This was posted on Ambie's Blog on Monday 8 December 2008.
A news report that the RBI has a package proposal to accelerate the growth of the dawdling real-estate sector, by offering special consideration to the upper middle and middle class people who plan to take home loans up to Rs 20 lakhs, ring an alarm bell. The reason for the slowdown in the real estate sector is e unreasonable spike in prices, and the upward interest rates. The high interest rates, indeed, saved many from the inflated sale price of the property market.
Now that the proposal through banks to infuse money and induce people to buy houses would give only a notional stimulus to the real estate market, but would not be beneficial to the buyers in the long run. With a constantly inflationary economy, such packages would not do much help to the common man, but for pushing him into more troubled finances, as the constant price rise and slow growth of the economy are antithetic in nature.
The moot question is whether naturally savings minded Indian middle class would plunge into such offers and find themselves in the middle of a meddle. The Indian home buying scenario is not dominated by market forces or economic incentive packages. It is a family event and the women of the family have a definite say in the decision making. Given fact that Indian women are not price sensitive but price performance sensitive, we cannot expect that the inflated prices would be paid by the Indian middle class families for a few thousand bucks incentive from some banks.
The mathematically shrewd lot of Indian middle class men would calculate the interest rate/EMI and would finally conclude that the few thousand Rupees of discount/incentive by the banks would not be beneficial to them at the end of the day, as they would end up paying more than the incentives they got vide EMI and interest on loan. So, this stimulus package would induce people who have no financial plan and care free of the money spent, as they could easily be dragged into a financial deal which might not be beneficial to them.
Come to think of the IT professionals, they were the lot to be wooed in by such packages. But given the volatility of the industry, and the stress many from IT industry have undergone during the meltdown of the US economy and it's global impact, only a few takers could be found for such an incentive to home buyers.
The need of the hour is to curb the unreasonable price hike of the property and related materials, so that the industry could be trimmed from the economic obesity. In general, the Government, instead of putting money in people's pockets, should try and keep inflation under check. Any deal without having inflation under control would not work and deliver the expected result. Instead this stimulus package would further feed the inflation, and hence fillip would be given to the inflation not to the economic growth.
With this step the Government has started a walk into a land of financial mines and economic quick sand. Let us hope the mindset of the Indian middle class would help people from falling prey to such failed economic models and save the nation from a desi subprime.