Our beloved economist prime minister did a great job of liberalizing the country from that of a socialist one to capitalist one in the 90s. Now the country can boast of doing business with more than 400 Fortune 500 companies after economic liberalization, from that of near zero pre-liberalization.
With the sudden transformation of the economic structure in the country has created great wealth among individuals and institutions. Thanks to US outsourcing and weak rupee which multiplied the income of the employees working for these multinational companies nearly 40 times without they are having to travel abroad to get the same result.
The sudden spurt in wealth has created a new problem in an otherwise poor country with one section having a high spending power and other majority of the population struggling for a square meal a day. The high spending power made the matter worse resulting in high inflationary economic situation, with the government having to balance the situation, where major part of the problem is global as well.
When the government has to take not so populist measures in such a situation, it leaves the whole responsibility to Central Bank. The Central Bank tries whatever best in its mandate by increasing CRR, increasing repo rate, there by sucking the money from the financial institution, hoping that it will result in reduction in inflationary condition, thereby financial institutions increasing lending rates. But this cannot go on as we cannot afford unhealthy difference between global interest rates and local interest rates. But this measure only controls the financial institutions; what about individuals who are the beneficiaries of dollar rupee conversion. The CRR and repo rate will not rein in individual with high spending power.
When there is more money at people’s disposal, they go out for shopping, they buy houses, apartments, cars, consumer durables, etc. When there is high demand for material wealth naturally there will be scarcity in the market resulting in price rises. Moreover whenever there is high demand for manufactured goods and houses, it creates a great demand for raw materials like steel, cement, etc., resulting price rise, a highly sensitive area, which the government is most feared of.
So what is the solution? Solution lies in making people spending even more, much higher than they could afford with their accumulated savings! Sounds strange? Let me explain.
The individuals with more money look towards different options of investment. Other than material wealth they invest in stock market, mutual funds, and other financial products. But globally stock market attracts only fraction of the population and because of its highly volatility nature and many tend to lose money than benefit from it. But the investments in these financial products create no demand for raw materials and contribute nothings towards inflation. But because of the high risky nature of stock market and people tend to invest only few thousands in stock market this is not an option.
The government gives tax concessions for home loans, many have benefited from it. The tax concessions given to home loan is so attractive that it can be considered as best investment option. But unfortunately constructing a home requires a lot of raw materials, it puts a high demand on cement, steel, wood, tiles, etc. As we have seen massive scale apartments coming up all over India, one can easily imagine what sort of demand housing industry would have created on raw materials. The situation has badly affected a genuine buyer with the rising cement and steel cost. Naturally tax concession has worked against the government in the housing industry with the rising prices of very sensitive commodities cement and steel.
Well, the government cannot do away with tax concession to housing industry. As it is a populist policy of the government. But government should remove attractiveness tag which is attached to this as an good investment option. There should be cap on the amount one can avail the tax concession. This amount can vary for metros and non-metro cities.
So most of the investment options mentioned above puts a high demand for raw materials and there by result in an inflationary situation. So which investment option will take all the accumulated money from cash rich individual and is a safe and secure investment option which is good for the country too?
India is a country with unplanned cities and rural areas. People first build their homes and then spaces left out in between their homes become area for commuting and there by called as roads. Globalization brought in new ideas and changed lifestyles. Now people prefer to live in places with better road connectivity and good infrastructure. Thus we have seen umpteen numbers of gated communities coming up around major cities. These have more open spaces and more green area. There is a norm that 50% of the area should be meant for parks and roads. As most of these layouts are not much far from the city are high value investment options. The making of the layouts are labour intensive, and very less raw material oriented. In some cases completing the layout takes more than six months there by giving continuos employment to laborers. There by making it far better option than government’s own employment guarantee scheme.
The government should propose tax concession for those who buy land in these layouts making investment on land an attractive option. Only approved layouts should be allowed for such tax concession to avoid malpractices. Only 50% of the government notified value should be allowed for tax concession, there by safeguarding financial institutions, in case if the land rates were to fall, these financial institutions will not get into subprime kind of a situation in the future.
As these projects requires very less raw materials and the investment on this is 90% towards the land it achieves many purposes. As these are high investment options, first it takes away all the cash which is available with individuals and there by reduce their spending power. It gives a best alternative to individuals who are shying away from stock market. It also would make people to go for loan and people repaying loans would certainly spend even less. It is a good investment option, one can encash it with good returns when in need.
May be till the next 20 years nobody will be living in these layouts because of the distances they are currently from the cities, but we have already reserved spaces for well organized living in the future. The new urban India will have well planned layouts when people start living in these areas. As 50% of the area is meant for parks and roads, this will surely transform Indian cities to beautiful ones.
Wednesday, August 13, 2008
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