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By Mike Caggeso
A decline in housing prices in India have led billionaire investor Kushal Pal Singh, the chairman of DLF Ltd., India's biggest real-estate developer, to call on the Reserve Bank to lower interest rates.
According to Reuters India, Singh told reporters that "because of high mortgage rates and monetary policy, the real estate market is subdued temporarily."
The Hindu Business Line reported that Singh said that he didn't the have statistics to back up his claims, but argued that "his gut feeling was that the cooling happened because of high interest rates."
"I am sure once the interest rates drop, demand will pick up,"' he said.
But is Singh jumping the gun? Or perhaps demonstrating some envy over rival China's much-faster and more-consistent growth? Both are reasonable questions, given that India's rate of economic growth is the second fastest in the world – to China, of course.
With its hyperkinetic rate of growth, China is fighting a rear-guard action – and most analysts contend, a losing battle – against inflation, pollution, and very large, dispute-fomenting trade surpluses with key trading partners. Interest rates have been raised five times since March, another may happen by the end of the year, but even that won't be enough to reign-in its runaway economy, most outside experts agree.
In the United States, by contrast, a housing slump has spawned a mortgage crisis that quickly morphed into a global credit crunch – spreading fear worldwide, as well.
These two scenarios are playing out right before India's eyes. Like China, India has been quick to raise rates to keep its economy in check – six times in the past 18 months. But unlike China, India lacks a modern infrastructure or a reasonably efficient government, making growth as rapid as China's both unlikely and risky.
Singh cites reports that houses are dropping in price, but he's likely missing the bigger picture.
India's middle class – 300 million people and growing – won't just stop buying houses if rates are kept high. On top of that, economic growth is creating jobs, and wages have increased more in India than any other country in Asia last year.
Singh likely sees the housing crisis and potential recession in the U.S. market and thinks the same will happen in India. And it could, ironically, if he gets his way. By keeping its interest rates high, India is preserving its growth by keeping a fairly tight control over credit.
And let's not forget Singh's motivations. In the past few years, his company and other property developers and builders have shattered growth records — no surprise since they are first in line to reap the benefits of growing demand for houses, offices and malls.
India's Reserve Bank has another month and a half before its next meeting produces the next major decision on monetary policy.
Until then, it might be best to heed a less-biased analysis of India's economic needs.
News and Related Story Links:
- Reuters: DLF: High Rates Affecting Real Estate Development.
- Google Finance: DLF Ltd.
- Hindu Business Line: Real Estate Market Hit By High Interest Rates, Says DLF Chairman.
- Money Morning: India Gains Importance and Economic and Political Epicenter.