Magic Bullet to Revive the Indian Economy

Earlier this week, India’s Finance Minister Nirmala Sitharaman painstakingly tried to convince the nation through her statement in the Parliament that the economy has slowed, and is not in recession. Coming directly from the government, it is indeed a matter of concern. There can be no magic to reverse the slowdown, yet that’s exactly what everyone is hoping for.

However, this magic is possible through one major correction which is long overdue, yet it’s the least talked about.

There is one big-ticket industry, which affects every family, both in the urban and rural areas: Housing, Construction and Real Estate. India’s real estate and construction is one such industry that creates demand for hundreds of other small and large industries. And these industries range from the heavy weights such as steel and cement to light industries such as electrical, fabric and furniture, among others. For comparison, what the automobile or car industry means to the American economy, is what construction, housing and real estate means to the Indian economy.

At present, India’s real estate is suffering not due to a lack in consumer demand, but primarily because of “very high prices,” which the masses cannot afford. Fortunately, policy correction (no, I am not advocating for any fresh fund allocation) can reverse this scenario and trigger a strongest recovery ever in the country, not merely for short-term, rather for a few decades. This is possible, as the entire country needs to be rebuilt, city-after-city (particularly the Tier-2 and Tier-3), village-by-village, both in the private and public spaces.

The three key questions which needs to be answered before this magic bullet can be fired for economic revival in India.

1) What is the right affordable price for a house?

2) How do we ensure that these affordable housing prices become viable for the industry as a whole?

3) How much GDP growth can be expected through this one move?

Well, answer to the first question is simple arithmetic, which one can compute on fingertips. For this we need to consider the prevailing monthly rents. A large majority of people who rent (or, may like to buy their own house if it’s affordable) pay ₹25,000/- to ₹50,000/- per month as rent for one to three bedroom dwelling in suburban metros and ₹10,000/- to ₹25,000/- in Tier-2 and Tier-3 cities. At an interest of around 9% per year, the value of these houses could vary from ₹35 lakh to ₹70 lakh in metros, and approximately ₹15 lakh to ₹30 lakh in Tier-2 and Tier-3 cities. One may put a premium of 20 to 25% for being the owner of a house and raise these prices a bit. But the big point is that affordable prices for a house are about half when compared to the current level of prevailing prices. Full demand (15-20 lakhs houses per year in urban areas alone) is worth about ₹10 lakh crore for houses alone. This lone example gives an idea of the magnitude of growth in real estate and housing sector.

The answer to second question about ways to reach affordable price levels, may appear to be a non-starter to many; but that is where the “true solution” to Indian economy lies. To appreciate this as a solution, one needs to pay attention as to how land and housing prices rose exorbitantly in the first place. If we go back to the year 2004, which is not too long ago, prices for 1-to-3 bedroom apartments were in the range of ₹10 lakh to ₹20 lakh in metropolitan cities, and ₹4 lakh to ₹8 lakh in Tier-2 and Tier-3 cities. How did these prices increase by 1000%, merely in a decade by 2014?

It can be said with conviction that speculative price increase of real estate between 2004 to 2014 was the greatest economic fraud, the nation has ever experienced. An astounding 100% increase every year! Incidentally, this is the same period, when banks disbursed huge corporate loans of over ₹15 lakh crore, much of which has eventually turned into NPAs (Non-Performing Assets). NPAs are termed as bad loans in common parlance or better called as ‘loan-defaults’. Much of this is commonly viewed today as telephone-banking frauds. Worst affected by these speculation are the youth who now face a situation where owning a house has become a distant dream. In fact, around 95% of the population is unable to afford a house today.

The big point is why did these phenomenal speculations did not raise an eyebrow. The reason is very simple. In real estate, even if one house sells at a hefty price in a colony, price of every other house in the area is considered to have been increased. Who dislikes, if told that price of their existing land or house has increased by 5-10 times in its value, provided they could sell it! People carrying notional value of the only house they own, in their mind, also forget that to acquire additional room for a growing family they would now need to pay ₹50 lakh instead of the earlier ₹5 lakh. Those who talk of shortage of supply being the reason for such price increase, need to note that not even 0.1% of existing stock of land and houses are really traded fresh.

In this context, following actions that are essentially policy decisions (not requiring financial outlays by the government) can trigger a fresh addition of more than 5% in India’s GDP, with almost immediate effect.

1) Government should make parts of government land in every city available at prices a little higher than 2004, for housing purpose. Remember, price depression of one house will bring down prices of every other house in the area. A quick, back-of-the-envelope estimate suggests that every 10% reduction in real estate price, can add more than 1% to the national GDP. Compared to the 10-folds price rise during 2004-14, the fall in current prices by half may not look so bad, after all. However, even after correction, real estate prices would be 5-times compared to the price of 2004. But people will accept this gladly.

2) Registration charges in real estate should be waived off for the next 2 to 3 years.

3) Income tax deductions for purchase of “first home”, should be allowed to the extent of 100% of payment.

The only people who would feel hurt to some extent are those who have purchased their first homes at the higher speculative price during the past decade. But even they would find it far easier to buy a bigger home, once affordable. Besides home owners, SMEs (small & medium enterprises) and budding entrepreneurs would benefit immensely. Reduced land and house costs will bring about overall cost reduction in prices of all kinds of daily-use commodities, ranging from vegetables, grains, etc. while adding huge employment at all levels, for unskilled to highly skilled.

Indian economy has slowed down due to the bursting of speculative bubbles, created during 2004-14 and not because of GST (Goods and Services Tax) or even demonetisation. It’s time, we correct this fraud, through simple policy interventions and put India on high road to prosperity for all.