Chanakya

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Strategic Planning Department Volume I Issue VII

Home Loan to GDP – Does it make any sense?

Increasing home loan rates have strengthened the

interest pay out on loans. Today, a borrower taking a
In this issue: home loan of Rs 10 lakh with tenure of 20 years will
require spending Rs 39,000 more every year on
equated monthly installments. Loans up to Rs 20 lakh
Home Loan to GDP 1
form 80%.
– Does it make any
According to the data showcased by Assocham, the
sense
home loan GDP ratio should go double in the budget
Logistic Cost a drag 2 proposals for 2008-09. Outlined below are the
on Indian Port observations made by the authority regarding home
loan scenario in India
Competitiveness
Buying a home is certainly the biggest investment
Port Snippets 2 decision any individual makes. This underlines a need
for a strong GDP ratio.
High interest rates on home loans along with
SEZs as key to 3
increasing property prices have largely affected
prosperity buyers’ affordability. Still, the demand for home loans
continue to persist and will become stronger in near
Economic Snippets 4
Y es it does. Despite Indian Real
Estate undergoing a paradigm shift, India’s
future
Of the total home loans and 90% borrowers are first
Team Chanakya 4 home loan to GDP ratio is stuck to a time buyers.
paltry 5% compared to around 30-35% There is a shortage of 19.4 million housing units in
for the developed economies like, UK India. Off this, 6.7 million is earmarked for urban
and US. whereas the remaining 12.7 million is
in rural India.
Interest rates on home loan have sharply Indian middle class has grown by 10
risen from 7% in 2003 to 12% in 2007, times to 583 million people, which is
with its impact being felt across the board likely to drive the real estate growth
including genuine home buyers, industry to unprecedented levels.
watchers, builders, and bankers. The demand for residential property
would increase to 45 million by 2012.
 Logistic Cost ….a drag on Indian Port Competitiveness

The following table represents the per tonne

handling cost in the major ports of India.

Port Per ton Handling Cost (Rs.)

1995-96 2004- %
05 increase

Kolkatta + 125.60 229.4 83%

Haldia

Paradip 76.5 95.1 24%

Vizag 44.7 55.1 15%

Chennai 49.5 85.3 72%

Tuticorin 30.4 45.4 49%

Cochin 71.0 129.2 82%

Mangalore 45.3 61.7 36%

Mumbai 92.1 195.5 112%

World Freight payments, as a percentage of total import value (CIF),
JNPT 168.3 99.0 -41%
stood at 6.21% in 2000 as per UNCTAD. For developed countries, it
stood at 5.21% and for developing countries it stood at 8.83%. For Kandla 21.9 28.4 30%
India, freight payments as a percentage of total import value stood
at 10.32% (1997) and around 11.4% in 2000, the same for the year All Ports 63.4 95.1 50%
2006 is around 11.2%.

As per UNCTAD, such variation could be explained by Port Snippets

differences in trade and shipping patterns, particularly in the liner
sector, where the growing importance of feeder operations tend Of the world’s top 10 ports in terms of
to place those countries not covered by mainline services at a traffic handled, 7 ports are from Asia out
disadvantage. They also reflect insufficient infrastructure facilities, of which 5 are from China.
low productivity of terminal equipment, and poor The two Chinese ports, Shanghai and
management practices in cargo handling. Ningbo handled 715.4 MT of cargo – all
the 13 major and 187 minor ports
Nevertheless, these figures reflect the higher logistics costs in
handled around 568.94 MT in India.
India, which are a drag on our export competitiveness. Over
World port traffic is made of 45% of liquid
the last five years there has been a steep rise in the port handling
charges of Indian Ports affecting the export competitiveness of bulks (mainly oil, petroleum products, and
India. chemicals), for 23% of dry bulks (coal, iron
ore, grain, and phosphate), and for 32% of
Per ton cost of handling has increased from 15% to 112% in major general cargo, including container cargo
ports of India with the exception of JNPT were it has decreased
by 41%.
 SEZs as key to Prosperity
When China wanted to experiment with economic
liberalization, it decided to set up four special economic
zones (SEZs), referred to as "laboratories" for testing out
the economic model, in 1979. China reaped large benefits
from the laboratories and attracted large chunks of foreign
direct investment (FDI).
India, despite having been much more advanced and liberal
in its economic outlook vis-à-vis China, is only now adopting
the SEZ model. Thankfully, the initiative to increase public
expenditure for infrastructural development resulted in
turning the cycle of economy, proving the merit of
Keynesian model.
Of the four laboratories set up in China, Shenzhen was
successful. Korea achieved success from Masan between
1974 and 1979, though the growth was followed by a
flattening curve.
Historically, SEZs have resulted in spurts of economic
growth, which then flatten out to normal levels with time,
save some exceptions like Shenzhen. In fact, experiments by
Russia and North Korea have not resulted in anything
exciting in terms of propelling economic growth. However,
this failure is more to do with policy framework rather than
the concept itself.
Shenzhen's development story has spanned over two
decades; today it is a modern city of four million people
(from a population base of 20,000) with per capita income
of US$ 4000. The process of development passed through
periods of modest growth, and the continuous focus
on revising strategies to achieve the targets is one of
the key reasons for its success.
The local administrative authority of Shenzhen
promoted industries with advanced technology and
attracted the attention of well-known global
companies. Their constant focus on improving higher
value addition through investments into the region
resulted in establishing sizeable and significant
capacities. For instance, today Shenzhen produces
more than 10 per cent of world production for
certain category of products. The local authorities
continuously offered incentives, provided facilities
and improved the infrastructure to attract investors.
India has notified 142 SEZs; the number may go up to
300. On the contrary, one Shenzhen can bring India
FDI in excess of $20 billion with per capita income
touching $5,000. This means India can become debt-
free, with surpluses on its balance of payments in 5
years.
From the uniqueness of business advantage point of
view, accessibility to inexpensive human resources
would be a key advantage for a global player wanting
to shift capacities to an Indian SEZ. However, in
terms of technology, except in IT, SEZs would have
to depend on imports, like Shenzhen, which, as a
strategy, ensured high-value-added technologies
space in the SEZ. The regulatory guidelines have
incidentally not addressed any such aspect and this
may lead to SEZs becoming logistics hubs rather than
real value-creators resulting in a incrementally higher
gross domestic product.
The role of local authorities managing the SEZ
becomes one of the key aspects for attaining success.
As per the SEZ Act, a public limited company would
be floated to act as the SEZ Authority for specified
areas, with the Development Commissioner as one
of the members of the board. Although the
constitution of SEZ Authorities would be identical,
the level of efficient functioning of these bodies
would become a crucial benchmark in the success or
failure of the SEZ.
Shenzhen has become a model to a number of
economists and politicians. The policy of SEZs will
earn dividends if we are successful in creating at least
one Shenzhen. However, this requires focus and
concentration of energies. Certainly, SEZ is not the
only route to achieving superlative economic growth,
as perceived by many sections of the society. There
are a number of risk factors associated with the
business model and the probable factors for success
or failure of SEZs in India as well. Let’s hope we
don’t go the way of Russia and North Korea.
Economic Snippets In the other commercial and industrial credit, banks are
facing two pronged punches.

Indicator 15 Sep 2007 15 Aug 2007 One from the RBI, which has increased the risk weight age
of real estate investment and real estate collaterals. The
Bank Credit 22.6 23.7 second is the falling industrial production. With the high
interest rate the industry is shying away from taking credit.
Deposits 24.4 24.9
The combination of both has helped in the increasing CD
Money Supply 21.7 21.6 ratio for the banks which will result in the lower
profitability.
Forex
Reserves (US$ 232.18 225.40 Is this situation likely to continue? The answer would be
Billions) anybody’s guess. It all depends on how RBI wants to view
it. If RBI wants growth it has to reduce the interest rate, if it
Inflation 4.41% 4.36%
wants safety from inflation then they have to sacrifice
Home Loan growth.
11% 11.25%
Rate
With both the measures, real estate sector is not going the
IIP 9.7 10.8 get respite at least for some time to come. As banks are
Forex Rate 39.70 40.96 being discouraged to lower their real estate mix in their
loan portfolio with the increased risk weigtage and literally
the ECB and other credits are closed for real estate, tough
The fall in the credit growth is giving sleepless nights to time ahead for the sector.
the bankers. If this is not enough the rise in the deposit
rate is aggravating the grief of many bankers.

SBI to capture the lost ground in deposits is refusing to Team Chanakya

bring down the interest on deposit. In the last IBA meeting
as well, SBI has clearly stated that the deposit rates would
be unchanged for some time to come. Mr. Subramanyam Mutnuru
Head – Strategic Planning
Unlike many private banks the corporate credit for SBI and
the 20% fall in the real estate offtake of non-farm credit Mr. D Joel K Pandian
has not affected it much like many other banks like HDFC DGM- Strategic Planning
and ICICI.
Mr. Sheetal Shah
Having said that the fall in the overall credit growth is a Asst. Manager – Strategic Planning
cause for concern for the macroeconomic fundamentals.
Falling IIP, widening credit deposit ratio and a falling Mr. Anup Choudhry
inflation are a perfect recipe for a banking collapse. Asst. Manager – Strategic Planning

How will it affect the real estate sector? In the retail Mr. Manish
credit, which is around 32% of the total credit Home loans Management Trainee
constitute around 85%. This has seen a greatest fall of
around 20% and so the retail credit has come crashing Ms Gayathri N
down. Executive Secretary