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Is India not an economic miracle?

December 6, 2006

Peter Foster, a foreign correspondent of The Telegraph, UK, has reteriated what a recent issue of The Economist had said – that India is ‘Too Hot to Handle’. But then The Economist is quite prejuduced about India (it opposed the nuclear deal). I don’t even want to go into what The Economist has said here because I feel the magazine has a blinkered view of India and many know it. Let’s see what Peter has said, a journalist who tells ‘the story of emerging India.’ He believes that ‘investor confidence (both foreign and Indian)’ does not match ‘with some of the ground the realities’ in India. One of the points he makes is about infrastructure, which he feels is just not good enough.

True, India’s infrastructure is developing very slowly. To western eyes this seems shocking because they keep comparing us to China. But China is not a democracy and a lot of things happening there are happening due to sheer ‘force.’ On the other hand, India is building infrastructure at her own pace and though we crib and complain, most of us acknowledge that life has improved. If we don’t complain enough it is perhaps because we are used to traffic jams and power cuts. Complacency is becoming a problem.
Changes need to happen, yes. India needs to get proper infrastructure in place and this will happen. It’s already happening. And those who are patient will be ahead in the race.
Peter also mentions that the Indian economy is ‘a bit toppy.’ He gives an example:

An Indian acquaintance of mine who is selling up her flat in the UK to move out and live with her husband and baby in Delhi for good. She’s considering investing in the Delhi housing market, which led to a discussion about the relative values of property in Delhi and London. London prices, as any recent first-time buyer will tell you, are mad but Delhi’s are in many respects madder still. The price of good residential property in Delhi has more than doubled in the last couple of years and continues to sky-rocket as lots of money chases too little property – the builders at the bottom of my garden notwithstanding. The result is a micro-bubble which is pushing prices into the la-la land. Another Indian friend reports looking at a house in the West End suburb of Delhi recently priced at 8 crore (80m) rupees, or nearly one million pounds. Now we’re not talking about a classic Lutyens Bungalow here but a normal, Indian concrete box with all attendant problems of intermittent electricity, dripping plumbing and fizzing electrics. I find myself unable to rationalize these prices – a million quid is still a good war chest in the London market, a city which, for all its faults and failings, offers a far higher quality of life than Delhi. How can a suburban house in Delhi – a city where it’s unbearably hot for six months of the year, a city with dengue fever and dangerously high levels of particulate pollution – be worth a million quid?

Well, one of the reasons for the crazy real estate prices is that real estate is still developing – the demand is higher than supply. And there is a lot of black money flowing – this aspect is usually neglected when it comes to real estate. The high level of corruption in India has given people a lot of extra cash to stash. Also the large number of Indians abroad are also prospering and they too invest in real estate in India. Many are doing so simply for the investment.

There are also some strict rent control laws in some places which again reduce the supply. It will all be rationalised in the long run. Those who are patient will reap the fruits.

14 Comments leave one →
  1. December 6, 2006 2:06 pm

    This is analogous to a kind of ‘irrational exuberance’ which is witnessed in the Stock markets. This would lead to burst in the bubble eventually. As long as the prices don’t reflect the real values of assets, the investors, especially the hard working ones will see a deterioration in their asset values.

  2. December 6, 2006 4:25 pm

    I agree with you Alex that one must not be irrationally exuberant.
    But to take your own analogy of the stock markets, even though the prices are going higher and it leads to instability and uncertainity, it’s those who stick around who are going to benefit. India is not a place where people can cash in their investments in the short term. The economy has not stablized that much. In the long term, yes, we are going to be an economic miracle. I think we should look at least more 5 years before we see some stability.
    China may seem more stable but that bubble is going to burst if democracy arrives. And one day it will.

  3. December 6, 2006 7:32 pm

    India itself is a miracle, not just on the economical front, but in every way πŸ™‚ It is a succesful anarchy, which bewilders westerners.
    India cannot be compared to anyone, not just China. There is a vast difference between China and India, based on the different principles of governance.
    As you clearly pointed out that in the long term India is clearly a winner as compared to China. China has the advantage of ‘law’ and ‘order’ imposed by the state, and that could well be one of the major drawbacks in its economy. In China any product is manufactured in millions of units looking to the international demand, overlooking the domestic demands.
    Whereas India allows any person with a little enterprise to do whatever he believes to be the opportunity and hence businessmen venture into all kinds of markets from the smallest domestic markets to the largest international markets. The only restriction is a man’s imagination.
    Further, I believe, that most of the money pumped into China is from Western investors and they may withdraw at any time, whenever they feel worried, and therefore this makes the market vulnerable.
    Whereas, India has its own internal financial support system. Especially business communities like Marwaris, Gujaratis and many others who have their own internal financial support system without depending on the government, where billions of rupees are lent on oral promises. It is unlikely that the Indian economy will collapse even without any support of West (infact it is western producer who seeks the Indian market, and in the past restrictions on India have been disadvantgeous to the American companies)
    One of the largest fears in China is about the growing disparity among the people on account of newly acquired wealth by a small section of the urban population. China, like India, is an integrated population of different races, but there is not as much harmony as in India, making civil war in China not far in reality.
    Clearly India is fundamentally a stronger economy than any other devloping country.

  4. suresh permalink
    December 14, 2006 7:54 pm

    Ok, basic questions about economics:
    Q: When will you pay more for some thing?
    A: When it has more ‘value’, which you can definitely feel. Q: What is the value you associate with real estate?
    A: When you have good returns[on investment] or you have an asset which does not fall like a rock. For any real estate, the key is location, location and location. All I can see now is the entire city is a location.. You have *ALL* the areas of the city rising. Doesn’t it sound a little weird? Sure, a rising tide lifts all boats – happens with any economy. But what after the tide? A lot of things to clean up.

    One more thing, being an Indian I cringe when some one says we are different. We are NOT. I am proud & happy to be an Indian but please don’t tell me we are different. I strongly suggest reading Jim Roger’s Adventure Capitalist book to understand that we are not different.. We are a ‘nation’ just for the last 50 years – added by sheer force. Throughout history, we have been squabbling amongst ourselves – Mughals, Ranas, Guptas, Chalukyas etc., Just check for ancient history of Tamilnadu and you will see that this southern most state was ruled by no less than 3 clans at any time!

  5. December 14, 2006 8:55 pm

    That’s true Suresh to some extent. We are far more similar to each other than to the others. Just by virtue of being together I guess. But I feel proud about the differences. Why not? It’s not a bad thing, being different. It’s a bad thing if we cannot tolerate the differences.
    Finally we are all humans and I think we are not that different from other human beings from other parts of the world either. What really bugs me is when foreigners feel that Indians are something really wierd or different…but we are just like them! As human as them!

  6. suresh permalink
    December 15, 2006 6:18 pm

    Nita.. we also feel the same when we saw foreigners for the first time. They were dressed in ‘weird’ clothing – according to us, who were dressed in dhoti/kurtas and wore turbans. πŸ™‚

    Anyway, that is bygone era now.. coming back to the topic, I am still challenged in real estate growth in India.. all over the country we have swarms of speculators buying up land and selling them for profit.. It has now percolated to lower levels, where common man has started speculating with his money. This clearly indicates we are near the end of the so-called ‘boom’. I vividly remember the conversation I had 6 years before – with one of my college mates. He said – “Yaar lets start a software company, a VC will invest in it & then we can sell it off”. With due respect to his enterprunership capabilities, I was actually shocked to hear about it.. The same dialogue plays in my mind when I talk to the real estate “investors”.

  7. December 15, 2006 8:02 pm

    I am not sure whether we have reached the end of the real estate boom. Ofcourse, I am not an expert. But I feel that with so much black money floating around and so many NRI’s coming back to India alongwith with many foreign companies…there are enough people to push up the prices.

  8. Ghalib Imtiyaz permalink
    December 23, 2006 7:09 am

    Comparisions shouldnt be drawn between London and Delhi’s property market. In the subcontinent people possess a different view about procuring a property. I am buying a property in Chittagong and i am happy to be paying 12 million BDT for it and some of my colleagues back in Sydney find my decision completely irrational and some tend to insinuate that
    a property in Chittagong doesnt deserve 12 million BDT. Well the most expensive suburb in Chittagong is Khulshi and prices there are starting from 18 million BDT. But considering that more than 6 million people live in Chittagong compared to Sydney’s 5 million the demand is definitely greater yet there are only few houses for sale.

    Most of these properties are definitely overpriced but there are only a few properties for sale so prices tend to sky rocket. I am not planning to sell my property unless i retire πŸ™‚ after 31 years.

  9. December 23, 2006 8:50 am

    Absolutely. It’s a question of supply and demand. Why don’t foreigners understand this I wonder. Could it be that they apply their own yardstick to all the countries in the world? If that is so, it is indeed sad. It shows a lack of understanding about other countries.

  10. January 28, 2007 2:36 am

    Prices will always go up in the subcontinent as long it does not reach a housing unaffordability crisis as is the case in Sydney.

    However one tends to ignore that in the west rate of home ownership is very high and few years ago 71% Australian had their own home however in the big cities of the subcontinent that rate should be very low thus the select few will always be looking to procure a property and thus property prices will definitely increase.

  11. Phantom permalink
    March 29, 2007 2:18 pm

    The rate of increase and nature of increase in the property mkt in India is all symtoatic of a bubble….asset prices rising at very high rates without much apparent reason. Brokers in the major cities often are unable to commit to price quotes from day to day as within the day itself increased demand could push up the price. Emperical and anecdotal data have shown that property prices have indeed multiplied over the past decade. Yes…..homeowners and investors are laughing all the way to thr bank. However, one has to realise that it is economically unfeasible for this rate of growth to carry on undaunted. Yes, salaries are also increasing, but as property prices keep rising, the EMI figures begin to form an increasing proportion of one’s income, thereby putting a squeeze on real disposable income. This will have the effect of reducing demand for property as people fidn that either their abnks are unwillling to lend against such a tight loan servicability or they will themsleves be wary of accumulating such a tight liability. For cash purchasers, a rapidly escalating property market will mean they have to pay a lot more for the property compared to what they could have paid just a short while ago. This too will gradually and eventually serve as a disincentive to buy at that price, therebyb reducing demand.

    Other factors that could affcet the market include interest rate movements which will directly impact on EMI payments, thereby directly impacting one’s disposable income. Secondly, the current rush to built new properties, appartments and townships will release increased supply of new homes into the market over th enext few years, and this will ease the supply demand relationship.

    Having said all this….the fact of the matter is….there is simply too much money floating around in the country…too much foreign $$$$s pouring in and a general attitude eof bullishness. Corporates with large cash reserves tend to be relatively price inelastic..and the high rates they pay for proeprties will fuel the growth in asset values.

    Unlike the equities stock mkt however, the property mkt will not crash immediately….as siumply put, it takes time to liquidate property assets, and owing to the huge glut of new owners/investors, there will a tendency to want to hold on to the property to at least break even.

    My gut feeling – the mkt will ocntinue to appreciate healthily, although we may not see the ridiculous rate of increase that we’ve seen of late. For a medium to long term investor, the prpspects are very very good, as simply put….India is denly populated, there is only so much land (esp in the cities) and far to many people, far too much economic activity. I also expect to see the property sector get more structures as we see increased incidence of loan dirven purchases. Legality will become more structured and we’ll see an entire industry related to the property sector developing (brokerage, property maanegemnt, valuation etc).

    but when a property price appreciates by say 10%, a mere 10% rise in salary is insufficient to maintain the same level of affordability. This is relevant to

    If a Rs 50 lakh property appreciates by 10%, that Rs 5 lakh.

  12. priyo permalink
    April 16, 2007 3:58 pm

    I strongly agree that the pace of growth is fabulous but the inflation concern is raising doubt about the projected growth rate of more than 9%.

    Even, Japan showed an excellent growth in economy but the international ‘external factors’ pulled it down to the growth rate of China and India emerged eventually.

    so let’s be positive but we are still far behind the size of Chinese economy.

  13. Bill permalink
    September 26, 2007 1:07 pm


    Please don’t be too sensitive to English journalists’ views about India and similar countries. They are poorly educated & trained compared to US journalists.

    Having said this India & China have a long way to go to catch up with the mainstream developed western countries. This is a historical process & needs historical time. Western countries were in a much worse condition than India & China in a comparable stage.

    We must learn from others whatever is good and shouldn’t be very defensive about our problems.

  14. September 26, 2007 2:00 pm

    Thanks for those encouraging words Bill. πŸ™‚

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