Economic lessons for India from the Evergrande crisis in China

 Synopsis: China’s Evergrande issue has highlighted the importance of its real estate sector. India can take a few lessons out of this crisis.  

Background  

Evergrande, the world’s most indebted real estate company in China, may collapse in the near future. It has worried the financial and economic world.   

Read more – China’s ‘Lehman moment’ 

However, the big issue to highlight is China’s dependence for growth on its real-estate sector. Real estate makes up for around 29% of the Chinese economy, as per estimates in Peak China Housing, Kenneth S. Rogoff and Yuanchen Yang.  

It has resulted in the mounting of the huge debt of real-estate companies and debt of consumers who have taken housing loans. 

As per Fitch Ratings, Chinese household debt as of the end of 2020 stood at 62% of China’s gross domestic product (GDP). Any excessive debt-driven growth is not good for a country in the long run.  

In the light of the events in China, we need to analyze the situation of the real estate sector in India and take lessons from this crisis in China. 

India’s Real estate sector  

Low Share in the GDP: As witnessed in China, the real-estate sector has huge multiplier effects. The real estate sector formed around 7% of the Indian economy in 2019-20. While in the Chinese case this figure was too high, in the Indian case, it is too low.  

Multiplies effect: Real estate sector boosts other sectors, which provide inputs to this sector. For example – steel and concrete, from the manufacturing sector, labour input from the construction sector, capital input from the banking sector, etc. 

Demographic dividend: Real estate sector creates more jobs, particularly at the semi-skilled and low-skilled levels. It will help in reducing disguised unemployment in the agriculture sector.   

High intesrest rate and home prices: The Indian real-estate sector has been stagnant, primarily because of high-interest rates and high home prices. It is evident from the fact that priority-sector home loans given by banks as a proportion of overall housing loans have gone down from around 72.7% in September 2007 to an all-time low of 32% in August 2021.  

Priority sector home loans are home loans of up to ₹35 lakh in metropolitan centres with populations of 1 million-plus. In non-metropolitan centres, they are home loans of up to ₹28 lakh. It is subject to the condition that the homes being bought should be priced up to ₹45 lakh and ₹30 lakh, respectively, in metropolitan and non-metropolitan areas 

The issue here is that the banks are largely financing homes worth at least ₹30 lakh in a country with an annual per capita disposable income of about ₹1.5 lakh. 

Lessons from China 

Firstly, homes in a price range of ₹10-15 lakh are required for real estate to become a major sector, it has been in the Chinese case.  

Secondly, Land prices on the edges of cities and within cities need to come down. Land-usage norms should be reformed.  

Third, running a real estate company needs to be made simpler than it actually is at present. It will resolve the issue of concentration of real-estate companies in few cities.  

Source: This post is based on the article “Economic lessons for India from the Evergrande crisis in China” published in Live Mint on 6th October 2021.