Short-term blips notwithstanding, we are generally agreed on the robustness of the Indian domestic demand story. Growth will keep accelerating with the leverage provided by the pent up demand for goods and services.
Accurate as this surmise is, it runs into problems if policy does not work to tailor the advantage. An example of this is low cost housing. The possible demand for low cost houses in the economy is above Rs 6,20,000 crore, estimates the recently released report Trends in Housing in India by the National Housing Bank. The same report, however, also points out this demand cannot be met if the corresponding market for securitisation of housing loans does not take off.
The world economy has paid a huge price through the sub-prime crisis, but still there are only two options for India to provide adequate housing for its people. The head in the cloud response is to imagine a government at the state or the Centre with unlimited ability to create fiscal deficit to go on a housing construction spree for this decade and next.
The other is to create a market for securitised debt from the loans taken out by the low income families. Why only low income housing? The ticket size of each loan taken out is too small for real estate companies to take an interest while the risk of delinquency is high (see the same data for NPA across income brackets) for banks to make the effort to offer more loans unless they can sell them to clean their balance sheets.
The model will include a trust which will warehouse the loan papers, an agency like the National Housing Bank to create a special purpose vehicle that will securitise the papers by bundling them and a market where financial institutions with the demand for such long term papers turn up to buy them—typically insurance and pension funds.
This means all the financial sector regulators including RBI and the Irda have to permit banks and financial institutions to invest in these papers. But this remains a bugbear for all of them. Despite endorsement by authorities like C Rangarajan, securitisation remains voodoo for policy makers. On the state policy front, stamp duties and legal difficulties in marketing such papers makes the market impossibly costly to set up.
The result is the poor don’t get the houses, the demand for housing material remains muted and a powerful value-add