Why Real Estate Prices Haven’t Crashed After Notebandi


Demonetisation or notebandi was expected to push down real estate prices. Some experts had said that by March 2017 real estate prices would fall by 30 per cent. This was supposed to happen because after demonetisation, the cash needed to carry out the black part of the real estate transactions would not be available.

In India, a portion of most real estate transactions is almost always carried out in black. This involves the buyer paying the seller in cash. This essentially ensures that the buyer saves on paying stamp duty, whereas the seller saves on paying a capital gains tax.

With the cash needed to carry out a part of the real estate transaction in black not being available post demonetisation, prices would fall. Or so we were told. (To know my views on the issue, click here).

The question is have real estate prices fallen in the aftermath of demonetisation? The government seems to think so. Take the case of what the
Survey says about this issue: “[Real estate] prices declined, as wealth fell while cash shortages impeded transactions… Prices could fall further as investing undeclared income in real estate becomes more difficult.”

Sometime last week the chief economic adviser Arvind Subramanian said: “The aim of demonetisation, is in fact, to bring down real estate prices.” He also added: “Real estate on the other hand, you do see a dip in prices, in sales, in launches and of course, some of it may be adverse of the economy, but in the long run, some of that is also good, because in equilibrium, the aim of demonetisation, is in fact, to bring down real estate prices.

The question is have real estate prices really fallen? Take a look at the following chart sourced from the latest Economic Survey, which Subramanian perhaps forgot to look at.


The chart essentially shows real estate launches, sales and price, over a period of time. If you look at the right-hand side of the chart, you can clearly see that the red and the blue curves have fallen at a very fast pace. This tells us that demonetisation has led to a huge slowdown in both real estate sales as well as launches.

If we look at the chart carefully, launches of new homes by builders, were down by 60 per cent by December 2016 (the end of the fourth quarter of 2016) in comparison to end 2015. The sales were down by around 40 per cent over a similar period. All of this was not because of demonetisation because both launches and sales were already falling even before demonetisation.

In comparison, the price curve just shows a small dip in the post demonetisation period, this despite the sales crashing. Also, the prices (like sales and new launches) had already been falling even before demonetisation.

So, what does all this tells us? It tells us that the contention of the Economic Survey and Arvind Subramanian of the real estate prices falling should be taken with a pinch of salt. In comparison to the fall in sales and new launches, real estate prices have barely moved.

It also tells us that the government should be carefully reading the documents that it puts out. In this case, the graph says one thing and the analysis accompanying it, says exactly the opposite thing.

So, what explains this phenomenon of falling sales and more or less flat prices? The Indian real estate scenario is always a little tricky to explain. In any other market, if sales had fallen by 40 per cent, the market would have crashed by now. So, what gives? There are no clear cut answers here but only speculative ones.

Most Indian real estate companies are fronts for the ill-gotten wealth of politicians. The builders who operate as fronts have promised a certain rate of return to politicians, and hence, are not able to cut prices. This is one possible explanation. Another explanation that keeps getting offered is the fact that the builders and politicians have made a lot of money over the years, and hence, are in no hurry to cut prices to sell the real estate inventory of homes that has been built up.

A third explanation offered is that banks which have lent money to the builders don’t want them to cut prices. A fourth explanation that was offered to me by a reader was that even though home-sales fell they did not fall by as much as they should have. What does this mean? It basically means that some of the smaller builders post demonetisation, have managed to sell some of their inventory to those who had black money in the form of high denomination notes of Rs 500 and Rs 1,000.

They took this money and used it to pay off their debt to their suppliers. The suppliers then used the money and paid it off to those who they owed money to. Essentially, the demonetised notes were paid down the chain, until they reached the workers who went ahead and deposited the money into their bank accounts. So, the world worked, and black money was converted into white.

I am sure there might be other explanations for this as well. But these are the explanations that I came across and have put them out. With very little data going around, Indian real estate, as always, remains very difficult to analyse.

The column originally appeared in Equitymaster on February 6, 2017



The one time I really feel fleeced is when I want to have a soft drink in the middle of a flight. The soft drink can that you get in the market for thirty bucks costs as high as Rs 100 on a flight. Sandwiches and noodles retail for Rs 200.

A similar rip-off happens inside cinema theatres as well. Everything from soft drinks to bottles of water to popcorn is exorbitantly priced. In fact, the companies help both airlines as well as cinema theatres by producing the same products for them, but at a different maximum retail price. Hence, the same can of soft drink which costs Rs 30 outside, costs Rs 100 on an airplane. The same bottle of water which costs Rs 10 otherwise, costs Rs 30 inside an airplane or a cinema theatre.

This essentially means that companies end up offering the same product at different price points at different places. This essentially violates what economists call the One Product-One Price principle. And what is this principle? As the Economic Survey of 2015-2016 points out, it is basically the “intuition that products which are essentially the same should be charged essentially the same price.”

What allows airlines and cinema theatres to charge more is the lack of an option. When one is inside an airline, there is no other option. And the same stands true for a cinema theatre as well. Hence, the violation of the one product, one price principle does not have any repercussions.

But the same cannot be said about other walks of life. Take the case of the subsidised goods that the government offers the citizens. This includes rice, wheat, kerosene and sugar, among other things When these goods are sold through the public distribution system constituting of around five lakh fair price shops all over the country, they are offered at a price which is much lower than their market price.

And what does this do? It violates the one product one price principle. Let’s take the case of rice. It is available at a price of Rs 3 per kg under the National Food Security Act. In the open market, rice sells at many times this price. Hence, it is but natural that the rice which has to be supposedly distributed through the public distribution system at an extremely cheap price finds its way into the open market.

This violation of the one product one price principle leads to “incentives to divert the subsidised commodity from eligible to ineligible consumers”. What is true about rice is also true about wheat, kerosene, sugar, domestic cooking gas and urea.

In a research paper dated January 2015 and titled Leakages from PDS (PDS) and the Way Forward, economists Ashok Gulati and Shweta Saini, put the leakage of the public distribution system for the distribution of rice and wheat at 46.7 per cent. In absolute terms the leakage was at 25.9 million tonnes. This basically means that nearly half of the rice and wheat distributed through the public distribution system doesn’t reach those it is meant for.

The leakage rate in case of kerosene is 41 per cent. In case of sugar it is 48 per cent. In case of urea the leakage rate is 41 per cent. As the Economic Survey points out: “The 75 per cent subsidy on agricultural urea creates a large price wedge which feeds a thriving black market diverting urea to industry
and possibly across the border to Bangladesh and Nepal.”

This basically means that the government ends up wasting a lot of money that it spends on subsidies. What is the way out of this? The answer may very well lie in cash transfers, wherein money is directly deposited into the Aadhar-linked bank accounts of citizens, allowing them to buy these goods at their market price from the open market.

This will ensure that the violation of one product one price principle comes to an end and the government subsidies are well spent.

The column originally appeared in Bangalore Mirror on August 24, 2016



What the Govt Should Do and What It Shouldn’t

indian flag

The government of India over the years, at least in theory, has tried to make the lives of its citizens comfortable, by trying to deliver various goods and services at a subsidised rate.

And it has failed miserably at it. The leakage is extremely high i.e. much of the stuff the government wants to deliver gets stolen before it reaches the individuals it is meant for.

54% of the wheat that the government distributes through the public distribution system gets siphoned off. So does 15% of the rice and 48% of the sugar.

And the stealing doesn’t end at rice and wheat. 40% of fertilizer, 46% of kerosene and 24% of cooking gas is also stolen.

The government suffers from what economists call a principal-agent problem. As Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “The government…suffers from a ‘principal-agent problem’. Its functionaries (legislators, bureaucrats) may pursue their own agendas rather than act in the public interest. They may shirk their duties or feather their own nests.”

While politicians and high-level bureaucrats are a part of the government, they are not the ones that people of this country deal with on a regular basis. The people deal with low level officials, from clerks at the local transport authority who won’t lift a finger without being bribed to the shopkeepers running the public distribution system, throughout the country.

And the incentives of these individuals are not in line with the public interest. Hence, there is pilferage and the subsidies that are meant for the people of this country never reach them.

This leads to a lot of money being spent by the government getting wasted. It leads to the government having to incur a higher expenditure than it would have if things reached the people they were meant for.

It also leads to an active black economy, where everything that is stolen from the public distribution system, is sold in the open market, at a higher price.

So what is the way around this? Should the government stop subsidising the people of this country and in the process save the money that gets wasted? Not really.

As Joshi writes: “There is a crucial distinction to be made between on the one hand the state paying for goods and services and on the other hand the state producing goods and services. For example, ‘food security’ may be thought of in common usage as a ‘public good’. However, even if it is agreed that the state should pay for food security, it does not follow that the state should carry out the task of actually delivering food to people.”

The fact that the government tries to deliver rice, wheat, sugar, kerosene, cooking gas, etc., to people, leads to the principle-agent problem and all the corruption that follows. So what is the way out? As Joshi writes: “The state could enable the poor to buy food in the market, at market prices, by transferring purchasing power to them directly in the form of cash or food vouchers. A system along these lines may be more effective in reaching poor people, and also less corrupt. This example is not chosen at random: it is highly relevant to the problems facing India’s public distribution system(PDS) for food delivery.”

Such a system is already available in case of cooking gas. It’s called Pahal. In this case, the subsidy amount on a cooking gas cylinder is paid directly into the bank account of the individual, instead of the cylinder being sold at a lower subsidised price, as was the case earlier.

In late June, 2016, the finance secretary Ashok Lavasa, told PTI that the government had saved Rs 14,872 crore by paying the subsidy amount directly into the account of people, instead of trying to deliver the cooking gas cylinder at a subsidised amount. The government has been able to save money by being able to bring down the cooking gas cylinders being sold in black.

As the Economic Survey of 2015-2016 points out: “The Pahal scheme has been a big success. The use of Aadhaar has made black marketing harder, and LPG leakages have reduced by about 24 per cent with limited exclusion of genuine beneficiaries.”

The real benefit to the government and the citizens will come when the government is able to implement the cash transfer programme (or what it calls direct benefit transfer) to other areas, where the leakages are high. For this to happen, citizens need to have Aadhaar cards and these cards need to be linked to savings bank accounts.

A lot of progress has been made in the issuance of Aadhar cards. As the Economic Survey points out: “The current government has built on the previous government’s support for the Aadhaar program: 210 million Aadhaar cards were created in 2015, at an astonishing rate of over 4 million cards per week. 975 million individuals now hold an Aadhaar card – over 75 percent of the population and nearly 95 per cent of the adult population.”

An Aadhaar card is necessary in order to identify the right beneficiary. This helps in eliminating bogus identities, through which people claim subsidies. But for the government to be able to transfer money to individuals, the Aadhaar card needs to be linked to a bank account.

As of June 2016, the 22.3 crore bank accounts had been opened under the Jan Dhan Yojana. This is a huge jump from 5.3 crore bank accounts from September 2014. Nevertheless, a lot still needs to be done on this front. As the Economic Survey points out: “Despite Jan Dhan’s record-breaking feats, basic savings account penetration in most states is still relatively low – 46 per cent on average and above 75 per cent in only 2 states (Madhya Pradesh and Chattisgarh).”

The Economic Survey was published in February 2016. Given that some time has elapsed since then, the figures quote above would have improved since then. What also does not help is the fact that only 27 per cent of villages have a bank within a distance of 5 kilometres. This means that last mile connectivity is a problem.

This essentially means that if the government moves to cash transfers immediately in a whole host of areas, chances of people being left out because they do not have a bank account, are high. This needs to be set right in the years to come. Of course, it is easier said than done.

The savings from such a system, if and when it is in place, will be huge. As Nitin Gadkari, the road transport and highways minister recently said: “If bogus claims are removed from scholarships, pension, subsidies, ration cards and other schemes and these are linked to Jan Dhan Yojna and Aadhar, it will result in savings of Rs 1 lakh crore to the exchequer.” For all the leakages that happen, Gadkari might just be right.

The column originally appeared in Vivek Kaul’s Diary on July 8, 2016

Why Skill India is as Important as Make in India


make in india

Organised retailing is expected to be a big job creator in the days to come. A recent report brought out by National Skill Development Corporation(NSDC) suggests that 5.6 crore people will be working in the sector, by 2022. The earlier estimate was around 1.8 crore.

Estimates made by NSDC suggest that organised retailing employed around 3.86 crore in 2013. This number is expected to increase to 4.51 crore in 2017 and finally to 5.6 crore in 2022.

The question is will this happen? We will get around to answering that later in this column. Essentially, countries escape from being under-developedthree ways: geology, geography and jeans. Jeans is basically a code for low-skilled manufacturing.

As the Economic Survey of 2014-2015 points out: “In recent years West Asia, Botswana and Chile, and further back in time Australia and Canada, exploited their natural resources endowed by geology to improve their standards of living. Some of the island successes (Barbados, Mauritius, and others in the Caribbean) have exploited their geography by developing tourism to achieve high rates of growth.”

On the other hand, the East Asian countries (China, Thailand, Indonesia, Malaysia etc.) got out of being underdeveloped by concentrating on jeans i.e. low skill manufacturing. The initial fillip to economic growth came from these countries relying on low-skilled manufacturing. With time, they diversified into more sophisticated manufacturing.

India has missed the low-skill manufacturing revolution, for sure. Information technology was our great big hope. But the sector needs extremely skilled individuals, and thus has its limitations in creating sustained as well as wide-spread economic growth.

Also, it is worth pointing out here that no country in the world has escaped poverty by using skill-intensive activities as the launching pad for economic growth. One of the major criteria for creating rapid, sustained and wide-spread economic growth is the alignment of the fast growing sector with the comparative advantage of the country.

In the Indian case, this happens to be the availability of labour. As the Economic Survey points out: “To ensure that expansion occurs and the benefits of fast-growing sectors are widely shared across the labour force, there should be a match between the skill requirements of the expanding sector and the skill endowment of the country. For example, in a labour abundant country such as India, the converging sector should be a relatively low-skilled activity so that more individuals can benefit from convergence.”

In other countries which have had abundant labour, low-skill manufacturing has put the labour to work, incomes have gone up and sustained economic growth has been created. Due to various reasons, from focus on public sector enterprises to a surfeit of labour laws leading to firms which do not grow a certain size, India has missed out on the low-skilled manufacturing revolution, which has pulled many East Asian countries out of poverty.

The manufacturing sector as it has developed in India has been highly skill intensive. As Amrit Amirapu and Arvind Subramanian write in a research paper titled Manufacturing or Services? An Indian Illustration of a Development Dilemma: “It turns out that registered manufacturing is indeed a sector that is relatively skilled labour intensive…The share of workers with at least secondary education is substantially higher in registered manufacturing than in agriculture, mining or unregistered manufacturing and also greater than in several of the service subsectors. In some ways, this should not be surprising. High labour productivity in this sector is at least in part a consequence of higher skills in the work force. What it does suggest, however, is that registered manufacturing does not really satisfy requirement number four. The skill intensity of the sector is not quite aligned with India’s comparative advantage.”

Given this, Indian manufacturing the way it is currently structured is not going to solve India’s jobs problem. What India needs are jobs for the low-skilled. The current Modi government has tried to tackle the lack of jobs in India, by launching the Make in India programme.

Further, the question is, will the services sector, of which organised retailing is a part, be able to generate enough jobs. Estimates suggest that nearly one million individuals are entering the workforce every year. And this is expected to continue for a while.

Does the services sector have the potential to put low-skilled Indians to work? As Amirapu and Subramanian point out: “Services in aggregate are no less skill-intensive: on average, 78% of workers in the service sector have at least a primary education (77% in registered manufacturing), and 48% have at least a secondary education (43% in registered manufacturing). Furthermore, a large number of service subsectors – including 1) Banking and Insurance, 2) Real Estate and Business Services, 3) Public Administration, 4) Education, and 5) Health and Social Services – have significantly higher educational attainment (90% or more of workers have at least primary education) than registered manufacturing. What this implies is that many service subsectors (precisely the high productivity, high growth subsectors, for the most part), have a limited capacity to make use of India’s most abundant resource, unskilled labour.”

The NSDC report on organised retailing also talks about lack of skill in the organised retailing sector. Hence, if the services sector in general and the organised retailing sector in particular, have to create jobs in India, the skill-set of Indian labour needs to improve in the years to come.

As the Economic Survey points out: “Sustaining a skill-intensive pattern on the other hand would require a greater focus on education (and skills development) so that the pattern of development that has been evolving over time does not run into shortages. The cost of this skill intensive model is that one or two generations of those who are currently unskilled will be left behind without the opportunities to advance. But emphasising skills will at least ensure that future generations can take advantage of lost opportunities.”

Further, if a skill-intensive pattern of development has to be followed, what it means is that the Skill India programme is as important as the Make in India programme. As the Economic Survey points out: “What the analysis suggests is that while Make in India, which has occupied all the prominence, is an important goal, the Prime Minister’s other goal of “Skilling India” is no less important and perhaps deserves as much attention. Make in India.”

Disclosure: The basic idea for this column came after reading Akhilesh Tilotia’s research note Forecasts of fewer jobs dull demographic sheen. Tilotia works for Kotak Institutional Equities and is also the author of The Making of India.

The column originally appeared in the Vivek Kaul Diary on June 13, 2016

India’s Agriculture Crisis is Set to Become Worse


The gross domestic product(GDP) data for 2015-2016 was declared sometime back. As per this data, agriculture (actually agriculture, forestry and fishing), made up for around 14.1% of the GDP, during the course of the financial year. The trouble is that close to 50% of the population continues to depend on agriculture for a living.

This basically means that agriculture formed around one seventh of the Indian economy during the last financial year. At the same time around half of the population is dependent on it. The point being that it employs many people than it actually should. Hence, there is a huge disguised unemployment in the rural areas.

Disguised unemployment essentially means that there are way too many people trying to make a living out of agriculture. On the face of it they seem employed. Nevertheless, their employment is not wholly productive, given that agricultural production does not suffer, even if some of these employed people stop working

There are many more people than the sector requires and this leads to lower incomes for those who work in agriculture. The broader point is that if the average incomes need to go up, people need to be moved away from agriculture. But a new analysis suggests that this will not happen at the pace it was earlier expected to be.

Akhilesh Tilotia of Kotak Institutional Equities makes this point in a recent research note titled Forecasts of fewer jobs dull demographic sheen. Tilotia is also the author of The Making of India. He reviewed a “set of 24 industry reports commissioned by the National Skills Development Council (NSDC) and compare them with similar reports that NSDC had put together around the end of the last decade.”

The earlier reports had put the size of the Indian workforce at 65.4 crore by 2022. The number is now a lot lower at 57.5 crore. As far as number of people employed in agriculture in 2022 is concerned, the earlier estimates put the number at 11.4 crore or 18% of the workforce. As per new estimates the number of people who are expected to be working in agriculture in 2022, stands at 21.6 crore or around 38% of the workforce.

This basically means that nearly 10.2 crore more Indians will be dependent on agriculture as a mode of living, than was expected earlier. Further, by 2022, agriculture is expected to form around one-ninth of the GDP or the overall economic size of the country.

The automobile sector which was earlier expected to employ 4.8 crore individuals is now expected to employ only around 1.5 crore individuals. The same goes for the food processing sector, which was earlier expected to employ around 1.8 crore individuals, but is now expected to employ only 40 lakh individuals. On the other hand, the numbers for organised retail have gone up dramatically from 1.8 crore individuals earlier, to 5.6 crore individuals, as per the latest estimates.

Long story short, enough jobs will not be created to move people out of agriculture into other sectors where they can make a living.

In fact, as the Economic Survey of 2014-2015 points out: The data on longer-term employment trends are difficult to interpret because of the bewildering multiplicity of data sources, methodology and coverage. One tentative conclusion is that there has probably been a decline in long run employment growth in the 2000s relative to the 1990s and probably also a decline in the employment elasticity of growth: that is, a given amount of growth leads to fewer jobs created than in the past. Given the fact that labour force growth (roughly 2.2-2.3 percent) exceeds employment growth (roughly about 1½ percent), the challenge of creating opportunities will remain significant.”

As the Survey further points out:Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labour force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent. Creating more rapid employment opportunities is clearly a major policy challenge.”

One reason why enough jobs are not being created is because of what economists call falling labour intensity. Economic growth now generates fewer jobs in the non-farm sector (industry including manufacturing, construction, mining and utilities plus services sector) than it used to earlier. For every 1% increase in the gross domestic product, the non-agricultural employment went up by 0.52%, between 1999-2000 and 2004-2005. This fell to 0.38% between 2004-2005 and 2011-2012. (Source: D.Joshi and V.Mahambare, HIRE & LOWER–Slowdown compounds India’s job-creation challenge, Crisil Research, January 2014)

Hence, economic growth does not translate into the same number of jobs as it used to in the past. This basically means that economic growth is less labour intensive. This has happened primarily because of two reasons. First, the economic growth now is driven by less labour intensive sectors like business and financial services as well as information technology and information technology enabled services. These sectors require only one or two people to produce Rs 10 lakh of real value added Gross Domestic Product or economic output. This basically means that faster growth in these sectors does not necessarily translate into jobs. (Source: D.Joshi and V.Mahambare, HIRE & LOWER–Slowdown compounds India’s job-creation challenge, Crisil Research, January 2014).

This is clearly a big problem which does not have easy answers. Further, people dependent on agriculture are low on skill-sets that are needed for jobs in other sectors. It also needs to be pointed out here that moving people from agriculture into other areas is not so easy.

In fact, other countries which have grown at a very fast pace in the past, have experienced the same phenomenon. TN Ninan makes the point in The Turn of the Tortoise. Take the case of Thailand. Agriculture still constitutes close to 40% of its workforce. Or China, which has become the factory of the world. Around 35 per cent of the workforce is still engaged in agriculture, even though it produces just 10 per cent of the Chinese economic output.

The column originally appeared in the Vivek Kaul Diary on June 9, 2016