The Reserve Bank of India’s decision to push banks to clean their balance sheets by recognising non-performing assets, resolving bad debts of large defaulters and, failing that, taking them to bankruptcy court for liquidation, has focused attention on the crisis in a few sectors. Among those, besides power, steel and textiles, is real estate, consisting of housing, commercial real estate and hospitality assets. 

Firms such as Unitech, Jaypee Infratech and Amrapalli are being pursued by banks and home buyers who had paid them advances but not received their houses have turned to the courts. They fear they would lose out in case of liquidation because home buyers’ claims will be considered only after those of secured creditors like the banks have been settled. 

The real estate story is of special interest because the post-liberalisation evolution of this sector reveals quite starkly the characteristics and contradictions of post-reform growth. An overriding objective of neoliberal reform is to get (domestic and foreign) private investment to drive economic growth by providing it the right environment and offering it the appropriate incentives. But in a market economy, while supply side initiatives may help nudge into activity a private sector afflicted with inertia, those initiatives would work only if the fruits of such activity find a market. So even if it is not among the stated objectives of reform, a parallel thrust of policy must be that of stimulating demand.

Private preference 

This is challenging for a policy frame that refrains from using autonomous state expenditure as the principal stimulus to growth. The belief is that this is not necessary and should be avoided when tax and other concessions are used to incentivise private investment, since increased public expenditure would lead to large deficits that defeat the purpose of fiscal reform. It must also be avoided because it goes against the grain of a growth strategy that seeks to give primacy to the private sector.

This implies that demand must come from the private sector. Some of this comes from derived demand, as is true of commercial real estate. When business is doing well, demand for office space rises. Nothing illustrates this better than the rapid expansion of steel and glass-fronted structures in the major metropolitan cities to accompany the export-led boom in the software and information technology-enabled services sectors. 

As compared with this, the component of the real estate sector that was waiting to explode due to consumer demand was the personal housing market. Based on the Census 2011, the total number of households in urban India was placed at 81.1 million in 2012, while the urban housing shortage in that year was estimated at 18.78 million. That is, close to a quarter (23.2 per cent) of households in urban India needed new houses because they were homeless or lived in dilapidated or over-congested accommodation.

But this is only indicative of the fact that the “technical” demand for housing in a rapidly urbanising economy with a high share of youth in the population is bound to be high. The challenge for the reformers was to convert this technical demand into effective demand. The opportunity to do this came from two sources, especially from the early 2000s. The first was the rapid build up of liquidity in the economy, resulting from a combination of an easy money policy and a sharp increase in foreign capital inflows. The second was financial liberalisation that allowed banks to hugely expand credit based on that liquidity, even if it entailed substantial increases in exposure to certain sectors.

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