Debt-stricken Worries

Known for its brilliant debt management strategies, China, one of the most influential economies of the world, now is in the shackles of more debt. As of April 2016, corporate debt in China is 160 percent of GDP, and is only going to rise, according to the IMF. This has been predicted so, because of the increasing number of firms that are coming under the purview of ‘risky’ or ‘high-risk’ category of firms.  Non-performing loans (NPLs) had been managed by China back in 1999, by creating asset management companies, which purchased state-owned banks, with 10-year government bonds. Writing off these bonds had been easier in 2009, because of their value decreasing from 20 perc of GDP to less than 5 perc of GDP. However, with the global financial crisis hitting China, the 10-yr bonds were rolled-over to another 10 years, they being potentially reckoned in 2019. However, the NPLs and the debt overhang faced in the aftermath have been huge. Though the plan was to shrink this huge debt overhang by a further percentage, making it more manageable.

A recent estimation by IMF states this much at risk, as far as China is concerned: 15 perc of Chinas overall commercial lending and banking sector losses of more than 7 perc of GDP; this, in essence meaning that NPLs will rise.

IMF points out that one debt management method may be conversion to equity. How much this method will help in reducing NPL stress is a substantial question. The method has been a popular one in the last few years. Debt to equity conversion is perhaps the first welcome step in tackling NPLs in several financial systems. But, when the corporates involved are already in distress and are non-viable or vulnerable, conversion to equity will only entail more risk to the investors. For example, when this method was sought for in India, market capitalisation of firms in the vulnerability or known stress levels of the considered corporates was at an average of 90 perc.

Part liquidation, and part shareholder ownership would probably suit the existing conditions. Rating companies on the basis of stress, and deciding on liquidation and/or equity ownership will reduce the stress on investors. Getting an outside management team to oversee the functions, performance and profitability of the managed companies would further boost investor confidence.

The Road to Privatisation

In the neighbourhood we live in, there are a few narrow roads that lead up to the main road. While road no.1 is inconveniently narrow, road no.2 (the one that has all the offices and residential building), is wider but has vehicles parked on both sides, making it narrow. Road no. 1, which is a short-cut to offices and other destinations, is so narrow that even if one on-coming vehicle squeezes through, there is little chance that the flow of traffic goes unobstructed from the other vehicles. The result of such counter-traffic (definitely more than one vehicle) is generally a jammed-up road. The other result of this has been increased levels of concentrated pollution. This situation (of more than one on-coming vehicle passing by) has gone for more than 2 years. About 5 weeks ago, we saw a barricade at the entry point of the road, which read ‘no entry’ for the on-coming vehicles. The discipline lasted for about less than an hour. After this, it was not a surprise that people chose comfort over discipline or the chance to avoid some pollution. Two weeks back, vexed with such attitude of our own neighbours, some of us stood and controlled traffic by holding placards and redirecting vehicles to a wider entry point. Also, we worked on constructing impediments for waiting cabs that were parallely parked on the road, even though there was place inside the office complexes. It took us two weeks to get people to adhere to a complete discipline and we were successful in reducing any congestions that occurred on these two roads.

A recent news report that talks of privatisation of water services has been the first step towards the direction of privatisation of municipalities and/or municipal services in India. Although, when it comes to roads, highways and such, the idea is slightly different. Roads represent a major chunk of revenue for municipalities. Of course, the use of these taxes to repair temporary and long-forgone roads is a still a question, because we have been victims of not just bad roads, but also murderous potholes. The municipal regime may not fully agree or come to terms with these facts because laying roads once before monsoon and/or winter showers is where their “duty” ends. Maintenance does not count as one of their duties or responsibilities. (Now, the reasons for road damage are several; in our city, the main reasons are heavy and continuous rains, and heavy vehicles.)

Lot of us may agree that privatization of neighbourhood roads or a public-private partnership (the latter being the more viable option) would be a nice beginning towards building good roads. It has been observed that for a builder of a commercial or residential complex, construction of approach roads are his responsibility. And this expenditure includes the cost of construction and the taxes that he would pay every year. If the builder start maintaining these approach roads on his own (privately), his expenditure would be much lesser than the taxes he would pay every year to the municipality. Therefore, perhaps even the builders are ready for such a bargain. But are municipalities ready to forgo their tax-revenue? Will this be more of a trade-off for them where they do not have to bother maintaining such internal roads and thus do not have to bother about the use of the taxes they collect?

Will India ever have a Housing Index?

The Housing Index in India is perhaps the most debated issue till date. While there are two indices in India, that cover house prices – The National Housing Bank’s Residex and the RBI’s House Price Index (HPI) index, both are updated quite infrequently. The Residex is updated on a quarterly basis, the latest index values being available up till January-March 2015, for 26 cities.  RBI’s house price index is also updated on a quarterly basis, the latest values being available up till the last quarter of 2014, for 10 cities. The index values of both these indices are different.

A house price index can possibly eliminate price risk, and give an insight into future prices. When Indian house prices and house price indices are compared to those of other economies like the UK, Australia and US, several aspects are to be considered even before deciding on constructing a housing index for India. The first of them is the source of volatile house prices. The source of  volatile prices seems to be constant shortage of supply of land that has been zoned and/or approved. One may wonder why this shortage exists; there is something called ‘hoarding’ of land that has been happening in India. Either zoned land has been rationed, or ‘approval’ of lands has been delayed. But remember, there is no shortage of demand whatsoever, considering ever increasing urbanization, population and literacy levels in India. People desperately want to own a home but are afraid of two factors – prices of homes, and the illiquidity in the market.

Will house prices ever shrink? Will the supply ever match the rising demand for houses? The answer is perhaps a blatant “no”, the reason being that real estate has been the source of political money. Selling hoarded land pieces, and making huge return on them, and in turn investing them in other land and expecting an even greater return has artificially hiked real estate prices. The circle of transactions continues with other investors with black money looking to reap from the opportunity costs, speculators who want to take advantage of arbitrage of land prices, and brokers and developers. Therefore, the prices of residential properties will tend to rise in the near future, no matter how much the demand rises.

So, in this scenario, does India qualify for a housing index at all?