Is land responsible for high inflation? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is land responsible for high inflation? 

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In this issue:
» Jobless growth plagues India
» Green Laws are not to protect the poor
» The govt's new avenue for funds
» US' inflation numbers are 'phony'?
» ...and more!

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We recently came across an article in Firstpost that drew our interest. The article talked about an asset that is also responsible for inflation in our country. Interestingly the same asset is also responsible for the widening current account deficit problem. The asset is none other than land. As per the article, land is responsible for higher inflation to a significant extent. And the reason it does so is because of its limited supply.

It all starts with people investing in land in order to earn rates higher than the rate of inflation. But things go awry when speculation sets in. Since the supply of land is limited, speculators enter the market and pay higher prices to hold on to the land. Their idea being that if they hold the land long enough, they would be able to find another speculator or interested party willing to pay a higher price. As this cycle of speculation sets in, the same piece of land keeps getting priced higher and higher. Two things come off it. First the persons from whom the land is being bought get richer and have more money at their disposal. Second, the feeling that they have become wealthy leads them to splurge even more not just on essential goods and services but also discretionary ones.

As demand of these goods and services rise and supply shrinks, there is inflation which leads to higher prices of goods in the country. The increase in prices attracts foreign goods and services without commensurate rise in exports. When this cycle sets in, there is an adverse impact on the country's current account deficit. As the cycle of speculation deepens inflation rates and current account deficit increases.

When this cycle continues for a long time then asset bubbles start to build. This seems to be exactly what is happening in India. Land prices have been spiraling upwards thanks to speculators. Though this is not the only contributing factor for inflation, but still it has supported continued higher prices in the country. The government needs to reform the laws to prevent and control this kind of speculation. The consequences are severe. We can already feel its repercussions with slowing growth and dampened economic conditions simply because the high inflation is not letting Reserve Bank of India (RBI) cut rates and encourage investment towards production of more goods and services. If the bubble continues to build then things are just going to get worse. And when it bursts, the shockwaves will hurt the economy even more.

Do you think that land speculation has contributed to inflation in India? Share your comments or post them on our Facebook page / Google+ page

01:10  Chart of the day
The numbers on the Indian economy have not been encouraging in recent times. That this year was going to be bad was something everyone was prepared for. But exactly how bad is something no one knew. Even after downgrading the growth estimates several times, the GDP growth was still pegged to be around 6%. Even though this was bad but still it was similar to the growth that we saw in FY12. But now the government has revised the estimate even lower. It now estimates that India's GDP growth in FY13 would be just 5%. Though this is better than the growth rates expected in the developed world, it is still the lowest growth figure in 9 years. Only in FY03 was the growth lower at 4%. Since then India has managed to grow at over 5% every year till now.

Source: The Mint
* Estimate

Joblessness is no longer a vice associated with economies in the West. The problem is attaining critical mass even in countries like India and China. Despite relatively better growth rates, these economies have not been able to suitably employ its working class. Consistent demand for steep wage hikes have also been plaguing industrial units in both countries. As a result, mechanization of industries has rendered several jobless. Plus given the high population of these economies, unemployment could get acute over the years. A report by Institute of Applied Manpower Research quoted by Economic Times confirms this fear.

The report cites that agriculture's share in total employment falling from 57% to 53% between 2005 and 2010. In the same period, the construction sector added 18 m people as workers as the government made huge investments in infrastructure. However, most workers moving out of agriculture ended up being casual labour. During the same period, the manufacturing sector lost 5 m jobs. The supposed shift to services sector, witnessed only 4 m additional jobs in 2005-2010. To sum it up, most of job shift in the last 5 to 7 years has ended up with more workers in the casual labour class. A scenario that could get dangerous if the unskilled labourers cannot be retained.

Environmental protectionism has gained a lot of prominence in the recent past. Benchmarks are being set for no-go areas while getting clearances for mining in green zones have become all the more cumbersome. The basic idea is protect Mother Nature and local inhabitants. Unfortunately, it appears that the government is using it as a tool to eschew its responsibility from the matter in the name of poor. Or in other words it is playing the situation to its convenience. Let us explain how.

True, that certain green areas should be left untouched even if they contain rich mineral resources as protecting the environment is an utmost priority. In that case, growth will have to be sacrificed that may come if the area is industrialized. Thus, environmentalist approach is projected to be against the poor here. But what happens when the poor itself oppose some large projects bound to be undertaken in the green areas where they reside? Here the argument shifts from environmentalism to national interest. It gets projected that locals do not understand the benefits of the project and it must go ahead in national interest. And even if the project goes ahead on the national interest bandwagon it results in low paying jobs to the poor. It is nothing as compared to the resources lost and carbon foot prints released post industrialization. All in all, what we are trying to say is that the government is just riding on the poverty story while deciding on environmentalism or industrialization issue. Ultimately, it does what it wants to do!

There is no denying that the Indian Government is in a fiscal mess. Hence it wants to leave no stone unturned in its efforts to garner as much revenue as it can. What's helping the Government in this endeavour in a big way is a wing of the IT department, the Directorate of Transfer Pricing. Last year, it managed to rake in a cool Rs 660 bn and there's the target of collecting an additional Rs 440 bn this fiscal.

There is nothing wrong in the concept of transfer pricing we believe. After all, what is earned in India should certainly be subject to Indian taxes. Our worry though is the danger of this concept being taken too far.

Recently, there was a case where the transfer pricing authorities forced the Indian subsidiary of an MNC to pay taxes on its advertising and marketing spends. The transfer pricing department was of the view that beyond a certain amount, the advertising expenditure in fact ended up promoting the MNC brand. Thus, taxes need to be paid on this extra expenditure. Now, this is akin to entering a grey territory we believe. As it cannot be convincingly established what expense is towards enhancing local sales and which one's towards promoting the MNC brand? Thus, things like this should better be left alone. Otherwise they could end up hurting the investment climate in the country.

Bill Bonner, President & Founder of Agora Inc, had already stated how the US Fed has been falsifying inflation numbers to suit its purpose. And this view is also being endorsed by Bert Dohmen, founder of Dohmen Capital Research Institute. Mr Dohmen believes that the US is already in a recession. This is reflected in the actual rate of inflation rather than the phony numbers put out by the US Fed. According to him, if one calculates the CPI now as it was calculated in 1980, then inflation is actually around 9%. On the other hand, the US Fed has published inflation rate of 1.7% in 2012. This implies that when inflation begins to rise, the US Fed resorts to changing the basket so as to bring down this rate. This effectively means that the published inflation rate is out of sorts with reality. Indeed, despite reckless quantitative easing programs, the US economy has failed to recover in the manner the US government had wrongly envisaged. Unemployment still remains high. Unless this is not dealt with effectively, path to recovery may very well be an arduous one.

In the meanwhile after opening the day on a positive note, Indian equity markets care now trading in the negative zone. At the time of writing, the Sensex was down by 23 points (0.1%). Barring Japan and Indonesia, other major Asian markets closed the day on a positive note. Europe too has opened in the green.

04:55  Today's investing mantra
"Compound interest is the eighth wonder of the world. He, who understands it, earns it ... he who doesn't, pays it." - Albert Einstein
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30 Responses to "Is land responsible for high inflation?"


Mar 6, 2013

The vacant lands,plots,converted agricultural lands,Lands facing major high ways, state high ways bought with an intention of greater appreciation of their black money should be subjected to vacant land tax @ 10% of the market value by the state governments.The central government should impose wealth tax @10%of the market value.The government should make the unused land burdensome for the citizens.Current account deficit is on account of black money available with the sellers of land finding its way into purchasing gold biscuits.we have so for imported 800 tonnes of gold this year worth 50 billion$.we have exported our valuable rice of 4 million tonnes for 3 billion dollars through kakinada port & the rice price has gone up from 35/- to 55/- now.Makbool had been left free by the big wigs in the AP government in 2009.We believe that he has been compromised for money from ISI&IMM.You know what happened now.DILSUKH NAGAR BLASTS.please comment.



Feb 15, 2013

let there should not be direct sale of land / property between parties but should be auctioned through govt authority or approved auction house to curb black money.

Like (1)


Feb 11, 2013

The reason why we want to invest in land or gold is because of the losing value of the rupee, and lack of trust in other investment avenues. After the stock crash of 2008, and the ever-increasing corruption scandals like 2G, the retail investor is very wary of investing in the stock market.

Like (1)


Feb 10, 2013

Yes. To some extent the statement is true. But if we go a few steps deep into the analysis, we can find that it is not just the land alone. But the main reason is that our Governments economic policies which have been devaluating our RUPEE month after month and year after year. If we compare purchasing power of RUPEE in 1950--in terms of land, gold, commodities/consumables, Dollar etc. we can find Rupee has lost its value by more than 90% on an average.
Second main reason is explosion of population beyond tolerable levels, particularly in low income group. There are so many idlers, like persons of above 70 years of age, vagabonds, beggars, eunuchs, monks, saadhus etc. whose energies are just wasted.
All the above factors cause INFLATION with lot of gap between supply and demand.
To come out of such grave situation we need leaders like HITLER but not Monks like MANMOHAN.

Like (1)


Feb 10, 2013

SPeculation in land generates maximum black money.Tehsildar , naib tesildar to patwari and politicians get their fixed %age of share at the cost of the state revenues.Black money so generated can't be deposited in bank /post office. It goes to be spent in extravagance,marriages ,and buildings.One way to check it can be that people should be allowed to deposit any amount without PAN NO. However all withdrawals above ten thou sand ,subject to a maximum amount of 40 thousand in a month should be allowed with PAN NO.

Like (1)


Feb 9, 2013

Govt in the name of housing sector, print and pump money to the real estate. Black money got generated in billions and they are pumped to other countries in the name of business or ulterior motive. This works against the nation.

Like (1)


Feb 9, 2013

I look at real estate sector as one of the basic need of man kind like food,clothing,shelter,hence what the bursting of bubble concept will not applicable to this sector,
Secondly this is the only industry which gives direct boost up to other industries,once any project starts right from mining industry to chemical industry to automobile industry starts getting businesses so this industry is directly effecting economy.
The problem of inflation should have to find out other logic than low of demand and supply.
Speculation is the concern which must be governed effectively so as,it should not encourage black money.
Finding out one answer,new problem should not come out.
Land is not only one,which is responsible for high inflation.

Like (1)

George Elava

Feb 9, 2013

High Inflation is mainly due to "Black" & "Fake" money in the market. These monies are competing with the official monies in the daily circulation. For which Govt. has proved has no role to play. When this is the fact "why you are harping upon the "Land" which is fixed and the supply is limited. No problem even if the land value through out all over India still increasing because it is "Real Money" - and not at all "Fake Money"!

Like (1)


Feb 9, 2013

The government needs to reform ?? They are only interested party .....

Like (1)

pradyumn kumar jain

Feb 8, 2013

Off course it is land prices but I would like to blame one more evil to the dampened economy i.e. higher interest rate. Why because ,higher interest rate gives more and more people freedom to spend more and causing inflation.
My suggestion(though it will look like foolishness) ; RBI must first reduce interest and GOI to make policies such that INDIA produces more and utilize its natural resources optimally so as to bring down the inflation .If any body agree to it ,mail me.

Like (1)
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