Tuesday, June 16, 2009
GDP to grow by 6.6% this fiscal, says CMIE
GDP to grow by 6.6% this fiscal, says CMIE
The Economic Times, June 16, 2009, Page 9
MUMBAI: Despite falling exports, the economy would grow by 6.6% this fiscal on the back of a strong domestic market and resilience, economic think-tank CMIE (Centre for Monitoring Indian Economy) said on Monday. However, the economy is likely to bounce back to the 9% growth path by 2010-11 when the impact of poor exports demand is overcome. “Growth during 2009-10 will be a combination of two very divergent stories...In 2009-10, real GDP will grow by a tepid 6.6%,” CMIE said in its monthly review of June. The divergence relate to the resilience and handsome growth of domestic markets and to the falling international demand that is adversely affecting India’s exports, trade, transport and export oriented industries.
Budget on July 6
Budget on July 6
The Hindu Business Line, June 16, 2009, Page1
The Budget session of Parliament opens on July 2.
The Finance Minister, Mr. Pranab Mukherjee, will present the General Budget for 2009-10 on July 6. The Railway Budget would be presented on July 3.
Sops for lending
Sops for lending
The Hindu Business Line, June 16, 2009, Page 8
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Tax concessions alone will not open the tap for bank finance. Facilitating land acquisition for core projects and curbing time and cost overruns are as important.
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As Budget time approaches, various stakeholders, hurt by economic cycles, urge tax concessions of one kind or another. Since September, when the current crisis first hit Indian shores, pleas for such tax relief have been aired by exporters and domestic producers trying to maintain not just profit margins but output in a falling market. So far, the government has responded fairly rationally by reducing excise taxes, a common demand of domestic manufacturers. Now banks are asking the policymaker for tax concessions for lending to infrastructure, one of the most critical sectors for the next phase of economic growth. How should North Block respond?
The most rational policy at this point of time, when the fiscal deficit has begun to skid out of control, would be to refuse. A pragmatic ploy, however, would be to agree to restore a tax sop for long-term lending to core projects so that banks are encouraged to get into the act. In 2007, tax benefits under the Income-Tax Act 1961 were withdrawn — a move that bankers feel served as a disincentive to lending for core projects. Although another provision allows 20 per cent of the interest to be tax-deductible, bankers would like the earlier provision restored. Bank lending over the decades has steadily increased as a proportion of total offtake but it has tended towards land transport. Also, a major portion of the lending has been focussed under Central priority lending schemes. But as a committee set up by the RBI recently noted, banks should contribute to project finance in the core sector. Banks have been constrained in such financing for several reasons, not the least of which is the project gestation, and the dangers of cost and time overruns that delay revenue and cash-flows and thus the bank’s options to start recovering its dues. But the biggest deterrent to banks may be the lack of clarity on key issues that builds risks into the initial phase of such projects; land acquisition for roads or any core projects, for that matter, could, and have, led to litigation and sometimes violent opposition that delay the completion of the projects.
Tax concessions alone will not open the tap for bank finance. Ensuring a hassle-free environment for land purchase and curbing time and cost overruns may prove to be as important.
Signs of a global recovery
Signs of a global recovery
The Hindu Business Line, June 16, 2009, Page 9
A world in recession since the end of 2007 is searching for signs that suggest the system is approaching the bottom of the downturn and is likely to experience a recovery. C. P. Chandrasekhar and Jayati Ghosh examine evidence that backs the view that we are near the end.
Finance Ministers of the G8, meeting at Lecce in Italy during the latter part of week ending June 14, were cautiously optimistic. The final communiqué noted that in the aftermath of efforts at financial stabilisation and fiscal stimulation “there are signs of stabilisation in our economies, including a recovery of stock markets, a decline in interest rate spreads, (and) improved business and consumer confidence”. But the ministers cautioned “the situ ation remains uncertain and significant risks remain to economic and financial stability”
Differing perceptions
There were two elements of the communiqué that pointed to a compromise between the differing perceptions of the US and the UK, on the one hand, and Germany and France, on the other, regarding the principal problems and tasks at hand. The first of these elements was the reference to the persistence of “significant risks” which was not there in the original draft of the communiqué, and was ostensibly inserted by those countries (UK and US) who feel that it is not yet time to decide that the recovery is here and the stimulus provided thus far has been adequate. Moreover, the mention of “encouraging figures in the manufacturing sector” that figured in the draft was dropped, since it went against the evidence that industrial production in the euro-zone area had fallen by 21 per cent in April, relative to the corresponding month of the previous year.
The second element of the communiqué of interest is that it pushes for going beyond thinking of recovery and formulating national level “exit strategies” “for unwinding the extraordinary policy measures taken to respond to the crisis.”
The reference here is to the huge budget deficits and high levels of public debt that many countries, especially the US, have accumulated in the wake of the bailouts and the stimulus packages they have put in place.
Though the US and the UK have played down this aspect of the discussions, there is clearly a difference in emphasis among the leading powers on where the world economy stands and what is the immediate priority in terms of action.
The difference hinges, quite clearly, on the extent to which different sections believe that the worst is over. The reason for uncertainty regarding a potential recovery is that the figures are yet to point to a definitive revival.
As of May 2009, nearly two years since the financial crisis broke and a year-and-a-half after the onset of the global recession, the economic scenario remains uncertain, if not bleak. The rate of unemployment in the US, which stood at less than 5 per cent in the first quarter of 2008, had risen to 8.1 per cent in the first quarter of 2009 (Chart 1) and is estimated to have touched 9.4 per cent in May 2009 — its highest rate for the last 26 years. This possibly explains US pessimism.
It is true that the unemployment rate in the European Union had also risen from 6.8 to 8.1 per cent between the first quarters of 2008 and 2009. But the higher base level may be making the problem appear less alarming to ruling governments there than in the US, influencing their perceptions.
Output growth too gives no cause for optimism. Quarter-on-quarter growth rates of US GDP (as measured relative to the corresponding quarter of the previous year) had declined sharply in the last quarter of 2008 and first quarter of 2009 across the G7. This decline was even sharper in the UK and the EU, than the US (Chart 2).
The crisis had clearly not gone away by the beginning of April, despite signs of recovery in the stock market. The disconcerting element is that this situation prevails despite huge infusion of funds by G7 governments. According to one estimate, the US Federal Reserve had by April 2009 offered about $12.7 trillion in guarantees and commitments to the US financial sector, and spent a little over $4 trillion in combating the crisis.
As a result, the federal deficit has risen to more than 12 per cent of GDP, frightening fiscal conservatives who predict the onset of stagflation. The big thrust seems to be over and the recovery is still not in sight. What it has possibly done, and even that is not certain, is prevent the recession from turning into a depression.
Tenuous evidence
Despite this evidence relating to the period till the last full quarter for which numbers are available, speculation that the downturn has bottomed out and the developed world is on the verge of recovery proliferates. This optimism is based on still tenuous evidence, including evidence that the rate of decline of economies is slowing.
The most important of these is that the monthly decline in employment in the US is down sharply. In May 2009, non-farm payroll employment fell by 345,000, which is around half the average monthly decline over the previous six months and well below the close to 750,000 fall in January this year.
Associated with this fall in monthly employment declines is a fall in new unemployment claims. Economist Robert Gordon of Northwestern University in the US, a respected analyst of growth and productivity trends in the US, has found that past recessions came to an end four to six week after new unemployment claims peaked, which they have now done. So he conjectures that the business cycle will find its trough in May or June.
While these developments are reassuring, we should view them in the light of the fact that the unemployment rate is at record levels and new unemployment claims are still above the figures they touched in the worst months of the last recession.
A second cause for optimism is that US producers may be reaching the phase of their inventory cycle where an increase in production is inevitable. By April, wholesale inventories had fallen for the eighth month running as firms cut back production to clear the excess inventories generated by falling demand. Having made those adjustments, it is argued, firms are now in a position where they would have to step up production, especially if demand begins to stabilise.
In other words, the argument is that since things are so bad, they can only get better. But the figures do not support even this position. Thus, after seven months of decline, inventories in April fell 1.4 per cent relative to the year before and 6.4 per cent relative to the corresponding month of the previous year. That was because sales fell by 0.4 per cent in April, led by automobiles and parts. Sales of durable goods too were down 1.9 per cent during the month and 23.4 per cent over the year.
The third potential cause for comfort is the sign that relative to previous months the decline in production is slowing. As Chart 3 shows the decline in GDP relative to the immediately preceding quarter, which was rising till the first quarter of 2009, seems to have bottomed out in the US and to a lesser extent in the EU.
What is more, this trend seems to be reflected even in the month-on-month annual growth rates of industrial production, with the rate of decline in April 2009 relative to the corresponding month of the previous year showing signs of reversing its hitherto continuous increase in the US, UK and EU (Chart 4).
While this third factor may be adequate reason for optimism for some, there are two reasons why we should not read too much into this data. To start with, even if the downturn is touching bottom in terms of the stabilisation of the rate of decline, the decline could persist and the economy could “bounce along the bottom” as some analysts reportedly speculate. That is, there is no “statistical” reason why a stable rate of decline should automatically lead to lower rates of decline and positive rates of growth in the coming months or quarters.
Further, it is unclear whether there would be adequate alternative stimuli to sustain the recovery when the effects of the already implemented fiscal stimulus wane. Governments could hold back on providing any fresh stimulus because of arguments of the kind espoused by conservative economists, representatives of the financial sector and even some European governments, which emphasise the dangers of inflation. If that happens, recovery would depend on the return of the consumer to the market.
But here too the prognosis is not all too happy. Fears generated by the recession and rising unemployment and the increased desire to save to make up for the decline in the values of accumulated housing and financial assets is encouraging savings even in the US.
Net worth of households
According to a recent estimated of the Federal Reserve, the net worth of US households had fallen 2.5 per cent or by $1,300 billion in just the first three months of 2009. This comes on top of the 18 per cent fall in the previous year which was the worst since the Fed began estimating household wealth in 1946. The net result is that household savings rates in the US are rising and consumer spending was falling in March and April this year.
In the event many still remain sceptical. Martin Feldstein has been quoted as saying that “it is possible but unlikely” that the recession is over. “I think it is a more likely scenario that we are seeing the favourable effects of the fiscal stimulus,” he reportedly said. “That, for a while, will offset the general diminished trend we have seen over the past two quarters, but it is a one-shot thing.” Put otherwise, there could be more bad news ahead.
The Hindu Business Line, June 16, 2009, Page 9
A world in recession since the end of 2007 is searching for signs that suggest the system is approaching the bottom of the downturn and is likely to experience a recovery. C. P. Chandrasekhar and Jayati Ghosh examine evidence that backs the view that we are near the end.
Finance Ministers of the G8, meeting at Lecce in Italy during the latter part of week ending June 14, were cautiously optimistic. The final communiqué noted that in the aftermath of efforts at financial stabilisation and fiscal stimulation “there are signs of stabilisation in our economies, including a recovery of stock markets, a decline in interest rate spreads, (and) improved business and consumer confidence”. But the ministers cautioned “the situ ation remains uncertain and significant risks remain to economic and financial stability”
Differing perceptions
There were two elements of the communiqué that pointed to a compromise between the differing perceptions of the US and the UK, on the one hand, and Germany and France, on the other, regarding the principal problems and tasks at hand. The first of these elements was the reference to the persistence of “significant risks” which was not there in the original draft of the communiqué, and was ostensibly inserted by those countries (UK and US) who feel that it is not yet time to decide that the recovery is here and the stimulus provided thus far has been adequate. Moreover, the mention of “encouraging figures in the manufacturing sector” that figured in the draft was dropped, since it went against the evidence that industrial production in the euro-zone area had fallen by 21 per cent in April, relative to the corresponding month of the previous year.
The second element of the communiqué of interest is that it pushes for going beyond thinking of recovery and formulating national level “exit strategies” “for unwinding the extraordinary policy measures taken to respond to the crisis.”
The reference here is to the huge budget deficits and high levels of public debt that many countries, especially the US, have accumulated in the wake of the bailouts and the stimulus packages they have put in place.
Though the US and the UK have played down this aspect of the discussions, there is clearly a difference in emphasis among the leading powers on where the world economy stands and what is the immediate priority in terms of action.
The difference hinges, quite clearly, on the extent to which different sections believe that the worst is over. The reason for uncertainty regarding a potential recovery is that the figures are yet to point to a definitive revival.
As of May 2009, nearly two years since the financial crisis broke and a year-and-a-half after the onset of the global recession, the economic scenario remains uncertain, if not bleak. The rate of unemployment in the US, which stood at less than 5 per cent in the first quarter of 2008, had risen to 8.1 per cent in the first quarter of 2009 (Chart 1) and is estimated to have touched 9.4 per cent in May 2009 — its highest rate for the last 26 years. This possibly explains US pessimism.
It is true that the unemployment rate in the European Union had also risen from 6.8 to 8.1 per cent between the first quarters of 2008 and 2009. But the higher base level may be making the problem appear less alarming to ruling governments there than in the US, influencing their perceptions.
Output growth too gives no cause for optimism. Quarter-on-quarter growth rates of US GDP (as measured relative to the corresponding quarter of the previous year) had declined sharply in the last quarter of 2008 and first quarter of 2009 across the G7. This decline was even sharper in the UK and the EU, than the US (Chart 2).
The crisis had clearly not gone away by the beginning of April, despite signs of recovery in the stock market. The disconcerting element is that this situation prevails despite huge infusion of funds by G7 governments. According to one estimate, the US Federal Reserve had by April 2009 offered about $12.7 trillion in guarantees and commitments to the US financial sector, and spent a little over $4 trillion in combating the crisis.
As a result, the federal deficit has risen to more than 12 per cent of GDP, frightening fiscal conservatives who predict the onset of stagflation. The big thrust seems to be over and the recovery is still not in sight. What it has possibly done, and even that is not certain, is prevent the recession from turning into a depression.
Tenuous evidence
Despite this evidence relating to the period till the last full quarter for which numbers are available, speculation that the downturn has bottomed out and the developed world is on the verge of recovery proliferates. This optimism is based on still tenuous evidence, including evidence that the rate of decline of economies is slowing.
The most important of these is that the monthly decline in employment in the US is down sharply. In May 2009, non-farm payroll employment fell by 345,000, which is around half the average monthly decline over the previous six months and well below the close to 750,000 fall in January this year.
Associated with this fall in monthly employment declines is a fall in new unemployment claims. Economist Robert Gordon of Northwestern University in the US, a respected analyst of growth and productivity trends in the US, has found that past recessions came to an end four to six week after new unemployment claims peaked, which they have now done. So he conjectures that the business cycle will find its trough in May or June.
While these developments are reassuring, we should view them in the light of the fact that the unemployment rate is at record levels and new unemployment claims are still above the figures they touched in the worst months of the last recession.
A second cause for optimism is that US producers may be reaching the phase of their inventory cycle where an increase in production is inevitable. By April, wholesale inventories had fallen for the eighth month running as firms cut back production to clear the excess inventories generated by falling demand. Having made those adjustments, it is argued, firms are now in a position where they would have to step up production, especially if demand begins to stabilise.
In other words, the argument is that since things are so bad, they can only get better. But the figures do not support even this position. Thus, after seven months of decline, inventories in April fell 1.4 per cent relative to the year before and 6.4 per cent relative to the corresponding month of the previous year. That was because sales fell by 0.4 per cent in April, led by automobiles and parts. Sales of durable goods too were down 1.9 per cent during the month and 23.4 per cent over the year.
The third potential cause for comfort is the sign that relative to previous months the decline in production is slowing. As Chart 3 shows the decline in GDP relative to the immediately preceding quarter, which was rising till the first quarter of 2009, seems to have bottomed out in the US and to a lesser extent in the EU.
What is more, this trend seems to be reflected even in the month-on-month annual growth rates of industrial production, with the rate of decline in April 2009 relative to the corresponding month of the previous year showing signs of reversing its hitherto continuous increase in the US, UK and EU (Chart 4).
While this third factor may be adequate reason for optimism for some, there are two reasons why we should not read too much into this data. To start with, even if the downturn is touching bottom in terms of the stabilisation of the rate of decline, the decline could persist and the economy could “bounce along the bottom” as some analysts reportedly speculate. That is, there is no “statistical” reason why a stable rate of decline should automatically lead to lower rates of decline and positive rates of growth in the coming months or quarters.
Further, it is unclear whether there would be adequate alternative stimuli to sustain the recovery when the effects of the already implemented fiscal stimulus wane. Governments could hold back on providing any fresh stimulus because of arguments of the kind espoused by conservative economists, representatives of the financial sector and even some European governments, which emphasise the dangers of inflation. If that happens, recovery would depend on the return of the consumer to the market.
But here too the prognosis is not all too happy. Fears generated by the recession and rising unemployment and the increased desire to save to make up for the decline in the values of accumulated housing and financial assets is encouraging savings even in the US.
Net worth of households
According to a recent estimated of the Federal Reserve, the net worth of US households had fallen 2.5 per cent or by $1,300 billion in just the first three months of 2009. This comes on top of the 18 per cent fall in the previous year which was the worst since the Fed began estimating household wealth in 1946. The net result is that household savings rates in the US are rising and consumer spending was falling in March and April this year.
In the event many still remain sceptical. Martin Feldstein has been quoted as saying that “it is possible but unlikely” that the recession is over. “I think it is a more likely scenario that we are seeing the favourable effects of the fiscal stimulus,” he reportedly said. “That, for a while, will offset the general diminished trend we have seen over the past two quarters, but it is a one-shot thing.” Put otherwise, there could be more bad news ahead.
Long-term fiscal strategy statement will help businesses plan operations for 3-4 years’
Long-term fiscal strategy statement will help businesses plan operations for 3-4 years’
The Hindu Business Line, June 16, 2009, Page 15
Our expectation is it should be an investment Budget. We need measures that would propel investments in the economy.
K. R. Srivats, New Delhi
It’s an idea whose time may have come. Whether it gets a new direct tax code or not, Corporate India certainly wants stability in tax policy, especially on the direct tax front. The need of the hour is a statement that would spell out the Centre’s tax policy, including the rates, for a three-four-year horizon, said Mr Chandrajit Banerjee, Director-General of the Confederation of Indian Industry, in an interview to Business Line.
Excerpts from the interview:
Why is manufacturing not doing well? Is it because of taxation?
I would say taxation is one of the reasons why manufacturing is not doing well. The tax administration is not based on trust. A simple and stable tax system along with a trust-based administration would help industry improve competitiveness and, at the same time, shore up revenues for the Revenue Department.
Why do we need stability in tax policy?
India needs a long-term fiscal strategy statement that would help businesses plan their operations for three-four- year horizon. We cannot go from Budget-to-Budget on the taxation aspect. Then there is also the issue of retrospective amendments to direct tax law. It always comes as a blow to industry and reduces its competitiveness. There is also no level-playing field for domestic industry.
So, what are the tax reform expectations from Budget 2009-10? A roadmap for GST…
Our expectation is it should be an investment Budget. We need measures that would propel investments in the economy. GST is definitely one reform that industry would benefit from. The Government is looking at dual-GST system. As industry, we favour a single, unified GST system across the country.
Does this mean you are opposed to a dual GST system?
No, you should not infer it that way. We are pushing for a single GST system. It is not that we will not accept dual GST system.
What are some of your pre-Budget suggestions that really need serious consideration from the Finance Minister?
I would say reintroduction of investment allowance. This is something that can give a boost to the economy.
Why has the CII suggested that the peak rate of Customs duty should be retained at 10 per cent? This seems a different approach compared to previous years.
Yes, we have suggested that peak rate should not be further lowered. In the current economic environment, domestic industry needs some protection.
Given the fiscal situation, do you think the government will revoke some of the excise exemptions and backward area development incentives?
I don’t think so. These incentives were given with a purpose. So long as they are being met, why should they be disturbed? The Government also has to do a fine balancing act keeping in view the social development aspects such as employment generation, etc.
Noida land prices up 200 times in 20 yrs
Noida land prices up 200 times in 20 yrs
The Financial Express, June 16, 2009, Page 10
Press Trust of India, New Delhi
Property prices in Noida have skyrocketed about 200 times in the past two decades, reveals an RTI reply. Residential plots in all sectors of Noida, which were available at a price of Rs 175 per square metre in 1980, have now spiralled to Rs 39,600 per square metre in some sectors of the township, said the reply.
The highest surge has come in sectors 14, 14A, 15A, 17 and 44, the reply said. As per official records, residential land in other sectors is available in the range of Rs 14,400 per square metre and Rs 27,600 per square metre.
Exercising his right to information, an RTI activist, Lokesh Batra, has filed an application with the New Okhla Industrial Development Authority (Noida), asking it to furnish information on categories for which the authority is selling or allotting land and regarding the prices of plots as per the record.
The authority is selling land under five categories -- residential land, residential group housing, industrial land, commercial land and institutional land. There is a definite procedure for fixing and revising land allotment rates for various sectors. "For industrial and other institutional activities, land cost is subsidised. For commercial land, prices are fixed on ad hoc basis keeping in view the market rates," the reply said.
Industrial allotment rates of Noida have risen over 350 times to Rs 14,400 per square metre from Rs 40 per square metre since 1976.
Land in first, second and third phase of Noida was available at Rs 40 per square metre in 1976, which has now touched Rs 14,400 per square metre for phase I, Rs 5,550 for phase II and Rs 5,750 in phase III, the reply said.
Ansal Infra to raise Rs 1.5k cr via QIPs
Ansal Infra to raise Rs 1.5k cr via QIPs
The Financial Express, June 16, 2009, Page 2
fe Bureau, New Delhi
Close on the heels of Unitech and HDIL announcing their plans to raise money via the qualified institutional placement (QIP) route, realty major Ansal Properties & Infrastructure Ltd (APIL), on Monday, said it plans to raise funds up to Rs 1,500 crore through the issue of securities on a private placement basis to qualified institutional buyers.
The board of directors of the company has approved “to issue securities up to Rs 1,500 crore by way of qualified institutions placement basis to resident or non-resident QIBs,” the company said in a filing to the Bombay Stock Exchange.
“The raising of funds via QIP route is a capital raising exercise for APIL to provide both business and financial strength to significantly enhance company’s flexibility,” Pranav Ansal, vice chairman and managing director, Ansal Properties said.
“This QIP will also be used to partly fund and support the two large hi-tech integrated townships consisting of hotels, buildings, shopping malls, IT parks and group housing in Lucknow and Dadri,” he added.
The company’s board would also seek the approval from its shareholders for making public issue or any other issue, from time to time, for raising a sum of up to Rs 2,500 crore. The realty firm is also planning to increase the limit of foreign institutional investors’ (FIIs) in the company to 49%.
At present the limit is at 24%, it said. The firm would seek the approval from its shareholders, by way of postal ballot, for the various ways of fund raising, it added.
Shares of Ansal Infra on Monday closed at Rs 60.35, down 4.21% on the BSE.
Small housing projects too can make big profits, says Jerry Rao
Small housing projects too can make big profits, says Jerry Rao
The Economic Times, June 16, 2009, Page 5
J Padmapriya BANGALORE
JERRY Rao, the iconic founder of IT firm Mphasis, is completely immersed into his next business innings: Nano housing. Just like the Nano car, he wants to work backwards from his sub-Rs 7 lakh price point to deliver homes to a varied buyer profile that includes drivers, housemaids, plumbers and electricians. Jerry Rao’s new venture, Value and Budget Housing Development Corporation, is targeting building a million homes in 10 years in 17 cities. In an exclusive interview to ET, Jerry Rao said, unlike conventional developers, his business model would treat land as an inventory and not a capital asset. If he is able to roll out his project and deliver in 12-18 months, the returns would be in the region of 30-40% almost similar to what the IT industry enjoyed in its dream run. Excerpts:-
After IT, banking and angel investing, what made you think of housing?
I could retire and do nothing. At 57, I have got at least another 5 to 10 years to do something else. I did want to stay away from IT and banking and wanted to do something of scale. I looked at agribusiness, education, health care and it seemed to me that I could leverage my IT and project management skills in housing. And, there was no paucity of demand. So, you could scale this business and create a big impact.
What is the difference between your business model and how conventional realty operates?
Unlike conventional realty, we want to think of land as inventory and want to sell it as soon as we can. That is the basic difference that sets us apart. I thought it would be a high risk model. But, the downside here is very low. We are using equity to buy land. We will have access to construction finance and then we also get 25% down payments from buyers. So, even if the project goes bust, we can still repay all the loans and also repay equity. But, if we get it right and build and sell the project in 12-18 months, then the return on equity will be in the 30-40% range. It is actually quite an attractive place to be in.
Then, how come nobody else has entered the space?
Why did nobody create a low-cost detergent before Nirma? The high-cost market was profitable enough. One, it is partly a supply side problem that people do not re-engineer. Two, the middle class and upper class segment, Rs 0.50-1 crore, has been very profitable. Three, if you are looking at land as a capital asset, you would not do it. This model requires a mindset shift. I have no interest in the land price whereas the entire development of last 30 years has been based on land price appreciation. A developer may be building 60 flats but he will sell only 20 in the initial phase, wait for a year and sell the next 20 at double the price and so on. He is not in a hurry. Once you start looking at land as an inventory, it is a completely different scenario. That is the way Karzanbhai Patel must have thought. Instead of looking at a detergent as a middle class or upper class product, he looked at it as a cleansing agent any housewife could have. Nano again is an interesting example. They set the price and worked backwards. They did not say we will make it and sell it cost plus.
How will you address the backend challenges? Your potential buyers constitute the unbanked part of the population?
There are two big demand-side challenges. One, unlike in Manila and Sao Paolo, where poor and rich neighbour hoods are far away, in Indian cities, the poor live inside the city. Now, we are giving them housing far away. So, there is a commute cost and a commute time. That is a demand side dampener. The second is they may want to buy but how many of them will qualify for a loan. That certainly reduces the size of the market. But, you will be amazed at the number of people who have saved up and can put down Rs 50,000 to Rs 1.5 lakh. So it reduces their borrowing. People are frugal and they have saved. In the long run, credit access is going to be an issue although initially, we do not see that as a problem. Over time, we believe the system will be in a position to offer 15-year mortgages in the Rs 2-8 lakh range.
What is your assessment of the buyer profile?
They may be poor but they are upwardly mobile. Let us get it clear, these are not the absolute destitutes or the pavement dwellers. They are buying aspirations. What they want is to get out of their present shanty, slum kind of dwelling to a more secure place. They want compound walls, security, indoor toilet and privacy. Most want their children to go to English medium schools. The target buyer is someone who has an income and also high labour mobility so that even if he moves to the city outskirts, he would get a replacement job pretty quickly. Like a driver or high-skilled construction worker. This model is not a solution to the entire homeless problem of India.
If you prove that this model is profitable, do you think other realty players will crowd this space?
Yes. We want to make money. There is a vested interest in that. If we get in and make a 5% profit, nobody will be interested. If we are profitable, then many more will enter and the whole sector will gain legitimacy. It is not meant to be a not-for-profit/NGO model.
What does the project road map look like?
The company will initially set up two projects in Bangalore. We would then move nationwide. Our project sizes would be in the range of 8-50 acres. Typically, in 20 acres, one can build 2,800 to 3,200 units sized between 300 and 450 sq feet.The first equity round will be Rs 50 crore essentially to fund land acquisition. We are currently in the process of raising the capital. We will tie up with several MFIs to target buyers with credit access and use regional building contractors. The big demand is in Mumbai and NCR. We have to get there sooner. In Mumbai, people are willing to accept smaller flats and they do not mind commuting but land prices there are higher. We are also in the process of setting up a housing finance institution. We are studying the guidelines for the same as a housing finance company has to be separate from the development company. We are working on how to get a separate set of investors to drive it.
Realty is also the unreformed part of the economy? How will you tackle things like black money, corruption?
We are very clear. We pay for all our lands in cheque. We won’t buy it if it is not on those terms. For us, land is just one of the inputs. We are not looking for government subsidy, grant or any regulatory exceptions. We don’t want anybody to acquire land and give it to us.
Fire Capital plans to invest $300 m in Indian realty mkt
Fire Capital plans to invest $300 m in Indian realty mkt
The Economic Times, June 16, 2009, Page 6
Ravi Teja Sharma NEW DELHI
PRIVATE equity fund Fire Capital is looking at investing $100 million a year for the next three years in the Indian real estate market. The fund will raise the money this year and hopes to make the investments in 2010. “Our investors are willing to invest in projects which are sound, can stand on their own and come at the right valuation,” says Fire Capital chief executive officer Om Chaudhry.
The fund recently announced its second FDIcompliant integrated township project in Nagpur, spread over 152 acres in a joint venture with a local Nagpur-based developer Arcor Group.
“If the projects and managements are sound, investors will still come in. They will not want to invest if developers are raising capital just to replace costly debt. There have to be real projects, real demand and real risk adjusted returns,” says William A Eagan III, director, board of advisors at Fire Capital. Eagan is also one of the LPs of Fire Capital.
Fire Capital has been concentrating on providing affordable housing through large integrated township projects. Its first project in Indore has now entered its second phase and the fund has finalized investment of close to $90 million across three JVs with local developers in Jaipur, Bangalore and Chennai. These three integrated townships will be announced by the third quarter of this fiscal, says Chaudhry.
With the $300 million it plans to deploy over the next three years, Fire Capital has plans to develop 10 more integrated townships in tier II and tier-III cities. “For tier III cities, we are looking at smaller 25-acre township developments,” he says. Tow third of this $300 million will be deployed for housing while the balance will be used for opportunistic investments in healthcare, education and hospitality which would eventually help them secure these services in the townships.
The Economic Times, June 16, 2009, Page 6
Ravi Teja Sharma NEW DELHI
PRIVATE equity fund Fire Capital is looking at investing $100 million a year for the next three years in the Indian real estate market. The fund will raise the money this year and hopes to make the investments in 2010. “Our investors are willing to invest in projects which are sound, can stand on their own and come at the right valuation,” says Fire Capital chief executive officer Om Chaudhry.
The fund recently announced its second FDIcompliant integrated township project in Nagpur, spread over 152 acres in a joint venture with a local Nagpur-based developer Arcor Group.
“If the projects and managements are sound, investors will still come in. They will not want to invest if developers are raising capital just to replace costly debt. There have to be real projects, real demand and real risk adjusted returns,” says William A Eagan III, director, board of advisors at Fire Capital. Eagan is also one of the LPs of Fire Capital.
Fire Capital has been concentrating on providing affordable housing through large integrated township projects. Its first project in Indore has now entered its second phase and the fund has finalized investment of close to $90 million across three JVs with local developers in Jaipur, Bangalore and Chennai. These three integrated townships will be announced by the third quarter of this fiscal, says Chaudhry.
With the $300 million it plans to deploy over the next three years, Fire Capital has plans to develop 10 more integrated townships in tier II and tier-III cities. “For tier III cities, we are looking at smaller 25-acre township developments,” he says. Tow third of this $300 million will be deployed for housing while the balance will be used for opportunistic investments in healthcare, education and hospitality which would eventually help them secure these services in the townships.
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