The other day I was speaking to my friend Asit, an industrialist, who was bemoaning the fact that there was no money available in the market. Customers were delaying payments due to him and as a consequence he was unable to pay his suppliers on time. The irony, he pointed out, was that banks were flush with funds but due to high interest rates, no-one was taking loans. This phenomenon is true in many other sectors and especially the real estate market.
Very few transactions are taking place, and as a consequence there are even tales of builders offering inducements to buyers. The concern that have driven many potential buyers away from purchasing apartments is the fear that with money not being available builders may face a liquidity crunch leading to non completion of the projects.
Interest rates are high because inflation is high. The Reserve Bank of India in order to curb inflation had raised interest rates to contract demand for money. If rates are low, people would take loans resulting in increased money in the hands of consumers. This results in an increase in demand. As, in developing countries like India, demand usually exceeds supply, the classic syndrome of "too much money chasing too few goods" comes into play causing prices to rise and this triggers inflation. Truly a vicious cycle.
Last week it was announced that the monthly wholesale price index (WPI) in October fell to a five-year-low of 1.8%, giving rise to expectations that there may be a softening of interest rates. There is a hope that this would result in a surge of demand as more would be forthcoming in taking loans. I submit that with a reduction in interest rates and an increase in money supply, inflation will again begin to rise. In a developing economy, inflation will always be high.
India is a developing economy. Huge investments need to be made in infrastructure and other projects. If this is not done, the country is not going to realise its potential. Therefore, even though WPI may have fallen, I cannot see prices of consumer durables and other items reducing significantly. The sad reality is that when the price of an item is increased, it is seldom brought down. The high price remains and individuals accept this and make adjustments. Inflation is here to stay at least in the foreseeable future.
The other bane that Asit mentioned is unaccounted money or black money (as it is normally called). An entirely parallel economy exists and though there have been very good efforts to curb it, expose it, etc. it remains. How can this be obliterated? No one knows the extent though it is estimated that $1.4 trillion are deposited by Indians in Swiss banks alone. The black money in the hands of individuals in India must be at least 10 times that (and this is being conservative). What can be done regarding this? While it may be difficult to do much regarding the money stashed abroad, I believe that domestic black money can be eradicated by de-monetisation. A law or diktat can be passed stating that all money that cannot be accounted for is of no value. A totally new currency must be created and it should be stipulated that only this currency is valid. The vast quantities of money hoarded by individuals would become worthless overnight. It is admittedly a drastic step but it will be very effective. Drastic situations call for drastic steps.
The writer is MD, Cortlandt Rand and an author
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