Chanakya Volume I Issue VII

8/14/2019 Chanakya Volume I Issue VII

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Home Loan to GDP

Does it make any

sense

1

Logistic Cost a drag

on Indian PortCompetitiveness

2

Port Snippets 2

SEZs as key to

prosperity

3

Economic Snippets 4

Team Chanakya 4

Newsletter Date

ChanakyaMarg Constructions Ltd

Newsletter DateNewsletter DateStrategic Planning Department Volume I Issue VII

In this issue:

Home Loan to GDP Does it make any sense?

Increasing home loan rates have strengthened the

interest pay out on loans. Today, a borrower taking

home loan of Rs 10 lakh with tenure of 20 years will

require spending Rs 39,000 more every year on

equated monthly installments. Loans up to Rs 20 lak

form 80%.

According to the data showcased by Assocham, the

home loan GDP ratio should go double in the budge

proposals for 2008-09. Outlined below are the

observations made by the authority regarding home

loan scenario in India

Buying a home is certainly the biggest investment

decision any individual makes. This underlines a need

for a strong GDP ratio.

High interest rates on home loans along with

increasing property prices have largely affected

buyers affordability. Still, the demand for home loan

continue to persist and will become stronger in near

future

Of the total home loans and 90% borrowers are firs

time buyers.

There is a shortage of 19.4 million housing units in

India. Off this, 6.7 million is earmarked for urban

es it does. Despite Indian Real

Estate undergoing a paradigm shift, Indias

home loan to GDP ratio is stuck to a

paltry 5% compared to around 30-35%

for the developed economies like, UK

and US.

Interest rates on home loan have sharply

risen from 7% in 2003 to 12% in 2007,

with its impact being felt across the board

including genuine home buyers, industry

watchers, builders, and bankers.

whereas the remaining 12.7 million is

in rural India.

Indian middle class has grown by 10

times to 583 million people, which is

likely to drive the real estate growth

to unprecedented levels.

The demand for residential property

would increase to 45 million by 2012.

Y


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When China wanted to experiment with economicliberalization, it decided to set up four special economiczones (SEZs), referred to as "laboratories" for testing outthe economic model, in 1979. China reaped large benefitsfrom the laboratories and attracted large chunks of foreigndirect investment (FDI).

India, despite having been much more advanced and liberalin its economic outlookvis--vis China, is only now adoptingthe SEZ model. Thankfully, the initiative to increase publicexpenditure for infrastructural development resulted inturning the cycle of economy, proving the merit ofKeynesian model.

Of the four laboratories set up in China, Shenzhen wassuccessful. Korea achieved success from Masan between1974 and 1979, though the growth was followed by aflattening curve.

Historically, SEZs have resulted in spurts of economic

growth, which then flatten out to normal levels with time,save some exceptions like Shenzhen. In fact, experiments byRussia and North Korea have not resulted in anythingexciting in terms of propelling economic growth. However,this failure is more to do with policy framework rather thanthe concept itself.

Shenzhen's development story has spanned over twodecades; today it is a modern city of four million people(from a population base of 20,000) with per capita incomeof US$ 4000. The process of development passed through

periods of modest growth, and the continuous focuson revising strategies to achieve the targets is one ofthe key reasons for its success.

The local administrative authority of Shenzhenpromoted industries with advanced technology andattracted the attention of well-known global

companies. Their constant focus on improving highervalue addition through investments into the regionresulted in establishing sizeable and significantcapacities. For instance, today Shenzhen producesmore than 10 per cent of world production forcertain category of products. The local authoritiescontinuously offered incentives, provided facilitiesand improved the infrastructure to attract investors.

India has notified 142 SEZs; the number may go up to300. On the contrary, one Shenzhen can bring IndiaFDI in excess of $20 billion with per capita incometouching $5,000. This means India can become debt-

free, with surpluses on its balance of payments in 5years.

From the uniqueness of business advantage point ofview, accessibility to inexpensive human resourceswould be a key advantage for a global player wantingto shift capacities to an Indian SEZ. However, interms of technology, except in IT, SEZs would haveto depend on imports, like Shenzhen, which, as astrategy, ensured high-value-added technologiesspace in the SEZ. The regulatory guidelines haveincidentally not addressed any such aspect and thismay lead to SEZs becoming logistics hubs rather than

real value-creators resulting in a incrementally highergross domestic product.

The role of local authorities managing the SEZbecomes one of the key aspects for attaining success.As per the SEZ Act, a public limited company wouldbe floated to act as the SEZ Authority for specifiedareas, with the Development Commissioner as oneof the members of the board. Although theconstitution of SEZ Authorities would be identical,the level of efficient functioning of these bodieswould become a crucial benchmark in the success orfailure of the SEZ.

Shenzhen has become a model to a number ofeconomists and politicians. The policy of SEZs willearn dividends if we are successful in creating at leastone Shenzhen. However, this requires focus andconcentration of energies. Certainly, SEZ is not theonly route to achieving superlative economic growth,as perceived by many sections of the society. Thereare a number of risk factors associated with thebusiness model and the probable factors for successor failure of SEZs in India as well. Lets hope wedont go the way of Russia and North Korea.

SEZs as key to Prosperity


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Indicator 15 Sep 2007 15 Aug 2007

Bank Credit 22.6 23.7

Deposits 24.4 24.9

Money Supply 21.7 21.6

Forex

Reserves (US$

Billions)

232.18 225.40

Inflation 4.41% 4.36%

Home Loan

Rate

11% 11.25%

IIP 9.7 10.8

Forex Rate 39.70 40.96

The fall in the credit growth is giving sleepless nights to

the bankers. If this is not enough the rise in the deposit

rate is aggravating the grief of many bankers.

SBI to capture the lost ground in deposits is refusing to

bring down the interest on deposit. In the last IBA meeting

as well, SBI has clearly stated that the deposit rates wouldbe unchanged for some time to come.

Unlike many private banks the corporate credit for SBI and

the 20% fall in the real estate offtake of non-farm credit

has not affected it much like many other banks like HDFC

and ICICI.

Having said that the fall in the overall credit growth is a

cause for concern for the macroeconomic fundamentals.

Falling IIP, widening credit deposit ratio and a falling

inflation are a perfect recipe for a banking collapse.

How will it affect the real estate sector? In the retail

credit, which is around 32% of the total credit Home loans

constitute around 85%. This has seen a greatest fall of

around 20% and so the retail credit has come crashing

down.

In the other commercial and industrial credit, banks are

facing two pronged punches.

One from the RBI, which has increased the risk weight age

of real estate investment and real estate collaterals. The

second is the falling industrial production. With the highinterest rate the industry is shying away from taking credit.

The combination of both has helped in the increasing CD

ratio for the banks which will result in the lower

profitability.

Is this situation likely to continue? The answer would be

anybodys guess. It all depends on how RBI wants to view

it. If RBI wants growth it has to reduce the interest rate, if it

wants safety from inflation then they have to sacrifice

growth.

With both the measures, real estate sector is not going the

get respite at least for some time to come. As banks are

being discouraged to lower their real estate mix in their

loan portfolio with the increased risk weigtage and literally

the ECB and other credits are closed for real estate, tough

time ahead for the sector.

Economic Snippets

Mr. Subramanyam Mutnuru

Head Strategic Planning

Mr. D Joel K Pandian

DGM- Strategic Planning

Mr. Sheetal Shah

Asst. Manager Strategic Planning

Mr. Anup Choudhry

Asst. Manager Strategic Planning

Mr. Manish

Management Trainee

Ms Gayathri N

Executive Secretary

Team Chanakya

Documents

Chanakya Volume I Issue VII