Japan and Malta) were democracies throughout the period and three (Thailand, Portugal and Greece) waffled between autocracy and democracy.” China has also had an autocratic regime through its period of economic development through the late 1970s.

This is offered as evidence as to why India would have done much better if it had been run by a benevolent dictator and an autocratic regime. The trouble with this argument is that it looks at just one side of the equation—the countries which have had benevolent dictators and have done well. It doesn’t look at countries, which have had dictators and gone absolutely to the dogs.

The African continent is littered with examples of such countries. Closer to home, there is Pakistan. Look at the mess the country currently is in. Or look at what has happened in a country like Myanmar.

Economist William Easterly has done some interesting research in this area, which he summarises in a research paper titled Benevolent Autocrats. As he writes: “The probability that you are an autocrat IF you are a growth success is 90 percent. This probability seems to influence the discussion in favour of autocrats.”

But that is the wrong question to ask. The question that needs to be asked should be exactly the opposite—if a country is governed by an autocrat what are the chances that it will be a growth success? “The relevant probability is whether you are a growth success IF you are an autocrat, which is only 10 percent,” writes Easterly.

To put it simply—most fast growing nations are ruled by autocrats. Nevertheless, most autocracies do not grow fast. The point being, if the government in a country is being ruled by a dictator, there is no way to figure out in advance, whether he will turn out to be a disaster or be benevolent.

The question is why do so many educated middle class Indian men believe in the idea of a benevolent dictator then? (I know I am stereotyping here, but I have experienced this many times over the years).

I guess what behavioural economists call availability bias is at play here. As Leonard Mlodinow writes in The Drunkard’s Walk—How Randomness Rules Our Lives: “In reconstructing the past, we give unwarranted importance to memories that are most vivid and hence most available for retrieval. The nasty thing about the availability bias is that it insidiously distorts our views of the word by distorting our perception of past events and our environment.”

Air-crashes are an excellent example of this. As Jason Zweig writes in The Devil’s Financial Dictionary: “Flying is among the safest ways to travel, but on the rare occasions when an airplane does crash, the fireball on the runway is broadcast worldwide and burned into the brain of everyone who sees it.”

This leads people to believe that airplane travel is unsafe. But what they don’t realise is that the media does not report about the thousands of planes that land safely every day all over the world. It also does not report the many car crashes that happen all over the world every day, unless a celebrity is involved.

Availability bias comes into the picture with an event being over-reported. As Easterly writes: “One way this can happen are with an event that is over-reported relative to its actual frequency. A common example is that probability of death from murder is overestimated because of intensive coverage of murders by the media relative to other causes of death that are not as newsworthy (e.g. heart disease).”

When it comes to the idea of a benevolent dictator, this phenomenon is at play. Indians who go to countries like Singapore and China, see how much progress the country has made, and come to the conclusion that autocracy leads to economic growth. But these individuals never go to Pakistan, so that they can see that the opposite is also true. Or Myanmar for that matter.

The media with its stories of China’s progress also has a role to play. But then the stories of how much mess dictators have made in Africa, over the decades, never really make it to the Indian press.

The column was originally published in the Vivek Kaul Diary on June 6, 2016

Why is Arvind Panagariya Cherry Picking Data to Show Modi Govt in Good Light?


The Narendra Modi government will be completing two years next week. Given this, currently there is a lot of propaganda on. The finance minister Arun Jaitley has been giving interviews highlighting the good performance of the government.

The Vice Chairman of NITI Aayog, economist Arvind Panagariya, has also been writing columns in newspapers talking about the good show of the Modi government. There is nothing wrong with this. It is the right of every government to highlight what it thinks is the good work that it has done, in the best possible way.

And as long as governments don’t place full page advertisements in newspapers, highlighting their achievements by wasting taxpayer’s money, I have nothing against the entire idea of the government talking about its good work. Please talk about it as much as you want to, but don’t waste my taxes in the process.

One of the points that Panagariya made in a column in the Business Standard was about village electrification. The general impression is that the government has done good work on this front.

As he wrote: “In power, the government has already electrified 6,816 villages in the last two years compared with 5,189 villages in the three years before that.”

Take a look at the following table. It gives the number of villages electrified every year, over the last decade.


YearsVillages electrified
2015-2016                                        7128*
Source: Annual Report Rural Electrification Corporation 2014-2015
* Press release put out by Press Information Bureau dated April 4, 2016


Let’s run the numbers for what Panagariya said. In the last two years 8,533 villages (7128 villages in 2015-2016 and 1405 villages in 2014-2015) have been electrified. Panagariya says 6,866 villages. In the three years before that 11,718 villages were electrified (1197 in 2013-2014, 2587 in 2012-2013 and 7934 in 2011-2012) which is more than the villages electrified in the last two years and not less as Pangariya suggests.

So where did Panagariya get his numbers from? I think he has gotten the years mixed up while making the calculation. In the years 2012-2013, 2013-2014 and 2014-2015, a total of 5,189 villages were electrified. This is the same as Panagariya’s number. But Panagariya has essentially suggested years 2011-2012, 2012-2013 and 2013-2014. This is incorrect.

I guess basically what he wanted to compare was the performance of the government on the village electrification front in 2015-2016, with that of previous three years, i.e. 2012-2013, 2013-2014 and 2014-2015. In 2015-2016, the government electrified 7128 villages, which is close to the 6,816 number that Panagariya offers, for the last two years. This difference could be primarily because end of the year data keeps getting updated I guess.

The Modi government has put up a decent show as far village electrification in 2015-2016 is concerned. More villages were electrified in 2015-2016, than were electrified in the three years before that. This is what Panagariya I guess wanted to say. But he got the years mixed up.

Nevertheless, let’s look at the performance on the village electrification front between 2005-2006 and 2011-2012. In each of the years more villages were electrified than in 2015-2016. In 2005-2006, 28,706 villages were electrified, which is four times the number last year. Hence, Panagariya is essentially cherry-picked data in order to show the Modi government and the power minister Piyush Goyal in good light.

Also, as I have mentioned in the past, if we keep comparing the economic performance of the Modi government to the second half of the second term of the Manmohan Singh government, things are definitely going to look better. Nevertheless, that is too low a benchmark to set. Anything will look better in comparison to those years.

Further, during the year 2014-2015, the Modi government governed for to ten months. During the course of the year only 1,405 villages were electrified. This can’t be totally held against the government because every government needs time to start operating. Also, given the fact that the number of villages electrified in 2012-2013 and 2013-2014 were very low, some time would have been needed to get the system going again.

It needs to be mentioned here that as the number of villages to be electrified comes down, it becomes more and more difficult to electrify the villages and the same pace cannot be maintained. If one takes this factor into account, electrifying more than 7,000 villages in a single year, is not a bad performance.

But trying to pass it off as something extraordinary is really not done.

Discslosure: The basic idea for this column came after reading Amitabh Dubey’s column Arvind Panagariya Spins an Infrastructure Tale on Chunauti.org

The column was originally published in the Vivek Kaul Diary on Equitymaster.com

Oil Prices Are Rising Again: What Will Modi Govt Do Now?


In a little over a week, the Narendra Modi government will complete two years in office. The finance minister Arun Jaitley, has already started to give interviews in the media, highlighting the success of the Modi government on the economic front. The Vice Chairman of the NITI Aayog, Arvind Panagariya, has written columns around the same, as well.

What both of them haven’t really talked about is the oil price and its dramatic fall, during the time the Modi government has governed India. On May 26, 2014, the day Modi was sworn in as the prime minister, the price of Indian basket of crude oil was $ 108.05 per barrel. Nearly two years later, as on May 16, 2016, the price of the Indian basket of crude oil stood at $46.18 per barrel.

Interestingly, it even touched a low of $26.95 per barrel on February 12, earlier this year. This was a massive fall of 75%. The point being if this hadn’t happened, the finances of the Modi government would have gone for a toss totally. The petroleum subsidy number fell from Rs 92,000 crore in 2013-2014, to a little over Rs 60,000 crore in 2014-2015, to around Rs 30,000 crore in 2015-2016. For 2016-2017, around Rs 27,000 crore has been budgeted for the petroleum subsidy.

The government benefitted on two counts. First, it got a lower petroleum subsidy bill. Second, it captured a large part of this fall in oil price by increasing the excise duty on petrol and diesel. Between November 2014 and now, the excise duty on oil and petrol, has been increased nine times.

The total excise duty collected by the government on petrol and diesel in 2014-2015, had stood at around Rs 1,56,000 crore. This jumped by 59% to a little over Rs 2,48,200 crore in 2015-2016. Hence, lower oil prices were of huge benefit to the government. The state governments also cashed in by increasing the value added tax on petrol and diesel.

By doing this, the fall in the price of oil wasn’t passed on to the end consumers. The trouble is that now oil prices have started to go up again. Between February and mid-May, the price of the Indian basket for crude oil has gone up by more than 71%. As on May 16, 2016, it quoted at $46.18 per barrel.

In a scenario of falling oil prices, the government did not pass on the entire fall in oil prices to the end consumer. Hence, in a scenario of rising oil prices it shouldn’t pass on the entire increase to the end consumer as well by cutting down the excise duty on petrol and diesel. That will be a fair thing to do.

In an ideal world, the Modi government should have freed up the price of petrol and diesel totally, and let the international price of oil, decide the market price of petrol and diesel. If they had done that people would have adjusted to the idea of high oil prices, given that they would have seen low oil prices as well.

But that hasn’t turned out to be the case. The price of oil now is 57.3% lower than it was in May 2014. But the price of petrol and diesel has fallen by 17.4% and 12.9% only, in Mumbai.

Also, it is important to remember here that high oil prices can end up screwing the accounts of the government. This is simply because the government still subsidises the sale of cooking gas as well as kerosene oil.

Further, what does the government plan to do if oil prices continue to go up? If the government continues to raise petrol and diesel prices, I am sure there is going to be a public outcry.

This will happen simply because last time around when oil prices really went up, the end consumer did not have to pay for higher petrol and diesel prices. The oil marketing companies, the oil producing companies and the Manmohan Singh government bore the brunt of high oil prices. The consumer did not. This ended up screwing up the finances of the government.

Also, this time around the Modi government has benefitted tremendously from lower oil prices by raising excise duty on petrol and diesel. It had a tremendous opportunity to move towards a market driven price of petrol and diesel. But if it did that, it would have had to look for alternative sources of revenue.

It would no longer be possible for it to continue financing loss making public sector enterprises. This would mean that some ministers would have become totally jobless. It would have had to sell more shares in profitable public sector enterprises and so on. It would also have to look at ways for cutting down on frivolous expenditure that almost all governments indulge in. It would also have to sell its shares in the cigarette maker ITC, which it strangely continues to hang on to.

Of course, all these would have been difficult decisions and the government chose to latch on to the low hanging fruit of raising excise duty on petrol and diesel. A huge opportunity was missed out on.

Further, what is the government’s view on higher oil prices? As finance minister Arun Jaitley said in an interview to The Economic Times recently: “You see as far as the oil prices are concerned, this is one area where nobody has been able to predict, even reasonably what is going to happen. It is only after the event that people analyse what has happened. When the prices were close to a $120, nobody really thought that they will come down below 30. At 30, they said it would stabilise at 40, now it is 50.”

What Jaitley said was that oil prices cannot be predicted. This is a view that I have often maintained in the past. Nevertheless, after saying this, Jaitley went on to do exactly the opposite i.e. he tried to predict oil prices. As he said: “I think they are still range bound. And being range bound they are within the limits of what India can consider to be affordable and therefore unless there is some very alarming increase, which does not look likely at the moment, I think we are reasonably comfortable.

So Jaitley feels that there are no chances of any alarming increase in oil prices. He said this after explaining in detail that no one can predict oil prices. This prediction came after oil prices have risen by 71% in a little over three months.

As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of Prediction“Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

While, the government and those who run the government may not be able to predict oil prices, it is important that they think through what they plan to do if oil prices do continue to go up. This becomes especially important given that they did not pass on the fall in oil prices to the end consumer. Also, they are well and truly addicted to all the easy money coming in from raising the excise duty on petrol and diesel.

What is the Plan B of the Modi government? And more specifically, do they have one?

The column originally appeared in the Vivek Kaul Diary on May 18,2016