Bail-outs have become the default means of dealing with the economic crisis, not just in India but round the world. Sectors and companies which have been hit so hard that they find it difficult to survive, even as economic conditions change for the worse, are petitioning governments to help them stay afloat. In India, while various government spokespersons have been promising measures to deal with the problems of specific sectors, one of the hardest hit sectors is real estate development. Recognising this, the government has been making life easier for beleaguered developers, in the form of concessions on repayment of loans as well as steps by banks to lower interest rates on housing loans. However, these do not seem to have helped very much and the industry is soliciting more interventions from the government. The question is: are the steps taken as well as those being asked for adding up to a viable rescue package?
The first question that needs to be addressed when thinking about a bail-out is whether a rescue operation will have economy-wide impact. With regard to construction activity, there is a broad consensus that this is indeed the case. Apart from linkages with sectors like steel and cement, construction generates large numbers of low-skilled jobs. The problem is that state governments are working out rescue packages that benefit companies without necessarily doing anything to revive construction activity. For instance, companies that have bid for large projects in Noida, neighbouring Delhi, have made the down payment but are unable to proceed with the projects for want of money. Logically, the down payment should be forfeited and the projects bid out to someone else. Instead, the developers are being allowed to go away virtually untouched—a level of state generosity to private parties that smells very fishy indeed.
Any reasonable bail-out needs to meet three basic objectives. One, projects that are stuck must get re-started if money is being provided, with preference given to those that are approaching completion. Two, the institutions that provide liquidity, whether public, private or a combination of the two, must receive a return on their investment as well as have the ability to monitor progress and enforce compliance with plans. Three, developers who get a bail-out must suffer a sharp hair-cut; there should be no free lunches of the kind being doled out now.
To achieve these objectives, two instruments need to be built into any rescue package. First, the pricing of properties must come down sharply to levels that reflect the new realities. Resistance to this on the part of developers should deal a fatal blow to the rescue. Second, given the enormous fragmentation in the industry coupled with the fact that even the largest players are in financial trouble, significant re-organisation and consolidation are going to be necessary to ensure that construction activity is sustained. This is one sector in which assets can be easily separated from organisational structures. Individual companies which refuse to comply with the conditions of a bail-out need not be kept afloat; their ongoing projects can and should be taken over and folded into organisations willing to work within the new boundaries. The merits of a bail-out are contingent on keeping construction activity alive, not companies.