On September 16, we sat down with Vivek at Our Offices in Nairman point to discuss
India's jobs crisis...and it's a whole lot worse then he initially thought.

"India is Staring at A Crisis."

In an Exclusive Chat, Vivek Kaul Shares Full Details About The Crisis...
And Reveals For the First Time That the Crisis May Be Much Bigger
Than What Bill and He Expected...

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On September 16, we sat down with Vivek at Our Offices in Nairman Point to discuss India’s jobs crisis….and it’s a whole lot worse than we initially thought.

“India is Staring at A Crisis.”

In an Exclusive Chat, Vivek Kaul Shares Full Details About The Crisis…
And Reveals For the First Time That the Crisis May Be Much Bigger
Than What Bill and He Expected…

Dear Reader,

The Ministry of Human Resources Development recently released a document titled Some Inputs for Draft National Education Policy 2016 that stated: “It is estimated that there will be 104.62 million fresh entrants into the workforce by 2022.”

This essentially means that there are around 105 million young Indians likely to enter the workforce over the next six years….That’s 17.5 million Indians entering the workforce on average every year.

This means around 1.5 million Indians will enter the workforce every month, over the next few years. A number greater than the estimate of one million Indians entering the workforce every year, put out by several experts…and even those initially put out by Vivek.

In fact, this new warning is so alarming – and urgent – Rahul pushed all his scheduled plans aside to meet with Vivek at his Nariman Point offices to find out a) What the jobs crisis was all about b) What was next for India; and c) What you should be doing about it right now.

What follows is an abridged transcript of their 60-minute crisis-talk, where you’ll discover:

• What India’s demographic dividend really looks like
• What industries India really needs to focus on to get on top
• What the government is really concerned with
• Why you should begin to protect your financial assets and family immediately
  

  *Plus valuable information on the current real estate market

Hi, Rahul Goel here.

I need you to read this transcript for one very important reason.

India is staring at a crisis.

Now, I don't want to sound alarmist.

But I can't help but share with you the true picture of where we stand today as a country.

But before I do that, I want to tell you one more thing…

The reason I am reaching out to you today is that the situation is getting worse...

And our analysts agree:

The mainstream media, biased as they usually are, are trying to drown out all the signals that would make you a very worried person. That's why my publishing firm and I can no longer sit on the sidelines and watch.

We are stepping in to clear the air about the issues that pose a serious threat to our future.

This is by far bigger than a near term stock market correction, or a commodities melt down.

These issues have the potential to impact your future. And your family's future too.

And here's the thing that is really worrying…

The efforts being taken by the government are not making an impact.

Their efforts to prop up the economy, the job market, and our country's finances have massive holes.

In fact, at times it seems that they are having just the opposite effects.

And now we're entering a situation where all these issues are starting to get big and serious.

So, what are the short and long term implications for you, your family, and your finances? And how can you navigate this period of job stagnation and government growth and emerge from the other side with healthy finances, having seen the worst pass?

That's exactly what I want to talk to you about today and that's why you need to read this transcript as soon as possible.

You see, I invited the reclusive financial journalist, Vivek Kaul, editor of The Vivek Kaul Letter and Vivek Kaul's Diary, to our offices in Nariman Point.

Vivek is one of the few people in India who has been outspoken as Bill, his mentor, has in recent years, explaining how we are sleepwalking into a jobs crisis of epic proportions.

In fact, just last month, we sold over 2000 copies of Vivek's new letter, The Vivek Kaul Letter, along with his mentor, Bill Bonner's book Hormegeddon.

But since, things have gotten a whole lot worse.

You see, one major issue that is worry us is what Vivek refers to as "the Demographic Dividend."

Talk to anyone in the Government, or the Government leaning media, and they will tell you how the power for the youth will make India the next great super economic power.

However, what they conveniently miss is this...

There are almost no jobs to employ the 33,000 people entering the workforce every day.

Yes, that's 33,000 job seekers entering the workforce every day.

How's the situation getting worse?

Well, The Ministry of Human Resources Development recently released a document that stated. It is estimated that there will be 104.62 million fresh entrants into the workforce by 2022 that’s 10.462 crore. If you break this down that's about 50,000 new job seekers a day!

And this is just one issue!

You see, the core idea that is playing out today is one which Bill has spoken about for long.

In fact, that's the crux of his new book Hormegeddon.

Perhaps you are one of the Indians who has already sent forHormegeddon, and is currently reading Vivek's newsletter, silently preparing for what Vivek believes is about to happen.

Even if you've already read the book or started reading Vivek's letter, however, I need you to watch this video. Because things are moving even faster than we initially thought. You'll learn loads from the exchange Vivek and I had at our offices.

It was a real eye-opener.

And if you haven't read Hormegeddon, or the warning Vivek and Bill developed together, I urge you to read it here today.

You'll learn everything you need to know about what's unfolding at present. And by reading their warning, and signing up a Vivek's newsletter, you'll acquire the knowledge necessary to protect yourself and your family from the coming crisis.

Because the fact is, the crisis is inevitable. And, as I have shown you already and you will hear repeatedly it has accelerated since we first published Hormegeddon and Vivek launched his flagship newsletter.

Today, Vivek has a combined 100,000+ readers from both his diary and letter…but the video we're producing today is probably more important than anything else we're publishing at this present time.

If you've got a feeling in your gut that something has to give or indeed is STARTING to give…you should make time to see it now.

So, without further ado, here's me and Vivek.

Rahul Goel: So Vivek, thank you for coming to the Equitymaster offices.

Vivek Kaul: Thanks for having me.

Rahul Goel: I know you've been traveling in the last few days, tell us about that?

Vivek Kaul: Basically, I was at IIM bangalore. IIM Bangalore runs a one year course on public policy other than the various MBA degrees that they offer, so these guys had called me for a talk on what I had titled as the “Exorbitant Privilege of The Dollar”. So it was basically based on the books, the Easy Money books that I have written.

So we basically talked about the fact as to how the U.S. dollar, a paper currency essentially makes the United States as strong as it is, wherein you know…all the other countries need to earn the dollars, whereas the U.S. can print as many dollars as it wants to. So that was the basic crux of the argument I was trying to make, and given that it was a public policy class and not an MBA class, the presentation went down very well [laughs].

Rahul Goel: So it's very interesting that the dollar is a source of a lot of global yields over the last couple of decades maybe…and what we're going to talk about today is very India centric which is our own budding problem. But we'll come to that later because I just want to lead into it by, you know, first congratulating you on the launch of the Vivek Kaul Letter, which now has over 2000 readers. I also understand the initial feedback has been very good, and people are coming in every day from what I can see. 

So I want to understand a little bit about the background to doing the Vivek Kaul Letter, and the role Bill Bonner played in the whole process.

Vivek Kaul: Okay, you know, I have known Bill for a while now, for almost eight years…I mean I first met him in November 2008 just after the financial crisis had started and Lehman Brothers had gone burst.

And when I spoke to him I got a totally different perspective on the crisis, I mean until then people had been sort of blaming this and that…and you know, the real estate bubble and so on and so forth. So when I spoke to Bill, I realized that the problem is a lot more historical than most people make it out to be.

And Bill sort of explained that in a conversation, which would have probably lasted around 70 minutes at best….and it was a real eye opener. So that's how I kind got to know him and over a period of time once I start writing for Equitymaster, I realized that Bill also writes a letter which is a called the Bill Bonner Letter.

And so the idea was to essentially get around to writing something similar, but in a totally Indian context, wherein you know, you call a spade, a spade and you don't beat around the bush, so to say.

And at the same time, you know the problem with a lot of writing in economics and finance is that it gets written for people who already understand economics and finance, which is not correct. Because economics and finance impact almost everyone.

And there is a great need to explain things to people, in a very simple straight forward way, so that people understand at the end of the day as to how does something which sounds pretty big impact us. So that's how we sort of you know got around to the idea of writing the Vivek Kaul Letter.

And the other point I would like to make here is that you know most of us, who sort of try to understand economics and finance, do so by reading newspapers and magazines and so on and so forth. The problems there is that at least in case of newspapers, they don't make money through the subscription price that they have. I mean, the money any newspaper makes is through advertisement, I mean a newspaper which gets sold for three bucks or four bucks essentially costs at least 15-20 rupees to produce.

So the advertiser essentially is the one financing the newspaper, and the advertiser these days has huge power on what gets reported and what does not get reported and how it gets reported and where it gets reported. I mean something might be page 1 news because it may impact the advertiser in a certain way. Or it may just go against the government of the day, so it might get buried on page 12, or one of the inside pages where you as a reader would probably never see it.

And let's be honest how many people actually spend time reading a newspaper. I mean it's something that you quickly go through in the morning as a matter of habit.

So the idea behind the Vivek Kaul Letter was also to highlight the more important economic issues of the day which do not get highlighted in the media due to various reasons…

I mean they may just be simply boring or they might be an advertiser angle to it or simply the fact that most newspapers ultimately have fairly limited space whereas sometimes issues in economics and finance can be a little complicated, and you need some time or rather you need some space to explain things.

Now the question is, what is the demographic dividend?

You know, in the lifespan of every country, if I may say so, comes a period of two to three decades where the working population grows at a rate which is faster than the overall population growth rate.

This happens due to multiple reasons. I mean it can happen because of the fact that health facilities improved, so infant mortality rates fall and because infant mortality rates fall people have fewer kids and when people have fewer kids, the population growth rate is slower than the workforce growth rate.

Now what this does is suddenly you have all these people entering the job market and as these people sort of earn money and they spend money, the country tends to grow at a much faster rate than it had done in the past. And that essentially leads to economic growth which is faster than the economic growth in the past and in the process pulls the country out of poverty.

China is a very good example of the demographic dividend coming good. So obviously demographic dividend was just one of the factors in the Chinese case there were other factors as well.

The key assumption to the demographic dividend is that people entering the workforce will actually find jobs. I mean, if they find jobs only then is there a demographic dividend. Now the scary thing in the Indian case is, I mean, if you look at the numbers, the number of people entering the workforce is simply too big.

Now there are multiple estimates going around and most of these estimates essentially if you were to look at a sort of scattered diagram, most of these estimates suggest that there are around 1 million individuals entering the workforce every month, which basically means that there are around 1.2 crore individuals entering the workforce every year.

Now this is the first part.

Now there are certain assumptions that have been used in order to arrive at this 1 million number.

If you dig down a little deeper and look at the assumptions, the one major assumption is on the female labor participation rate. Now, let's not get too confused by the jargon. It basically means, what proportion of women are likely to enter the workforce. As we know, in India, not every woman goes out to work, we are still a very patriarchal society that way.

So the assumption is that only around one third of the women entering the workforce will actually go out and work. Then the other assumption is that every year around 5 million people will retire.

Now if you look at the demographic dividend experience in other countries, more than one third of the women actually come out and work.

In case of China, in case of Taiwan, in case of Korea, the number is significantly high. It is more than likely as more women get educated, as the health systems improve; more women are likely to enter the workforce. So if we take these factors into account, the number can go up to as high as 2 million individuals a month okay, which is 2.4 crore individuals a year.

So the question is, and this is likely to last, depending on which report you look at, depending on which numbers you look at. This is likely to last as long as 2030-2035.

Imagine in such a situation if jobs are not created, the question is, are jobs been created? And the answer is no, I mean yes there are jobs being created, but are enough jobs being created?

The answer is no.

The problem in India's case is that we do not have very reliable job data. I mean in the U.S. every month an employment rate comes out, and in fact they have six rates of unemployment not one.

We have a rate of unemployment, but then it comes out with more than a slight delay and one doesn't know how reliable it is.

Now, one major data point that I have come across (from an economic survey from 2014-2015) says…

The growth in labor force, the new people entering the workforce every year has been close to around 2.2% per year, whereas the growth in jobs has been only around 1.4% per year.

So there is a gap between the number of people entering the workforce and the number of jobs which are being created…

The other interesting thing is which most people don't realize is that since the process of economic reforms was initiated, the rate of growth in jobs has actually fallen, so we have economic growth, but that economic growth is not leading to the creation of jobs as it used to before the liberalization in 1991, and you know liberalization happened 25 years back and as you come from 1991 to 2016, the rate of growth in jobs has actually been coming down.

And one major reason for this is that economic growth since 1991 has been less labor intensive.

Now what does it mean by being less labor intensive?

It means is that it is now possible to create growth without creating jobs, I mean take a sector like information technology or take a sector like banking and financial services, both sectors add a lot of value to the economy without recruiting a lot of people, so you have growth: you have the economy going up, you have the GDP going up, but that is not creating jobs.

The second point is that a lot of Indian manufacturing has become more and more machine oriented. Because let’s be very, very honest about this, no Indian capitalist likes to recruit a lot of labor, because the Indian labor laws, I mean, I don't have a better word for it are pretty screwed up and beyond a point nobody wants to recruit people and hence factories have gotten more and more mechanized. So we are not creating enough jobs.

Our great beliefs towards the turn of the century, around 2000-2001, was that the information technology sector would come to India's rescue, and we would go from being a developing to being a developed country.

The problem is that the information technology sector, as was the case then and as is the case now, is very, very skill intensive.

I mean if you want a proper job in an IT company, you need to be either an engineer or a charted accountant or an MBA or at least a graduate.

Now, India's natural comparative advantage is not high skilled labor, but low skilled and unskilled labor.

So you need to create jobs at the lower end of the spectrum, so information technology could never had had that multiplier effect so to say, and in fact now if you follow all these IT companies very, very closely they are even looking to mechanize a lot of the lower level jobs, which basically means that instead of human beings, robots will do those jobs.

Rahul Goel: Artificial intelligence is what they are talking about...

Vivek Kaul: So what has happened is that the thinking at our political level has been extremely muddled. In the sense that we've tried to project high skill intensive sectors, without trying to project the low skill intensive sectors, where a lot of jobs could actually be created. Things like textiles, toys, food processing, construction, real estate. These are the sectors, which need to be encouraged, and these are the sectors which will ultimately create jobs one for the people who are entering the workforce, let's not forget, we have huge, huge disguised unemployment in agriculture…

Rahul Goel: Let me stop you there, before we get into that, where we are now, you are saying that whatever demographic changes are happening, the number of people entering the world is sort of exploding. Then what we are saying is what if more women come to work, so…

Vivek Kaul: Which is a very good thing by the way…

Rahul Goel: Which is a good thing, and I think it should happen because as people get educated and they have fewer kids, women should possibly enter the workforce at a faster rate, so the input, the workforce is going to increase far faster.

Then we are saying that the growth which we used to observe is no more as productive because the growth is sort of anemic towards less labor intensive work, and then the sectors which still are labor intensive are plagued by bad policy, or basically government control, and that’s preventing the whole thing from absorbing this workforce.

So you have a situation where, like you said, somewhere between 1.2 to 2.4 core people entering the workforce every year and they're going to do that for about 20 to 25 to 30 years, at least two decades, and they're not going to be able to get jobs.

Vivek Kaul: We need to just make another simple point here, in India everybody gets a job, it's just that job does not add any value. Let’s take agriculture, now 50% of India's population is dependent on agriculture, but 50% of India's population produces around 16% to 18% of India's GDP so what that basically means is that, agriculture has many more people than it needs.

And if a few people are moved out of agriculture, it is going to have no impact on production.

So we have what I was trying to explain what economist call huge disguised unemployment...that’s one point.

The second very, very interesting point is that India has millions of enterprises which employ very few people. So an average Indian firm employs around 2.2 individuals.

Now, you know, a lot of these people are not entrepreneurs by choice, they are entrepreneurs because there are no jobs available. I mean take the fact that, you take a walk around Nariman point, there is a guy selling sandwich on every corner, and obviously it's very viable, maybe Nariman point it is, but if you go to other parts of Bombay, Mumbai, it's not a very viable business, but because there are no jobs, which essentially caters to his skill set, he has no other option but to do that, and then he is counted as employed.

So we have huge disguised unemployment in agriculture, and then we have all these so-called “entrepreneurs,” who would not be entrepreneurs if given a choice.

Rahul Goel: So the problem is no balling, we've been hiding or it has been getting clouded in the numbers, sooner or later something is going to give. So when do you think it’s going to give? What's going to happen? 30-40-50,000 people joining the workforce everyday, and no one's is really even thinking on how to get them jobs sustainably over a period of time.

Vivek Kaul: I mean it's very difficult to predict. These are very big long term macro trends, so if you were to ask me, if things would start unraveling in 2020 or 2025. I really don't know. But this is a problem which we cannot wish away. And what happens is that people like you and me who live in cities, we don't realize these things. I mean we look at the economic times and we say‘oh we're growing at 8%, now we're growing at 7.1% so 7.1% is very good, we are the fastest growing economy in the world’, but do you know that the average Indian who depends on agriculture for his income makes only 20% of the money in comparison to the average Indian who does not depend on agriculture. Now, what about that guy who is making one fifth of the income, which in comparison to other Indians, has got to give at some point of time.

In fact, it is already starting to show in societal tensions. I mean if you look at different parts of the country, a lot of “upper castes”… land owning upper castes..are essentially opposing or rather going against the government of the day.

I mean you look what happened in Haryana with the Jatts, Jatts are land owning upper caste.

Look at what is happening with the patels in gujarat or even the marathas in Maharashtra or the kapus in Andra Pradesh.

Now why this is happening, this is happening primarily because over the years the agriculture land that these guys had, has been divided into smaller and smaller portions.

Now we have reached the stage where the average land holding size of a farmer is so small, that it's simply not viable to grow stuff on it.

Rahul Goel: So we're going to talk about big government because I know it's one of the core ideas behind the Vivek Kaul Letter. So I want to go back to demographic dividend for a moment, just so that we understand…

You have spoken about how it's already starting to manifest in the problems that you've seen in the country, are there any examples globally where the demographic dividend hasn't really played out the way people anticipated to be?

Vivek Kaul: I mean look at the entire Middle East. I mean if you look at the spring revolution, it was essentially, the entire demographic dividend gone wrong.

I mean you look at a lot of these oil exporting countries, I mean, at a GDP level it looks all fine, but the rate of unemployment among the youth is very-very high…and this ultimately was one of the reasons that led to the Arab spring.

So demographic dividend does go wrong. It has gone wrong in the past. It's not only a China success story, the Arab spring was also demographic dividend gone wrong.

Rahul Goel: So something that is clear and visible…

Vivek Kaul: Which has happened I mean if you look at India with all these small protests, which have been happening in different parts of the country, they are an example of that.

See what we don't realize, is that the entire national media in India is based out of Delhi. So if it rains for two hours in Delhi, it is on the front page, but if, you know, there are people dying in the North East, or if somebody is protesting in Ahmedabad or in Hyderabad, or somewhere, it doesn't make it to the national level.

One reason the Jatt agitation caught the fancy, or either I shouldn't say caught the fancy of the nation, but why everyone in the country is aware of it is, because it happened in Haryana and Haryana is Delhi.

Rahul Goel: Like you said there is core economic issue.

Vivek Kaul: There is a core economic issue behind everything.

Rahul Goel: So we're going to move ahead to the next point.

So on the demographic dividend, we completely understand that you know numbers very well and it's backed up by hard data. There is a problem and something needs to be done and you were tracking that for the readers of the Vivek Kaul Letter in sort of guiding them on how things are progressing, but because we are talking about the media I think one point which sort of completely underscores whatever you are saying is the fact that they still continue to report a GDP number which is 77.1 without any mention that if you had continued to measure by the old series, you're probably at 4% or at about 5%.

So that just clearly underscores that you are trying to whip up a sort of happy kind of a climate without there being anything to support it.

Vivek Kaul: Yeah, I mean, the last GDP number that was reported was on August 31st and it was for the period I think April 2016 to June 2016 and the country grew at 7.1% and this is the slowest in five quarters which is all reported to the credit. What they did not do, what they did not get into, and this was primarily because, you know again, when it comes to newspapers there is lack of space and when it comes to television there is lack of understanding [laughs].

So I mean television is all about things looking good. So if you look at GDP I mean what is GDP? GDP is essentially measure of economic activity, measures economic size. So as John Maynard Keynes essentially defined the GDP and then it was worked upon by other economist. There were four different aspects of GDP, if one were to look at it a little mathematically.

So, it's essentially C+I+G+NX. What does it mean? It essentially means C is private consumption expenditure, I is investment, G is government expenditure, and NX is net exports which is exports minus imports.

Rahul Goel: So let's quickly get back to the point that you were talking about which is the big government. Now I just want to paraphrase the whole with the point that a lot of us here in India believe that government is anyways part of our lives, no matter what we do, but I think and this is what you have written and when you will extrapolate and tell us what the down side of that is of course, is that over the years even though a lot of the claims have been made…Modi himself made a claim of maximum governors, minimum government…

But what's really happening is that the government is going deeper, is getting bigger, if you will, and that seems to be hurting us in ways that are much bigger than what we have a thought, and you've being talking about that, I don't see anyone else talking about that, so tell us a little bit of this thing about big government.

Vivek Kaul: The main point in big government is essentially that the government tries to do too many things, and in trying to be over ambitious, it disregards its implementation capabilities.

The other important thing is, because the government tries to do too many things, it ends up not doing things that it should be doing, okay.

So just to explain this, take a look at the number of public sector enterprises that the Indian government runs…

And do you know in 1950-1951, four years after independence, India had just five public sector enterprises.

So this is not a problem we have inherited from the British, like a lot of administrative problems in India…the so called system…is wrong because it has been inherited from the British, I mean this is a standard analysis which you will receive anywhere.

But in case of public sector enterprises that is not the case. Public sector enterprises after four years of independence, were only five and now we have somewhere around 230-234 public sector enterprises. A lot of them lose a bunch of money, I mean take something like where India which has been in the news, Mr. Modi has talked about the so called turned around of Air India.

Now the problem is when they talk about Air India, they are talking about operating profit which is very, very wrong, I mean let's talk about the net profit number and if you look at the net profit number Air India has continued to lose money in fact it has lost close to 35,000 crores since 2010-2011. And how does the airline survive? It survives by borrowing money. Why does the market lend money to it? It lends money to it because Air India is owned by the government of India.

Rahul Goel: So the loss really is not 35,000 crores.

Vivek Kaul: No its not.

Rahul Goel: But it’s a lot more because –

Vivek Kaul: It’s a lot more because, you know, any government, any leader has only a certain amount of attention or certain amount of mind space, which is true for all of us.

You can surround yourself with the best people, but ultimately there is so only so much attention, so much time that you have. So you should be concentrating on the bigger problems, you know, stuff which we private sector cannot sort out.

I mean we have good airlines. We don't need Air India.

Vivek Kaul: So this is one part of it.

Vivek Kaul: And if you kind of let me speak a little more, the other problem that we have been talking about is the lack of skill in the Indian work force.

Up until now, how did the government try to build skill in the Indian work force?

We had these ITIs all across the country and there are some 8,000 ITIs across the country. But in some of the states, if you want to learn carpentry or you want to learn plumbing or want to become a mason, you need to be class 8th pass with having studied science as well.

You know as long as the carpenter can, you know, read, write and do some basic math, it doesn't matter if he doesn’t understand what photosynthesis is, right?

So this is again an excellent example of big government.

You know you have some infrastructure in place. Instead of using it well, I mean you have totally screwed up the system.

The good thing is that now this government realizes that it needs to involve the private sector in building skill sets.

So the National Skill Development Corporation is doing some amount of good work. So there is a change in thinking that has happened on this front, because there is no way – you know there is 1.2 crore individuals entering the work force every year. How can the government train even 10% of them?

Let's forget, you know, 1.2 crore, how can the government even train 10 lac out of those?

So you need to know all the parameters.

Rahul Goel: So it's probably, I guess, a case of too little too late, I guess…

Vivek Kaul: No, too little too late has always been part of India, but I guess even too little too late is going to be of some help.

Rahul Goel: Some help, okay. But, you know, the big government issue is not really India specific I guess, because that's the nature of government. The government feeds on itself. It feeds – you know, it just grows.

They have written the policy, they have spent the money, they audit themselves effectively, so they've got…it’s like an organism, which just keeps growing and growing and growing, and even Modi, who made a big promise, really is not able to even get rid of something like Air India, which is a complete no-brainer, so this is going to stay apparently.

Vivek Kaul: Yeah. So you know, I have a theory, I mean, on this that one reason for big government in India over the years was the fact that we had a coalition government.

We had coalition governments. You had to keep various political parties happy, so you gave all of them a ministry. Now when you give out ministries how, you know, important is a minister or a ministry if it doesn't have a few public sector enterprises.

Now take the case of something like, you know, The Ministry of Civil Aviation. Now if you were to take Air India out of it, what would remain?

Nothing, I mean, you would have some few airports and that is all that you would have.

Take the case of The Ministry of Telecom. If you were to take BSNL and MTNL out of it or even one of them out of it, what would remain?

I mean, how important would a telecom minister be? Would we even require a telecom minister?

Because I think even a telecom regulator would keep it updated.

So that problem has essentially continued with this government as well.

You have so many ministries, there are so many ministers as well, and there are so many bureaucrats.

So there is obviously some amount of resistance within the government as well.

Rahul Goel: So one of the ideas which Bill talks about in Hormegeddon, and you also sort of spoke about some point in time the situation becomes sort of un-terrible, something has to be addressed because they can't keep growing indefinitely, right?

You can't just keep spending money, you can't be throwing all your money in a black hole, it's like the first problem that we spoke of, the job crisis, at some point, and you don't know when…but at some point, it’s going to give.

So similarly in this big government debate where, you know, like you mentioned how it just keeps growing and growing, you know, the numbers in the public sector, you know, the government still runs Air India..

Vivek Kaul: Yes, because there is a company, there are employees. The employees need to be paid.

Rahul Goel:

Yeah. So at what stage does this give? What happens? What is the end game, if you will, for this whole thing about the government becoming bigger and bigger and bigger, and how the resources effectively are getting sucked out of the system to feed this beast, if you will?

Vivek Kaul: Its really difficult question to answer. I mean there is no end game, but there is a whole generation of people which loses out in the end. I mean, you look at the fact that we are producing so many, you know, unskilled individuals, where do they get jobs?

If they don't get jobs what happens to them. And all of that ultimately leads to societal problems, I mean, it's not good. But I don't know how this will unravel, I mean, maybe I haven't thought about it…I might be able to give you an answer few years down the line, but as of now, I don't know how it will unravel, but it's definitely not a good thing.

Rahul Goel: Okay. So I know we are talking of big issues. We're speaking of a job crisis. We are a speaking of a government which is becoming bigger and bigger by the day, but amongst your third core idea, if you will, seems to be an issue which is very dear to Indians, because all of us seem to have a fascination for property and real estate as a symbol for wealth…and you’ve been talking about it, you've been talking about how this whole structure, basically, precariously poised.

So talk to us a little bit about what you've been telling your readers in the Vivek Kaul Letter about what's happening in real estate and how do you see what you call the bubble or the supply curve play out few years to come.

Vivek Kaul: I was reading The Economic and Political Weekly, which is by far the most – one of the most leftist journals in India.

So there was a very interesting article in it, which said that as per the 2011 census India has 2.47 crore vacant homes. 2.47 crore vacant homes.

Now obviously all these homes are not up to the level where you know middle class individual like you or me would want to live in. But a large quantity, a large number of those homes are obviously homes in which you and me can stay, but they are vacant.

They have been built, they have been bought, they are vacant because they have not been put on a rent. They have not been put on rents because rental laws have screwed up, so people don't want to take that risk.

Over and above these vacant flats you get all these media reports which say that 7 lac flats are unsold across the 8 biggest cities in India and a lot of them are in Delhi and Mumbai. Now this 7 lac number obviously does not take into account the vacant flats as per the census. And the census is a 2011 census, so since then it’s a period of five years. So that 2.47 crore has already crossed 3 crore. And I am making a very reasonable assumption here.

And we are still building homes and people still want to buy homes.

 So there is clearly, you know, a glut when it comes to supply, that's one part.

The other part is what has happened in the last two to three years and that has started to unravel clearly now is that a lot of builders have taken money and have not gotten around delivery homes.

Now the question here is, you know, when you take money for a project and you don’t deliver, so obviously you know that money has gone somewhere, so where has that money gone.

Has it been siphoned off or has it been used to build a previous project? Which is what these real estate guys were doing…I mean they used to take money from one project and then complete a previous project.

Now the problem is that game has come to an end, because now people are a little weary about or more than a little weary about putting money in a under construction property. So they are not able to complete a large number of homes because their funding, their one very good method of funding has come to an end.

A lot of this money, my guess is again, has been used to build a land pack. So it is not that these guys don’t have money. I mean they may not have liquidity, but they definitely have lands which they can sell, and either make the homes or repay these guys.

 Now obviously what people don't realize is that, in a real estate market, prices don't follow a net. I mean, it's not like – you know, it's not like well spun, one day you know bad decision comes and stock is down, by a huge amount. Real estate bubbles deflate over a long period of time.

I mean if you look at the Japanese real estate bubble which started deflating in 1989, it did not deflate overnight. I mean it fell over a couple of decades, it fell by almost as high as 80%. If you people have forgotten there was a real estate bubble in India in the late 90’s, which started to deflate somewhere in ‘96, ‘97 and it went on till 2002, 2003.

I mean I remember when I moved to Bombay 2005, there were one bedroom, hall kitchens available in Andheri for as low as 24, 35 lacs, which is the same thing will now be over a crore...

And which is probably what led – you know there was recently a comment by Arun Jaitley where he said, he remembered the good old days, and he said, during the Vajpayee era the rate was as good as the EMI. I mean, the rent was never as good as the EMI, but –

Rahul Goel: Near.

Vivek Kaul: Yeah. I mean the rent was probably 50% of the EMI or something like that. I mean, right now if you look at it…I did some basic calculations…recently depending on what assumptions you make, the EMI can be four to six times your rent, which is very, very high.

Rahul Goel: So the situation as it stands today, you're saying, is that the builders were basically running a ponzi scheme, right, but the money was not being siphoned. The money might have disappeared, it may have went into the land banks –

Vivek Kaul: Why it is the money may have disappeared, I don't agree with it.

Rahul Goel: It may have gone to a political party; it may have to gone to lands.

Vivek Kaul: What I know is that some may have been used to complete previous projects, and it is also being used to build alignment.

Rahul Goel: And I think the real estate part is very critical and I am so glad that it’s one of the core issues you deal with, because for some reason people just believe the real estate prices always go up.

Rahul Goel:

So we have a situation where the work force is growing rapidly, the government is distracted by running photo films and Air India, et cetera…and they have got a very big sector which has the potential to absorb, probably on the brink of a collapse, if it plays out the way people think it could play out, or you think it could play out.

So you are really looking at this crisis being far bigger, but people are not even talking about it because the media is not talking about it…

Vivek Kaul: Media will not talk about it simply because real estate still brings in a lot of enterprising money.

Rahul Goel: A lot of enterprising money…So there is a serious problem which people should be thinking and planning for.

Vivek Kaul: Yes. They should be.

Rahul Goel: And they are not, because for whatever reason, when they listen to the television channel, which is supposed to look good, like you say, or when they read the papers which is funded by the very people who are sort of wanting to mislead them, they are left with, you know, sort of no friends in town.

Vivek Kaul: You know that's why we should all subscribe to the Vivek Kaul Letter.

Rahul Goel: And because that's where they are sort of dealing with really important issues which others will not even touch, if you will, and these are critical issues and the real issues.

So what I really liked, and I think this is what everyone says when they read Vivek Kaul's Diary and the Letter is that you sort of explain everything, and it’s just not your view, it’s a view backed by real hard data, and the data is flashing in most cases, and the data is actually flashing red and people are still completely ignoring that.

Vivek Kaul: Yeah, I mean, see the thing, the best example I can give you is whenever I write on real estate, I get a few stinkers trying to tell me that you don't understand what real estate is. They said you don’t have skin in the game, you've never bought.

I said, yeah, maybe, but points like this, I mean, these are obvious. I mean, supply and demand is a very obvious thing, you can’t ignore it.

Rahul Goel: So can we try and sort of recap what we are talking about…

We're talking of a job crisis. We're talking about a government which is completely distracted and not focusing on the right things, and taking over the resources which could other be well spent.

And then we are talking about this big sector, the real estate sector which is precariously poised.

It doesn't really look like a great picture, right?

Vivek Kaul: It doesn't, but then if you’ve been looking at it since 2012, 2013, it has never looked like a great picture.

It's just that what happened meanwhile, was that we started calculating the GDP growth rate in a different way. So if you kind of leave that out of the picture, there is not much difference between then and now as far as economics activities.

I mean obviously there are other differences in different regime and the fact that, you know, there is almost no corruption at the upper levels, and the fact that we are trying to do a few things…I mean it's not like they are not doing anything.

I mean like one of the good things they did was, you know, the labor law reforms in the textile sector.

Then, you know, recently they have also done something for the road and construction sector, where they are trying to ensure that all the arbitrations that are stuck between constructions firms and the government do not hold the construction firms back.

So there are a few good things which are happening, but it’s just that the problem is so deep that you need some deep fundamental reform, which is not happening.

Rahul Goel: And I think that sort of sums it up, in some sense, because the problems are real and the efforts are sort of just half steps. By now India should have been dealing with these. And we won’t know.

And like Bill says, these things are long term trends.

You have been saying it’s a long term trend. To turn it around requires a lot of focus, energy, effort, and money.

In short, so many things are required.

Vivek Kaul: Smart thinking.

Rahul Goel: Yes, smart thinking.

And as of now we are sort of trying a little bit here, a little there, and from what it appears, if you had to err on the side of the caution, you would err on the side of trying to prepare and not badger the government reign…Government usually don't win in any case.

Vivek Kaul: You know one interesting point that came into my head was that now there is a new education policy that is on the unveil, and the 43-page document I recently read makes some points about it. But I don't see any major breakthrough in it, which would essentially tackle the main problem of learning outcomes.

Rahul Goel: Yeah, just another proof, right? I think it’s too much to bet on the government. You shouldn't be betting on the government a lot.

Vivek Kaul: Yeah. I mean it was as if, if the document was saying, you know, or trying to tell us where the problem was with zero effort with explanation or analysis...

Rahul Goel: So blatant denial.

So I think, you know, in the Vivek Kaul Letter, you are dealing with issues that people are not even talking about: the real issues, the big issues; and its fantastic that you're dealing with them, because, at least for the few thousand that have come on board already…a window is open for preparation for what could potentially be a problem in the years, decades to come.

And when you're looking at long term…thinking of your child's future, you're thinking of your families, intergenerational wealth, these are the things that are very, very important.

So on that sober note, if you will, any last words you would like to say to the listeners.

Vivek Kaul: The last words. Famous last words; yeah, I mean, buy the Vivek Kaul Letter. Yeah.

Rahul Goel: So there is the endorsement from the man himself, Subscribe to the letter. And the Vivek Kaul letter is, of course, something that we all strongly believe and read, and love; and, you know, the beauty of it is that you can try it before committing to a long term subscription.

So Vivek, thank you very much for taking time out and having this discussion.

We hope to do a lot more with you on this, and we look forward to having you over at the Equitymaster Conference in January.

Rahul Goel: The 21st January 2017 conference, maybe to talk about this; and we'll see how these problems have evolved since then.

Vivek Kaul: Sure.

Rahul Goel: So thank you very much.

Vivek Kaul: My pleasure.

Rahul Goel:

If you haven't sent for Hormegeddon and the Vivek Kaul Letter yet, I urge you to do so now.

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It provides a backup evidence and research of what we've been talking about.

And as I have made light of before, Bill and Vivek are not economists who are paid to look the other way, and they're not big government.

So I am determined to get the story out there while there is still time.

That's why I created this presentation, because if India continues on this trajectory, as I believe it will, I would never forgive myself for not warning you.

Bill, of course, feels the same.

That’s why they are making such a generous offer, and placing these resources in your hands for almost nothing.

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