The crisis that shattered India's economic dreams

NEW DELHI: Wish Town was once a coveted destination for aspiring middle-class Indians looking for a portion of the good morning promised by an ambitious prime minister Narendra Modi when he came to power more than five years ago. Now, it is a symbol of lost hope.

Wish Town, an extensive 1,063-acre property development located in Noida, just outside New Delhi, was supposed to offer potential homebuyers bright shopping centers, pristine golf courses and modern medical clinics. The apartments that should have been delivered in 2012 were billed in the media as global homes with an Indian address.

Today, the area is dotted with unfinished apartment blocks, abandoned in the middle of construction. The ruined buildings are empty, with bushes covered with vegetation instead of well-kept grass. Most of the streets are empty of cars and people, apart from a few security guards.

The failure of Wish Town tells the story of an economy in distress, a banking system in trouble and consumers too worried about job cuts and rising costs to spend. India's decline in consumption is so severe that it is affecting global growth and causing economists, including last year's Nobel Prize winner Abhijit Banerjee, to warn of a major recession in the country.

The real estate market illustrates the extent of economic problems. Real estate developers such as Jaypee Infratech Ltd of Wish Town have been ruined, plunged into billions of dollars of debt and cannot obtain funds to complete the projects as promised.

Non-bank financing, an industry of $ 335 billion that has become the lifeline for millions of small businesses and consumers in recent years, has dried up. Potential homebuyers are paying mortgages for apartments they cannot live in, which puts their budgets under pressure. And millions of construction jobs are at risk, with effects that are already affecting India's most important rural economy.

From a growth of 8% three years ago, the economy will expand only 5% in the fiscal year until March, the weakest performance since 2009. The International Monetary Fund last week cut India's growth forecast for this year 1.2 percentage points to 5.8%, specifically citing the nation as a reason to reduce its global growth outlook.

Despite tentative signs that the worst may have happened, growth is not programmed to reach its previous highs in the short term, regardless of the 9% to 10% pace that the economy needs to combat extreme poverty in a nation of 1.3 billion people. Modi's goal of nearly doubling the size of the economy to $ 5 billion is becoming more distant and his 2014 promise that good morning is approaching no longer sounds true.

To make matters worse for Modi, he is dealing with the greatest social turmoil since he came to power. Thousands of students and people from neighborhood groups have come together across the country to protest against a controversial citizenship law that, according to critics, discriminates against Muslims and undermines the secular roots of India. The consequences have affected the image of Modi abroad and have given some investors reasons to rethink the Indian Uprising narrative.

At the center of the economy's problems is a persistent credit slowdown, aggravated by a crisis in the shadow banking industry almost two years ago after the failure of one of the country's largest infrastructure lenders. Shadow banks, lenders outside the regular financial system that are not as strictly regulated as banks that capture deposits, have been responsible for millions of small loans in everything from cars to gold jewelry and luxury apartments throughout years. The shock of non-compliance caused credit markets to freeze in what some have called the Lehman moment of India, a reference to the collapse of the Wall Street investment bank in 2008 that triggered the global financial crisis.

As lenders reduced credit, domestic spending suffered a blow, and consumption accounted for almost two-thirds of those in India. gross domestic product , it was not long before the growth numbers were reached.

In Wish Town, aspiring homebuyers are holding back spending while they wait for construction to continue.

Sherry Addvant, 39, public relations executive

She pays Rs 25,000 ($ 350) per month to rent an apartment while still paying a mortgage of Rs 80,000 for a house in Wish Town that has not been built six years after she made the purchase.

“I was waiting for my first child when we bought this property. Now I have delivered another one, but the house is not in sight, Addvant said from the balcony of his rented apartment, overlooking the half-built shell that was supposed to be his new home. He has reduced purchases and travel, and does not plan to replace his car for a decade.

A bustling intersection of shops and street food carts is a 10-minute drive from the Addvant home in Wish Town, where nearly 1,000 workers meet every morning in search of construction jobs that will pay less than $ 6 a day . Many wear caps and sweaters that are not warm enough so that the cold winter temperatures of New Delhi this year are as low as 3 degrees Celsius. Workers stand for hours on the sidewalk hoping to be picked up by builders who need additional hands that day.

Suraj Kumar, 25, construction worker.

Previously, everyone would get a job for about 25 days in a month, but now even five to 10 days is a lot, said Kumar, who emigrated to Bihar.

To feed her two-month-old baby and already recovering her family's loan payments, Kumar has taken a job as a night security guard. He replaced breakfast with just a cup of tea and eats bread and salt instead of full meals. He hasn't bought clothes in a long time, has sold his wife's jewelry to make ends meet and looks for additional work during the day to survive.

The links between the construction industry and rural income are strong, which explains why consumption has been so affected, according to Pranjul Bhandari, chief economist of India at HSBC Holdings Plc in Mumbai. About two thirds of the population of India live in rural areas and with limited income, many villagers go to the cities to look for work and send money to their families. Bhandari estimates that 70% of the rural population earns their income from activities outside of agriculture, especially in construction.

Rural income depends on construction, and construction depends on shadow banks in more than it seems, he said.

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Having secured a greater mandate in last year's elections, Modi now faces rising unemployment as layoffs spread across industries, from car manufacturers to jewelers. The unemployment rate, which according to the most recent official data reached a maximum of four decades of 6.1% in June 2018, probably rose to 7.85% in the last three months of last year, according to the Monitoring Center Indian economy .

Parth Mehta, managing director of Paradigm Realty, a medium-sized builder based in Mumbai, said the company is reducing employment as the number of projects decreases.

The blood in the financial system has completely drowned and it is difficult to find capital, he said. “The lack of trust, whether among buyers, developers and, in general, between companies, is one of the key reasons for the intensification of the slowdown. The shadow banking crisis was the last nail in the coffin. ”

The government's response to the slowdown so far has focused on boosting production in the economy, rather than stimulating demand. Finance Minister Nirmala Sitharaman He gave businesses tax cuts worth $ 20 billion last year, established a fund of 250 billion rupees to save stagnant residential projects, merged weak state banks with stronger ones, and facilitated foreign investment rules.

He is expected to describe more measures in his speech on the budget on February 1, and market observers call for more spending in rural areas and tax cuts. However, a significant fiscal stimulus is unlikely, given a fall in government revenue and a probable violation of this year's deficit target of 3.3% of GDP.

What Bloomberg economists say

“We believe that a coordinated fiscal and monetary impulse is needed to get the economy out of its current economic depression. In our opinion, tax cuts aimed at stimulating private consumption and an increase in public capital spending would increase capacity utilization, avoiding any displacement of private sector companies. - Abhishek Gupta, economist from India


Shaktikanta Das, governor of the Reserve Bank of India, does not have much room to continue reducing interest rates.

Inflation exceeds 7%, well above the bank's goal of 2% to 6%, and given credit problems in the financial system, the five RBI rate cuts last year have done little to stimulate loans. Economists in a Bloomberg survey see 25 basic points of relaxation during the rest of this year.

Rajesh Sharma, managing director of Capri Global Capital Ltd, a non-bank lender in Mumbai

The real estate loan in India is still considered a nightmare by investors due to problems that include the inability of many developers to complete projects and the slowdown in demand, he said. “The financing of real estate has dried up. While it was a bit difficult for developers to get money before the shadow banking crisis, it is now very, very difficult.

Back in Wish Town, a state company has been selected to complete the construction of the excellent apartments over the next four years. But homebuyers like Manish Choudhary, a senior executive at an information technology company, remain resentful of their circumstances.

We cannot plan vacations and buy even normal things. I would have sent my son to a better school if the mortgage and rent were not there, Choudhary said. The slowdown has affected the class that is paying taxes.