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| Arvind Singhal: The denial of reality | |
| MARKETMIND | | Arvind Singhal / New Delhi November 20, 2008, 0:38 IST | |
There is no sign of let-up in the economic turbulence all around us. While there is, finally, some realization within the PMO and the key economic ministries that India is not insulated from the global economy and that serious measures have to be undertaken to prevent the Indian economy from melting down too, it is surprising to observe the response of corporate India to this situation.
As if on cue from the USA where there is an increasing clamour for more government bailouts, many in the Indian private sector have started to make similar noises. Of all those who have been the most vocal in seeking government support, subsidy and protectionism, the case being put up by the realty sector is the most disturbing. When the recent economic boom started in 2003, land prices in posh Delhi localities ranged from Rs 40,000 to Rs 60,000 per square yard. Builders’ flats in Gurgaon for middle-income customers were being offered for booking at Rs 2,200-2,500 per square foot, while premium residential developments in South Mumbai came to market at Rs 4,000 per square foot. Office rentals in Gurgaon were at Rs 30-35 per square foot per month while in Mumbai, they hovered around Rs 100 or so. In April 2008, the same prices respectively had shot up to Rs 400,000 per square yard, Rs 6,000 and Rs 28,000 per square foot, and Rs 120 and Rs 400 per square foot per month. While this increase, ranging from 300 per cent to 1,000 per cent, put many Indian developers on the Forbes list of billionaires, it also resulted in the destruction of the primary demand for residential and commercial property from actual users since it became unaffordable and unviable, and brought only speculators to the market. In this situation, the noise from the real estate sector exhorting the government to facilitate reduction in the home loan rates is nothing but a denial of the reality that unless the property prices are scaled back to 2003 (or even 2005) levels — making them affordable/commercially viable for actual users once again — the realty sector will not see a boom again irrespective of the lending rates.
Similar data can be presented for many other sectors. Commodities like steel and cement have seen an increase of 100 per cent to 300 per cent in the price levels between 2003 and 2008. The civil aviation sector has — for its own mistakes and irrational exuberance — tried to make up for mounting losses by irresponsible fare increases to a point where even the most financially stable businesses have put restrictions on corporate travel. The sector cannot make up for the losses of the last many years by overpricing the seats in the face of rapidly declining load factors. Till 2006, the business traveler was able to buy corporate coupon booklets at about Rs 5,000 and Rs 8,000 per coupon for economy and business class, respectively. While the average fuel prices did go up by over 100 per cent in this period, fuel accounts for less than 30 per cent of the total operating expense, and hence, there is little justification to increase the fares from 100 per cent to 150 per cent in the same period. Hotels are no less guilty of similar short-sightedness and price-gauging mentality by resorting to twice-a-year increases, ranging from 25 per cent to 50 per cent, in room tariffs year-on-year for the last five years. And finally, many new-age fast-growing services sectors such as IT, ITES, retail, banking and finance, and insurance have inadvertently contributed to their own problems by resorting to unbridled expansion at very high operating costs — by contributing to unsustainable salary and wages inflation, and accepting other unrealistic operating cost elements such as the cost of space.
The solution to the challenge that corporate India (and the rest of India) faces today is not so complex since there is yet no systemic destruction of core economic principles, as is being witnessed in the USA and elsewhere. The Indian business leadership should start by getting rid of any obsession with market cap creation, and instead, go back to the very basic principles of making good-quality affordable products and services that relate to the purchasing power of the majority of Indians. Similarly, an obsession with growth at any cost has to give way to growth based on sound business fundamentals where all input cost elements are correctly aligned. And finally, instead of seeking subsidies and bailout packages, corporate India should put pressure on the government to undertake policy changes in order to make input costs lower and access to capital easier. For instance, reforms in the real estate sector, including substantially higher FSI, will create a bigger and more sustainable win-win for customers and developers. More liberal FDI policy in sectors like civil aviation, retail and financial services will provide more growth impetus to the economy than mere reduction in interest rates. Reduction in effective corporate tax rate by the elimination of various surcharges and dividend distribution tax will easily spur the capital markets again. Therefore, corporate India and the government should work on strengthening the growth driver fundamentals of the economy rather than seeking sops and promises from each other.
arvind.singhal@technopak.com
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