Jan 1, 2014

Inflation in India - Is it driven by easy money ?

Last month,  I was in India for a week. One of the aspects that I couldn't look away from was inflation.. Maybe some of the figures that I quote may seem to be quite normal for resident Indians. However for someone like me, who has moved abroad from 2011 end, there was a marked difference in the level of prices..

Observation 1 - I picked up a tooth paste - some colgate variety - from a reliance fresh outlet. Normally when I pick up any house-hold item like that, I don't pay much attention to the prices individually.. When the bill came, this item had a price tag of 200/- .. Not really sure if Reliance was jacking up the price or Colgate.

Observation 2 - Place : Guruvayur.. A roadside restaurant near the hotel where we stayed.. Price of few items - Masala Dosa (45/-) , Meals (105/-) ..  This is just a normal eatery with minimum facilities.. Inspite of the price range, this place is swarming with people - middle & lower middle class range.

Observation 3 -  Railway station cafetaria - No lunch item priced less than 100/-.

Observation 4 - A prominent political party worker came to collect donation for an upcoming election rally of a National level political reader. As per him no donation less than 500/- will be given a receipt and they don't require it :)

And much more.. In any decent textile shop, most of the items start at 300/- plus.. Any normal purchase of bakery items cost 150 plus.. No manual labourer can be hired at a rate less than 500/- per day..

All this gave me a feeling that there is too much money floating in the economy atleast in certain pockets.. Otherwise, FMCG companies cannot charge such rates and survive.. Roadside hotels cannot  charge that much unless people are willing to pay that high.  Our lose monetary policy has infused such a high amount of liquidity into the system so that people have started losing faith in rupee.

Markets have different ways to react to all this.  In our locality, inspite of the presence of  2 or 3 supermarkets,  there is a  - Nadan Pachakkarichantha - or local market to sell locally grown vegetables and fruits.. And, apparently it is at this place where you get cheapest vegetables.. Not any of the supermarkets.

I heard that in some of the property transactions, people have started using gold instead of cash to negotiate and pay ( can't vouch for the authenticity ) - partly to dodge taxes, partly because there is no guarantee on the value of rupee. It made me recall one of the documentaries that I had seen about the great depression.. The idea conveyed in that is that when currency becomes too weak, alternate items start functioning as currency - or  in extreme cases,  certain elements of economy start following barter system ( Haven't observed such instances so far fortunately )

All this points to the fact that abundant doles , subsidies, loands, pay hikes and all lose monetary elements have rendered rupee much weaker. Not commenting on the political side, however economically we should keep interest rates high to bring sanity to the economy.

Nov 30, 2013

Asset Bubbles ,Kerala Real Estate & Advertising

Robert Shiller, one of the winners of Economics Nobel 2013 defines speculative bubbles as “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” This attracts “a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

Few years back, from about year 2000 onwards, this trend has been in focus in Kerala. Practically nowhere in the state, you can buy small plots of land at less than a lakh INR per cent. Aided by the easy availability of credit, people have been gobbling up land, villas & flats in every nook and corner.  Lot of people, especially middle class have been clinging on to the moto " Real Estate prices never go down " or " As long as there is black money, real estate cannot go down ".. I find both these arguments really stupid.. If  asset bublbles can form and crash in US, Japan, practically every South East Asian country , & China, there is nothing unique about India or Kerala.

More than that, it is important to understand the market forces to understand the real estate sector. Housing is a primary need. A primary need based demand on real estate cannot easily go down, unless there are structural problems in the society or economy.. However, lot of people bet on real estate as an investment ( after they have a primary unit to stay ). This demand is the root cause of bubble. The problem with this kind of demand is that investors expect it to appreciate. And when the primary demand dries up ( because of the level of prices ), investors tend to lose value..or it ceases to appreciate. This situation is highly unstable when this secondary demand is backed up by easy credit.

So, when does this bubble burst - Here also, I'm a big fan of Shiller . Quoting from his essay "Bubbles  Forever " - One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.

I think the bubble is deflating, the signals are pretty much evident in the advertisements that are coming in the media . If one reads the schemes correctly - Ready to move in flats often means that builder is finding it difficult to sell the units , and he has a huge mortgage to repay - you can  make out these facts himself.  Increased advertisements of villas often mean that they are not selling themselves. Besides this, Kerala has one of the lowest rent to value ratio when it comes to apartments even in Kochi, Trivandrum or Calicut.. Meaning, it is better to rent an apartment than buy it in these places.

So where will the demand shift to ? I think there is a huge pent up demand for afforable housing at entry level.. As well as high end homes with top quality features. The time of fly by night builders and those who construct substandard flats are long gone by. And, no longer should one expect the value of land to appreciate substantially. We are in a high interest rate regime for the foreseeable future. Unless rates come down substantially, the bubble is going to stay in a deflated, not yet burst condition

For more reading

Oct 4, 2013

Is Facebook Doing a location Matching ?

I met an acquaintance of mine a few days back. Usually that person's facebook updates don't come in my news stream. However, couple of inconsequential updates on FB over the last few days from that person ( not 'liked' by anyone, not the most recent one in my stream ) has appeared prominently in my news stream.

 How could facebook give prominence to such an activity in my stream ? My conjencture is that facebook may be doing a location matching . My phone is always connected to net..And, facebook app may have been on as well. I'm supposing that may be true for this particular person as well. So, FB may be doing a location based hypothesis that we have met , and based on that, highlighting the updates more prominently..  Interesting, but kind of creepy.

After seeing this interesting Ted Talk ( http://www.ted.com/talks/eli_pariser_beware_online_filter_bubbles.html ) sometime back, I think we are nearing an age where science fiction  & fantasy in some dimensions atleast gets near reality.