Under Dr Manmohan Singh both the depositor and the borrower are weeping. His queered economics has shattered everybody and the country is going downhill. Because of the double-digit inflation, and Chidambaram'smanipulation of the RBI to confront inflation, the depositor is incurring a loss of at lest four per cent on his money deposited in the bank. That is why experts say it is no longer paying to keep money in fixed deposits. But the high lending rates, recently announced have made the home, vehicle and consumer loan equated monthly installments (EMI) costlier. In the last four years lending rates have increased on four occasions and compared to the NDA time they have almost doubled. Housing loan segment is the worst affected and politically most sensitive.
The housing loan interest rates have gone up from seven per cent during Vajpayee'stime to 13.5 per cent under Manmohan Singh. This alone if properly articulated would throw the UPA out lock, stock and barrel in the next election. Of course there are numerous issues on which it will be punished.
High interest rates hurt everybody. It makes investment costlier, pushes up cost of production, leads to price rise, reduces demand and adds to inflationary expectations. But it hits the fixed income group the cruelest. The Indian Express last week carried some case studies with great sensitivity which highlighted the horror of high EMIs on households? living condition. Most stories that get instant attention however concern the higher income bracket. What about the millions of workers who get less than Rs.10,000 a month, yet tried to make a home because of the low interest rate during 2001 to 2006. Thousands of technical education institutions and small enterprises sprang up taking advantage of low interest loan facility. All of them are now in doldrums.
Access to cheap finances was being touted as one of the major achievements of liberalisation. The easy and affordable terms had whetted the appetite of Indian consumers propelling growth in automobiles, housing, consumer durables and electronics. The Indian Council for Applied Economic Research in 2003 in its Indian Market Demographics Report said the growth in purchase of white goods that are financed is significantly higher than those that are not. Rural India accounted for a third of all purchases of white goods with consumer financing. More houses were built in the rural areas because of this. Men and women worked in cities and financed their once in a life-time ambition to own a house, brick by brick, bit by bit. This was the great Indian growth story.
The downward trend in interest rates since 2001 triggered a housing boom. Even lower income group could afford to take a housing loan of say five to 10 lakh when the rates were hovering between 6.5 and 8.5 for almost three years. Not much of paper work. A regular income was enough. The cheaper housing loan became the new vehicle of mass asset creation. It created a new national fervor. To own a house meant a lot to the working class. With it came the need and demand for better roads, electricity, water, civic amenities and transport. It changed the whole philosophy of life. With it the property prices skyrocketed. For people who bought their houses for Rs 10 lakh to Rs 20 lakh the appreciation was more than four times. This created a new confidence, the pleasure of investing wisely and pride of owning a valuable asset. The efforts did not go waste, they said. In fact, this sold liberalisation more effectively than anything else. The consumer craze inevitably followed, a new buoyancy in market. The housing loan raced ahead at 40 per cent per annum. A large chunk of this asset creation happened during the NDA. And this also was perhaps the reason for the BJP to coin its India Shining slogan. As it prepares for another general election, it has a Brahmastra in the housing loan fiasco, Manmohan-Chidambaram team has created. Nostalgia has great value in politics.
The rapid growth in banking, consumer finance and financial services sectors witnessed during the NDA rule in the first quarter of the decade was stimulated by falling interest rates. My friend, Balmiki Singh in 2004 took eight lakh housing loan from Syndicate Bank on a seven per cent interest on floating rate for a ten-year term. He actually wanted to take it on a fixed rate. The bank manager, a puny slime, tricked him into taking the loan on floating rate, though Balmiki was sure that the fixed rate then was the lowest and there was no chance of it falling further. Today the poor chap is servicing the loan paying nearly 14 per cent which is almost double the rate under which he took the loan less than four years ago. He has to pay more than double the EMI or continue servicing the loan for his entire lifetime if he lives long enough or perhaps till perpetuity if the present rates continue.
Nobody, not even the most pessimistic economic analyst predicted the present situation. The interest rates started the reverse journey in February 2006. When it reached 9.5 per cent there was a hue and cry. That was last year. It meant an increase of 30 to 35 per cent in the EMI. Then by early 2008, the rates climbed so high and so steep, 11 per cent, the only solace remained was Chidambaram'sassurance that he will keep it low. Nobody understood the economics of his claim, but we all believed in his ingenuity to sell the bluff.
Now it has become not only a melancholic nightmare, but a crushingly tragic reality show. It is not only the EMI but everything else has gone up. Some say the real inflation is up by 30 per cent though the official rate is 11.45 per cent. Is there any hope left for the aam aadmi?
This is what Man-mohanomics has done to the burgeoning 400 million plus modern Indian middle class whom the merchants of globalisation are dangling before the world. These people were getting converted as the most vociferous supporters of globalisation. But the house loan trauma is one that concerns every poor Indian who ekes out a living working as a labourer, plumber, clerk, electrician, driver or petty trader. Very soon there could be a demand for home loan waiver, which will be more genuine than the one Chidambaram has announced on February 29.
These days the Finance Minister P. Chidambaram has stopped talking about not hurting the housing loan segment with his diktat to the banks. He has conceded defeat on the monetary front as well. Chidambaram and other Congress Party leaders have always been talking of the importance of low interest rates for the economy especially for housing loan. ?It is related to the aam aadmi?, they would say.
The Vajpayee government was in a position to announce a slew of attractive sops for investment to build on the great potential the banking-consumer bonhomie of those days. For half his term Manmohan Singh reaped its benefit.
For sometime the UPA even dabbled in trying to humour the EMI constituency. Mid-way through the UPA regime when the burden of the EMI households increased, there was still hope of rising property prices. Now it has become a double whammy. The property prices are not rising any more. Rather it is falling, if not stagnant. This is the added worry.
According to a senior bank executive, the cumulative effect of interest rate hike over the last three years means that for those who have borrowed in 2005, the new EMI would be 28 per cent higher than it was when they started repaying the loan. Of course, this percentage will change depending on the bank from where one has taken the loan, the duration of the loan and the amount. It is the housing sector that has been hit the worst. Inflation has made the construction costs go haywire, with labour, cement, steel and all other items becoming costlier. This adds a new dimension to the housing dream. The builders or societies are asking for more cost escalation, further adding to the burden of the borrower.
Banks too are not happy. Increased unaffordable EMI means more default and low profitability coupled with the chances of increased non performing assets (NPA). Already customers have more than once readjusted their repayment schedule because of earlier hikes. With every per cent increase in interest rate, the repayment period increases by eight years if EMI is to be maintained at current levels. As the rates have gone up six per cent in the recent past the customers have reached the maximum possible repayment period already. For these cases increased EMI is the only option the banks offer. Imagine the catastrophe Chidambaram has wreaked on the house owners.
(The views expressed in this column are personal. The writer can be contacted at [email protected])