The key takeaway from PM's speech on 31st December 2016 was except the scheme declared for pregnant mothers, all other schemes are interest rate subsidies.
The housing scheme was kind of anticipated. PM has talked first about his vision of 'Housing for all by 2022' in his Madison square address. Then he reiterated the objective last month in one of his speeches. In today's speech, first definite measures have been announced towards achieving this objective. I think it's laudable, though I am slightly skeptical about wrong set of beneficiaries using the scheme and possible domino effects of using credit as main channel of boosting the growth.
One wonders how exactly government is going balance the trick of maintaining government deficit vis-a-vis bearing burden of all subsidies. I think the gap between value of old invalid notes and value of old invalid notes returned to banks will be used here. My guess is the gap will be declared at around 3 trillion rupees and a trust or regulatory body will be formed with this capital to oversee the housing credit objectives.
Or banks will be given shot in the arm using this windfall gain, as many analyst have expected and some have warned against. The invigorated banks and cheaper credit supply along with better tax base will kick-start the economy, pivoting on real estate and hence allowing government to take on the subsidy burden. It seems bit like supply side economics, and just to spot the similarity, Trump's plan also have some supply side elements.
The thrust of less-cash economy hasn't been taken out. Earlier in the day, it has been declared that ATM withdrawals limits have been increased while bank withdrawal limits stay as it is. Various measure to coax producers in using digital mechanism have been provided.
One effect of this less-cash situation, will be cheaper funds for banks. Banks are flush with liquidity and structure has been put in place to make it difficult for consumers to suck out this bank deposit liquidity with hard-cash. Banks can lend more freely. And consumers are being told, 'Go, get your own house!'.
Pivoting on residential real estate can work wonder for next election, though it can hardly address core issues in Economics. PM is trying to touch the nerve of millions of Indian by trying to nudge them to be housing buyer. Just to put it in perspective, 9 lakh home loan with 5% effective rate for 20 years will come to around 6000 rupees monthly EMI!
Semi-urban and small city consumers can really benefit from the scheme and it will provide boost to affordable housing. The key assumption might be that such effect will have considerable spillovers and fuel other parts of the economy too.
We will read more nuanced analysis in few days.
I see many of my neighbours and friends, rushing to bank to buy their first, second or n-th home and at the same time wondering over why there are only 24 lakh tax payers with income above 10 lakh.
Really interesting times are ahead of us!