Chennai, March 4 The DLF group is planning invest Rs 1,200 crore in a residence project meant for the mid-income group near Siruseri on the Old Mahabalipuram Road, south of Chennai, the company’s Executive Director – Southern Region, Mr J Subrahmanian told journalists here today. The group has acquired 100 acres of land for this purpose, he said.
The project is one of the several that DLF is planning to put up near Chennai, the total value of which works out to around Rs 2,500 crore. While a few of the planned projects are yet to be taken up for implementation, a few others are underway. The biggest among them is the IT Park at Manapakkam in the city, where it is constructing 7.2 million sq ft of space. The project cost Rs 1,500 crore, of which Rs 450 crore is yet to be spent.
Mr Subrahmanian said that the first phase (2 million sq ft) was fully occupied. The company is giving finishing touches for the 2.5 million sq ft second phase, which is getting occupied. Construction has already begun for phase-3. The entire space is leased out. The going rate is about Rs 40 a sq ft a month. Hence the company earns Rs 8 crore a month from Phase-I.
The other projects are: a Rs 175 crore shopping mall on a property leased from the Madras Race Course, Guindy, by DLF Retail Developers Ltd, and three residential projects. One of them is a luxury apartment block in the city, at a cost of about Rs 500 crore. Another is a 2,500-unit bungalow-type project at Sriperumbudur, expected to be completed over the next 3-4 years. The third is a Rs 1,200 crore residential project for mid-income customers, for which DLF has acquired 100 acres of land. In addition to these, a joint venture of DLF and Hilton is planning to put up a Rs 150-crore, 300 room business hotel in the SIPCOT IT part at Siruseri, on the Old Mahabalipuram Road.
Saturday, March 7, 2009
Wednesday, March 4, 2009
RBI cuts rates again
RBI announced 50-basis-point cuts in repo and reverse repo rates. After the Reserve Bank of India announced a 50-basis-point cuts in repo and reverse repo rates on Wednesday, at least three public sector banks announced a reduction in lending and deposit rates. However, private sector banks such as ICICI Bank and HDFC Bank are yet to take any decision.
The banks that cut lending rates on Thursday include Bank of Baroda, Union Bank of India and United Bank of India. BoB and Union Bank of India lowered the prime lending rate by 50 basis points to 12 per cent with effect from April 1. The Kolkata-based United Bank of India cut the PLR to 12.5 per cent with effect from March 5. BoB also reduced deposit rates by 50-75 basis points, across various maturities. United Bank of India cut deposits rates by 25-50 basis points across various maturities effective March 6. Canara Bank said it will cut interest rates on home and vehicle loans. The bank will also cut deposit rates by 25-75 basis points with effect from March 11.
A lower PLR will lead to a cut in the rates for all loans, including home and auto finance. Naturally, real estate developers have welcomed this move of rates cut by RBI in the hope that home loan rates will come down further and demand will go up.
The banks that cut lending rates on Thursday include Bank of Baroda, Union Bank of India and United Bank of India. BoB and Union Bank of India lowered the prime lending rate by 50 basis points to 12 per cent with effect from April 1. The Kolkata-based United Bank of India cut the PLR to 12.5 per cent with effect from March 5. BoB also reduced deposit rates by 50-75 basis points, across various maturities. United Bank of India cut deposits rates by 25-50 basis points across various maturities effective March 6. Canara Bank said it will cut interest rates on home and vehicle loans. The bank will also cut deposit rates by 25-75 basis points with effect from March 11.
A lower PLR will lead to a cut in the rates for all loans, including home and auto finance. Naturally, real estate developers have welcomed this move of rates cut by RBI in the hope that home loan rates will come down further and demand will go up.
Monday, March 2, 2009
Deflation in Japan
Deflation in Japan started in the early 1990s. The Bank of Japan and the government tried to eliminate it by reducing interest rates, but this was unsuccessful for over a decade. In July 2006, the zero-rate policy was ended. There were several reasons for deflation in Japan which are explained below:
1. Bust of Asset price bubble: There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary.
2. Insolvent companies: During the boom time (1980s) Japanese banks lent aggressively to companies and individuals that invested in real estate. However, when real estate values dropped, people were not able to pay back these loans to banks. The banks tried to collect the collateral (land or properties), but this wouldn't pay off the loan because their prices had fallen significantly. Banks delayed their decision to foreclose these loans hoping asset prices would improve. These delays were also allowed by national banking regulators. This continuing process is known as maintaining an "unrealized loss", and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy. Improving bankruptcy law, land transfer law, and tax law were suggested by leading economists as methods to speed this process and thus end the deflation.
3. Insolvent banks: Japanese banks had a larger percentage of their loans as "non-performing" i.e. they were not receiving any interest payments on them, but have not yet written them off. With high non-performing loans or assets, they were unable to lend more money; thus, their earnings declined significantly and risk of insolvency increased many a fold.
4. Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods, raw materials (due to lower wages and fast growth in those countries). Thus, prices of imported products were decreasing with the rise of economy of scale in China. Domestic producers had to lower their prices in order to remain competitive. This decreasing in prices of domestic products over a period of time led to deflation.
5. Fear of insolvent banks: Japanese people were afraid that banks might collapse so they preferred to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in local bank accounts. Thus less money was available for lending and therefore economic growth. This meant that the savings rate depresses consumption, but did not appear in the economy in an efficient form to spur new investment.
Deflation alarms in the US?
With the fed fund rate at a historic low (0.00-0.25%), there is a growing fear of deflation in the US. Many economists believe that USA could face short term period of deflation. With the bust of housing bubble, acute shortage of credit and falling consumption, USA has more or less similar conditions that were prevalent in Japan in early 1990s. However, I believe there are some basic yet crucial differences.
Firstly, Japanese companies were far more dependent on commercial banks for financing than are today's U.S. multinationals, which have stockpiles of internal capital as well as broader access to capital markets. Moreover, US Treasuries are still considered as the safest investments in the world. This keeps the flow of money into the US economy.
Secondly, Bank of Japan’s exceptionally poor monetary policymaking was a big reason for the country's protracted problem. The central bank's failure to lower interest rates in the early 1990s ultimately drove the economy into a deflationary death spiral. They were just too slow and conservative to react to the situation. However, US Fed has been quite aggressive and proactive in taking sound monetary decisions and ensuring that they do not repeat those mistakes. In 1992, for example, amid negligible inflation and a comatose economy, the Bank of Japan's key interest rate was still nearly 4%. In contrast, after the tech bubble burst in the USA, the Fed quickly slashed its benchmark rate to 1 %. Also, the current fed rate is between 0.00-0.25%.
Thirdly, though both USA and Japan faced housing trouble and mortgage crisis, Japan's central bank was too slow to act. The country's banks hid their bad loans beneath opaque corporate structures rather than absorb the losses. But rather than write off the loans, Japanese banks extended additional credit to borrowers, allowing them to at least make minimal interest payments. Those made banks look healthier than they were, at the cost of impairing the flow of credit to new businesses. However, American banks have been forthcoming in absorbing the losses on their books and writing off loans. This has given fed a clear picture of true losses and subprime crisis in the economy.
Having said that I believe the US economy may bleed for some time and enter a period of deflation. However, that period would be short lived and not as prolonged as that of Japanese economy in 1990s. As per an estimate, avoiding a long period of deflation and recession might cost the US a staggering $3 Trillion.
Will India face deflation?
Let’s examine Indian economy vis-à-vis Japanese economy of 1990s. In the last five years BSE exchange went up from 5,000 to 21,000, an increase of 400% while real estate prices in Indian witnessed an increase of over 300%. This is phenomenal increase in prices and asset prices looked highly inflated. After the global financial crisis, Indian stock exchange plunged by over 60% and real estate values dropped by almost 30-40% in less than six months. Some welcomed this fall while majority believed Indian global dream is finally over. The mayhem still continues with stock prices and real estate prices further going down.
Compare this with that of Japan - In the five years before its 1989 peak, the Nikkei (Japanese stock exchange) stock average rose 275%. Property prices became so inflated that the tiny spit of land surrounding the Imperial Palace in central Tokyo was briefly worth more than the entire state of California. At the time, Japan's seemingly unstoppable rise inflamed fears among Americans that the United States had slipped into permanent economic inferiority. When the bubble finally busted in late 1989, stock and property prices nose-dived in tandem. In less than three years, the Nikkei stock average fell 63% from its peak of 38,916. It didn't hit bottom until April 2003 and a total decline of 80%. Do these two stories sound similar? Yeah they do!
Inflation figures for the last week was 3.92% which is far less than the peak rate of 12% less than six months back. Are we going into a period of negative inflation or deflation? We are currently in a state of disinflation which is a decreasing value of inflation as the inflation rate is still positive. However, this may lead to a situation where downward price movement continues and we enter a period of deflation. I believe this is highly unlikely because we are a growing economy with very young population. Moreover, we are not an export oriented economy and hence do not depend too much on external demand. Our economy is mostly driven by domestic demand and consumption, which is somewhat insulated from other countries and global events. We still have lot of room to maneuver our policies to regenerate demand and spending. Yet, with the growing globalization we too run a risk of deflation if our monetary and fiscal policies are not handled well.
How deflation can be avoided?
To counter deflation we have to revitalize our growth story, reignite demand and create confidence among people. Compare to the inflation rate, 3.92%, lending rates in India are still close to 10%, which is quite high. Unless lending rates do not come down people won’t buy properties, automobiles or other consumer goods. Moreover, corporate won’t be able to borrow money to launch new innovative projects, spend on infrastructure or build capacity. Thus, to create demand and investments, government as well as RBI has to bring down this lending rate by implementing ways to reduce cost of borrowing funds.
Hence, only monetary policy won’t be sufficient to tackle this menace; fiscal policy too has to play a significant role here. Government has to be more aggressive in implementing reforms and speeding up infrastructure spending. Let us hope better sense will prevail among our political class.
Deflation in Japan started in the early 1990s. The Bank of Japan and the government tried to eliminate it by reducing interest rates, but this was unsuccessful for over a decade. In July 2006, the zero-rate policy was ended. There were several reasons for deflation in Japan which are explained below:
1. Bust of Asset price bubble: There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary.
2. Insolvent companies: During the boom time (1980s) Japanese banks lent aggressively to companies and individuals that invested in real estate. However, when real estate values dropped, people were not able to pay back these loans to banks. The banks tried to collect the collateral (land or properties), but this wouldn't pay off the loan because their prices had fallen significantly. Banks delayed their decision to foreclose these loans hoping asset prices would improve. These delays were also allowed by national banking regulators. This continuing process is known as maintaining an "unrealized loss", and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy. Improving bankruptcy law, land transfer law, and tax law were suggested by leading economists as methods to speed this process and thus end the deflation.
3. Insolvent banks: Japanese banks had a larger percentage of their loans as "non-performing" i.e. they were not receiving any interest payments on them, but have not yet written them off. With high non-performing loans or assets, they were unable to lend more money; thus, their earnings declined significantly and risk of insolvency increased many a fold.
4. Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods, raw materials (due to lower wages and fast growth in those countries). Thus, prices of imported products were decreasing with the rise of economy of scale in China. Domestic producers had to lower their prices in order to remain competitive. This decreasing in prices of domestic products over a period of time led to deflation.
5. Fear of insolvent banks: Japanese people were afraid that banks might collapse so they preferred to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in local bank accounts. Thus less money was available for lending and therefore economic growth. This meant that the savings rate depresses consumption, but did not appear in the economy in an efficient form to spur new investment.
Deflation alarms in the US?
With the fed fund rate at a historic low (0.00-0.25%), there is a growing fear of deflation in the US. Many economists believe that USA could face short term period of deflation. With the bust of housing bubble, acute shortage of credit and falling consumption, USA has more or less similar conditions that were prevalent in Japan in early 1990s. However, I believe there are some basic yet crucial differences.
Firstly, Japanese companies were far more dependent on commercial banks for financing than are today's U.S. multinationals, which have stockpiles of internal capital as well as broader access to capital markets. Moreover, US Treasuries are still considered as the safest investments in the world. This keeps the flow of money into the US economy.
Secondly, Bank of Japan’s exceptionally poor monetary policymaking was a big reason for the country's protracted problem. The central bank's failure to lower interest rates in the early 1990s ultimately drove the economy into a deflationary death spiral. They were just too slow and conservative to react to the situation. However, US Fed has been quite aggressive and proactive in taking sound monetary decisions and ensuring that they do not repeat those mistakes. In 1992, for example, amid negligible inflation and a comatose economy, the Bank of Japan's key interest rate was still nearly 4%. In contrast, after the tech bubble burst in the USA, the Fed quickly slashed its benchmark rate to 1 %. Also, the current fed rate is between 0.00-0.25%.
Thirdly, though both USA and Japan faced housing trouble and mortgage crisis, Japan's central bank was too slow to act. The country's banks hid their bad loans beneath opaque corporate structures rather than absorb the losses. But rather than write off the loans, Japanese banks extended additional credit to borrowers, allowing them to at least make minimal interest payments. Those made banks look healthier than they were, at the cost of impairing the flow of credit to new businesses. However, American banks have been forthcoming in absorbing the losses on their books and writing off loans. This has given fed a clear picture of true losses and subprime crisis in the economy.
Having said that I believe the US economy may bleed for some time and enter a period of deflation. However, that period would be short lived and not as prolonged as that of Japanese economy in 1990s. As per an estimate, avoiding a long period of deflation and recession might cost the US a staggering $3 Trillion.
Will India face deflation?
Let’s examine Indian economy vis-à-vis Japanese economy of 1990s. In the last five years BSE exchange went up from 5,000 to 21,000, an increase of 400% while real estate prices in Indian witnessed an increase of over 300%. This is phenomenal increase in prices and asset prices looked highly inflated. After the global financial crisis, Indian stock exchange plunged by over 60% and real estate values dropped by almost 30-40% in less than six months. Some welcomed this fall while majority believed Indian global dream is finally over. The mayhem still continues with stock prices and real estate prices further going down.
Compare this with that of Japan - In the five years before its 1989 peak, the Nikkei (Japanese stock exchange) stock average rose 275%. Property prices became so inflated that the tiny spit of land surrounding the Imperial Palace in central Tokyo was briefly worth more than the entire state of California. At the time, Japan's seemingly unstoppable rise inflamed fears among Americans that the United States had slipped into permanent economic inferiority. When the bubble finally busted in late 1989, stock and property prices nose-dived in tandem. In less than three years, the Nikkei stock average fell 63% from its peak of 38,916. It didn't hit bottom until April 2003 and a total decline of 80%. Do these two stories sound similar? Yeah they do!
Inflation figures for the last week was 3.92% which is far less than the peak rate of 12% less than six months back. Are we going into a period of negative inflation or deflation? We are currently in a state of disinflation which is a decreasing value of inflation as the inflation rate is still positive. However, this may lead to a situation where downward price movement continues and we enter a period of deflation. I believe this is highly unlikely because we are a growing economy with very young population. Moreover, we are not an export oriented economy and hence do not depend too much on external demand. Our economy is mostly driven by domestic demand and consumption, which is somewhat insulated from other countries and global events. We still have lot of room to maneuver our policies to regenerate demand and spending. Yet, with the growing globalization we too run a risk of deflation if our monetary and fiscal policies are not handled well.
How deflation can be avoided?
To counter deflation we have to revitalize our growth story, reignite demand and create confidence among people. Compare to the inflation rate, 3.92%, lending rates in India are still close to 10%, which is quite high. Unless lending rates do not come down people won’t buy properties, automobiles or other consumer goods. Moreover, corporate won’t be able to borrow money to launch new innovative projects, spend on infrastructure or build capacity. Thus, to create demand and investments, government as well as RBI has to bring down this lending rate by implementing ways to reduce cost of borrowing funds.
Hence, only monetary policy won’t be sufficient to tackle this menace; fiscal policy too has to play a significant role here. Government has to be more aggressive in implementing reforms and speeding up infrastructure spending. Let us hope better sense will prevail among our political class.
Thursday, February 26, 2009
Are we going to face problems of deflation? Part 1
Since nothing is happening much on real estate front, I decided to take a look at things happening at broad macroeconomic level in India and elsewhere. The very first thing that struck me was falling inflation and fear of defaltion everywhere. Nowadays we keep on reading that global economies such as US and Europe will face severe problems of deflation due to recession. Fed fund rate in the US is between 0.00-0.25% or 25 bp (100 basis point = 1%). Inflation in these countries is close to 0. Even in India inflation is down from 12% last august to 3.5% last week. With the falling interest rates in India will we too face similar situation?
Deflation is a “sustained” fall in the general price level of goods and service below zero percent inflation. It results in an increase in the real value of money — a negative inflation rate. It is just opposite of inflation, which is the general increase in the price level of goods and services. When the inflation rate slows down (decreases, but remains positive), this is known as disinflation. Disinflation is a substantial drop in the rate of increase of the price level. Deflation should not be confused with temporarily falling prices; instead, it is a sustained fall in general prices.
Inflation destroys real value in money whereas Deflation creates real value in money.
Real Price ~ Nominal Price –Inflation
With the passage of time, the “real price” of any good or service is characterized by above equation. Hence, if it is positive inflation or normal inflation, real price decreases over a period of time. However, if inflation is negative i.e. deflation, real price increases with time. Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit.
Causes of deflation
1. Deflation is caused by the fall in aggregate level of demand i.e. there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral. (As we can currently see that buyers believe real estate prices will fall further, thus delaying their purchase decisions. This in turn has reduced the demand for the real estate properties which in turn has reduced the construction activities. Thus, general economic activities such as cement production etc are down.)
As demand and economic activity falls, investments fall as well because corporate do not want to invest in increasing capacity as there is no demand. This leads to further reduction in aggregate demand. This is the deflationary spiral i.e. a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price. An answer to falling aggregate demand is stimulus, either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand such as reducing interest rates or giving money to corporate or people at significantly lower rates.
2. In monetarist theory, deflation is related to a sustained reduction in the velocity of money (It is the average frequency with which a unit of money is spent in a specific period of time. Velocity affects the amount of economic activity associated with a given money supply) or number of transactions. This is attributed to a dramatic contraction of the money supply, perhaps in response to a falling exchange rate, or to adhere to a gold standard or other external monetary base requirement. In the present scenario it appears to be one of the prime reasons for growing fears of deflation.
3. Deflation also occurs when improvements in production efficiency lower the overall price of goods. Improvements in production efficiency generally happen because economic producers of goods and services are motivated by a promise of increased profit margins, resulting from the production improvements that they make. Competition in the marketplace often prompts those producers to apply at least some portion of these cost savings into reducing the asking price for their goods. When this happens, consumers pay less for those goods; and consequently deflation has occurred, since purchasing power has increased.
4. Deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of money going down and the supply of goods going up. Historic episodes of deflation have often been associated with the supply of goods going up (due to increased productivity) without an increase in the supply of money, or (as with the Great Depression and possibly Japan in the early 1990s) the demand for goods going down combined with a decrease in the money supply.
Indian scenario – Last few years we saw massive boom in all the sectors. There was huge demand for real estate properties, IT services, Cements, Food products etc. Our economy was growing in excess of 9% and mood was upbeat. Everybody thought this growth will continue forever. Hence, corporate invested heavily in building capacity, developers invested billions of dollars in launching new projects etc. Suddenly the boom busted due to financial crisis. People lost jobs, interest rates went up through the roof and demand plunged. There was a huge mismatch between supply (more) and demand(less). This led to price correction - real estate saw over 40% drop in prices, commodities went down by over 70% and so on. Moreover, due to global financial crisis, there is acute shortage of liquidity in the market and hence less flow of money in the economy. People are holding back to their investments as well as consumption; thus, reducing velocity of money. Does it sound like symptoms of deflation?
Effects of deflation
1. Deflation leads to decrease in prices of good and services, increasing value of money. While an increase in the purchasing power of one's money sounds beneficial, it can actually cause hardship when the majority of one's net worth is held in illiquid assets such as homes, land, and other forms of private property.
2. Deflation raises real wages, which are both difficult and costly for management to lower. Moreover, falling prices and demand discourages corporations from investing. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment.
3. Deflation often follows a period of nearly zero interest rates. When the central bank has lowered nominal interest rates all the way to zero, it can no longer further stimulate demand by lowering interest rates. This is the famous liquidity trap. When deflation takes hold, it requires "special arrangements" to "lend" money at a zero nominal rate of interest (which could still be a very high real rate of interest, due to the negative inflation rate) in order to (artificially) increase the money supply.
Why deflation is bad?
While shoppers see falling prices as a good sign, economists see it as a threat to the economy or nation. Deflation hurts the economy much more than inflation. In fact a small positive inflation is good for the economy because it suggests growing demand as well as healthy economy. However, in deflationary conditions consumers postpone expenditure, because they think prices will decrease further. This decreases demand in the economy which badly affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy.
I will spend some time to find out the infamous Japanese deflation and impending crisis in the US. Will be back soon.
Deflation is a “sustained” fall in the general price level of goods and service below zero percent inflation. It results in an increase in the real value of money — a negative inflation rate. It is just opposite of inflation, which is the general increase in the price level of goods and services. When the inflation rate slows down (decreases, but remains positive), this is known as disinflation. Disinflation is a substantial drop in the rate of increase of the price level. Deflation should not be confused with temporarily falling prices; instead, it is a sustained fall in general prices.
Inflation destroys real value in money whereas Deflation creates real value in money.
Real Price ~ Nominal Price –Inflation
With the passage of time, the “real price” of any good or service is characterized by above equation. Hence, if it is positive inflation or normal inflation, real price decreases over a period of time. However, if inflation is negative i.e. deflation, real price increases with time. Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit.
Causes of deflation
1. Deflation is caused by the fall in aggregate level of demand i.e. there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral. (As we can currently see that buyers believe real estate prices will fall further, thus delaying their purchase decisions. This in turn has reduced the demand for the real estate properties which in turn has reduced the construction activities. Thus, general economic activities such as cement production etc are down.)
As demand and economic activity falls, investments fall as well because corporate do not want to invest in increasing capacity as there is no demand. This leads to further reduction in aggregate demand. This is the deflationary spiral i.e. a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price. An answer to falling aggregate demand is stimulus, either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand such as reducing interest rates or giving money to corporate or people at significantly lower rates.
2. In monetarist theory, deflation is related to a sustained reduction in the velocity of money (It is the average frequency with which a unit of money is spent in a specific period of time. Velocity affects the amount of economic activity associated with a given money supply) or number of transactions. This is attributed to a dramatic contraction of the money supply, perhaps in response to a falling exchange rate, or to adhere to a gold standard or other external monetary base requirement. In the present scenario it appears to be one of the prime reasons for growing fears of deflation.
3. Deflation also occurs when improvements in production efficiency lower the overall price of goods. Improvements in production efficiency generally happen because economic producers of goods and services are motivated by a promise of increased profit margins, resulting from the production improvements that they make. Competition in the marketplace often prompts those producers to apply at least some portion of these cost savings into reducing the asking price for their goods. When this happens, consumers pay less for those goods; and consequently deflation has occurred, since purchasing power has increased.
4. Deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of money going down and the supply of goods going up. Historic episodes of deflation have often been associated with the supply of goods going up (due to increased productivity) without an increase in the supply of money, or (as with the Great Depression and possibly Japan in the early 1990s) the demand for goods going down combined with a decrease in the money supply.
Indian scenario – Last few years we saw massive boom in all the sectors. There was huge demand for real estate properties, IT services, Cements, Food products etc. Our economy was growing in excess of 9% and mood was upbeat. Everybody thought this growth will continue forever. Hence, corporate invested heavily in building capacity, developers invested billions of dollars in launching new projects etc. Suddenly the boom busted due to financial crisis. People lost jobs, interest rates went up through the roof and demand plunged. There was a huge mismatch between supply (more) and demand(less). This led to price correction - real estate saw over 40% drop in prices, commodities went down by over 70% and so on. Moreover, due to global financial crisis, there is acute shortage of liquidity in the market and hence less flow of money in the economy. People are holding back to their investments as well as consumption; thus, reducing velocity of money. Does it sound like symptoms of deflation?
Effects of deflation
1. Deflation leads to decrease in prices of good and services, increasing value of money. While an increase in the purchasing power of one's money sounds beneficial, it can actually cause hardship when the majority of one's net worth is held in illiquid assets such as homes, land, and other forms of private property.
2. Deflation raises real wages, which are both difficult and costly for management to lower. Moreover, falling prices and demand discourages corporations from investing. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment.
3. Deflation often follows a period of nearly zero interest rates. When the central bank has lowered nominal interest rates all the way to zero, it can no longer further stimulate demand by lowering interest rates. This is the famous liquidity trap. When deflation takes hold, it requires "special arrangements" to "lend" money at a zero nominal rate of interest (which could still be a very high real rate of interest, due to the negative inflation rate) in order to (artificially) increase the money supply.
Why deflation is bad?
While shoppers see falling prices as a good sign, economists see it as a threat to the economy or nation. Deflation hurts the economy much more than inflation. In fact a small positive inflation is good for the economy because it suggests growing demand as well as healthy economy. However, in deflationary conditions consumers postpone expenditure, because they think prices will decrease further. This decreases demand in the economy which badly affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy.
I will spend some time to find out the infamous Japanese deflation and impending crisis in the US. Will be back soon.
Thursday, February 5, 2009
Exemption from service tax on property sales
The real estate industry has some more news to cheer, as the Central Board of Excise and Customs has issued a circular stating that developers do not have to take up registration or pay service tax on property sales.
The clarification is a step in the right direction, said real estate developers. With banks making interest rates more attractive, construction costs coming down with the prices of steel and cement, and prices also becoming attractive, the timing of this circular is just perfect, they said.
“This decision would definitely benefit purchasers, as they were liable to pay 12.5 per cent tax on 33 per cent of the construction cost, which actually translates to 4.1 per cent of the cost of construction,” said Mr A. Balakrishna Hegde, Former President of Confederation of Real Estate Developers’ Associations of India CREDAI, Karnataka.
The clarification has come after the CREDAI representation to the board that some States insisted that real estate developers undergo registration under the Service Tax Act and pay service tax in respect of residential complex having more than 12 units under the “construction of complex” service. Welcoming the decision, Mr Hegde said: “Our stand has been vindicated.”
The clarification is a step in the right direction, said real estate developers. With banks making interest rates more attractive, construction costs coming down with the prices of steel and cement, and prices also becoming attractive, the timing of this circular is just perfect, they said.
“This decision would definitely benefit purchasers, as they were liable to pay 12.5 per cent tax on 33 per cent of the construction cost, which actually translates to 4.1 per cent of the cost of construction,” said Mr A. Balakrishna Hegde, Former President of Confederation of Real Estate Developers’ Associations of India CREDAI, Karnataka.
The clarification has come after the CREDAI representation to the board that some States insisted that real estate developers undergo registration under the Service Tax Act and pay service tax in respect of residential complex having more than 12 units under the “construction of complex” service. Welcoming the decision, Mr Hegde said: “Our stand has been vindicated.”
Sunday, February 1, 2009
Unitech to sell stake, raise $500 m
Unitech Ltd, India's second-largest real estate developer, is looking to raise about $350-500 million (up to Rs 2,500 crore) from a group of foreign investors, in a desperate bid to reduce its debt mountain of Rs 8,300 crore. The company is expected to raise the money by the end of March. Sanjay Chandra, managing director of Unitech, refused to comment. "We would not like to comment on market rumours and speculation".
The company's senior management team, led by founder Ramesh Chandra, is said to be in the tax haven of Cayman Islands in the Carribbean, negotiating the stake deal. Unitech promoters hold 74.56% stake in the company. Sources familiar with the development said the sale of stake is likely to be less than 14.99% so that it does not trigger an open offer.
On Monday, the company announced plans to raise long-term funds up to Rs 5,000 crore through issuance of further securities. Last year, during the boom time, Unitech had planned a qualified institutional placement (QIP) issue for which they had also conducted a roadshow in Mumbai. However, the attempt failed because the Unitech share price was hovering around Rs 650 at point, whereas the company was seeking Rs 750 per share.
Sources said Unitech may be planning a divestment along similar lines. "This may also be because the company's plan to raise about Rs 4,000 crore through distress sale hasn't met with success," said a sector analyst, who did not wish to be named.
"No one goes all the way to Cayman Islands to do a deal but if Chandra is in Cayman then it surely means he will come back with money," said the analyst.It is likely that the stake will be bought not by one but by a group of private equity investors. Earlier in November, Chandra had said Unitech would halve its Rs 8,300 crore debt within 5 to 7 months.
The company's senior management team, led by founder Ramesh Chandra, is said to be in the tax haven of Cayman Islands in the Carribbean, negotiating the stake deal. Unitech promoters hold 74.56% stake in the company. Sources familiar with the development said the sale of stake is likely to be less than 14.99% so that it does not trigger an open offer.
On Monday, the company announced plans to raise long-term funds up to Rs 5,000 crore through issuance of further securities. Last year, during the boom time, Unitech had planned a qualified institutional placement (QIP) issue for which they had also conducted a roadshow in Mumbai. However, the attempt failed because the Unitech share price was hovering around Rs 650 at point, whereas the company was seeking Rs 750 per share.
Sources said Unitech may be planning a divestment along similar lines. "This may also be because the company's plan to raise about Rs 4,000 crore through distress sale hasn't met with success," said a sector analyst, who did not wish to be named.
"No one goes all the way to Cayman Islands to do a deal but if Chandra is in Cayman then it surely means he will come back with money," said the analyst.It is likely that the stake will be bought not by one but by a group of private equity investors. Earlier in November, Chandra had said Unitech would halve its Rs 8,300 crore debt within 5 to 7 months.
Sunday, January 18, 2009
Cushman & Wakefield, Technopak in retail tie-up
Cushman & Wakefield, the retail real estate services provider, and Technopak, the management consulting firm in retail, have entered into a strategic alliance to establish an integrated platform of end-to-end retail services. The partnership is expected to enhance Cushman & Wakefield’s capabilities for its clients in the retail industry by providing access to Technopak’s retail strategy and consulting services, while enabling Technopak’s clients to access Cushman & Wakefield’s global platform of real estate market intelligence, management expertise and a broad range of real estate services.
The alliance would have over 500 dedicated talented professionals having diversified skill base in the retail industry with geographic reach across 100 cities in the country.
The alliance would have over 500 dedicated talented professionals having diversified skill base in the retail industry with geographic reach across 100 cities in the country.
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