Amid talk of an asset bubble in the country, housing prices overall are not yet a concern. But policy makers should closely monitor and take action if prices begin to rise too fast, Ratna Sahay, deputy director, monetary and capital markets, International Monetary Fund, tells Praveen Bose. Sahay was in Bengaluru to participate in the 'IIMB-IMF International Conference on Housing, Financial Stability and Growth", and notes that the housing market seems to be well regulated. Excerpts:
Is there a bubble in the Indian property market?
A bubble occurs when prices are rising too fast compared to historical trends. We do not yet see this phenomenon in India, though property prices are rising. It could be that bubbles are emerging in some pockets such as in big cities that are still growing fast. In general, a rise in prices indicates that demand is going up more rapidly than the increase in supply.
It depends. If income levels are rising, one should expect house prices to go up too. This can be positive for the government's budget as property tax revenues will also go up. But if prices are rising because borrowing large sums of money to buy a house is easy, it may be a sign of concern, especially if people cannot afford the mortgage payments later.
The economic problems of 2008 in the US started in the housing sector. Many people, including those in the middle and low income groups got large mortgages at cheap rates that they really could not afford after some time.
Are the policies of the government helping keep bubbles in check?
India has used several types of macro-prudential policy tools intended to limit systemic risks to control a rapid increase in property prices. Limits have been imposed on 'loan to house value' ratios, called LTVs, which help contain demand. These limits have been imposed in both the household sector and in commercial properties. If the ratio of loan to value of a house is high, risks build up. LTVs around the world have ranged from 20 per cent on certain kinds of loans in Hong Kong to 100 per cent in Argentina. If the regulators know that loans are being taken for speculative purposes, they should implement policies to prevent the extension of such loans.
How is the Indian economy doing, and what more should the new government do?
With regards to the economy, there is a lot to look forward to. The GDP (gross domestic product) growth rate is increasing from about 4.7 per cent in the last fiscal year to 5.6 per cent this fiscal year. Next year, the IMF expects it to be more than 6 per cent. Thanks to the efforts of the RBI (Reserve Bank of India) in maintaining a tight monetary policy, CPI (consumer price index) inflation is finally coming down from over 9 per cent last year to around 6.7 per cent this fiscal year, per IMF's expectations.
With the new government's focus on governance and development, business confidence is also rising. Oil prices are falling fast, which is very good news for the energy-importing Indian economy as it will boost the government's fiscal consolidation efforts, further dampen inflation pressures, and narrow the current account deficit (CAD).
There are still many challenges. Inflation needs to fall further - in most countries it ranges between 1 per cent and 3 per cent, while in India the average CPI inflation will still range between 6 per cent and 7 per cent in the next two years. The Budget deficit, at about 7 per cent of the GDP this fiscal year, has come down in recent years, but is still too high and should decrease. In 2003, the government introduced the Fiscal Responsibility and Budget Management Act which aims to reduce the fiscal deficit to 3 per cent by 2016-17. But the quality of fiscal consolidation is also important. Rather than cutting capital expenditure, the government should raise revenues such as through the introduction of the GST (goods and services tax).
While fuel subsidies have fallen recently, other general subsidies should also fall, such as those on fertiliser and food. Moreover, the food procurement and distribution systems in India need to be fixed as there is a lot of leakage. There's no benefit from that. At the same time, these subsidies should be replaced with those targeted towards the poor. There are many ways to provide relief to the poor. One is through cash transfers, which will become possible with the introduction of the Jan Dhan Yojana and by identifying the poor through the Aadhaar scheme. Supply bottlenecks in power, coal, and other infrastructure also need to be removed to allow economic growth to rise even further.
Is inflation targeting important?
The RBI's plans to adopt a flexible inflation targeting framework is a welcome step. The RBI has announced an objective of bringing the CPI inflation down to 6 per cent by the first quarter of 2016, which is good. It is important to have a clear nominal anchor, which in India's case is the CPI inflation, and find ways to reach that target.
What initiatives of the new government have been most striking?
Introduction of e-governance, which diminishes the scope of corruption, reducing subsidies, tackling supply bottlenecks in infrastructure, and focusing on health and education of women are impressive. Providing toilets to girls across schools in the country is a very empowering step as it will encourage more girls to attend school.
Is there some point you would like to emphasise?
In addition to raising economic growth and reducing inflation, the 2008 global financial crisis taught us that preserving financial stability is very important. The non-performing assets of public (sector) banks along with restructured assets make up almost 10 per cent of outstanding advances of the banking system, which is high by international standards. The Indian authorities need to tackle the quality of assets in public sector banks, improve their governance, and further strengthen insolvency frameworks.
Is there a bubble in the Indian property market?
A bubble occurs when prices are rising too fast compared to historical trends. We do not yet see this phenomenon in India, though property prices are rising. It could be that bubbles are emerging in some pockets such as in big cities that are still growing fast. In general, a rise in prices indicates that demand is going up more rapidly than the increase in supply.
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So are the rising property prices you are seeing good or bad?
It depends. If income levels are rising, one should expect house prices to go up too. This can be positive for the government's budget as property tax revenues will also go up. But if prices are rising because borrowing large sums of money to buy a house is easy, it may be a sign of concern, especially if people cannot afford the mortgage payments later.
The economic problems of 2008 in the US started in the housing sector. Many people, including those in the middle and low income groups got large mortgages at cheap rates that they really could not afford after some time.
Are the policies of the government helping keep bubbles in check?
India has used several types of macro-prudential policy tools intended to limit systemic risks to control a rapid increase in property prices. Limits have been imposed on 'loan to house value' ratios, called LTVs, which help contain demand. These limits have been imposed in both the household sector and in commercial properties. If the ratio of loan to value of a house is high, risks build up. LTVs around the world have ranged from 20 per cent on certain kinds of loans in Hong Kong to 100 per cent in Argentina. If the regulators know that loans are being taken for speculative purposes, they should implement policies to prevent the extension of such loans.
How is the Indian economy doing, and what more should the new government do?
With regards to the economy, there is a lot to look forward to. The GDP (gross domestic product) growth rate is increasing from about 4.7 per cent in the last fiscal year to 5.6 per cent this fiscal year. Next year, the IMF expects it to be more than 6 per cent. Thanks to the efforts of the RBI (Reserve Bank of India) in maintaining a tight monetary policy, CPI (consumer price index) inflation is finally coming down from over 9 per cent last year to around 6.7 per cent this fiscal year, per IMF's expectations.
With the new government's focus on governance and development, business confidence is also rising. Oil prices are falling fast, which is very good news for the energy-importing Indian economy as it will boost the government's fiscal consolidation efforts, further dampen inflation pressures, and narrow the current account deficit (CAD).
There are still many challenges. Inflation needs to fall further - in most countries it ranges between 1 per cent and 3 per cent, while in India the average CPI inflation will still range between 6 per cent and 7 per cent in the next two years. The Budget deficit, at about 7 per cent of the GDP this fiscal year, has come down in recent years, but is still too high and should decrease. In 2003, the government introduced the Fiscal Responsibility and Budget Management Act which aims to reduce the fiscal deficit to 3 per cent by 2016-17. But the quality of fiscal consolidation is also important. Rather than cutting capital expenditure, the government should raise revenues such as through the introduction of the GST (goods and services tax).
While fuel subsidies have fallen recently, other general subsidies should also fall, such as those on fertiliser and food. Moreover, the food procurement and distribution systems in India need to be fixed as there is a lot of leakage. There's no benefit from that. At the same time, these subsidies should be replaced with those targeted towards the poor. There are many ways to provide relief to the poor. One is through cash transfers, which will become possible with the introduction of the Jan Dhan Yojana and by identifying the poor through the Aadhaar scheme. Supply bottlenecks in power, coal, and other infrastructure also need to be removed to allow economic growth to rise even further.
Is inflation targeting important?
The RBI's plans to adopt a flexible inflation targeting framework is a welcome step. The RBI has announced an objective of bringing the CPI inflation down to 6 per cent by the first quarter of 2016, which is good. It is important to have a clear nominal anchor, which in India's case is the CPI inflation, and find ways to reach that target.
What initiatives of the new government have been most striking?
Introduction of e-governance, which diminishes the scope of corruption, reducing subsidies, tackling supply bottlenecks in infrastructure, and focusing on health and education of women are impressive. Providing toilets to girls across schools in the country is a very empowering step as it will encourage more girls to attend school.
Is there some point you would like to emphasise?
In addition to raising economic growth and reducing inflation, the 2008 global financial crisis taught us that preserving financial stability is very important. The non-performing assets of public (sector) banks along with restructured assets make up almost 10 per cent of outstanding advances of the banking system, which is high by international standards. The Indian authorities need to tackle the quality of assets in public sector banks, improve their governance, and further strengthen insolvency frameworks.