India – Superpower in the Making

 

It’s a new India. It’s a new journey, a journey from poverty towards prosperity, from tradition towards modernity, from a nation protected in the garb of license raj to a nation ready to compete in the global firmament.

India has come a long way, since it embraced the market economy in 1991. The economy has undergone significant changes since then, which have made it an attractive global destination for businesses and trade, thanks to the forces of liberalization and deregulation that have unleashed an environment which is on par with some of the best in the world. Its strong macroeconomic performance (with average annual GDP growth of about 6%) has propelled it to emerge as the fourth largest economy in the world, on account of purchasing power parity. It has a well developed banking system and a vibrant capital market. Further, with a billion plus population where every sixth person in the world is an Indian, the fast growing middle class, the competitive world class enterprises and the growing purchasing power, the economy has been growing more than twice as fast as the US economy.

And there is more good news. India is fast emerging as a land of incomparable opportunities. The whole world is looking at India’s unlimited new business opportunities. The country’s economic and other achievements are getting recognized the world over. Even the world’s lone superpower recognizes it. This is reflected in the statement made by the US Secretary of State, Randy Daniels, who remarked, “India is indeed a beacon for peace and growth, not only for the region, but also for the entire world.” More and more global organizations are setting up their bases here. The “Made in India” label is increasingly becoming a respected global brand, for its competitiveness, reliability and quality, more so after the country’s IT industry’s stellar success.

Against this backdrop, the country is all set to become an economic superpower. It is indeed a significant development for a country that was labeled as one of the ‘third world’ nations for nearly 45 years. Now, that is a thing of the past. Indian economy in recent times has shown exceptional resilience in absorbing external shocks like oil market fluctuations and worldwide recession. Today, a new sense of confidence is emerging, a new sense of pride is there, and there is a willingness to emerge as an economic superpower. And that does not look unrealistic. To its credit on the demographic front, 50% of the population is less than 25 years of age. This means that the domestic demand is high and is less dependent on exports. Allan Conway of Schroders, a US-based fund manager expresses optimism about the present growth, as he says “Emerging markets such as India have to rely on international trade in the initial stages of development, but as employment grows and people get wealthier, they become a rich source of domestic demand that can sustain the economy.”

The recent World Bank study describes India as an emerging giant that is likely to become an economic powerhouse in 25 years. The study further reveals that India has a huge pool of well-educated, technically-trained people, proportionately much larger than in China or Southeast Asia; India’s number of scientists and engineers, for example, is second only to that of the United States. If their skills can be tapped, they represent an unparalleled resource. “There is an assessment that India’s power on many fronts is growing steadily and that other countries must develop a working relationship with it,” says Stephen Cohen, Senior Fellow in Foreign Policy Studies, Brookings Institution, US, who predicted the rise of India in his book, “India: Emerging Power”. He believes that India is finally reaping the benefits of steady reform process that will translate into enduring growth. “The biggest change the last decade witnessed was that the world at large recognized that India can deliver technologically superior products, competitively. The country’s expertise in IT, Pharmaceuticals and Heavy Engineering has been accepted globally,” says a CEO of India-based company. He predicts that these three industries will drive future growth.

According to a recent report by Goldman Sachs, a leading global investment banker, the Indian economy is expected to be the third largest in the world by 2050, after the US and China, overtaking France, Germany and Japan. Adam Matthews,

Asia-region specialist with JP Morgan Fleming, echoing the same view said, “India is being rated even higher than China at the moment, and is a hot market right now.” Overall, all sectors of the economy are facilitated by a host of factors, such as growing agricultural production, stable prices, falling interest rates, and, of course, political stability in general, and the restoration of goodwill between India and Pakistan, in particular. On the employment front, Indian IT majors as well as foreign outfits like Microsoft, IBM, Accenture, HP, Sun Microsystems, Dell, Reuters, J P Morgan, Citi Group, HSBC etc. are creating new jobs, which augurs well for the economy.

Emerging Trends

Overall, the economy is witnessing a stable macro-economic framework of high economic growth supported by modest agriculture growth and robust industrial and services sector growth. Accordingly, the strength of the Indian economy is evidenced by key macro-economic indicators like low inflation rate, burgeoning foreign exchange reserves and a favorable interest rate regime. These indicators are at work to help India emerge as the economic powerhouse. On the other hand, it is rapidly creating world-class knowledge-based industries, which have emerged despite less government support and have helped to boost the economy. The IT revolution, telecom growth and pharmaceuticals have changed the face of India. The rapid growth of service sector is turning the country into a global hub for servicing MNC clients. Business Process Outsourcing (BPO) has served the cause of India further to emerge as a preferred destination for MNCs.

 After the great success in the field of Information Technology (IT), India now dreams of becoming the most preferred destination for BPO ahead of countries such as Philippines, Mexico and Ireland. The BPO industry comes as a great opportunity for India. It could really be a shot in the arm for the Indian economy going by the country’s rich talent pool. It has the second largest English-speaking people with computer skills in the world after the US and with education being a priority in most Indian families, this is bound to rise in the future. Going by this, BPO is definitely a sunrise sector in India with bright prospects in the long-term.

On the other hand, India’s manufacturing sector is on the strong growth path as global companies are favoring India as the major manufacturing hub to leverage its cost advantages and growing domestic market. On the domestic front, India Inc. is building global brands by taking cost-cutting measures and productivity improvement initiatives. Besides, a combination of business entrepreneurship and social entrepreneurship is developing rapidly. More and more companies are joining this bandwagon. For many years India was considered as the service economy, but revival in manufacturing sector has shown the future potential for the economy. India’s competitive advantage in the manufacturing sector is going well beyond the labor advantage. For instance, the average wage in India is about £300 a year compared with more than £20,000 in Britain. India is well-placed in providing the professionals to industry, well-trained engineers and technicians compared to other developing economies like China, Thailand and Malaysia. India’s inherent strength lies in engineering designs, process innovations and R&D. Besides the labor advantage, India has huge untapped domestic market and abundant raw materials like iron ore, bauxite etc, which are basic inputs for several manufacturing industries.

Against this background, the movement of the Indian rupee was unidirectional. In the last couple of years, on the back of a strong economic growth and increased interest from the foreign investors, the rupee started gaining strength vis-à-vis the US Dollar. However, the rupee appreciation affects India inc., positively as well as negatively. The Net Importers like the oil companies would gain from dollar depreciation but export oriented companies especially in Pharmaceuticals, Software and ITES stand to lose. If the dollar appreciates the fortunes would reverse. Ashima Goyal, Professor, IGIDR suggests that the RBI has to keep in mind not only what is happening to the US exchange and interest rates, but also the changes in the Real Effective Exchange Rate (REER), relative productivity and what competitors such as China are doing.

Challenges

Though India has great potential; a lot still needs to be developed. But for that potential to be realized, its promise must not be treated as an instrument of short-term electoral popularity. India being an agrarian economy, the performance of agriculture is very important not only from the point of view of economic growth but also for the well-being of the majority of the population. The sector that provides 60% of employment is virtually stagnant and its development has been systematically ignored both by the central as well as the state governments.

Besides, the biggest challenge is to raise the per capita income and standard of living of these people. To sustain the tempo of growth, it is imperative to make the sector economically rewarding. Another important issue that needs to be addressed for achieving a vibrant economic growth is regional disparities. In the post-reform era, it is found in many studies that regional disparities in terms of growth have widened. Also, very few states have adopted the reform measures. Experts suggest that to achieve high growth with low incidence of poverty, India needs to focus on regional development.

Overall, there are bad things accompanying good things. Economists say that the broad-based fundamental improvements in macroeconomic scenario should not make policy makers overlook some key areas of concern. Though it is a happy moment for Indians to observe the economy graduating up the ladder of growth, it is too early to celebrate the observation.

Notwithstanding the fact that the country is witnessing strong growth it is not reflected in the overall improvement of living standards. The government will have to put its shoulders to the wheel in order to attain and sustain the growth rate in GDP. It will have to come up with reforms by way of enhancing public and private investments in infrastructure, strengthening the financial sector and capital markets and deepening structural reforms and regenerating industrial growth. The country must pay attention to its ballooning public debt and inflating high fiscal deficit. It must also consolidate tax reforms and continue fiscal adjustment at both the Central and the State levels. Besides, pressing issues like high level of poverty, lack of proper education to the masses, inadequate infrastructure must be tackled on war footing, and then only India can emerge as an economic powerhouse.

N K Singh, Member, Planning Commission, suggests, “The competitiveness of the Indian economy would need to be substantially improved through a continued soft interest rate regime, lower cost of financial intermediation, credible labor reforms and managing expectations about the appreciation of the rupee - in the face of rising reserves - to prevent erosion of export competitiveness.”

The Global Economic Power in the Making

Although a section of experts express pessimism that India’s economy and economic policy are still relatively inward looking and it seems unlikely that India will become a dominant player of the world economy in the current decade, given the government’s desire to push reforms process, the situation in the next decade may be quite different. The journey towards becoming economic powerhouse has already started and is gathering momentum.

Along with China, India is going to create a new kind of balance in Asia. Goldman Sachs predicts that growth in India could actually exceed that of China by 2015. Further, India will overtake Britain in 2022 and Japan in 2032 to become the third-biggest economy in the world, after China and America. “There is every hope that the present challenges will be tackled successfully in the years ahead. India in 2020 has every reason and chance to become at least a mid-sized economic power,” says V Anantha-Nageswaran, Founder-Director of LIBRAN, Asset Management, Singapore.

Let’s welcome the new confidence to pave the way for an emerging economic powerhouse. The positive factors mentioned above would help accelerate growth rapidly in the coming decades. In the light of these developments, undoubtedly, the future is going to be India’s.
Image source: www.globalmarathi.com

N Janardhan Rao, Lead Economist.

Urbanization – Global and India's Experience

Urbanization is a phenomenon that is gaining momentum across the world, today. The trend, which is fueled by the twin factors of urban population growth and migration from rural to urban areas, however, is not bad and in fact, often benefits the economic growth of cities and its surrounding areas. But on the flip side, it poses huge challenges as it exposes poor infrastructure facilities of urban centers which have not kept up with the rise in urbanization and lack of effective policy planning on part of the governments, both at the local and at the central level.

The growth of cities will be the single largest influence on development in the 21st century.”

– United Nations.

In 1800, only 2 per cent of the world’s population lived in urban areas, although the history of cities is as old as the 3rd millennium B.C., according to the United Nations. The number now has grown manifold to 3 billions and, in 2007, it crossed another milestone: more than half of the world’s population is urban. And if the pace of urbanization (the World Bank defines urbanization as a process of relative growth in a country’s urban population accompanied by an even faster increase in the economic, political, and cultural importance of cities relative to rural areas) continues its momentum, by 2050, nearly 2/3rd of us would be living in cities.

According to estimates by the United Nations, by 2008, more than half of the world’s current 6.7 billion population will live in cities; by 2030, the urban population will have risen to 5 billion, i.e., 60 per cent of the world’s total population. Further, in 2005, China, India and the US had the largest number of urban dwellers in the world.

What is causing the sudden burst in urban population? Migration from rural areas to urban centers and growing population are the two major factors behind rapid urbanization witnessed across the globe, including India. In fact, the trend is going to be stronger in India, in particular, and the whole of Asia-Pacific, in general, if the forecasters are to be believed. The process of rural migration has accelerated in recent times with agriculture’s diminishing role in employment generation and growing economic activities in cities.

Contrary to common perception, urbanization is not a side effect of economic growth; rather, it is an integral part of the process, suggests a World Bank report. According to it, India’s urban areas make a major contribution to the country’s economy. For instance, though less than 1/3rd of India’s people live in urban areas, they account for over 2/3rd of the country’s GDP and 90% of the government revenues. However, the rising trend of urbanization poses a significant challenge to the country’s cities.

While the cities have been expanding to catch up with the spurt in migration and also population, it has not been matched with the creation of basic amenities like housing, water, transportation and sanitation among others. Lack of availability of shelter has, in fact, emerged as the biggest issue facing the Indian cities, today. According to the WB, slums now account for 1/4 of all urban housing; in Mumbai, which has the distinction of having Asia’s biggest slum, more than half the population live in slums.

Rapid urbanization also means increased pressure on the cities’ already choking infrastructure like roads, sanitation, water, healthcare etc. It is no secret that our cities have not been able to cope with the sudden burst in urbanization, a trend which has been gaining momentum. Major metropolises like Mumbai and Delhi have been struggling to provide basic services to their denizens. Jammed roads, rising levels of pollution, lack of affordable housing, erratic power supply, lack of access to drinking water etc. have been the nagging issues facing these mega cities in-the-making. Offering effective and affordable citizen services is another major challenge before the government and policymakers. Added to the list of woes is the issue of rising urban poverty.

Cities lack the vision and proper policy initiatives and also funds to effectively deal with the challenges arising out of rapid urbanization. However, given that the trend of urbanization is irreversible, there needs to be concerted efforts on the part of the policymakers and urban planners to come out with better solutions.

Defining Urbanization

In today’s context, the definition of an urban area differs from region to region and from country to country. However, on an average, demographers define that cities are large, densely populated, built-up areas. However, the most accepted criterion of urbanization is typically population size, population density, and the extent of the built-up area. For instance, in the US, census regard urban areas as those with at least 2,500 people, but in the UK the figure is 1,000. Accordingly, the definition of an urban area changes from country to country and there are no uniform standards.

Most commonly, a city is generally defined as a political unit organized and governed by an administrative body. This unit is a symbol of defining a city or an urban area by the number of residents. According to the United Nations, an urban area contains residents of over 20,000, and a city contains more than 100,000. The US defines an urbanized area as a city and surrounding area with a minimum population of 50,000. A metropolitan area contains both urban and rural area, which is socially and economically integrated with a particular city.  Megacities contain over 5 million inhabitants and there were 41 megacities in the year 2000 and the number is expected to grow expected to grow as population increases in the next few decades. By 2015, the figure may go up to 50 megacities and 23 of these are expected to have over 10 million people.

There are many reasons for the growth in numbers of cities. The large pool of urban habitants benefits the agglomeration or clustering, of related activities, which saves time and money. Moreover, cities are linked to other cities by transport network to access goods and services.

The Process of Urbanization

The practice of urbanization occurred differently in developing and developed countries and historically many of these countries were former colonies. It happened due to the population growth rates and countries with highest growth rates have the largest urban areas. The developing counties are characterized by poor, rapid migration from rural to urban area and having significantly less technology than the developed world. For instance, in the US migration from rural to urban was facilitated by large-scale industrialization to fulfill labor requirements. In the developing countries, urban migration takes place without any industrialization and employment opportunities for the masses leading to a great deal of pressure on urban areas. That is why many cities in poor countries contain large unemployed people living in poverty and in unsanitary squatter settlements.

Today, the degree of urbanization varies across the globe and this in general reflects the wealth of individual countries. The developed and industrialized nations tend to be the most highly urbanized.

In 20th century, one of the remarkable characteristics of urban growth has been the rapid increase of small cities to very big ones. During the 18th century, there was hardly any city with more than a million inhabitants. However, after it the number of cities has risen steadily and in the 19th century there were at least 13 cities with more than a million inhabitants, and by 1950 the number had grown to 68. Today, there are around 250 cities of more than a million habitants and many of these are in Asia, particularly in India and China.

Factors Driving Urbanization

A World Bank report suggests contrary to common perception. Urbanization is not a side effect of economic growth; rather, it is an integral part of the process. It further says that India’s urban areas make a major contribution to the country’s economy. For instance, though less than 1/3rd of India’s people live in urban areas, they account for over 2/3rd of the country’s GDP and 90% of the government revenues. However, the rising trend of urbanization poses significant challenge to the country’s cities.

Urbanization in India – On the Rise

According to a report by the United Nations Population Fund (UNFPA), India is getting urbanized at a faster rate than the rest of the world and, by 2030, 40.7% of the country’s population will be living in urban areas. With growing job opportunities and increasing salaries, states like Tamil Nadu and Maharashtra are witnessing rapid urbanization against the least urbanized states like Bihar and Assam. UNFPA opposes the idea that rural migration is driving urbanization in India. It says that urbanization is happening more due to the natural rate of population growth than increased migration. The report says that among the factors that are adding to rapid urbanization is natural increase in the urban area, which is contributing 61% while 22% to, rural to urban migration and another 17% to reclassification of rural areas as urban. To its credit, India’s urban population is the second largest in the world and is higher than the total urban population of US and Russia put together, excluding China. In terms of population, Mumbai ranks fifth and Delhi is the sixth largest and Kolkata is the 12th among the world’s top ten cities.

The Challenges

The rapid urbanization is creating numerous slums in the industrializing world, around 900 million slum inhabitants the world over, whose surface is splattered with fetid fluids and littered with plastic bags. The situation is worst especially in Africa, Latin America, Asia and in many parts of the Middle East. According to a study done by the United Nations Human Settlements Program (UN-Habitat) titled “The Challenge of Slums: Global Report on Human Settlements” urban slums are growing faster than expected. It says “With the locus of global poverty shifting rapidly from rural areas to cities, almost one sixth of the world’s population is already living in unhealthy areas, more often than not without water, sanitation or security.” The report warns that if no concerted action is taken, the number of slum-dwellers worldwide will rise to two billion over the next thirty years.

Despite these concerns, the number of people moving to cities is growing rapidly which is resulting in the huge increase in the world’s urban and urban slum populations. This is a crisis of unprecedented magnitude. The rapidly growing cities are caught in a deep morass of haphazard growth and unplanned development of infrastructure making these cities unable to cope with the increasing burden of population. The people who are living in slum are yet to be provided with shelter, employment along with other urban services. “The stretched capacity of most urban economies in developing countries is unable to meet more than a fraction of these needs,” says Naison Mutizwa-Mangiza, Chief of the Policy Analysis, Synthesis and Dialogue Branch at the UN-HABITAT Monitoring and Research Division.

Against the growing migration from rural to urban areas, there are possible outcomes of slums, salvage yards, or ruins. So, the biggest concern of growing cities is to ensure and to upgrade the slums significantly by investing in infrastructure. Mutizwa-Mangiza suggests “Experience has shown the need for significant investment in citywide trunk infrastructure by the public sector if housing in upgraded slums is to be affordable to the urban poor and if efforts to support the informal enterprises run by poor slum dwellers are to be successful.”

Statistics reveal that the world is now more urban than rural and especially for developing countries, the going seems tough and the coming years will be an acid test for countries seeking slum development. For effective urban planning Jeffrey D Sachs, Director, Earth Institute, Columbia University suggests, “the world’s cities will have to succeed on three policy dimensions to ensure all citizens have adequate living conditions as follows:

• Urban planning by build adequate infrastructure, such as roads, houses, electricity, water and sanitation services, public transportation, schools and health clinics;

• Urban development strategy, through tailoring their goals to their circumstances of their own regions to transform slums into legitimate communities; and

• Strengthen urban governance to improve the lives of poor people and promote equity.”

If urban policymakers ensure the above conditions, the spread of urbanization will be an enormously beneficial. In fact, people in urban area are much more economically productive and they have been a wellspring of innovation for many new ideas. The process of globalization and the death of boundaries increased the returns for being smart, and even one becomes smart by associating with smart people. Therefore, cities are important forever as they create the intellectual connections that forge human capital and spur innovation. The problems like poverty, pollution, and disease, are not because of growing urbanization but lack of proper vision in planning and governing cities of policymakers.

Outlook

Across the globe, cities are struggling with huge outward migration of people and related problems. On the other hand, public authorities have once again tried to slow or halt the process but they have been failing in their effort to stop people from moving into the cities. It is difficult to predict what the next chapter history of urbanization will bring. However, there are lessons to draw from what has happened to date.

N Janardhan Rao, Senior Economist.

Indian Economy : Rising Inflationary Pressure

Food inflation in India rose 9.01% in the week ended May 28, 2011, stoking fears of further policy tightening by RBI.

Led by sharp spike in prices of food articles, mainly fruits, India’s food inflation, as measured by the Wholesale Price Index (WPI), surged 9.01% on a year-on-year basis in the week ended May 28, 2011, as the latest data from the government shows. The annual food inflation had stood 8.55% during the preceding week. The latest figure is also the highest in the last two months since March 26 when it had stood at 9.18%. Fruit prices, which recorded a jump of nearly 31%, y-o-y, milk prices, which rose 8.5%, and egg, meat and fish, which became expensive by 7%, contributed to the rise in the annual food inflation. Cereals, which grew 5.8% and a jump of 14% in onion prices too pushed annual food inflation to jump to its two months high level.

The latest inflation figure stokes fear that interest rates would rise higher as banks respond to belt tightening by the central bank. The RBI has raised repo rate, its key lending rate, by 250 basis points to 7.25 per cent beginning March 2010 which has seen cost of consumer loans such as car, personal and home loans head higher, thus raising EMIs for retail borrowers.

With no let up in inflation rates, further monetary tightening by the central bank remains a possibility. The apex bank is scheduled to meet next week on June 16. Meanwhile, with the government under pressure to raise prices of petroleum products to meet its fiscal deficit target of 4.6% of GDP for the financial year 2011-12, hope of any let up in inflation seems a distant possibility. Yet with forecast of a normal monsoon and reports of a bumper crop this year, hope of a moderation in inflation rates still floats. 

Indian Reality Sector – Eying on Affordable Housing

With the increasing demand for affordable and low-cost housing and the huge potential of the segment, real estate companies are eying innovative and affordable housing projects, especially in times of economic slowdown.

The Rs 65,000 cr real estate sector has started showing signs of recovery, with the newfound mantra of affordable housing, or you could call it the Nano effect. The industry is currently estimated to be around 5% of GDP and to have a growth rate of 25-30% annually. A recent Assocham Business Barometer (ABB) survey has found that the embattled realty majors see positive signs of recovery taking place within the next quarter against increasing low cost housing demand and improved cash flows. According to a study by PropEquity Research, 74% of residential apartment sales in Mumbai in the first quarter of 2009 came from the low cost segment. The trend was the same in Gurgaon and Chennai too, where the corresponding numbers were 60% and 58% respectively.

Encouraging policies and robust demand for the segment are likely to hold the key for a speedy recovery of the sector. After a lull in 2008, the sector is witnessing real actions, which include the high-profile launches of some major projects, coupled with an overwhelming response for their upcoming projects.

Despite the global financial crisis, the Indian economy recorded a healthy growth during the last three years, with the presence of real domestic demand and consumption continuing to fuel the economy, besides the renewed faith of overseas investors weighing up the series of steps taken by developers to improve their financial position.

Estimates indicate that India has a shortfall of more than 25 million houses, of which 97% is in the low-income group. Moreover, the increasing urbanization projections of 600 million urban residents by 2030, from the current 328 million, present a lucrative market for low-cost housing. This is the reason why top players like DLF, Unitech, Jaypee, Omaxe and Tata Housing have all joined the affordable housing bandwagon. After realizing the resident market dynamics, these players are changing their strategies accordingly. Earlier, they used to tap only 5% of the market, which got saturated during the slowdown. Building and selling affordable housing is the only way for realtors to survive. Most of the realtors have realized the truth that less profit is better than no profit and are eying the potential in affordable housing and devising ways to revive their fortunes.

Affordable housing boom

After the overwhelming response for Nano car, the Tata group has entered the low-cost housing segment to target industrial workers and other low-wage income pool. Tata Housing has already announced the low-cost township to be built at Boisar, 100 km from Mumbai, in the next two years. The price range for houses is Rs 4,00,000 to 6,70,000. Industry pundits say that the entry of Tata group will bring a paradigm shift in the entire landscape of the Indian real estate sector and give many established players a run for their money.

Likewise, a general softening of interest rates has also helped real estate players cut their borrowing costs by as much as 300 basis points. Beyond these things, currently, affordable housing is gaining momentum and seems to have taken the industry by storm. Brotin Banerjee, Managing Director, Tata Housing, echoes the hope: “The demand for new homes has picked up in the second quarter of 2009 from the previous one. Increasing interest in affordable and low-cost housing is widely expected to help India’s real estate market make a recovery in 2009 to 2010.”

There are increasing signs that buyers are returning to the market slowly, but surely. For instance, DLF’s first residential project in Delhi recorded bookings of 1,400 flats on the first day itself. Drop in interest rates by both banks and housing companies is also boosting housing sales. If realtors price their products in the right manner, they would find buyers without doubt. Neeraj Bansal, Associate Director – advisory services, KPMG, says “Affordable housing will play a significant role in the real estate recovery over the next few months as developers are now connecting with ‘real buyers’ for the ‘real prices’ and are pricing projects more competitively.”

Window of opportunity

Low-cost housing has been largely overlooked during the housing boom. Until now, established builders were concentrating on premium segments like new high rises, golf courses, luxury flats, etc. because low-cost apartments will not be luxurious and will be absolutely tiny.

The Tata apartments will be built on 67 acres in Boisar, an industrial area, where most lower-wage commuters stay on rent. A typical carpeted area of the smallest units will be 218 sq ft and the largest units would be about 373 sq ft. Unlike conventional developers, the low-cost housing project business model treats land as an investor and not a capital base. Brotin Banerjee suggests, “To develop low-cost housing projects one needs to find out ways to bring the cost of construction down. We have adopted the revenue-sharing model with the land owners so that we do not have to bid for land at exorbitant prices.” Estimates indicate that if developers are able to roll out their project within 12-18 months, the returns would be in the region of 30-40%, almost similar to what the IT industry enjoyed in its boom period.

Challenges

Until now, one of the biggest challenges for affordable housing was finance. Most banks were unwilling to lend loans to people with no credit history or proof of identity. However, National Housing Bank and National Bank for Agriculture and Rural Development came forward to provide funds to housing finance companies to offer mortgages for such buyers. To reduce risks, banks are demanding from buyers a quarter of the purchases price, with confirmed income proof. Moreover, they are charging little more interest than those with an established credit history. 

Beyond finance, the other biggest risk is execution because developers have to deal with the state governments. There are chances that inefficient and corrupt officials can hurt developers. Given that affordable houses are already low-margin projects, this is the reason why bigger developers are unwilling to construct apartments for middle-income groups, even when the downturn forced them to do a rethink.

Though many now claim to be doing ‘affordable’ housing, the prices do not suggest that, because even though they are building smaller houses, they are selling them only at slightly lower rates than the peak rates. DLF have challenged the practicality of Tata’s low cost housing, starting from Rs 4 lakh. It suggested, “Such types of flats can be made only on zero-cost land acquisitions. We will have to see how the Tata group can provide flats at such cheap rates on freshly acquired land.”

Issues to address

To boost the activity of affordable housing projects, developers must be provided with fiscal incentives. The absence of any direct incentive could act as a dampener for the industry. However, the Finance Minister has announced welcome initiatives like increased outlay on schemes such as JNNURM/Rajiv Awas Yojana, allocation of Rs 2,000 cr for Rural Housing Fund, launch of program of housing to create one lakh dwelling units for Central Para-Military Forces. With these measures, the government is on the right track, but still there are a number of issues that need to be cleared up. These include: clear land titles, mortgage insurance, lack of data on credit history and timely credit, which is more important than subsidized credit. Vikas Rikhye, Property Consultant and Expert, suggests, “The government should consider the industry to be a part of infrastructure development and provide the real estate developers with incentives to increase the investments in real estate to achieve the social commitment of affordable homes.”

Another subprime?

Experts say that affordable housing segment in India is not subprime like the US. There are fundamental differences, both in the economic situation and the customer segments. In US, the housing market growth was linked with easy and plenty of cheap money available. Most banks were tempted and offered home loans to people with poor and tarnished credit histories. The end result was that most customers failed to repay and started defaulting on the loans, which led to foreclosures and home sales.

On the other hand, the scenario in India was completely different. The industry had a boom which has been limited to the middle and upper income segments. The segment earning between Rs 7,000 and 15,000 has hardly considered either lenders or developers, despite the fact that the segment has steady income flows and employer recommendations.

Analysts opine, “Given that in these small-sized homes, the land cost represents a small percentage of the overall cost; the speculative risk is low, with a very low probability of a drop in these property prices.” In India, affordable housing acts as a driver for economic growth and is in no way a subprime like the US. A strong growth in this segment generates a huge multiplier benefit, which includes employment generation for low-skilled daily wage workers and a huge demand for related industries output, including cementand steel. Needless to say, it will bring smiles to the lives of millions of poor people both in urban and rural India.

‘Affordable’ future

Skeptics are of the view that the increasing realtor interest in affordable housing could be a stock market gamble. Just like investors, the developers who joined the affordable housing bandwagon will turn back to luxury projects once the slowdown is over. Regardless of this, the industry is on the road to recovery and is betting in a big way on affordable housing. As long as the developers devise their strategies based on the right demand for the right product, the sector will continue to see growth, with rising demands for affordable housing. But they have to be cautious with regard to their approach henceforth. Let us hope that the government achieves its dream target of building an affordable house for every Indian in the near future.

Tags: Housing Sector, Subprime Crisis, Low Cost Housing,

N Janardhan Rao, Senior Economist.

Privatization in India – An Overview

At a time when the government is hard pressed to reduce its fiscal deficit and reduce budgetary support through subsidies to PSUs, the need of the hour is to take urgent measures to instill market discipline among PSUs, retain the profit-making and strategic ones and exit those which are economically unviable and where it has no business to be in business such as hospitality and airline.

Since 1948 when India got its first PSU (Public Sector Undertaking), in the form of ITI (Indian Telephone Industries Limited), their number and significance grew enormously in the next four decades that followed. In the first First-Five Year Plan, the country got five central PSUs. By 1980, the number of PSUs had grown to 163. Just before India embarked on the privatization or disinvestment drive beginning 1991-92, there were 244 PSEs at the end of the Seventh Plan in 1990. According to the CAG, there were 404 central PSUs, including six corporations and 94 deemed government companies, as on 31 March 2006, operating across a wide spectrum of businesses that include sectors such as banking, coal, engineering, power, oil, steel, textiles etc., (during the same period, there were 1062 State Government companies). The central PSUs employ about 2 million people in the country.

The PSUs were created to play a pivotal role as envisaged in the economic model adopted by the country in the post-independence era, inspired essentially by the Soviet socialist model. A large number of PSUs were set up across sectors, which have played a significant role in terms of job creation, social welfare, and overall economic growth of the nation. Over the years, the PSUs emerged to occupy commanding heights. However, according to critics, many PSUs were also set up in non-traditional areas like cement, hospitality, trading etc. Further, they prospered in an era of protectionism, and enjoyed subsidies, which led to inefficiency and falling productivity at many PSUs, leading to huge losses to the exchequer. The collapse of the erstwhile Soviet Union and India’s BoP (Balance of Payment) crisis in 1990, made a strong case to revisit the country’s Soviet-style economic model and make a transition to free-market economy.

Further, the piling losses at many PSUs too added the pressure on the government, to explore the ways, including privatization, to fix the woes. As reforms were unleashed in the post-1991 period, concerns grew over the survival of these PSUs, as critics apprehended them to succumb to competition as they lacked market discipline. The difficulties of governments that run businesses are well-known. The government opted to go for selective privatization, on case to case basis, rather than going for rapid privatization. This gradual approach has been hailed by many, as it is felt that, this is the best way to achieve better results. While this was done owing to political compulsions, it has certain advantages like it gives government and other participants in the privatization process time to gauge the possible impacts. In their paper, “Privatization in India: The Imperatives and Consequences of Gradualism”, Devesh Kapur and Ravi Ramamurti, say that rapid privatization was not necessary because the country did not satisfy two necessary conditions for rapid privatization: severe macroeconomic crisis, including high inflation, and a strong executive that could ram policies through. They say that many developing countries satisfied one of these criteria, e.g. Brazil and Turkey experienced several bouts of macro-economic instability, yet these countries did not privatize rapidly. 

In fact, they observe, even countries that satisfied both criteria, e.g., in sub-Saharan Africa, privatized gradually or not at all. They cite the examples of countries such as Argentina, Chile, Peru, Czech Republic, Estonia, etc., that met both criteria and also privatized deeply and quickly.

An across the board privatization is also not required given the fact that, there are many PSUs which have either turned profitable or have continued to improve their profitability during the last few years. For instance, according to CAG report, the number of central government companies and corporations that earned profit increased from 156 in 2003-04 (Rs.64,174.44 crore) to 175 in 2005-06 (Rs.79,426.52 crore). Further, as per the report, the number of dividend declaring Central Government companies and corporations also went up to 109 (including two statutory corporations and 30 listed companies) in 2005-06 from 106 (including two statutory corporations and 30 listed companies) in 2004-05. Also, dividend declared as a percentage of net profit earned by these companies and corporations increased from 28.69 per cent in 2004-05 to 32.15 per cent in 2005-06.

However, on the flipside, there are some disturbing facts. For instance, the same CAG report discloses that close to 70 per cent (Rs.54,933.54 crore) was contributed by a handful of companies i.e., 38 Central Government companies and corporations under four sectors viz., Petroleum, Power, Telecommunication Services and Coal & Lignite. Further, the number of loss making PSUs have remained stagnant at around 100 although accumulated losses of central government companies decreased by 9.50 per cent, i.e., from Rs.67,344.11 crore in 2003-04 (105 PSUs) to Rs.60,948.56 crores in 2005-06 (94 PSUs). The report also highlights that as on 31 March 2006, 116 central government companies and corporations (including 10 listed companies and one statutory corporation) had accumulated losses of Rs.84,155.22 crore, which included 29 profit earning companies (including four listed companies). However, equity capital of 82 companies (out of 116) under 19 Ministries/Departments had been completely eroded. The accumulated losses in these 82 government companies were Rs.81,617.04 crores against equity investment of Rs.13,902.20 crores as on 31 March 2006 making their combined net worth negative at Rs.67,036.47 crores. This included six listed companies whose accumulated losses were Rs.4,880.30 crores against equity investment of Rs.1,417.69 crores, making their combined net worth negative at Rs.3404.74 crores. According to the report, Out of 82 companies that had their capital completely eroded, 46 companies had been referred to the Board for Industrial and Financial Reconstruction (BIFR).

Proponents of privatization say that, it is the time now to push the process further so as to free labor and capital from the loss-making firms before they turn out to be “zombie firms” (a popular term used to describe loss-making firms in Japan that tend to have low or negative productivity for many years and drag down the productivity performance of the overall economy). Many even highlight positive outcomes from some of the strategic sales that include Modern Food Industries (bought by HLL), Bharat Aluminium Company Limited (by BALCO), VSNL (by Tatas) etc.

However, a section of experts caution that privatization is not the panacea. The government needs to consider other alternative models like leasing out, while retaining ownership of a PSU, besides exploring approaches like according greater autonomy, bringing in professionals, and doing away with protectionist regime could ensure improved performance for PSUs. Further, to make the case for privatization strong, the government also needs to ensure transparency in the privatization process, protection of the workers’ interests, avoiding politicization of the process, devising strategies for effective use of the disinvestment proceeds, guarding against selling away profitable PSUs at throw-away prices, and taking employees and all affected parties into confidence.

Experts feel that the disinvestment process that was initiated about one-and-a-half decades ago has clearly gone off track. Though successive governments since 1991-92 promised to make bold decisions and achieve major breakthroughs with clear cut milestones for each financial year, the government’s move of, since 2005-06, not keeping any fixed targets tell a lot about a program being stuck owing to compulsions of coalition politics. So far, the privatization program has remained limited to 100% divestment in a handful of profit-making PSUs CMC, VSNL, Balco etc. Beyond which there are some stray cases of divestment of limited stake in a few profit-making PSUs. A major problem, critics cite with respect to the disinvestment agenda, is that it has been done largely with the sole objective of reducing the country’s fiscal deficit rather than aimed at improving performance of the concerned PSUs. Inconsistency in policies of successive governments at the center during the last one decade and a lack of consensus among coalition partners in the government has seen the government following a ‘blow hot, blow cold,’ approach regarding its privatization program. Further, growing protests among workers and trade unions along with compulsions of coalition politics, they all have ensured that privatization program reach its logical end. This is evident in the fact that even today there remains a number of PSUs which are chronically-sick and loss-making. 

Conclusion

Given that the reforms were started with the objective of improving the operational efficiency and hence productivity of the government-owned enterprises, it was imperative that the government initiated appropriate and sound measures to bring down the burden on exchequer by getting rid of loss-making units and also exiting businesses such as hotels and hospitality, and better let the private sector play a role here. 

The big question, however, is: Will the privatization meet its logical end, at least in long-term, if not in the near future? The government’s dilly dallying over privatization of Air India and Indian Airlines do not inspire confidence. And so the inordinate delay over the fate of MTNL and others slated for privatization. For now, it appears the IPO route is the only way disinvestment could go, however, it is doubtful that IPOs alone could help them much in absence of professional management, market-orientation, and autonomy. To conclude, it is imperative that to survive and sustain in the long-term PSUs would need all these and hence it is imperative that the government develop a long-term perspective and devise mechanism, which is transparent and has a wider acceptance, to take the privatization program to its logical end.

N Janardhan Rao, Lead Economist