June IREF: On Macroeconomics

n stagflation, it is the contrary.

Land which is unusable loses value - nobody has money to waste on empty land. So plot prices plummet - nobody has money to spend on construction - construction costs also inflate. Empty plot is useless - its prices rises in good times only. Remember plot prices in 1996, 2001 and 2008? Some 50% drop from peak. Similarly, a flat in remote places like Daruhera, greater noida etc will lose value. People wont live there because petrol for commute is expensive.

Actual rentable property - in places close to jobs or good shop locations - they maintain value.

Rentals actually go up a lot. Remember the 70s and 80s - rent for flat used to be one half of salary in places like Bombay.

When the "inflation" part of stagflation makes everything expensive, the base rent (smallest livable flat i.e. small 2BHK flats in Delhi's unauthorised colonies) - they go up a lot.

It has already done so recently. Rent for the base flat in Gautam Nagar of South Delhi is now 12,000 Rs per month. In 2008 it was 5-6000Rs. That is a 100% increase. So a guy earning 25000 per month is now forking out 50% of salary as rent. Or living remote and biking to work 25Km each way = 70Rs a day = 2000 per month.

Thats the floor - rent for the cheapest flat. And the kind of people who own these types of flats dont compromise on rental value - mostly rough badmash types who bought the property through all kinds of means - the types who squeeze the maximum out of their property.




In recession, one buys in main metros without new supply - because in recession people dont have money and so prices dont go up so much. Only there, in the middle of metros, will the rentals increase with stagflation. Rentals in far flung places will fall.

In boom times one buys away from main cities in up and coming areas - because prices in main cities go up too much and in boom time, there is more development.

Buying in far flung areas during recession is a big mistake. I have learned this the hard way - when in 2009 I went for DEay location instead of GCX.

In boom time one plays the booking game. In recession/stagflation one buys prime property

A bubble can burst in 2 ways - either the prices come down - or the currency loses value to reflect the new price as normal.

Traditionally, in USA and Britain before that - i.e. developed country with steady currency, prices come down.

In India, traditionally, inflation and depreciation of currency are what normalise the prices. So in the early 80s, in 1990-91, in 2008 and right now - it is the currency which gave way - not the RE prices.

There are other ways for bubbles to burst. Those without RE in portfolio will surely regret. 2003 to 2008 in India was an extraordinary time wiht low rates. Never seen before.

It may never be seen again. India is now back to normal - a bumbling mess.

Did you know that the lions share of "services" in India is contributed by "Govt?". And that "productivity" in Govt is measured as expenditure?

So money spent on NREGA, fertilizer subsidy, defence expenditure and salaries to govt servants is straight jacked in as "GDP"

Dont recall exactly, but last I remember some 30% of India's GDP is calculated on the basis of this servises i.e. money spent plus "salary paid to Govt servants" - both central and state combined.

Whether there is any level of productivity there is not counted at all.

Now you know why the component of services is rising in our economy - because of govt pay commissions!!!!! and spending sprees.

If you build a road for 1billion dollars, and it is washed out in rain and next year you again spend 1.05 billion, then it is counted twice - this year and next year - and since next year you spent more i.e 1.05billion - voila - there is your 5% GDP growth !!!!!!

The soviets went bankrupt with this kind of "productivity" and ran their country into the ground.


Well, its not that bad - Govt expenditure is mentally "discounted" by people. 

And mind you, Industry and software was also growing - something has to grow for the govt to tax and spend after all.

Basically the taxation and inefficient expenditure became too much. Govt spending has three levels of inefficiency attached to it.

1. Usually, govt spends money where it shouldnt - like NREGA or fertilizer subsidy or minimum support price grain purchase

2. Second, there is an element of leakage and corruption where politicians and babus loot much of the money

3. This generates black money which notoriously has much slower velocity than white money.

Many people actually praise black money as "preventing RE crash". But what they fail to realise is that black money has a habit of stopping money velocity in its tracks.

In a white transaction, if you spend 100Rs, the person you give it to again spends it to and so on - the same 100Rs will exchange hands many times - each time someone gets a 100Rs as income. Each time he again spends it, he generates employment and someone else earns that 100Rs. There is a huge beneficial effect. This is the effect of money velocity.

Each time that 100Rs gets spent, 10Rs gets taxed by govt - so it is possible to get 200Rs in tax if the same 100Rs passes hands 20 times

Now black money is not spent similarly. Most black money ends up as an empty plot, empty flat, gold in a locker, cash under someone's bed or sent abroad in hawala so that the velocity benefits other countries.

OR - black money gets spent in totally useless ways - like boozing, or other bad habits. Adds little to useful product and generates more problems than the utility of the velocity generated.

The only time black money gets converted into white money is at election time - when jeep walas, printers and other people are paid for their services and the money gets back into circulation.

Everytime real estate and gold gets into a bubble, it is an indicator of the underlying malaise of black money. It means economy will come to a grinding halt. 

Until we get rid of the problems in our govt, get rid of corruption, get rid of black money and hawala - they will always overwhelm the good parts of our economy - manufacturing and IT.

And Sanjana, in 2006-7 I always remember my visits to Bombay - just looking out of the window of the car with Sense-x at 20,000 and thinking - look at these people - how is India shining? They look like beggars! And my relatives would talk about how much money they were making in the stock market - so was I - and the picture outside the window was completely different.

Any other country which is shining - look out of the window an you see a modern city. Hong Kong, Shanghai, even Bangkok. Or even Kuwait or Dubai.

We look out and we see only dirt and poor people.

No wonder slumdog millionaire got made. India was never shining. Some people in middle class got paid somewhat similar to the same kind of job elsewhere because of globalization.

The majority were unemployable. And the hype misled us. I sold out my stocks in November 2007, thinking this is too much. I was right.

Unfortunately I didnt get back in when we hit 8000 sense=x in 2009. Still lamenting the missed opportunity