What Narendra Modi can and should do for Indian real estate

Jan 22, 2015

- By Vivek Kaul

Vivek Kaul
I am getting into a habit of writing trilogies. This is my third column this week on real estate, after writing three columns on oil sometime back. And I decided to write this column after a friend asked me to "stop ranting" and come up with something constructive instead. So here we go.

First and foremost it is important to realize why a healthy real estate sector is necessary for economic growth. Real estate has tremendous forward as well as backward linkages, which leads to what economists refer to as the "multiplier" effect.

The multiplier effect can be both direct as well as indirect. The direct effect comes from the demand in the construction sector for products from other sectors. A house that is being built needs cement, wood, glass, bricks, sand, electrical equipment etc.

As Fatih Terzi and Fulin Boren write in a research paper titled An Analysis of the Development Between Housing and Economic Development: "The multiplier effects of housing [come] through the creation of investment in other sectors generated by the demand in the construction sector for their products. The builders buy raw materials for the building and hire transport to move them." These are essentially referred to as backward linkages."

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Then there are forward linkages as well. "The occupants of the houses buy furnishings and fittings, and pay for maintenance, all of which creates paid employment and the use of materials," write Terzi and Boren.

The indirect effect comes because of the money being spent in the local economy by those benefiting from the direct effect of construction of homes. As Keith Wardrip, Laura Williams, and Suzanne Hague write in a research paper titled The Role of Affordable Housing in Creating Jobs and Stimulating Local Economic Development: A Review of the Literature: "During the construction of affordable housing - or any kind of housing, for that matter - the local economy benefits directly from the funds spent on materials, labor, and the like. If the builder is purchasing windows and doors from a local supplier, the supplier may have to spend money on materials and hire additional help to complete the order - examples of indirect effects. Finally, the construction workers, glass cutters, and landscapers are likely to spend a portion of their wages at the local grocery store or shopping mall, which illustrates induced effects."

One estimate puts the number of total such linkages to 270. Given these reasons a vibrant estate sector is a necessity for a vibrant economy. In fact, a study commissoned by HUDCO found that housing came third among 14 major sectors, in terms of the linkages that it had with other sectors. This tells us how closely linked a vibrant real estate sector is to the overall economy.

The latest Economic Survey of the government makes this point as well when it states: "Housing activities have both forward and backward linkages which not only contribute to capital formation, generation of employment, and income opportunities but also to economic growth. Estimates show that every rupee invested in housing and construction adds 78 paise to the GDP."

Nevertheless, these linkages come into play only when homes being built are also being sold. But as we saw in the column published on January 19, 2015, that doesn't seem to be the case. Most homes being sold in cities are way beyond what most people can afford. In fact, a friend on reading the January 19 column quipped, "forget taking on a loan to buy a home, how many people even have enough money to make the 20% down payment required on the home". Typically, most banks finance up to 80% of the home price. The remaining money needs to be made by the borrower of the loan as a downpayment.

Given this, affordable housing is something that should be a huge priority for the government. The Report of the Steering Committee on Urbanization released in November 2012 points out: "approximately 24 percent of India's urban population resides in slums. The proportion of slum dwellers in large metropolitan areas is higher. For example, according to Census 2011, 66 percent of the population in Mumbai Metropolitan Region (MMR) lives in slums."

Further, "not all slum dwellers are poor but the extreme scarcity of housing for low income groups has led to them living in slums." Living in slums also leads to inadequate access to basic sanitation facilities and potable water.

The issue of affordable housing becomes even more important when one takes into account the fact that the number of people living in cities is going up day by day. "Nearly 30 per cent of the country's population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030. The present urban housing shortage is 18.78 million units of which 95.6 per cent is in economically weaker sections (EWS) / low income group (LIG) segments and requires huge financial investment," the Economic Survey points out.

So, the question is what can the Narendra Modi government do to making housing more affordable? The solutions on offer are not easy to implement. Neither can they change things overnight. Nevertheless, the work needs to start someday and the sooner it starts the better it will be.

The situation can be improved significantly if some of the land that the government has been sitting on can be made available for affordable housing. KPMG in a report titled Affordable Housing - A key growth driver in the real estate sector points out "The government holds substantial amount of urban land under ownership of port trusts, the Railways, the Ministry of Defence, land acquired under the Urban Land (Ceiling and Regulation) Act, the Airports Authority of India and other government departments."

The question is will this happen? More land in the market will lead to land prices falling. And this is something politicians will not like given that their ill-gotten wealth is held through benami land as well as real estate. As Bombay First points out in a report titled My Bombay My Dream "Government and the land mafia in fact do not want more land on the market: after all, you make more money out of the spiralling prices resulting from scarcities than you could out of the hard work that goes into more construction."

Nevertheless the basic issue is the huge amount of black money that comes into the real estate sector. If real estate has to become affordable something needs to be done on this front. While the Narendra Modi government has been very aggressive about getting back all the black money that has gone abroad, they haven't said much about trying to recover the black money that is there in the country.

This money would be considerably easier to recover vis a vis the black money that has already left the shores of the country. Also, in this day and age a lot of information technology can be used to figure out who are the individuals who are not paying taxes.

The government can learn from what happened in Greece. In order to recover black money, the Greek government used Google Earth to track those who have swimming pools and then cross indexed their address with the amount of tax they are paying. Ideas along similar lines which use information technology extensively in order to identify people who are not paying the correct amount of income tax, need to be come up with.

In the February 2013 budget speech, the then finance minister P Chidambaram had estimated that India pointed out that only 42,800 people in India had a taxable income of Rs 1 crore or more.

This in a country where 27,000 luxury vehicles are sold every year. Self employed professionals like property dealers, doctors, etc., need to be made to pay their fair share of income tax.

Of course, the income tax department does not have the resources to go after everybody. Hence, it is necessary that a few pilot projects may be implemented in different parts of the country and depending on results things can be taken forward.

I am no expert on real estate but I am sure that there are lots of other things that can be done to break the backs of those who are pouring their black money into real estate. The only thing required is the political will. The question is does Narendra Modi have that will? The nation wants to know.

Do you see the government taking steps towards breaking the nexus between Indian real estate and black money? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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15 Responses to "What Narendra Modi can and should do for Indian real estate"

r ilodh

Jul 3, 2015

Dear vivek.

black money is something which keeps our political class
in power without any responsibilty and knowledge of governance. they change the parties every election without
compunction, because some party or the other will give them a seat. this is more relevant in local election like municipal,assembly. everytime they win, with no grey matter, they latch on to some big timers and make enough money to be ready for the next. their close associate too
enter the fray in illegal deals and the scarcity of land or any item goes through the roof. The middle class (i am still not aware what it means) are then squeezed out (the various reserved categories get all the concession).
the government with all the lands gives some land to make
genuine middleclass people who i am sure will pay 50%.
more then the reserved. but since the nexus of the elected
members their cooteri of moneybags and the middlemen
will never be broken till a leader of guts and morals emerges. god help india


Ram Gaggar

Jan 29, 2015

Dear Vivek,

Couldn't agree more with you on your comments on real estate sector (trilogy was worth it)!!

I believe similar effort is required from this government on making agricultural income as taxable after a defined limit say Rs. Lacs.

Like Google Earth for swimming pool in Greece, if tracking of sale of Smartphone above Rs. 25,000 (say), watches above Rs. 10,000 (say), cars, etc were to be done the people having concealed income will be known and can be brought under tax bracket.




Ajay Gupta

Jan 25, 2015

We are talking about the Black money abroad, no party is interested in it as their own interest is hurt. Secondly have we thought of how much black money is still beinmg created.
If the government wants they can do several things.i.e., to find how the land developers are asking like shy lock interest of 24% and they delay the projects the client can only go to consumer courts, How much delay and corruption.
Why the govment cannot pass one bill about the false witnesses and affadavits to be penalized it will decongest courts and will reduce delays.
The it department can get the list of new property buyers and their sources of funding will reveal new defaulters of Taxes that will also give the earning of raised by Builders and developers, but most of them are politicians or connected to them.



Jan 23, 2015

on economic side domestic black money should come out.and no black money created hereafter.
expenses by gov.should commensurate with its income .
everything on economic front will fall in place



Jan 23, 2015

Don't think modi can do this (even if he wants to) as he cannot drop the axe on his (party's) foot...he will be restrained.
But what we can do as common men, is to pledge not buying real estate unless it comes back to sanity. Make this business loss making for them so they move their black money elsewhere.


Sarat Palat

Jan 23, 2015

Every body needs a house to live. If there is an alternative good investment opportunity is available people will stop investing in real estate as an investment.

Like (2)

Subhash Moharir

Jan 22, 2015

"The nation wants to know" is being used by all columnists. Why do all media persons give themselves such importance?

Like (2)


Jan 22, 2015

Even more than fresh land being made available, it's important to mandate (and ensure) provision of proper infrastructure for any kind of "development". Proper access, zoning, water, power, sewage - will ensure substantial improvement of quality of existing land itself (thereby increasing availability of viable altrrnatives).

Like (2)

Naushad Daruwalla

Jan 22, 2015

What about Rent Act.There are many millonaire tenants and many poor landlords.Is it fair that a tenant uses the property you paid to buy at a fraction of the marketprice depriving you of reaping the benefits of what you had invested.Would not abolishing rent act bring more mobility to talent that right now remains immobile due to not being able to afford the "pugree"

Like (2)

Sajid Khan

Jan 22, 2015

Very good article..where there is a will there is way for sure..

Like (1)
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