Of Falling Real Estate Prices, Dr Arvind Panagariya and the Art of Continuing to Suck Up

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Dr Arvind Panagariya, the former vice-chairman of the Niti Aayog, today in a column titled Demonetisation: Evaluating the Critics, in the Business Standard, writes: “The second avenue through which demonetisation has directly expunged unaccounted wealth is real estate…Unsurprisingly, an attack on unaccounted cash struck at the heart of this black wealth by cutting real estate prices by a quarter.”

There are multiple questions that this statement raises:

1) What is the source for this data? This isn’t exactly a conversation between two property dealers, or two prospective real estate buyers, who can quote any offhand numbers, while having a conversation. This is a statement being made by someone who was at the top of an economic institution run by the Indian government. This is a statement by an economist working in a top university in the United States.

Also, if real estate prices have fallen by 25 per cent after demonetisation, why isn’t this visible in official data sources. Take the case of Reserve Bank of India’s All India House Price Index, which has been plotted as Figure 1.

Figure 1: 

Figure 1 clearly shows that housing prices across the country have been on their way up. There has “clearly” been no dip, as Dr Panagariya claims. How do things look if we plot one-year return instead of index values? Let’s take a look at Figure 2, which does that.

Figure 2: 

Figure 2 tells us clearly that the one-year return in real estate has been falling over the last six and a half years. This trend started much before demonetisation took place. Also, how have the returns been post demonetisation? Between the end of December 2016 and June 2017 (the latest data available), real estate prices as per the All India House Price Index have gone up by 4.3 per cent. The returns between September 2016 and June 2017, have been 6.9 per cent.

Other than RBI’s All India House Price Index, there is NHB’s Residex. As of now this index has data only up to March 2017. And the one year median return between March 2016 and March 2017, as per this index, across 49 cities, was 2.8 per cent. This is very low. But where is the 25 per cent fall that Dr Panagariya has written about?

2) For a moment let’s assume that Dr Panagariya is right and real estate prices have fallen by 25 per cent. If real estate price all across the country have fallen by 25 per cent on an average, then there will be cities/town/localities where the price has fallen by more than 25 per cent. Which are these places? Can Dr Panagariya provide us with a list? This would make for a super investment right now.

Let’s say there is this town where real estate prices have fallen by 50 per cent post demonetisation. It is worth remembering that a 50 per cent loss wipes off a 100 per gain. (If the price of an asset moves from Rs 50 to Rs 100 that makes for a 100 per cent gain. When it falls back to Rs 50 that is a 50 per cent loss). If there exists such a town, it would make for a great real estate investment right now. Can Dr Panagariya provide us with names of a few such places?

3) Also, if prices have fallen by 25 per cent, why are real estate transactions not happening? Why has the total number of unsold homes of real estate companies, only continued to grow? It is worth remembering here that a 25 per cent fall within a time period of a year, is a huge fall. Falls like these in case of real estate, only happen once in a few decades. And if something like this has happened, as Dr Panagariya claims, then why aren’t people buying? Interest rates on home loans have also fallen post demonetisation.

Take a look at Figure 3. It plots the growth in home loans outstanding with banks.

Figure 3: 

Figure 3 clearly shows that the growth in home loans outstanding has fallen post demonetisation. What this means is that people are not buying as many homes as they were in the past. If prices have fallen by 25 per cent post demonetisation, people would have bought homes and the curve in Figure 3 would slope upwards i.e. people would take on more and more home loans to buy homes.

4) Further, if real estate prices have fallen by 25 per cent, as claimed by Dr Panagariya, it is time that the state governments cut the ready reckoner rates on which stamp duty needs to be paid, by a similar proportion. This should be fairly easy given that BJP governments govern most of the big states across India and a direction from the PMO should be suffice to get them to do the needful. But nothing of that sort has happened. Why hasn’t this been done till date, is a question that only Dr Panagariya can answer.

5) To conclude, it is safe to say that Dr Panagariya has just made up this data, in order to justify demonetisation. It’s a sad day today, when an Indian economist, working in one of the best American universities has had to fudge data in order to please his former political bosses.

The irony is that Dr Panagariya is no longer a part of the government. And he doesn’t really need to say things which do not hold up against data, unless, he is looking for another stint with the Modi government. That changes things.

The column originally appeared on November 13, 2017.

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Demonetisation–The Unanswered Question

Time flies.

It has been one year since that fateful day last year, when prime minister Narendra Modi, suddenly announced that Rs 500 and Rs 1,000 notes, would be useless, in a matter of few hours.

Modi was lauded for this “brave” decision. In a country, where politicians do not like to take decisions, here was one politician who had decided to make one.

The trouble is that nobody told us on what basis had the decision been taken. Every decision, has consequences, especially a decision as disruptive as demonetisation turned out to be. And given this, there has to be some logic behind why the decision was made in the first place.

It doesn’t take rocket science to understand that if 86.4 per cent of the currency in circulation is made useless overnight, in a country where 80-98 per cent of the transactions happen in cash (depending on which estimate you would like to believe), the buying and selling of things is bound to crash. When economic transactions crash, it leads to a slowdown of the overall economy, which is precisely what happened in India.

As Jean Drèze writes in Sense and Solidarity—Jholawala Economics for Everyone: “For instance, a study by Nidhi Aggarwal and Sudha Narayanan… shows that mandi arrivals of non-perishable agricultural commodities crashed across the board within a week of demonetisation. The declines range from 23 per cent for cotton to 87 per cent for soybean.”

This happened because agricultural markets in India operated in cash and with no cash around, the farmers were in no position to sell what they had produced. The onion market in Lasalgaon (near Nashik, and India’s largest onion market) continues to face this problem, a year later.

Many informal markets crashed in the aftermath of demonetisation and haven’t been able to revive again. The growth of the non-government part of the economy, which forms close to 90 per cent of the economy, for the period April to June 2017, fell to a little over 4 per cent, in the aftermath of demonetisation.

On top of that the total amount of deposits with banks increased dramatically and because of that the interest rates crashed. This hurt many people (especially senior citizens) who depend on interest from deposits for their survival. It also hurt those who use fixed deposits to save for the long-term. At the same time, the fall in interest rates did not lead to an increase in bank lending. In fact, bank lending in the aftermath of demonetisation has crashed.

The question that remains is on what basis was the decision to demonetise taken? Was there any logic to it or was it just taken on a whim? The closest answer to this has come from Arjun Meghwal, a junior minister in the Modi government. He told the Lok Sabha in February 2017: “RBI held a meeting of its Central Board on November 8, 2016. The agenda of the meeting, inter-alia, included the item: “Memorandum on existing banknotes in the denomination of Rs500 and Rs1000 -Legal Tender Status.””

Meghwal passed the buck on to the Reserve Bank of India (RBI). A Right to Information query was filed with the RBI by a correspondent of the Press Trust of India (PTI). In the query, the central bank was asked to provide the minutes of the meeting in which the decision to demonetise Rs500 and Rs1,000 notes was taken. Over and above this, it was also asked to share its correspondence with the Prime Minister’s Office (PMO) and the Finance Ministry, on the issue of demonetisation.

The RBI replied: “The information sought in the query carries sensitive background information including opinions, data, studies/ surveys etc. made prior to the completion of the process of withdrawal of legal tender character of Rs500 and Rs1,000 notes… Disclosure of such information would detriment economic interest of the country from the viewpoint of the objectives sought to be achieved by such decision.”

Basically, the RBI refused to answer the RTI query. And a year later, we still don’t know on what basis was demonetisation carried out.

The column originally appeared in the Bangalore Mirror on November 8, 2017.

Demonetisation’s negative impact on economy is not done yet, it will continue; be warned

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In a few days, the first anniversary of demonetisation will be here. The Narendra Modi government will continue doing what it has done in the last one year—give demonetisation a positive spin.

But how can a decision which made 86.4 per cent of the currency in circulation, useless overnight, in a country where 80-98 per cent of the transactions were carried out in cash (depending on which estimate you would like to believe), be a positive one?

Let’s take a look at Figure 1. It basically plots the annual growth in non-oil non-gold non-silver imports.

Figure 1:
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What does Figure 1 tell us? First, it tells us that the annual growth in non-oil non-gold non-silver imports had been rather subdued since January 2015. In fact, it has been in the negative territory several times, especially in a few months before November 2016, when demonetisation was announced.

But after November 2016, the growth in non-oil non-gold non-silver imports simply took off and reached a peak of 42.5 per cent in April 2017. This basically means that these imports where 42.5 per cent higher in April 2017 in comparison to April 2016.

What does this tell us? It tells us that a significant portion of the consumer demand post demonetisation has been fulfilled through higher imports. So far so good.

Demonetisation basically disrupted and destroyed supply chains, both in the formal as well as the informal economy. With supply chains being destroyed, the supply of domestic goods has been replaced by imports and has not been fulfilled through the production of domestic firms.

It is worth remembering here that imports are a negative entry into the gross domestic product (GDP) formula.
Y = GDP
C = Private Consumption Expenditure
I = Investment
G = Government Expenditure
NX = Exports minus imports

Hence, if imports grow at a faster pace than exports, they pull down the GDP to that extent. Exports during this year (between April to September) have gone up by around 10.9 per cent in comparison to last year. Imports are up by 22.3 per cent. Given this, it is not surprising that the economy has slowed down. The economic growth for the non-government part of the economy, which forms around 90 per cent of the economy, was around 4.3 per cent, for the period between April to June 2017. This was more than 9 per cent in early 2016.

Hence, demonetisation has played a huge role in slowing down economic growth. And this is tragic given that one million Indians are entering the workforce every month. In fact, it has also rendered a standard tactic in reviving economic growth, pretty much useless.

Allow me to explain. When countries are not doing well on the economic front, the standard prescription offered by economists is for the government to spend more. When the government spends more, the extra spending becomes somebody’s income. When that income is spent, businesses benefit, and the economy revives.

The trouble is that in the current situation if such a prescription is applied on India (actually to some extent it already has been), the government spending will eventually create consumer demand, a substantial portion of which will be fulfilled through imports. Imports, as we have already seen, are a negative entry into the GDP formula. Given this, a fiscal expansion instead (the act of government spending more) of creating faster economic growth might just slow it down.

The point being that we aren’t done yet with the negative effects of demonetisation. There’s more to come.

The column originally appeared on Firstpost on November 3, 2017.

The Real Brave-hearts are Those Who Still Have Deposits in IDBI Bank

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IDBI Bank is the worst performing public sector bank when it comes to its gross non-performing advances or bad loans. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more.

As on September 30, 2017, the bad loans rate of the bank stood at 24.98 per cent. This basically means that the borrowers have defaulted on nearly one-fourth of the loans given by the bank. Now take a look at Figure 1. It plots the bad loans of IDBI Bank over the last three years.

Figure 1: 

The bad loans rate of IDBI Bank has jumped from around 5 per cent to around 25 per cent, over a period of just three years. What is happening here? What this tells us is that initially the bank did not recognise bad loans as bad loans. It probably did that by restructuring loans (i.e. giving the borrowers more time to repay or decreasing their interest rate or by simply postponing their repayment) or by issuing fresh loans to borrowers in a weak position, so that they could repay the loans that were maturing. In the process, the recognition of bad loans as bad loans was avoided.

Of course, any bank can’t perpetually keep kicking the can down the road, and after a point of time must do the right thing. IDBI Bank is now doing the right thing of recognising bad loans as bad loans and given this it has such a high bad loans rate. Given that, one-fourth of the loans advanced by the bank have been defaulted on, it is worth asking whether this bank should be in the business of banking at all.

Nevertheless, the more important issue here is how do depositors view this bank. The best way to find this out is to look at the total amount of deposits the bank still has. Take a look at Figure 2, which plots that.

Figure 2: 

What does Figure 2 tell us? The total deposits of the bank have fallen after peaking in December 2016. Nevertheless, the total deposits with IDBI Bank are still higher than they were three years back. Hence, the conclusion that we can draw here is that while bad loans of the bank have gone up from 5 per cent to 25 per cent over a period of three years, the total deposits with the bank are still at the level they were.

Why is this the case? Why would you continue banking with such a bank? First and foremost, this faith comes from the great faith in the government. The government will not allow any bank to go bust. Fair enough. But why wait for that to happen? Typically, when a bank lands up in major trouble, the government tends to merge it with a bigger bank and thus the depositors continue to be safe. Nevertheless, such a merger is never smooth and there might be a brief time period when the full money deposited in the bank cannot be withdrawn. Hence, liquidity can become an issue.

Also, it is worth remembering here that IDBI Bank is not a small bank. It is a relatively big bank and had total assets of close to Rs 3,61,768 crore, as on March 31, 2017. This means that if the government were to decide to merge it with another bank, the balance sheet and the profit and loss account of the combined entity, will be another big mess.

Secondly, many people are simply unaware of how badly the bank is placed. This lack of knowledge about their financial activities is a general trend among many people in this country. We spend more time gossiping and worrying about the state of the nation, than the state of our own finances.

Thirdly, many people locked in their fixed deposits at high interest rates, a few years back. In the aftermath of demonetisation, interest rates have crashed as banks have been flush with funds that were deposited and at the same time their lending has crashed. Given this, even if some individuals understand the riskiness of the situation, they really can’t do much about it. In case they were to break their fixed deposits and move it to other banks, they would earn a much lower rate of interest.

And at that lower rate of interest, they would simply not be in a situation to meet their monthly expenses. This is another negative impact of demonetisation at play, with people having to continue to bank with risky public sector banks, which includes IDBI Bank.

While, some people are simply stuck with IDBI Bank, there are others who can easily move their money to other public sector banks, like State Bank of India, Vijaya Bank, Indian Bank, Syndicate Bank etc., which are in a comparatively much better position.

But given that they have chosen not to, they are the real brave-hearts.

The column originally appeared on November 6, 2017.

How Demonetisation Destroyed Indian Jobs and ‘Possibly’ Helped Create Jobs Abroad

The ill-effects of demonetisation are still coming to the fore. In this issue of the Diary, I will talk about how demonetisation destroyed Indian jobs and “possibly” helped create jobs abroad.

Before I get into explaining why I am saying what I am saying, a recap of some basic economics is necessary here.

At its most basic level, the gross domestic product(GDP), a measure of the economic size of a country, is expressed as Y = C + I + G + NX, where:

Y = GDP

C = Private Consumption Expenditure

I = Investment

G = Government Expenditure

NX = Exports minus imports

The point to remember here is that imports are a negative entry in the GDP formula. The more a country imports, its GDP falls to that extent. Having said that imports also represent consumer demand at the end of the day, even though that demand does not add to the country’s GDP. For example, every time an Indian buys an electronic good manufactured in China, he is adding to the consumer demand but not to the GDP. Of course, he is adding to the Chinese GDP because exports are a positive entry into the GDP formula.

Hence, if we remove the imports of oil, gold and silver, from the total imports number (in dollars), what remains (i.e. non-oil non-gold non-silver imports) is a good indicator of consumer demand.

Now let’s take a look at Figure 1, which basically plots the year on year growth in the monthly non-oil non-gold non-silver imports. Hence, the non-oil non-gold non-silver imports in April 2017 went up by 42.5 per cent in comparison to the imports in April 2016. And that’s how it is for all other data points in Figure 1.

Figure 1: 

What does Figure 1 tell us? It tells that non-oil non-gold non-silver imports have grown at an extremely fast rate after October 2016. They are growing at rates at which they haven’t grown for a couple of years. What is happening here?

As Jahangir Aziz, head of emerging market economic research, told Bloomberg Quint recently: “What we had also feared was the demonetisation would disrupt the supply chains that run through both the formal and the informal economies. And if those supply chains get disrupted, then the revival in demand would not get fulfilled by domestic production.”

This basically means that demonetisation destroyed domestic supply chains. Without supply chains products can’t move. This has resulted in consumer demand being fulfilled through imports.

This is clearly visible in the huge growth of non-oil non-gold non-silver imports. What this also means is that as demonetisation destroyed supply chains in India, it also led to a huge job destruction. If goods weren’t moving, there was no point in producing them either. This meant shutdown of firms and massive job losses.

Further, by importing stuff that we used to produce in India earlier, we have helped the manufacturing business in foreign countries and in the process “possibly” helped create jobs there.

The irony is that one million youth are entering the workforce in India, every month. The economist Kaushik Basu had said in November 2016 that “[The] economics [of demonetisation] is complex & the collateral damage is likely to far outstrip the benefits.”The impact of this complex economics is still playing out and along with the botched up implementation of GST, has pulled down non-government GDP growth to around 4.3 per cent.

The column was originally published on Equitymaster on September 26, 2017.

Why the weak spin on demonetisation is still going strong

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On August 30, 2017, the Reserve Bank of India (RBI), published its much-anticipated Annual Report. Up until last year, only journalists who covered the banking beat, economists and analysts, kept track of the RBI Annual Report.

But this year, many more people were interested. This was primarily because the Annual Report would finally reveal what portion of the demonetised Rs 500 and Rs 1,000 notes, made it back to the banks.

And why was this of interest? After demonetisation had been announced, many people including government ministers and several leading economists, had hoped that a large portion of the demonetised notes won’t come back to the banks. This was because those who had black money in the form of cash wouldn’t want to deposit it into banks, and reveal who they are to the government. In the process, a lot of black money held in the form of cash would be destroyed.

But nothing of that sort happened. The RBI Annual Report revealed that Rs 15.28 lakh crore of the Rs 15.44 lakh crore that was demonetised, made it back into the banks. This meant that nearly 99 per cent of demonetised notes made it back to the banks, and almost no black money was destroyed. Other than not achieving its major goal of destroying black money, demonetisation has also hurt India’s economic growth in general and manufacturing and industrial growth in particular, very badly.

After this, the government as expected has been offering multiple reasons in favour demonetisation. In a press release the ministry of finance offered this reason: “The fact that bulk of specified bank notes (SBNs) have come back to the Banking system shows that the banking system and the RBI were able to effectively respond to the challenge of collecting such a large number of SBNs in a limited time.

What does this even mean? If paper money is made useless overnight, it is bound to come back to the banks. Where else will it go? Another reason offered to show demonetisation as a success is that Rs 3 lakh crore of the Rs 15.28 lakh crore that has come back is black money. No explanations have been offered on how the Rs 3 lakh crore number was arrived on.
But even if we assume that it is black money, the holders of this black money aren’t exactly waiting to hand it over to the government. They have access to chartered accountants as well as lawyers and are ready for a long-drawn battle, if needed.

The weak government spin on demonetisation has continued. The question is why? The answer lies in the fact that a section of the population is still buying this spin on the social media. As Evan Davis writes in Post Truth: “In social media, our disposition to believe things is something a form of bonding. Not only do we tend to reside in echo chambers online, but we actively enjoy becoming closer to our friends by sharing views and agreeing with them. The act of consenting to someone else’s beliefs, and have them consent to ours, is satisfying; and because it is so, it stops us questioning the nonsense that others post.”

This is one explanation for the rather weak defence of demonetisation that is still being put out by the government. Then there is the problem of the narrative, or the prevailing interpretation of a pattern of events. There is a section of population which really wants to believe that demonetisation worked. It’s their narrative.

As Evans writes: “Like-minded groups of individuals share a narrative about many things… These narratives are sometimes true, sometimes not, but they are often like stereotypes… Once embedded in our minds though, they can easily gain excessive traction and trample over truth as willing believers put too much weight on propositions that conform to their narrative without looking for evidence in support of them.

And that explains why the weak spin on demonetisation is still going strong.

The column originally appeared in the Bangalore Mirror on September 20, 2017.

Gold Imports Surge: Are People Hedging the Risk of Another Demonetisation by Converting Black Money into Gold?

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The impact of demonetisation has played out in many ways. Here is one more way: The gold imports between April and July 2017 have been nearly 2.7 times the gold imports during the same period last year.

Let’s take a look at Figure 1 which plots gold imports (in Kgs) over the last few financial years.

Figure 1: 

It is clear from Figure 1 that the gold imports have jumped up big time between April to July 2017, in comparison to last year. In fact, they are the second highest in the last five years. Take a look at Figure 2. Figure 2 plots the money spent on importing gold over the last five years.

Figure 2: 

Even in value terms significantly more gold has been imported this year than last year. The price of gold during the period April to July 2017, averaged at $1257.9 per ounce (one troy ounce equals 31.1 grams). During the same period last year, the price of gold had averaged at $1291.3 per ounce, which was slightly higher.

How do things look if we look at the calendar year instead of the financial year? Between January and July 2017, the total amount of gold imported stands at 6, 61,836 kgs. Between January and July 2016, this had stood at 3,11,938kgs. There is a clear jump in this case as well. In fact, the interesting thing is that the import of gold has been concentrated during the first five months of the calendar year, immediately after demonetisation.

What does this tell us? When and why do people actually buy gold?

The history of economics tells us that people buy gold when the faith in official paper money (in this case the Indian rupee) is low. Take the case of the period between April to July 2013. A lot of gold was bought during this period. The rate of consumer price inflation was at 9-10 per cent. Given this, a section of the population had lost faith in the Indian rupee and was hedging against inflation and buying gold.

What is happening this time around? This time around Indians are buying gold because in the aftermath of demonetisation which was carried out in November 2016, there is a feeling that the government might do it again. Given this, a portion of the black money which was held in the form of cash earlier, is now simply being converted into gold. This seems like the most logical explanation for this surge. The lower price argument doesn’t really hold because prices this year have been more or less similar to prices last year.

Of course, gold is easy to store and has never gone out of fashion. Hence, it can easily be converted into cash at any point of time.

In 2013-2014, people had lost confidence in paper money because of extremely high inflation. This time around, people have lost faith in paper money because of demonetisation. Hence, they are buying gold.

As Indians bought gold in 2013-2014 and a lot of it (close to 4,20,000 kgs, during the first four months of that financial year, as Figure 1 suggests), the demand for dollars went up. India imports almost all of the gold that it consumes. Hence, it buys gold internationally in dollars. As the demand for dollars went up, importers sold rupees and bought dollars. In the process, the rupee lost value rapidly against the dollar.

In April 2013, one dollar was worth Rs 54.23. By August 2013, it was worth Rs 67.4. The rupee simply crashed during the period. It is worth asking here that why a similar situation does not prevail right now. Why hasn’t the rupee crashed like it did when people bought lots of gold between April and July 2013?

This is because while Indians are buying gold, a lot of dollars continue to come to India through the foreign institutional investors route. These investors continue to invest in the Indian stock market and the debt market. Between April and July 2017, the foreign institutional investors have invested a little over Rs 95,000 crore in the stock and the debt market. The foreign institutional investors sell dollars and buy rupees in order to invest in the stock and the debt market. This demand for the Indian rupee has ensured that the dollar has remained stable against the rupee at around Rs 64. Hence, the demand for rupees among these investors is negating the demand for dollars among gold importers. This has led to a stable value of the rupee against the dollar.

What had happened between April and July 2013? While, the demand for gold was very high, the foreign institutional investors were selling out of India. During the period, they encashed close to Rs 27,000 crore from the stock and the debt market. In fact, the foreign institutional investors sold stocks and debt worth over Rs 60,000 crore between June and July 2013.

In order to repatriate this money abroad, they had to sell these rupees and buy dollars. This along with heavy gold buying, which was accompanied by selling of rupees and buying of dollars, pushed up the demand for the dollar, and drove down the value of the rupee.

This essentially explains why the value of the rupee had crashed in 2013-2014, and has remained stable during this financial year. Nevertheless, people are buying gold because their faith in the Indian rupee has gone down and they clearly want to hedge against the risk of another round of demonetisation.

(The column was originally published on Equitymaster on September 19, 2017).