FICCI

The Govt Should Ignore Jewellers’ Strike

gold

The jewellers went on a strike on March 2, 2016. On March 20, it was reported that they had called off their strike after suffering losses of Rs 18,,000 crore. But that did not turn out to be the case. Media reports suggest that on March 21, a section of the jewellers continued to strike.

A PTI reports suggests that: “Most jewellery shops and establishments in the national capital remained shut on Monday despite government’s assurance that there will be no harassment by excise officials. Some jewellers kept their shops shut in Mumbai as well.”

Meanwhile the strike has caused a lot of trouble and heartburn for brides to be. A recent report in The Hindustan Times discusses the plight of women who are about to get married and do not have their gold jewellery in place. The report quotes one such bride to be as saying: “I’m hoping this strike will come to an end soon otherwise I have to go for imitation jewellery on my D-day.”

The brides to be have been left in limbo because the gold jewellers have been on a strike for close to three weeks. The jewellers are striking against an excise duty of 1% on “articles of jewellery [excluding silver jewellery, other than studded with diamonds and some other precious stones]” that the finance minister Arun Jaitley proposed in the budget of the government, for 2016-2017, that he presented last month.

The jewellers are also protesting against the mandatory quoting of the Permanent Account Number(PAN) for cash transactions of Rs 2 lakh or more. This change came into effect from January 1, 2016, and hence, has been place for well over two months. Before this, quoting the PAN was necessary for cash transactions of Rs 5 lakh or more.

Media reports now suggest that the jewellers are claiming that this change has had a huge impact on their sales. Given this, they want the Rs 5 lakh limit to be reinstated.

So what is it that the jewellers fear? They want the government to withdraw the 1% excise duty because they fear harassment by excise inspectors. While this is a legitimate concern, the government has asked excise officials not to make factory visits. A section of the jewellers called off the strike on this assurance from the government. Also, it is important to understand that the 1% duty will generate an extra audit trail.

Further, it is important to understand that gold in its various forms remains an important conduit for black money. Black money is essentially income which has been earned but on which taxes have not been paid.

As the White Paper on Black Money released by the ministry of finance in 2012 points out: “Cash sales in the gold and jewellery trade are quite common and serve two purposes. The purchase allows the buyer the option of converting black money into gold and bullion, while it gives the trader the option of keeping his unaccounted wealth in the form of stock, not disclosed in the books or valued at less than market price.”

The beauty of gold is that a lot of wealth can be stored in a very small space. A lot of black money in the form of gold can be stored in a single locker. Hence, instead of holding on to paper money the holders of black money prefer converting it into gold. Also, with gold there is no fear of wear and tear as is with paper money.

A study on black money carried out by business lobby Federation of Indian Chambers of Commerce and Industry(FICCI) points out that: “Nearly 70-80 % of the transactions involving Jewellery are made using cash (black money).” This clearly explains how those with black money like to hold their wealth in the form of gold.

As the FICCI study points out: “Undisclosed sale of gold, silver etc. results in escapement of applicable tax liabilities Tax authorities have estimated purchases of gold bullion and Jewellery as the second-largest parking space for black money, next to Real Estate.”

Given this, the move to make PAN card mandatory for cash transactions of Rs 2 lakh or more when it comes to making jewellery purchases, is an important move. If it leads to the sales of jewellers falling, then so be it. The black money wallahs might figure out alternative parking spaces for their money, but then why should the government make it easy for them? I mean you should not be able to get out of your house, walk down your street and convert your black money into gold. It has to be a little more difficult than that.

The FICCI study further points out that: “Apart from unreported cash transactions that lead to black money, jewellers (specifically small jewellers) often sell ornaments that are made using adulterated gold. This practice also contributes to black money, as the jeweller typically does not report the full profit made by selling ornaments at premium rates (when they were made using adulterated gold, which is cheaper).”

Hence, while gold jewellery is a conduit for black money, it also helps generate black money. Further, many jewellers discourage the use of plastic money and customers who want to use their credit card or debit card to make the payment, are typically asked to pay 2% extra.

One excuse offered by jewellers is that many buyers do not have a PAN card. Well, if someone is in a position to pay Rs 2 lakh or more for jewellery, I am sure he can get a PAN card made as well. It shouldn’t be that difficult.

Once these factors are taken into account, it is in the best interest of the country that more jewellers are brought under the tax ambit. And that being the case, the government should not back down on its recent moves and let the jewellers’ strike continue.

The column originally appeared in the Vivek Kaul Diary on Equitymaster on March 23, 2016

Home Prices, And Not Buyers, Are Unrealistic

India-Real-Estate-MarketVivek Kaul

Columnist Gautam Mukherjee wrote an article on real estate published on this website on August 3, 2015. In this column Mukherjee had this to say about prospective buyers looking to buy a home to live-in: “These worthies [i.e. the prospective buyers], expecting a crash in prices as the crisis deepens, are gleefully seeking ever more unrealistic bargains before committing themselves. To them, the builders are profiteers, bloated on black money, and unethical, one-sided, contractual arrangements.”

I really wonder why prospective buyers have been called “worthies” here. And what is wrong about hoping to find a home to live in at a price which one can afford? Further, are the prospective buyers really seeking “unrealistic bargains” or are home prices at unrealistic levels? From all the data that is available it seems to be the latter.

Data put out by real estate research and rating firm Liases Foras tells us that the weighted average price of a flat in a city like Mumbai was Rs 1.3 crore as of March 2015. In the National Capital Region it is Rs 74 lakh. In Bangalore the price is Rs 86 lakh. And so is the situation almost all over the country.
I would like to ask Mr Mukherjee, among the people who he calls “worthies”, how many make the kind of money that is needed to be able to afford these homes? Let’s do some back calculation and see.

The weighted average price of a flat in Mumbai is Rs 1.3 crore. A bank would finance 80% of this. This means that the bank would give a home loan of up to Rs 1.04 crore. The remaining Rs 26 lakh the prospective buyer would have to arrange as a down-payment. This assuming that the builder does not ask for any payment to be made in black. I know that this is an unrealistic assumption, but just humour me for a bit.

The State Bank of India currently charges an interest of 10% on home loans above Rs 1 crore. For a twenty year loan the EMI works out to Rs 96,502. Typically, while lending banks ensure that up to 40% of the salary goes towards the EMI. Hence, to get a loan of around Rs 1.04 crore and to be able to pay an EMI of Rs 96,502, the salary of the borrower has to be around Rs 2.41 lakh per month(Rs 96,502 divided by 40%) or around Rs 29 lakh per year (Rs 2.41 lakh multiplied by 12).

Even in Mumbai how many people make that kind of money? The Maharashtra State Economic Survey for the year 2014-2015 points out that the average per capita income in Mumbai during 2013-2014 stood at Rs 1.88 lakh. So it’s not the “prospective buyers” who are being unrealistic, it’s the prices that builders want to be paid for the homes that they have built, which are unrealistic.

Given this, it is not surprising that, as the latest Economic Survey points out: “At present urban housing shortage is 18.8 million units [i.e. homes].”

As mentioned earlier Mukherjee writes: “To them [prospective buyers], the builders are profiteers, bloated on black money, and unethical, one-sided, contractual arrangements.”

What is wrong with this thinking? As analysts Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research report titled Real Estate: The unwind and its side effects: “Another big source of generation of black money is the real estate sector which has witnessed an unprecedented boom in the past ten years or so. In Delhi, the ratio of unaccounted value of real estate transactions to the total value is as high as 78%. The same ratio is 50% in Kolkata and Bangalore. In smaller towns and semi urban centres, nearly 100% of property transactions are conducted in cash.” In Mumbai, they put the ratio of black money to total value at between 10-30%. The Ambit analysts were quoting from data put out by National Institute of Public Finance and Policy in July 2014.

I guess Mukherjee may not want to believe this. So here is something out of a report on black money published by the business lobby FICCI in February 2015. As the report points out: “The Real Estate sector in India constitutes for about 11 % of the GDP of Indian Economy, as these transactions involve high transaction value. In the year 2012-13, Real Estate sector has been considered as the highest parking space for black money.” FICCI is a business lobby and not an association of buyers looking to buy homes to live-in. Given these things Mukherjee’s sarcasm towards prospective buyers who cannot afford homes at their current prices, was really uncalled for.

In the example considered above the weighted average price of a flat in Mumbai is Rs 1.3 crore. If the builder asks 20% of this in black (and I am being fairly conservative here), the prospective buyer has to arrange for Rs 26 lakh.

This leaves Rs 1.04 crore, which becomes the price of the flat on which the bank will give a home loan. Now remember, the bank gives a home loan of up to only 80% of the price of the flat. Hence, the bank will give a loan of up to only Rs 83.2 lakh. The remaining Rs 20.8 lakh would have to be paid by the buyer as a down-payment. This means that the buyer needs savings of at least Rs 46.8 lakh(Rs 26 lakh paid in black plus Rs 20.8 lakh to be paid as a down-payment) to buy a flat. How many people have savings of this kind?

And Mumbai has low levels of black money required to buy a home in comparison to other cities. So, if prospective buyers see builders as profiteers who are bloated on black money, there is absolutely nothing wrong with that. Further, many builders have just taken money from buyers and disappeared. There are many others who have endlessly delayed projects. Hence, if other buyers look at them in a negative light, you can’t blame them for it.
Mukherjee further asks: “But what is the government, specifically the RBI and Finance Ministry doing about the high interest rates, the recapitalisation of banks, and renegotiation of all the stressed loans to builders/ industry, which are about to become irretrievable NPAs?.”

He also suggests: “Also, in the interim, the assumption is that the construction industry will receive new lines of credit/ rescheduled debts from the banks and lending institutions to finish their half-built projects.”

The tone is that the government and the banks should come to the rescue of the real estate companies which are in a mess. There are multiple points that need to be made here. First and foremost why can’t builders cut home prices and sell the massive number of unsold homes that they are sitting on.

Second, why should banks lend more to a borrower who is unable to repay his past debt? It is important to understand the main purpose of a bank, which is to ensure that the money deposited by individuals with it, remains safe and earns some return in the process. What Mukherjee is suggesting is that banks throw good money after bad. Why? Just because a few builders are going to go bust?

Also, it is worth asking where did all the money that the builders raise for building projects go? They took money from prospective buyers. They took money from banks. Where did all this money go? Guess Mukherjee can give us an answer for that.

Further, the builders have made potloads of money between 2002 and 2013, when the bull run in real estate drove home-prices to the current unrealistic level. So how is it fair that prices were allowed to rise, but now when the prices are falling (or should be falling), they should not be allowed to fall?

John Kenneth Galbraith, who was probably the most read economist in the mass media in the twentieth century, once said: “In America, the only respectable type of socialism is socialism for the rich.” Mukherjee along these lines wants the government to bailout the builders. I am no capitalist but socialism for the rich, is socialism of the worst kind.

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

The column originally appeared on SwarajyaMag on Aug 5, 2015

Raghuram Rajan won’t cut interest rates even in Hindi

ARTS RAJANAt a recent function, Raghuram Rajan, the governor of the Reserve Bank of India (RBI), spoke in Hindi. The joke going around in the social media after that was that even in Hindi, Dr Rajan refused to cut the repo rate. Repo rate is the interest rate at which the RBI lends to banks. Nevertheless, four pieces of data that came out last week, will increase the pressure on Rajan to cut the repo rate. These four pieces of data are as follows:

  1. Inflation as measured by the consumer price index fell to 5.52% in October 2014. It was at 6.46 % in September 2014 and 10.17% in October 2013. 

  2. Inflation as measured by wholesale price index fell to 1.77%. It was at 2.38 % in September 2014 and 7.24% in October 2013. 

  3. The index of industrial production, which is a measure of the industrial activity within the country, grew by 2.5% in September 2014, in comparison to September 2013. The IIP for August 2014 was only 0.4% higher in comparison to August 2013. Interestingly, some economists believe that this marginal recovery in the IIP will not hold for October 2014. The reason for this lies in the fact that indicators of industrial activity like car sales, bank loan growth etc., have slowed down in October 2014. 

  4. The bank loan growth for a period of one year ending October 31, 2014, stood at 11.2%. This had stood at 16.4%, for the period of one year ending November 1, 2013. The loan growth year to date stands at 4.6%. It was at 7.6% last year.

These four data points have got the Delhi based economic experts and industry lobbyists brushing up their economic theory again. “It is time that the RBI started to cut interest rates,” we are being told. Chandrajit Banerjee, the director general of the Confederation of Indian Industries, a business lobby said “This provides sufficient room to the RBI to review its prolonged pause in policy rates and move towards policy easing in its forthcoming monetary policy especially as investment and consumption demand are yet to show visible signs of a pick-up.” This was a sentiment echoed by A Didar Singh as well. Singh is the secretary general of Federation of Indian Chambers of Commerce and Industry (FICCI), which is another industry lobby. As he put it “The inflationary expectations are fairly tamed and we see no immediate upside risks with regard to prices. Given that, it is important to reiterate that demand remains subdued. The consumer durables segment reported negative growth for the fourth consecutive month in September. It is imperative that all levers are used to pep up demand.” The idea here is simple. If the RBI cuts the repo rate, banks will cut the interest rates they charge on their loans as well. If that were to happen, people would borrow and spend more, and businesses would borrow and invest more. And this will lead to faster economic growth. Economics 101. QED. Banerjee and Singh are not the only ones asking for an interest rate cut. Sometime back industrialist Anand Mahindra had said that “It might be time for the RBI to think of a rate cut…The need of the hour has changed and its time to start to look to support growth.” Sunil Mittal, chief of Bharti Airtel, also suggested the same when he told CNBC TV 18 that the finance minister Arun Jaitley “had spoken for the nation,” when had asked for an interest rate cut. In an interview to The Times of India in late October Jaitley had said “Currently, interest rates are a disincentive. Now that inflation seems to be stabilizing somewhat, the time seems to have come to moderate the interest rates.” While all this sounds good in theory, things are not as simple as the businessmen and the politicians are making it out to be. It is worth recounting here what Rajan had said in a speech in February 2014: “But what about industrialists who tell us to cut rates? I have yet to meet an industrialist who does not want lower rates, whatever the level of rates.” And what about the politicians? Alan Greenspan, the former chairman of the Federal Reserve of the United States, recounts in his book The Map and the Territory that in his more than 18 years as the Chairman of the Federal Reserve, he did not receive a single request from the US Congress urging the Fed to tighten money supply and thus not run an easy money policy. In simple English, what Greenspan means is that the American politicians always wanted lower interest rates. The Indians ones aren’t much different on that front. Nonetheless, the question is will lower interest rates help in reviving consumption and investment? Let’s tackle the issues one by one. Let’s say an individual wants to buy a car. He borrows Rs 4 lakh to be repaid over a period of five years at a rate of interest of 10.5%. The EMI on this works out to Rs 8,598. Let’s say the RBI cuts the interest rate and as a result the interest rate on the car loan falls to 10%. The EMI now works out to Rs 8,499 or around Rs 100 lower. Now will an individual go out and buy a car because the EMI is Rs 100 lower? Even if interest rates fall by 200 basis points (one basis point is one hundredth of a percentage) to 8.5%, the EMI will come down by only around Rs 400. For two wheeler and consumer durables loans, the differences are even smaller. Hence, suggesting that lower interest rates lead to higher consumption isn’t really correct. The real estate experts think that cutting interest rates will help revive the sector. The basic problem with the real estate sector is that prices have gone totally out of whack and a cut in interest rates is not going to have any significant impact. What about corporate investment? As Rajan had asked in his speech “Will a lower policy interest rate today give him more incentive to invest? We at the RBI think not…We don’t believe the primary factor holding back investment today is high interest rates.” So what is holding back investment? The answers are provided in a recent report titled “Will a rate cut spur investments?Not really“, brought out by Crisil Research. As the report points out “Investment growth, particularly private corporate investment, plummeted in the fiscals 2013 and 2014, despite low real interest rates. During this time, the policy rate in real terms – repo rate minus retail inflation – has been negative, and real lending rates averaged 2.4%. This is significantly lower than the 7.4% seen in the pre-crisis years (2004-2008). Yet investment growth dropped to 0.3%, down from an average 16.2% seen in the pre-crisis years.” The accompanying chart makes for an interesting read. 

After 6 years, real repro rate (adjusted for CPI inflation) turns positive

Source: RBI, Central Statistical Office, CRISIL Research Note: Nominal repo rate at the fiscal year-end minus average CPI inflaction , F= Forecast

As Crisil Research points out “During fiscals 2013 and 2014, when investment growth slumped to 0.3% per year, the real repo rate was still minus 2.1%, while the real lending rate was only +2.8%. Only in June 2014, for the first time in six years, did the real repo rate turned mildly positive.” So companies were borrowing and investing at higher “real” interest rates earlier but they are not doing that now. Why is that the case? This is primarily because the expected rate of return on investments has fallen “because of high policy uncertainty, slowing domestic and external demand, and rising input costs driven by persistently elevated inflation.” “The rate of return on investments – as proxied by return on assets (RoA) of around 10,000 non-financial companies as per CMIE Prowess database – have fallen sharply to 2.8% in fiscal 2013 and 2014 from 5.9% in the pre-crisis years,” Crisil Research points out. Moral of the story: Corporates invest when it is profitable to invest, and not simply because interest rates are low. Indeed, the other factors that are likely to revive investment are in the hands of the government and not RBI. Hence, a cut in interest rates is neither going to revive consumer demand nor corporate investments. Having said that, high food inflation has been a big factor behind high inflation. And the RBI really cannot control that. Also, food inflation has come down considerably in the recent past. So why not just cut interest rates? Rajan explained it very well in his February speech where he said “They say the real problem is food inflation, how do you expect to bring it down through the policy rate? The simple answer to such critics is that core CPI inflation, which excludes food and energy, has also been very high, reflecting the high inflation in services. Bringing that down is centrally within the RBI’s ambit.” Further, food prices might start rising again. The government has forecast that the output of kharif crops will be much lower than last year and this might start pushing food prices upwards all over again. Also, recent data showsthat vegetable and cereal prices have started rising again because of the delayed monsoon. To conclude, despite falling inflation, the inflationary expectations (or the expectations that consumers have of what future inflation is likely to be) are on the higher side. As per the Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014, the inflationary expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent. Hence, inflationary expectations have risen since the beginning of this financial year. And for inflationary expectations to come down, low inflation needs to stay for a considerable period of time. As Rajan said “A more important source of our influence today, therefore, is expectations. If people believe we are serious about inflation, and their expectations of inflation start coming down, inflation will also come down…Sooner or later, the public always understands what the central bank is doing, whether for the good or for the bad. And if the public starts expecting that inflation will stay low, the central bank can cut interest rates significantly, thus encouraging demand and growth.” If inflationary expectations are controlled only then will consumer demand revive and that in turn, will lead to revival of corporate investments as well. Given this, it would be surprising to see Rajan start cutting the repo rate any time soon. The article originally appeared on www.equitymaster.com on Nov 17, 2014

Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He has just finished writing a trilogy on the history of money and the financial crisis. The series is titled Easy Money. His writing has also appeared in The Times of India, Business Standard, Business Today, The Hindu and The Hindu Business Line.