Out of the several financial perils hanging over the Indian economy like Damocles’ sword, some are akin to looming financial disasters, particularly in the housing sector and a handful of infrastructural projects. For proper appreciation of the most dreaded perspective of this pressing issue and its long-term damage to the domestic macroeconomy, it is pertinent first to mention the sudden spurts of massive private and government investments, notably in sectors such as housing, SEZs, airports, railways, power, digital infrastructure, as well as roadways since 2000, as part of a global role model for economic turnaround, which are apparently good.
China and India, being among the fastest-growing economies in terms of financial growth and GDP, are rising economic powers with mesmerizing achievements. They have pumped trillions of money through private and government initiatives in the last 26 years, particularly in the real estate sector, in comparison with other sectors, due to having the highest populations with near proportion in the global landscape. This housing sector boom is conspicuously not confined to big cities only, but has spread into every nook and corner of both nations.
In India, in the last eight years, this trend has driven 80% of private sector investment in the housing sector in small and medium cities, with three facets: 80% of private investments are in building a huge pool of residential apartments, 12% in the construction of hospitals and nursing homes, and the remaining 8% in the educational sector, particularly in private engineering, medical, paramedical colleges, and private schools.
Our most concerning issue is the massive private investment in the housing sector, which till 2022 paid good dividends to promoters due to massive migration of rural people to small and medium cities for a better financial future, owing to the long-struggling agricultural sector. Apart from this, due to sudden remarkable prosperity among business and professional classes in small and medium cities, these newly constructed apartments have become a major conduit for capital investment of excess money. Therefore, naturally, the housing sector in small and medium cities boomed, much like China.
But from the year 2023, this boom in the housing sector has been facing severe contraction, like in big cities in India, due to shrinking scope for meaningful jobs and income commensurate with rising inflationary pressures, much like China. China has burnt its fingers severely by the total collapse of its housing sector three years ago and is still gasping from this financial shock. This has not only affected promoting companies and entities, but has also left deep scars on financer banks, much like its failed Cross Border and Belt initiative, which landed Chinese banks in a perilous financial situation.
A similar trend is showing its hydra-headed face in the Indian housing sector in small and medium cities, being mostly bank-financed, with an average 85% non-occupation, yet the construction boom is gathering more strength contrary to market trajectory. Why? The reasons are multiple. Firstly, the promoting segment, being overcapitalized after making huge profits till 2023, is in a good financial position to bet on the housing sector even without banking support. Secondly, due to unprecedented political corruption across India, a sizeable chunk of politicians are now masters of huge unaccounted black money, which has received great impetus in the last 12 years due to the fast-diminishing effective power of direct tax administration, bordering on frivolity. This huge pool of black money is streaming into the real estate sector, mainly housing, while small portions percolate into the educational and health sectors.
Now, from the housing sector perspective, considering the overall financial situation in small and medium cities where 85% of people are flexi-workers, bereft of any meaningful permanent jobs, the imminent disaster in the housing sector is writing on the wall. Such disaster, already manifesting clearly, will not only land promoting entities in financial hell, but is also sucking 80% of floating capital in semi-rural and semi-urban India, with no prospect of retrieval, much like the Chinese housing sector with its innumerable ghost cities and apartments.
From the Indian economic perspective, the dreaded financial consequences of such depletion of 80% floating capital from 65% of India’s economy are easily discernible, like the immediate peril of complete breakdown of the direct tax system—the head and tail of economic discipline and structural macroeconomy. The right course for the real estate sector, by quickly learning the glaring lessons from China, should have been to concentrate on building supermarkets affordable to small businessmen, hawkers, and professionals instead of building thousands of shopping malls-cum-residential apartments.
Apart from this, on the government front, massive investments in airports, metro rail, and SEZs like GIFT City and Software Technology Parks of India are partly showing the same tendency of non-occupation or underutilization due to concentration of big capital in traditional big cities or their surroundings, along with acute planning deficiencies. A similarly dismal picture is discernible in the Indian Railways, the lifeline of India, with no tangible investment in increasing railway tracks and world-standard digitalization in operational infrastructure.
India’s policymakers since 2000 have been in a mad rush to copy the Chinese model of development, quietly forgetting that, unlike China, India has poor rule of law, poor administrative efficiency, weak digital infrastructure, massive shortages of manpower in administration and judiciary, unbridled administrative and political corruption, and the highest income inequality, along with financially weak state governments—factors sufficient enough to invite imminent disaster at the heart and soul of the macroeconomy.
Author Bio
