Sunday, July 4, 2010

Future, tense..?

Sri V Anantha Nageswaran in his article "Can Asians exhale?" (Mint, June 14, 2010) says that a news item in The Times of India on the relentless rise in apartment prices in Mumbai caught his attention. The asking price for a 620 sq. ft apartment was around Rs44 lakh.  While buyers are turning away, the developers do not appear to be deterred. 

The price rise is unreasonable.  In a place like Bombay (or Mumbai, to be politically correct), the rise is spectacular.  People who bought flats in the range of Rs.15-20 lakh 4 to 5 years back are getting offers of Rs.80 to 100 lakh.  In an earlier flat where we stayed (on rent), after the owner promised that we can stay for as long as we want, within 6 months, we had real estate agents swarming the place as there was change of heart of the owner.  The offers he was getting was very good though the housing complex (where our flat was located) was considered as part of the forest land and it was anybody's guess about the final decision in the matter.  After months of uncertainty, we finally shifted to another flat, wherein again after 6 months, we ended up with same uncertainty, as the flat came up for sale.  

Today people are getting offers, which have no basis or economic rationale.  After twenty years of working, I ventured into buying a flat and that too with trepidation.  We are taking a huge risk with a long term commitment.  The key assumption is that our jobs would be intact - our companies would grow - our salaries would go up etc.  We are living in an uncertain world and these assumptions, age has taught me, is pretty dangerous.  Today, too many youngsters are in the job market and they have never seen a downturn / recession.  That's why I feel too many young people are out to buy flats... even if its only for investment.  Maybe the growth in the economy in the last few years, has made corporates loosen their purse strings.  Too many young people make money too quickly and they don't know what to do with that money.  As they have seen that the prices of flats have gone up (in the recent past) they believe that it will go up in similar fashion in the coming years and end up buying flats at whatever be the price.  The situation is unsustainable.  Often I hear people say that it is better to buy flat now, as it will be too late tomorrow.  Here again, people make the assumption that the rosy job / salary / income situation would continue in the future for an indefinite period.  Only time will tell, if such an assumption is correct.

Anantha Nageswaran says -  
.. a combination of interest rate increases, currency appreciation, capital controls, anti-speculative measures targeted at specific sectors and moral suasion with the financial sector and with the public have to form part of the policy response in Asia.
... the overheating is also being fanned due to the pursuit of short-term economic growth as an end-goal in itself. Asia is still anxious to catch up fast and to compress the two or more centuries that Western nations took to achieve their current status into a generation. That is neither desirable nor feasible. There is needless insecurity and breathless activity, consequently. The social, environmental and geopolitical costs of such a pursuit are eluding their grasp.
The point is that no one wants to rock a boat when it apparently is sailing smoothly.  Who will bell the cat?  Politicians, media, banks ... everyone seems to have a vested interest in not rocking the boat.  Why fix something that isn't broke?  That seems to be the thinking.  I only wish it doesn't become a tsunami in future and wipe off all the hard work of the past.  The inflation that is raging on every single item of day-to-day use has to be seen to be believed.  But it doesn't pinch the politicians.  It doesn't pinch the government employees, as they have something like Dearness Allowance, to take care of price rise.  What about the employees from the private sector and the unorganised sector who work for fixed salaries (or CTCs)?  Who talks about them, now-a-days?

As China is growing at 10+% for decades, Indian politicians feel it will be below our dignity if the growth rate goes down a bit and so loose money policy will continue.  In the process, we lose our fight against inflation and impose a cruel tax on the poor.  I am increasingly worried about the future.  Sensex may go wherever it wants.  It doesn't matter to me.  For the common man, it is important to know whether he/she would be able to service large loans taken for housing purposes over 15 to 20 year periods?  I think, today no one is thinking about that.  Everyone feels that the prices of flats would only go up and in case of emergency situation, they can always sell the flat and get out.  In the event of a worse case situation emerging, can everyone get out at the same time?  Will not the prices crash in that case?  Who will service the EMI in such an event?  How will banks manage a tsunami of defaults?  Do they have a macro model where such events are taken cognizance of?  I am not sure. 

Anantha Nageswaran quotes George Akerlof and Robert Shiller for their excellent description of overheating (page 65 of their book Animal Spirits) -
The term overheated economy, as we shall use it, refers to a situation in which confidence has gone beyond normal bounds, in which an increasing fraction of people have lost their normal scepticism about the economic outlook and are ready to believe stories about a new economic boom. It is a time when careless spending by consumers is the norm and when bad real investments are made, with the initiators of those investments merely hoping that others will buy them out, not feeling independently confident that the underlying real investment is sound. It is a time when corruption and bad faith run high, since they rely on trusting behaviour on the part of the public and of apathetic government regulators. This corruption, however, is mostly recognized publicly only after the fact, when the euphoria has ended. It is often also a time when people feel social pressure to consumer at a high level because they see everyone else doing so, do not want to be seen as laggards, and do not worry about such high levels of consumption because they feel that others don’t either.
To me, this definition would definitely hold good in the Indian scenerio and that makes the future... tense.  

Sri Ashoak Upadhyay in his biting article "False optimism, empty promises" (Business Line, June 28, 2010) points out the policy makers have been endlessly dishing out a rosy perception of the future to those who want to hear it endlessly. For the rest, the miseries of inflation and poor infrastructure are here to stay. 

Sri Upadhyay says -
But the policy player seems to have advanced a step. The only way to connect India with modern infrastructure is to fill the funds gap — itself an endless incantation — with capital from the advanced markets that have it.
So the critical problem affecting the the Indian economy is both capital and the institutional mechanism to ensure its smooth flow into the sector. That sounds familiar, too.
So do a raft of assurances on everything that is wrong with India. Consumer prices have been riding high since mid-2008 — in their endless round of increases — and policymakers have never tired of assuring the nation, on television, in print, that their reversal is just round the corner.
How, one asks; what is the Ministry of Agriculture going to do? Crack the whip on hoarders? Boost farm productivity? Everyone is betting on rain, it appears. Last year the drought spoilt the kharif crop; then it was said the rabi would do the trick.
In April when prices soared (and even the Wholesale Price Index, or headline inflation defied North Block) policy players, from the advisor to the Finance Ministry to the Prime Minster himself, rushed to assure us that by year's end, December 2009 that is, prices would drop.
The Reserve Bank of India, for its part, magisterially pronounced its own time-table for deliverance —next March.
Even as policy makers repeatedly assured that inflation would go down, it has defied control.  It has not stopped policy makers from making one promise after another, as if to show that they are in control of the situation.  This graphic from Mint (June 22, 2010) throws light on this issue.

Somewhere down the line, we seem to have lost control over inflation.  Policy makers are caught between showing "better growth rates" so that capital markets don't tank and lower prices expected by the masses.  Today, elections are not there.  Thus, policy makers may think, that the masses can wait and may feel that keeping the capital markets happy is of paramount importance. Policy makers keep making announcements about how inflation is getting controlled or when it will be fully under control.  The media is swallowing and vomitting the policy makers' versions.  The inflation tiger has run away carrying the common man (and woman) in its mouth and the policy makers don't know how to get out of their growth tiger without getting hurt.  There is no satisfaction in knowing that other countries too are facing the same situation.  If I am hungry, I should have food to eat.  Knowing that ten others are also without food, is no satisfaction for me.  It is not going to satisfy my hunger.

Aparajita Sinha & Chandni Gupta point out in Mint (June 22, 2010) that there are indications that inflation is recently spilling over into the manufactured products sector. The big question then: Is the worst behind or ahead of us?  If the capabilities and intentions of the policy makers are any indication, our worst is yet to come.  Too many people are going to get hurt when the growth machine comes to an abrupt halt.  To me, future is uncertain and it definitely looks tense.