I think India has lots of potential to grow. But I do feel that India faces lots of hurdles too. The following are some pain points of Indian Economy. Few things to be noted before we go through the issues point by point are:
1. Some of these issues might be applicable to other nations as well(Including developed nations like US and countries in Western Europe).
2. I am looking at the economy from a long term(15 to 20 years) perspective. But as some famous economist said "In the long term everybody dies!!". So short term matters very much too. (and sometimes short term is much more important than the long term, depending upon your current state in life.). After all if you can keep making profits in the short term in the long term you will be well off too!! But this article does not concentrate about the prospects of the Indian economy in the short term(I mean next 5 years).
3. I did think through the following issues I am going to mention. But they might look random as I did not spend time on how to present them with a continuous flow.
Now coming to the actual problems:
Absence of the rule of law: In India it is a common occurence for rowdies and mafia dons to have control in many of the core businesses. The reason this is bad is it affects the core of capitalism. One important thing that is necessary for capitalism to survive is the rule of law. With out laws capitalism would become pretty destructive. Just as an example say there is a pharmaceutical company that comes up with some new medication. If there is no rule of law then the medicine would not be properly tested. Whichever company has the political clout would be able to release its drugs but the company that did the real research and development and testing, if it lacked political clout, would not be able to release its drug. That is not development. In fact that is making the life of people worse. I can give examples like this in every industry. But bottom line is with out the rule of law, in short term, companies with political/mafia power wins but in the long term these companies are detrimental for the growth of the economy.
Natural resources: In the long term the resources that matter are NOT petrol, gold, diamond etc.(But they don't hurt!! having them is good!!). But what matters in the long term is resources like clean water, clean air, fertile soil, good ecosystem etc. Problem with India today is more importance is given to resources like gold, diamond etc but people don't pay much attention to water, air, earth etc. If India keeps up with its current levels of unhealthy pollution then the future of our population is bleak(our food security is threatened). Which also means the future of our economy is bleak. The level of pollution in India in some sense is much worse than the developed world. After all pollution just does not mean carbon dioxide(developed world produces more of this) but it also includes how you take care of water(I remember reading lots of textile companies in India that donot treat their waste properly and just discharge them to water), how you take care of soil(deforestation is one reason because of which fertile top soil is washed away), how you take care of air etc. And global warming(assuming it is not a lie as claimed by some republicans) is only going to make things worse. This is a big threat for the entire world population.
Fair Accounting: Nobody knows how much one can trust the balance sheet of Indian companies. Remember not all companies are bad apples. But there are bound to be some. After all even in US with all the regulations there were companies like Enron. So I would not be surprised if there are a bunch of companies in India reporting false numbers. The problem is until the company fails on one of its financial commitments nobody knows something is wrong.So until the company is pretty close to bankruptcy people would think that the company is doing fine based upon the financial reports.
This is by no means exhaustive. As I mentioned earlier I did not spend time on the flow of this article. So it might look random. But I do feel one should consider these issues when evaluating the long term growth rate of Indian economy.
Saturday, November 22, 2008
Sunday, November 16, 2008
Bank Interest Rates in India
Currently the interest rates in nationalized banks in India for fixed deposits are pretty good. They are hovering around 11%. I personally have taken advantage by prematurely withdrawing some of my deposits and reinvesting them at the new interest rate and making new deposits.
Recently at a dinner party I had an interesting conversation with a friend about investing in a house in US versus the interest rate in India.
First off one has to understand that one must absolutely have to lock the safety money in India on a nationalized bank deposit. There is no argument about it. You need to calculate your living expenses and make sure you have enough amount to tide you over any crisis for exteneded periods of time. Assuming you have done that, does it make sense to invest in real estate in US?
Let us take a 10 year past history. First the exchange rate. (source of this information is federal reserve New York, http://www.ny.frb.org/markets/fxrates/historical/home.cfm). The exchange rate of Indian currency on 1998 was approximately 42 and it is approximately 48 now, about a 15% difference. So you would have gained if you had the money in dollars. But it did stay at 39 for some point a loss of about 8%. But let us assume you made NO profit or loss in exchange rate in the past 10 years, i.e., let us assume the exchange rate stayed same.(I want conservative estimates!! I guess 38 to 42 is a pretty conservative exchange rate for Indian rupees)
The bank interest rates have stayed any where from 7% to 12%. Let us take an average of 9%. At 9% your money would have grown approximately 2.4 times in 10 years.(so 1 rupee you invested would be worth 2.4 rupees in 10 years).
Let us take the home prices now. Remember this is one of the worst times to sell a house(and is one of the best times interest rate wise). But let us NOT make any special accomodations for that at all.
The 10 year home appreciation in Bellevue(from 1998 to 2008) is about 100%(source http://www.zillow.com/homedetails/charts/49015943_zpid,10years_chartDuration). Also this is a conservative number as 50% of the houses have higher appreciation than this and some times much higher appreciation!
Home prices have held steady in Bellevue despite the downturn. So I tried taking one of the worst affected areas like Los Angeles, Phoenix etc. Ironically they have a better appreciation rate in 10 years than Bellevue!! For example los angeles is like 200+%. But let us just stick with Bellevue as that seems conservative(And I want conservative numbers in any forecast!!).
Let us assume you buy a house for $250k in Bellevue in 1998. You generally invest 20% to buy a house. So your downpayment would have been $50k. For the moment forget the interest you pay on the mortgage every month. We will account for that towards the end.
If you had invested that $50k in a bank deposit 1998 you would now have $120k. so your gain is $70k.
If you bought a house at the same time, the house would be worth about $500k now(100% appreciation). You owe 200k to the bank. So your money in the house is 300k, subtracting your downpayment your gain is 250k.
Now coming to the interest you pay on the mortgage: Initially when you buy the house the interest you pay would be more than what you would pay on a typical house for rent. But over the course of 10 years your mortgage payment would have stayed the same but rents in your neigbourhood would have increased to allow for the inflation.
Take the above example. For a 200k mortgage your interest would be $1000 per month(this includes some principal too. But ignore that.) When you bought the house in 1998 this would have been a big amount. But at 2008, 1000 is typically the rent you pay in Bellevue for a two bedroom apartment(and that is not sufficient if you have 2 kids!!). But if you had bought the house in 1998 you would be living in a nice 3 bedroom house for the same amount.
Also there are other costs in owning a house like tax, maintenance etc. Let us add all this and subtract the rent you would have paid and say you had to fork out an extra $50k for owning the house(which is little high but let us stick with it). So from your gain of 250k subtract this and you end up with a 200k gain!! This is better than the $70k you would have gotten from the bank.
Again to reiterate, it would be stupid to invest in a house if you dont have money to tide you over the tough times. And bank deposits in India are an attractive and safe(and probably the right) way to save for that. But after doing that investing in a house is pretty attractive.
One more thing that I have omitted is the tax rate. You get tax advantage in owning a house. Unless you actually sell the house you dont have to pay any tax on your gains. Also for the mortgage and tax you pay on the house you can claim write off every year. But in a bank fixed deposit tax would be deducted every year if your interest is more than a certain amount, even if you dont withdraw your money.
Also one more thing to note is that in the above example I am just assuming you are investing only 50k as the downpayment. Assuming you invest the entire 250k would it still be attractive? The answer is it is not as attractive as the former. But it is still pretty good as you would pretty much save on all the money that you would pay on rent for 10 years(assuming an average of $600 per month that is equal to 72k for 1o years!!) . And also a house is more than just an investment, if you have kids etc. So it is probably worh it for most folks in any case!!
Recently at a dinner party I had an interesting conversation with a friend about investing in a house in US versus the interest rate in India.
First off one has to understand that one must absolutely have to lock the safety money in India on a nationalized bank deposit. There is no argument about it. You need to calculate your living expenses and make sure you have enough amount to tide you over any crisis for exteneded periods of time. Assuming you have done that, does it make sense to invest in real estate in US?
Let us take a 10 year past history. First the exchange rate. (source of this information is federal reserve New York, http://www.ny.frb.org/markets/fxrates/historical/home.cfm). The exchange rate of Indian currency on 1998 was approximately 42 and it is approximately 48 now, about a 15% difference. So you would have gained if you had the money in dollars. But it did stay at 39 for some point a loss of about 8%. But let us assume you made NO profit or loss in exchange rate in the past 10 years, i.e., let us assume the exchange rate stayed same.(I want conservative estimates!! I guess 38 to 42 is a pretty conservative exchange rate for Indian rupees)
The bank interest rates have stayed any where from 7% to 12%. Let us take an average of 9%. At 9% your money would have grown approximately 2.4 times in 10 years.(so 1 rupee you invested would be worth 2.4 rupees in 10 years).
Let us take the home prices now. Remember this is one of the worst times to sell a house(and is one of the best times interest rate wise). But let us NOT make any special accomodations for that at all.
The 10 year home appreciation in Bellevue(from 1998 to 2008) is about 100%(source http://www.zillow.com/homedetails/charts/49015943_zpid,10years_chartDuration). Also this is a conservative number as 50% of the houses have higher appreciation than this and some times much higher appreciation!
Home prices have held steady in Bellevue despite the downturn. So I tried taking one of the worst affected areas like Los Angeles, Phoenix etc. Ironically they have a better appreciation rate in 10 years than Bellevue!! For example los angeles is like 200+%. But let us just stick with Bellevue as that seems conservative(And I want conservative numbers in any forecast!!).
Let us assume you buy a house for $250k in Bellevue in 1998. You generally invest 20% to buy a house. So your downpayment would have been $50k. For the moment forget the interest you pay on the mortgage every month. We will account for that towards the end.
If you had invested that $50k in a bank deposit 1998 you would now have $120k. so your gain is $70k.
If you bought a house at the same time, the house would be worth about $500k now(100% appreciation). You owe 200k to the bank. So your money in the house is 300k, subtracting your downpayment your gain is 250k.
Now coming to the interest you pay on the mortgage: Initially when you buy the house the interest you pay would be more than what you would pay on a typical house for rent. But over the course of 10 years your mortgage payment would have stayed the same but rents in your neigbourhood would have increased to allow for the inflation.
Take the above example. For a 200k mortgage your interest would be $1000 per month(this includes some principal too. But ignore that.) When you bought the house in 1998 this would have been a big amount. But at 2008, 1000 is typically the rent you pay in Bellevue for a two bedroom apartment(and that is not sufficient if you have 2 kids!!). But if you had bought the house in 1998 you would be living in a nice 3 bedroom house for the same amount.
Also there are other costs in owning a house like tax, maintenance etc. Let us add all this and subtract the rent you would have paid and say you had to fork out an extra $50k for owning the house(which is little high but let us stick with it). So from your gain of 250k subtract this and you end up with a 200k gain!! This is better than the $70k you would have gotten from the bank.
Again to reiterate, it would be stupid to invest in a house if you dont have money to tide you over the tough times. And bank deposits in India are an attractive and safe(and probably the right) way to save for that. But after doing that investing in a house is pretty attractive.
One more thing that I have omitted is the tax rate. You get tax advantage in owning a house. Unless you actually sell the house you dont have to pay any tax on your gains. Also for the mortgage and tax you pay on the house you can claim write off every year. But in a bank fixed deposit tax would be deducted every year if your interest is more than a certain amount, even if you dont withdraw your money.
Also one more thing to note is that in the above example I am just assuming you are investing only 50k as the downpayment. Assuming you invest the entire 250k would it still be attractive? The answer is it is not as attractive as the former. But it is still pretty good as you would pretty much save on all the money that you would pay on rent for 10 years(assuming an average of $600 per month that is equal to 72k for 1o years!!) . And also a house is more than just an investment, if you have kids etc. So it is probably worh it for most folks in any case!!
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