Dec 16, 2008

India - Rural spend, housing to rescue growth


The year 2008 must be a bewildering experience for economists as well as social scientists. Sometimes, collective human behaviour defies explanation
based on past trends, so it becomes difficult to understand the present and look into the future. How do you read the manner in which real economies around the world are behaving in an almost identical fashion? The month of October seems to have caused industrial output growth in most emerging economies to turn negative, as if orchestrated by a common psychology and sentiment of fear. This would certainly be recorded as a rare occurrence in the history of economic globalisation. The last quarter of 2008, generally, appears to be producing a strange effect as if economies around the world are falling off a cliff.

Of course, there are many (this writer included) who believe that the largely homogenous experience across all economies is largely a result of sentiment and psychology. You could call it the fear factor. Some critical differentiation in their behaviour, based on real domestic factors, will start occurring in a few months. The International Monetary Fund has tried to make sense of what is going on by analysing some 122 recessions in the last 50 years. It has looked at all recessions between 1960 and 2007 and found that these last, on an average, 12 months. The shortest of these recessions was six months long and the longest over three years. Typically, the peak to trough GDP loss in these recessions has been 2%. However, these recessions were not accompanied by a combination of credit freeze, housing and equity busts.

The IMF believes that recessions accompanied by credit freeze and housing/equity busts could see GDP losses which are two to three times greater. Which means many slowing economies across the world which have experienced a cocktail of a banking crises, equity and housing bust will suffer much more and could lose 4 - 6 % output. In some sense, this is already happening in the United States, the epicentre of all the economic maladies. The US economy is poised to lose 4% to 5% GDP in 2008, relative to 2007.

But does India fall in this category? Most unlikely. Simply because India has not had banking crises and a widespread housing bust. Of course, equities in India have fallen about 50% from its peak, like elsewhere in the world. Once the global fear factor wanes, the growth recession in India could get limited to about 2%, before the economy bounces back to its trend GDP growth rate of 8%. Recessions caused by a housing bust take much longer to remedy. In this context, India has been lucky because housing finance penetration is still relatively very low in our economy. This means there is a huge scope for using housing itself as a key growth driver.

This point is best illustrated with one example. The Delhi Development Authority (DDA), one of the biggest city housing developers in India, recently invited applications for about 5,000 flats. It got over 5,00,000 applications. There were 125 applications per flat on offer. What does this tell you? There is a huge pent up demand for affordable housing in India. Some analysts put the demand-supply gap in affordable housing at about 30 million.

If one simply replicates the demand for half a million houses, as manifested by the DDA applications, in 20 other cities with reasonable purchasing
power, you have a ready demand for 10 million flats. Of course, it depends on how you convert this great opportunity into growth.

This will require some real skilful handling of policy by the central and state governments. Planning Commission deputy chairperson Montek Ahluwalia, who is now coordinating the big fiscal package of over Rs 30,000 crore unveiled last fortnight, readily agreed that the DDA example, and similar ones in other cities, indeed represented a tremendous opportunity. Mr Ahluwalia even suggested this was the right time for state governments to free up surplus land so that land prices came down and the cost of housing became reasonable.

Housing is also the lynchpin of the government’s new fiscal package because it instantly gives a fillip to other sectors such as steel, cement, etc. Besides, the small scale sector too gets a boost as it manufactures all kinds of fittings and furnishings for housing.

So, what will it take to make this grand project fructify in these times of economic slowdown? The political class across the spectrum, especially in states, must first sit together and decide that they will free up chunks of land for affordable housing. This could also be politically rewarding.

One is truly tested in adversity. The Indian industry must look at the broader national interests and work closely with the government in ensuring that investment and consumption continue at reasonable levels. For instance, they must not only pass on the recent excise cuts to the consumer but also tap pent up demand at even lower price points. A reasonable industrial growth in the midst of global recession will ensure India emerges as a beacon of hope for world investments. For this the government and business must work together and speed up infrastructure projects in the public-private partnership space. Both sides must extend all the concessions that are reasonable to jumpstart investments in sectors where there is still pent up demand.

Fortunately, India may manage to buck the global trend largely based on the buying power of the bottom 80% of the population which accounts for 67% of the total consumption. These are also people who are not affected by the negative wealth effect caused by the stock market fall. They were never in the stock markets in the first place. It is not for nothing that the country’s economic elite, shaken by heavy losses in their financial assets, have begun to see a great virtue in schemes such as NREGA, pay commission hand outs and the farm loan waiver. After all, such big ticket government expenditure may actually revive consumption, and even boost the stock markets. Good sense always prevails with a lag!

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