Tag: Construction | Vivek Kaul

Several estimates made by economists and analysts suggest that around one million Indians are entering the workforce every month.

That means around 1.2 crore individuals are entering the workforce every year. And it is expected that the trend is likely to continue over the next couple of decades. The number of jobs being created are nowhere near what is needed.

The government has tried to address this situation through doles. This has meant distributing food grains at a cheaper price, distributing kerosene at a cheaper price, distributing fertiliser at a cheaper price and even trying to create some work for citizens under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

The problem with these doles is that they are extremely leaky and on many occasions they do not reach those they are intended for. In the process, the government loses a lot of money. The leakages have other serious consequences as well (which I have talked about in the past and which I will keep talking about in the future).

Also, there is a fundamental problem with this approach—it doesn’t create the badly required jobs. Take the case of MGNREGA. The scheme is mandated to “provide at least 100 days of guaranteed wage employment in a financial year to every rural household whose adult members volunteer to do unskilled manual work.”[1]

It is widely believed that MGNREGA pushed up rural farm wages, during the second term of the Manmohan Singh government. The idea behind this was that MGNREGA set a sort of a minimum wage, and if farmers wanted workers to work on their farms, they had to offer more money than the government was offering through MGNREGA.

In a research paper titled Rising Farm Wages in India: The ‘Pull’ and ‘Push’ Factors, published in April 2013, Ashok Gulati, Shweta Saini and Nidhi Satija point out that: “At all India level, the results reveal that a 10 percent increase in lagged GSDP (overall), GSDP (agri) and GSDP (construction) leads to 2.4 percent, 2.1 percent and 2.8 percent increase in farm wage rates respectively. This indicates that the growth in construction sector GDP has somewhat stronger influence on farm wages than the growth of overall GDP or even agri‐GDP. Impact of MGNREGA is also significant but is 4 to 6 times less effective than growth variables since 1990‐91.” (GSDP = Gross State Domestic Product).

What does this mean? It basically means that when the construction sector is doing well, the farm wages grow the fastest. In comparison, MGNREGA has a much smaller impact on farm wage growth. What this basically means that real economic activity leads to faster wage growth in comparison to the government trying to create some work through MGNREGA.

When the construction sector is doing well, a section of the farm workers drift towards jobs on offer, and this in turn pushes up wages for those who remain.

What also works in favour of construction is the fact that the jobs generated in the sector cater to India’s comparative advantage, which is the abundance of low-skilled labour. In fact, only 14.4 per cent of employees in the construction sector have secondary education.[2] As the Economic Survey of 2015-2016 points out: “Aggregate services employment grew faster than that in registered manufacturing and a number of service subsectors—transport, real estate and construction—registered substantially faster employment growth.”

This is not surprising given that the jobs in the construction sector cater to those with low-skills. In fact, it can continue to be a major creator of jobs in the days to come. A recent KPMG report titled Urban Indian Real Estate—Promising Opportunities expects the construction sector to be the largest employer in India by 2030. KPMG expects the sector to employ more than 7.5 crore Indians by then. The expectation is that at a size of one trillion dollars, the Indian construction sector will be the third largest in the world by 2030.

Like all reports put out by consultancies, this one also sounds good in theory. Nevertheless, many other things need to happen for India’s construction boom to take-off. Let me try and list a few here:

a) The mess that prevails in the area of land acquisition needs to be sorted out. Any construction happens only when there is some land. The Modi government (including the prime minister Narendra Modi) took a serious shot at this last year, but turned out to be unsuccessful. I don’t see the government spending more political capital on this any time soon.

b) One major factor that hinders the acquisition of land in this country is the lack of title records. This is something that needs to be addressed, if easier land acquisition, where the government role is limited, has to become the order of the day. The Rajasthan government has made a start on this front. Other states need to follow.

c) For any infrastructure boom to take off, banks should be in a position to lend. The government owned public sector banks are currently in a mess. The last thing they would want to do is to lend to infrastructure companies and infrastructure projects The gestation period for infrastructure projects is very long and there are many things that can go wrong in between.

d) To reduce the dependence of the infrastructure sector on banks for borrowing, India needs a well-functioning corporate bond market. (This is something that people have been writing about for the last 25 years). A well-functioning corporate bond market has the wherewithal to finance long-gestation infrastructure projects.

e) What does not help is the fact that the infrastructure sector in India is full of crony capitalists. And that stems from the fact that given the way the system functions, only a crony capitalist can perhaps manage it. This is like a chicken and egg story. Also, these crony capitalists in the past have had the habit of siphoning off the money lent to them by banks for infrastructure projects.

f) The construction sector can really take-off once the real estate sector takes off. The real estate sector has forward and backward linkages with 250 ancillary industries.[3] This basically means that when the real estate sector does well, many other sectors, right from steel and cement, to furnishings to paints etc., do well. The multiplier effect is huge.

The real estate sector has now been in the doldrums for more than five years. The simple reason for this lies in the fact that most Indian real estate has been unaffordable for a while now. For this anomaly to be corrected the nexus between politicians and builders needs to end. The system of electoral financing needs to evolve and move away from the way it currently is. And this is easier said than done.

[1] NREGA FAQs

[2] A.Amirapu and A.Subramanian, Manufacturing or Services? An Indian Illustration of a Development Dilemma, Working Paper 409, Centre for Global Development, June 2015

[3] Urban India Real Estate – Promising Opportunities, KPMG, August 2016

The column originally appeared in Vivek Kaul’s Diary on August 24, 2016

After a brief break, I am back to writing on by favourite topic of real estate. In The Daily Reckoning edition published on January 22, 2015, I had discussed the job creating potential of real estate.

The construction sector benefits tremendously if the real estate sector is doing well and creates a huge number of semi-skilled jobs. This works the other way round as well. When the real estate sector is not doing well, there are not enough jobs going around in the construction sector.

And this is precisely what seems to be happening. A Reuters news-report points out that “more than half a million workers let go from sites around India’s capital in the last 18 months.” In fact, many labourers who work on construction sites in Delhi are migrant labourers who essentially come from the poorer states of Uttar Pradesh, Bihar and Jharkhand.

As the Reuters reports: “In Patna, the state capital, eight out of 20 labourers contacted by Reuters had this year made the 1,000 kilometre (600 mile) trip back from Delhi because they could not find work – pressuring salaries in a region where wages are already low.”

What is happening here? The real estate consultant Knight Frank in a recent research report had pointed out that there were around 7 lakh unsold homes in eight cities (Delhi-NCR, Mumbai Metropolitan Region, Bengaluru, Pune, Kolkata, Chennai, Hyderabad and Ahmedabad).

“Current unsold inventory levels stand at over 7 lakh units; would take over 3 years to exhaust,” the report pointed out. Liases Foras, another property consultant, puts the inventory in the major cities as of the end of June 2015, a little higher at 41 months, up 24% from last year.

Given the fact that homes are not selling, new launches have declined by 40% to 95,400 units during the first six months of 2015.
And this possibly explains why there is a job crisis in the construction sector. When real estate companies are not able to sell what they have already built, there is no point in continuing to build new homes. With new homes not being built at the same rate as they were in the past, the total amount of construction has come down dramatically, leading to a job crisis in the sector.

How can this disconnect be corrected? How can jobs be created in the construction industry that services the real estate sector? For this to happen new homes need to be built, only then can construction jobs come back in the real estate industry.

For new homes to be built, the unsold homes in the eight big cities and all over the remaining part of the country need to be first sold. And for that to happen prices need to come down so that homes become affordable. A major reason why homes are not selling right now is because they are exorbitantly priced and way beyond what most people can afford.

The real estate companies are not willing to accept this and cut prices. In a recent press release, the real estate lobby, the Confederation of Real Estate Developers Association of India (CREDAI) said: “it would be prudent to say that from the developers side a substantial reduction in prices has already happened across the country and any further decrease in sale prices would be a deterrent for the growth of a sector that contributes so much to the economy and employment at large.”

The real estate lobby feels that home prices cannot be cut because input prices have risen over the last few years. CREDAI President Geetamber Anand told PTI that “housing prices have gone down by 15-20 per cent on an average in last two years across India, while input costs have risen by 15-20 per cent.”

A similar feeling was echoed by Knight Frank Chairman Shishir Baijal who told the Business Standard that: “Input costs, including that of land, have gone up over the past few years. There is no scope for a serious correction in prices.”

Input costs may have risen, but is that a good enough reason for not cutting prices? The real estate companies may as well continue building homes at prices, which no one will buy. At the end of the day any product has to be priced at a level which the end consumer is willing to pay. This is a basic way in which any business works.

This logic did not apply to the real estate sector up until now because there was massive investor demand. This included people who had black money to park as well as others who were taking on home loans to invest in second and third homes. With returns from real estate more or less remaining flat over the last couple of years, the number of buyers in this category has come down dramatically. The Reuters story referred to earlier points out: “A law to clamp down on “black money” flows that fund as much as a third of real estate deals is further squeezing demand.”

I really don’t know where Reuters got hold of the one-third ratio, but there is enough anecdotal evidence to suggest that investor money coming into the sector has come down dramatically. The real estate consultants have also made this point. Given this, the only prospective buyers left in the market are those who want a home to live-in and they are in no position to pay the kind of money the real estate industry wants them to.

So, as I keep saying, the real estate sector is not going to revive without a massive price cut. Having said that, the CREDAI had an intelligent suggestion to make for once as well. The real estate lobby said in a press release that: “The onus is now upon the state government to rationalise taxes, ready reckoner rates and streamline the approval process to bring down property prices and provide relief to home buyers.”

In many parts of the country real estate transactions are not happening simply because the circle rates are higher than the prevailing market price of real estate. And this has led to the transactions in the real estate market coming to a complete standstill. People are not buying and selling homes because of this.

The area where real estate is bought or sold has a circle rate decided by the state government. The circle rate is the minimum value at which the actual transfer of a property between a seller and a buyer should take place. Hence, the buyer of the property pays stamp duty to the state government on the circle rate.

This is something that the state governments can correct by bringing down circle rates. But the question is will they do that? And if yes, how quickly?

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

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