The murky politician-builder nexus deepens...

Feb 7, 2014

In this issue:
» India scores low on innovation
» Why petrol and diesel is still expensive...
» Are we to see a repeat of the Arab Spring?
» Is there scope for jobs to accelerate in the US?
» ...and more!

If you were in any doubt about the nexus that exists between builders and politicians, the run up to the general elections might give an indication of the same. Here is how it works. According to a research paper released by Centre for Global Development and published by Firstpost, there is a link between construction, cement prices and election cycles. What happens is that politicians accumulate assets over a period of time. These are parked with the real estate players so that the former can escape public scrutiny and also earn a good return on investment. In the run up to the elections, real estate firms give back these funds to those politicians to fund their election campaigns. In fact, according to another data set released by a non-profit group and published in the same daily, real estate firms were one of the top donors between 2004-05 and 2011-12.

But this time around, the sector seems to be facing a problem. Given the slowdown and the cash crunch that many of the builders and realty players are grappling with, they are finding it difficult to fund these election campaigns. Inventory has remained unsold. At 36 months, the inventory levels are the highest in the last six years. Bank finance and private equity is gradually drying up. And because of funds shortage, new projects are getting stalled. This has then impacted cement prices as well.

It is a well known fact that real estate prices have never really stuck to the basic principles of economics. Despite the slowdown, prices continue to remain exorbitant and out of reach of the average Indian buyer. Too much black money and lack of transparency makes the sector increasingly murky.

Ideally, with inventory still lying around, the sensible thing to do would be to reduce prices to acceptable levels so that demand picks up. Because the fact remains that demand in India for housing is very much there. But given that so many problems are afflicting the real estate sector, buyers are just too wary of paying such high prices.

Nevertheless, real estate players do not seem to be in a mood to relent. They seem to be much more interested in funding political parties so that between the two of them prices can be kept artificially high. If they are finding it difficult to fund these campaigns, will their interests get compromised post the elections? More importantly, for how long can this gamble continue? In the longer run, real estate players have to sell more units to keep businesses sustainable. Relying solely on corrupt politicians to bail them out can only work for so long.

Do you think that the real estate sector will be able to come out of the rut it is in currently? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
As per R&D spending data for 2011 (the latest available), the US maintained its status as the leader of innovation. This is because the country's R&D spend remained the highest - at just below 30% - of the global R&D spend. This is hardly surprising given that the rise in status and power of the US in the global economy in the past several decades has been a result of its focus on innovation. What is more interesting, however, is that while the US still leads the field as compared to others, its R&D share since 2001 has declined. This has been due to increasing investments being made by other countries. And also due to the fact that the US itself is not innovating as much as it once used to. In the meanwhile, China has been making rapid strides in innovation, while India still lags far behind.

India scores poor on innovation
*2007 is the latest data available for India

That oil marketing companies frequently pile up losses on account of under recoveries is a fact well known. Therefore it is easy to conclude that they seem to be giving some form of subsidies to the end- consumer. However, a write up on has tried to demolish this very myth. The article points out how Indian consumers pay one of the highest prices for petrol and diesel in the world. Therefore, if these petroleum products are indeed subsidized, then what explains the high price relative to other nations? Is it that other countries subsidize petrol and diesel even more? Certainly not. The answer to this puzzle lies in the way petro products are taxed in India.

A significant portion of what we as citizens pay for petrol and diesel is passed onto the central and state governments in the form of taxes. As a matter of fact, these taxes are so high that even after paying the oil marketing companies for under recovery, there could still be a significant amount left. And we are not even considering a part of the under recovery burden that is passed onto upstream companies like Oil and Natural Gas Corporation Ltd. (ONGC) and Gas Authority Of India Ltd. (GAIL). Consequently, to call under recoveries of oil marketing companies as subsidies is totally wrong. For the consumer is not being subsidised at all. As a matter of fact, the consumer is the one who's funding the Government's wasteful expenses by paying humungous amount of taxes on petro products. It's time the Government stopped fooling the common man.

The Arab Spring. These three words essentially remind readers of a movement in the Saudi Arabia and Middle East for democratic rights and economic equality. However, as per an article on there was more to it. The movements got cooled off as soon as the governments resorted to more subsidies. Hence the population that rose against the government is essentially dependant on subsidies. The Arab economies on the other hand are dependent on Asia for buying its oil exports. Asia makes up no less than 57% of the Gulf Cooperation Council's (GCC) oil exports currently. As per the International Energy Agency, by 2035 Asia will purchase 90% of the Persian Gulf's oil exports. If and when Asia's slower growth does not allow the region to purchase that much oil, the economies of GCC will also get hurt. And that in turn will hurt their ability to offer subsidies. Needless to say such a scenario will lay the roots of Arab Spring II. The situation, however dire, is not entirely unrealistic. And economies like India that are overtly dependant on subsidies need to find alternatives to bring about economic equality.

The 2008 global financial crisis belonged to the developed world. It was said that emerging markets would be the engines of global growth in the coming times. But come 2014 and there seems to be a reversal of trend. Emerging markets seem to be out of favour. They are bracing with slowing growth levels, high debt and several other issues. In fact, some market commentators have even gone on to say that a big financial crisis is likely to break out in the emerging world. On the other hand, developed economies are showing some signs of recovery, though we're skeptical about the durability of such a recovery. Nonetheless, the US economy is expected to recover to growth levels of around 3%. India, on the contrary, is grappling with growth prospects in the region of 5%.

Now, the thing is that money flows where it sees greater returns. So there are fears that capital could flee from emerging markets to the developed world. This could adversely impact emerging market currencies and stock markets. This means that it's high time that India gets its act together. There is a pressing need to improve the business environment and hasten up removal of policy logjams. It is widely accepted that India has great long term growth opportunities. But many global investors are waiting for the right policy environment. We strongly believe that India needs to buck up on this front to revive and retain capital investments in the economy.

The US labor department is expected to report that 181,000 jobs were added in January, up from 74,000 in December. At this pace, getting headline unemployment down to 6%, while employing those people at the margins of the labor market, would require about 365,000 jobs each month for three years. Only then will the Federal Reserve consider raising short term interest rates. That would require growth to double the pace accomplished since the economic recovery began which is difficult to achieve. It's always good news when new jobs are created and when the unemployment rate goes down. But when more than 13 m Americans remain out of work, there is no cause for celebration. Especially when Washington keeps coming out with policies that will keep the economy moving at a snail's pace.

In the meanwhile, the Indian stock markets pared early gains but continued to trade above the dotted line. At the time of writing, the benchmark BSE-Sensex was up by about 40 points (0.2%). Stocks from metal and pharma were witnessing maximum buying interest whereas FMCG and IT stocks were the biggest losers. All the Asian indices were trading strong with markets in Japan and Hong Kong being the biggest gainers. The European markets also opened on a positive note.

 Today's investing mantra
"The individual investor should act consistently as an investor and not as a speculator."- Benjamin Graham

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17 Responses to "The murky politician-builder nexus deepens..."


Mar 5, 2014

Housing is a basic need which has become a commodity of investment for those having dirty wealth. A 2 bedroom flat in Versova Mumbai which was 1 lac in 1980 is nearly 3 crores today. Do you feel any honest citizen can buy at these rates? until and unless right user friendly policies are framed the future generations will have no hope to live happily.


Ramachandran S

Feb 11, 2014

Yes, very true analysis.Politicians & builders are exploiting the Indian middle and lower income segments of population and cornering the bulk of no two money whereby the country's economy is always pulled down,and real estate prices are unnecessarily always skyrocketing???



Feb 10, 2014

A stage managed show can only that long till the time it falls apart. This is unsustainable and prices will correct.


randhir singh

Feb 9, 2014

Perfect analysis. well done!
There is something seriously adrift. The black/white ratio in gurgaon is 80/20! Lets not leave out the innocent looking banks..they are neck deep in this too.
the builders and politicos have so much wealth, they can sustain without bringing down the prices. The common man..who's he? who care!? God Bless my India!


v o know real estateannathanjag

Feb 8, 2014

According to people who know Real Estate business the builders have raked several times of the amount they earlier invested by the sudden boom they had after 2006. So they are sitting on unsold stocks (estimated @40%) as they can afford to wait holding the prices without reduction! In away this is another form of hoarding.With the nexus you have pointed and the black money involved there seems to be no let up in the present deadlock unless drastic happens.


Amit Sengupta

Feb 8, 2014

Has it got any thing to do with the sudden interest of some foreign funds, in Indian Realty sector? May be, we have got used to smell a rat in all that connect us to our politicians.



Feb 8, 2014

The problems being faced by the real estate sector may in fact increase, as I understand that VAT is also likely to be imposed on the sale of housing units (Reference: L&T Vs State of Karnataka, as per the High Court of Karnataka order)



Feb 8, 2014

And despite such a few interesting paras, the moot point of whether HDFC should be dropped in favor of Gruh Finance, wasn't answered. :)

Maybe the article would have been complete if the analyst decided to stick his/her neck out and take a call on which one to pick (if only one was a choice and not both).


suresh panday

Feb 8, 2014

Yes, certainly nexus workiing.
To ensure prices does not comes rates are increased reegularly.
Govt housing companies are literary stopped to work on new projects.
Wealth tax is Not implemented strictly.
Why not impose annual holding tax 3to 5% on unoccupied properties.
Bank also party iin neexus, 2nd home loan should be Banned.


suresh panday

Feb 8, 2014

Yes, certainly nexus workiing.
To ensure prices does not comes rates are increased reegularly.
Govt housing companies are literary stopped to work on new projects.
Wealth tax is Not implemented strictly.
Why not impose annual holding tax 3to 5% on unoccupied properties.
Bank also party iin neexus, 2nd home loan should be Banned.

Equitymaster requests your view! Post a comment on "The murky politician-builder nexus deepens...". Click here!