Hike is higher than was expected; market drops over 1% on the announcement
The Reserve Bank of India (RBI) today raised key rates by a steep 50 basis points. (bps). Following this, the repo rate has gone up to 8% from the earlier 7.5% and the reverse repo rate to 7% from 6.5%. The central bank, however, kept the cash reserve ratio (CRR) rate unchanged at 6%. This is the 11th time since March 2010 that the RBI has hiked interest rates in a bid to tame inflation.
Despite the economy showing signs of cooling down, Wholesale price inflation (WPI) in June rose to an annual 9.44% from 9.06% in May, driven by higher prices lf fuel and manufactured goods. Finance minister Pranab Mukherjee recently maintained that inflation would continue to remain high till December.
Stating that the monsoon, global commodity prices and the Eurozone crisis have the potential to alter growth path and inflation level, the RBI said, "A significant departure of monsoon from 'normal', a collapse of global commodity price bubble and Eurozone debt crisis assuming full-blown proportion" can alter both growth as well as inflation forecasts.
The central bank, however, retained its economic growth forecast for the current fiscal at around 8%. A report by RBI-sponsored professional forecasters, however, scaled down GDP growth to 7.9% from earlier projection of 8.2%.
Vishnu Swaminathan, director of Ashoka Foundation which is undertaking a low-cost housing initiative for the poor, believes that such projects are not possible in the major metros where land costs are too high and delays add to the cost
The government estimates that the country will see a shortage of 26.53 million homes by 2012. Ashoka Foundation, the global association of social entrepreneurs for change, has in one of its several initiatives, launched low-cost housing projects focused on the poor across the country. The effort has been successful in Ahmedabad, but the association believes that a similar programme cannot be replicated in Mumbai or Delhi. Vishnu Swaminathan, director of Ashoka's 'Housing for All' initiative discusses the efforts and experience in the housing area.
Moneylife: Almost all the housing schemes for the poor and low-income groups have failed miserably. Why is affordable housing such a difficult aim to achieve?
Vishnu Swaminathan: There are many factors. First, let us consider the situation. Almost 90% of the people living in big cities do not have an income statement, which is necessary to get loans and identity cards. And the 'poor' is not a homogeneous group, as it is perceived.
The low-income segment is highly fragmented: there are households that earn as much Rs25,000 a month and can afford refrigerators and television sets, but don't possess identity cards or income statements. Most of the banks will not loan out to such people.
ML: So why not turn to government grants?
VS: Government grants take years to materialise and in many cases projects suffer from poor conceptualisation on the ground. The promise of free or heavily subsidised social housing has undercut market-based housing projects in several countries, where people prefer to wait for a long-promised subsidised home rather than buy an affordable one at market prices. Such programmes disincentivise the private and social sector actors.
ML: So how do you tackle the problem?
VS: The focus should be clear. We are looking at 250-550 square feet homes in urban areas for one family that usually consists of more than four members. So, at the most, these can be 2BHK flats.
Three groups should be on board for these projects. NGOs can arrange for identity cards and persuade banks and financial institutions to allow these people to open bank accounts and provide income statements. The government, on its part, can arrange for subsidies on land or taxes, and clear the projects first.
And, not to forget, the architects should be consulted, because it is they who will design the projects and the homes. For slum dwellers, the community is the centre of life and they would like to be close to some amenities like repairing shops for vehicles and tools and marketplaces. The project should be designed accordingly.
ML: What about the builders? Can one convince them to take up such projects?
VS: We are not talking about charity, so we don't expect the builders to build homes free of cost. Is there profit for them? Yes, and builders participating in our projects at Ahmedabad, Coimbatore and other places are seeing profits.
Of course, you cannot expect huge profit margins which you have for big realty projects in metros. The NGOs also help the customers manage their resources better and save, so that they can pay the monthly installments without fail. Moreover, this is an area where we don't see many players. So the field has good prospects, and offers good opportunity to builders.
ML: How do you reduce the cost for such projects?
VS: We don't work with big brand builders, and these small developers are happy with their margins. Also, in such places, government approvals are easier to get, because these projects are of modest size. The cost of marketing is negligible, because we have roped in NGOs who do most of the work.
Once the builders acquire the land and have the clearances, NGOs present them with the list of names of customers and they negotiate with banks and financers for loans. So the whole process is speeded up and unnecessary costs are eliminated.
ML: Let's talk about financing. Without income statements, how can these people get financing?
VS: Well, many NGOs are doing fantastic work and for our projects we have seen many banks proactively helping underprivileged groups. Of course, that option may not be available everywhere and that kind of sensitisation is a slow process.
Government subsidies can make a lot of difference and in many cases we could persuade the authorities to grant more FSI for the projects. It would help if housing finance companies take up this issue.
ML: Ashoka's initiatives in Kenya have been very successful, because of their collaboration with microfinance institutions. But given the situation in India, will that help?
VS: Unfortunately, no. Microfinance in India has proved to be a disaster in most places, and the joint group liability model is unsuitable for housing finance, because houses belong to the individual and not the group. The interest rates they charge are outrageous, no wonder people commit suicides. A home loan takes almost 15 years to pay back, but for MFIs, the duration is one to three years. We are not sure what is happening on the regulation front either. So I don't see MFIs working in the case of affordable housing.
ML: Ashoka estimates that by end of 2011, 2,500 completed units will be sold in Ahmedabad. Why don't we see such initiatives in Mumbai or Delhi becoming a success?
VS: Affordable housing is not possible in places like Mumbai and Delhi. Though I am not an authority on Mumbai, I can say that prices are too high there for middle class citizens to buy a home, forget the poor. Land prices are too high, the builders have high margins, approvals take a lot of time and delay adds to the cost.
Where land is scarce, one needs to grant more FSI-in Rajasthan, our housing projects have utilised the concept of transferable FSI to create more homes and hence bring prices down. In Mumbai, abuse of the FSI system and instances of irregularities are well known.
ML: So is affordable housing going to remain a dream for Mumbai?
VS: Affordable housing also means housing that is attainable. I don't see the poor people from Mumbai or Delhi ever attaining that level when they can own a house. To reduce the cost, one must stay on the outskirts, and poor people have to live further away. The cost of transportation will affect them. Where land is so scarce and so costly, there is no question of community-based living. It will remain a distant dream.