EMI isn't the only thing hurting: real issue is overpriced realty

If our politicians get away with murder, it’s because we ask the wrong questions.

Let’s start with a middle class concern: high interest rates, where I can’t afford to buy a home. And if I have already bought one, I’m finished. This is the scary poser in an Indian Express headline of Monday: Is you child going to inherit your home loan?

This is the wrong way of looking at the issue. Our home loan EMIs are unaffordable not because interest rates have suddenly gone up (they have, but that’s not the main reason), but because the properties we bought were bought at inflated prices.

[caption id=“attachment_125390” align=“alignleft” width=“380” caption=“Our home loan EMIs are unaffordable not because interest rates have suddenly gone up but because the properties we bought were bought at inflated prices. AFP”] [/caption]

The question to ask is not why are rates so high, but why are property prices unaffordable? The answers are simple: politicians, builders and criminal elements are artificially restricting supplies of land and building permits to keep land values rising - since this is where they hold their own ill-gotten wealth in benami names. While there is a real shortage of urban land, the shortage is not of a magnitude where there is no urban property in Mumbai or Delhi available below Rs 1-2 crore. Realty prices can keep rising only where land is scarce.

In fact, high interest rates are forcing builders to lower prices and inventories of unsold properties. Despite the short-term pain of higher EMIs, the only way to hurt the land sharks is to reduce demand for property. It is also good for people if they don’t splurge on property they cannot afford. The people who are hurting with higher EMIs probably bought properties they couldn’t afford on the assumption that rates will keep falling or that incomes will keep rising. This is the bitter lesson of the last decade of high loan growth.

Next, let’s look at oil prices.

Mamata Banerjee has raised a shindig because she was not “consulted” on the petrol price hike. But Pranab Mukherjee punctured her bombast when he pointed out that she was party to the decision to decontrol petrol prices last year. So she had no need to be consulted on a matter in which even the government wasn’t quite consulted. It was a decision by the oil companies.

Even so, petrol users are asking why have petrol prices been raised so often, when international oil prices are stable or falling? It is the right question, but does not go deep enough. The surface answer is the rupee has depreciated.

The real question is: what is wrong with our energy policy that Indian prices rise when global prices fall? And what explains the huge price differential between petrol and diesel prices (Rs 73.81 and Rs 45.99 respectively in Mumbai)?

The answer is: we run both a high taxation and high subsidy scheme for petroleum products. In short, the government collects high taxes on petrol and diesel and then pays a part of it back to the oil marketing companies as subsidies for losses on diesel, LPG and kerosene. Currently, it is just collecting its duties and using the money to reduce its fiscal deficit. It is not paying the oil companies their subsidy dues. Hence they are forced to over-compensate by raising petrol prices frequently. FYI: 45 percent of the petrol price is tax.

This is asinine. If duties are equalised, and diesel prices raised, petrol and diesel would cost more or less the same. Only cooking gas and LPG would need to be subsidised.

In short, the problem is the lopsided energy pricing and duty structure, not arbitrary price increases.

Next, why is government unable to bring down inflation despite high interest rates, and despite a bumper harvest?

This is a good question, and you will get the stock answer that global commodity prices are part of the answer. Actually, the government is the main culprit here. It spent a lot of money in increasing rural incomes (NREGA, higher food procurement prices, farm loans write-offs, etc) in the run-up to the 2009 elections - and that’s a good thing - but it did not prepare for the increase in demand for food items beyond rice and cereals due to this high pumping of money into the rural economy. When people get higher incomes, they eat better food - like milk and eggs and protein-based diets. It is the prices of these food items that are keeping food inflation high.

This failure to control inflation when it was beginning to rise boosted inflationary expectations, and now almost all prices are elevated. The government’s failure to raise petroleum prices adequately between 2005 and 2010 resulted in a build-up of expectations that inflation is understated, and also boosted the budget deficit due to subsidies. A budget deficit is nothing but more printing of note. When lots of currency chases goods whose supplies are fixed, we get inflation. Now, with fears of another meltdown in Europe growing, foreign investors are averse to investing in emerging markets like India. This is making the rupee weak - making imported goods more expensive (as in oil).

Next, why is corruption all-pervasive?

The prime minister will tell you that it’s all about coalition politics, and the answer is partly right. But the right question to ask is: why is episodic corruption - a.k.a. the 2G and Commonwealth scams - so high?

The real answer is that corruption is high only in areas involving government and use of discretionary power - but no political party wants to tell you that.

With liberalisation, the avenues for making big money have shrunk as licensing and permits are gone. This means more money has to be made from the remaining scarce resource areas under governments control - land, spectrum, mispricing of petro-fuels (adulteration), et al.

As for the day-to-day corruption we see - at the passport and rationing offices and at the tax department - the truth is that more and more of these areas are getting computerised and we can deal with government without having to meet a babu who will seek a bribe. Bureaucrats try and delay these changes as much as possible. But the direction is clear: we are seeing reduced corruption in many more areas, but we still assume that things are worsening.