Greater Noida Crisis : The Economics BehindPosted: July 22, 2011
Greater Noida Crisis : The Economics Behind
Greater Noida crisis are making waves in almost all quarters of the society. I mean the government, judiciary, politicians, real estate power brokers, banks & financial institutions, investors (common man) and of course the Farmers.
One fine day the court decides that the compensation given to farmers is not justified and the state government has taken their lands on some false pretexts.
Lets look at how the money changed it hands during the whole transaction –
Land Flow chart
FARMERS ————————> GOVT ———————–> BUILDERS ———————–> INVESTORS
Farmers gave land to the government against money, govt sold this land to real estate builders against money (& say bribes) and then the real estate companies sold their projects i.e land divided into apartments to the Investors. These Investors borrowed money from the Banks to finance their deals.
Banks lend both to Investors & Builders, as they were authorized by the Govt.
Money Flow Chart
FARMERS <———————– GOVT <———————- BUILDERS <———————— INVESTORS
(builders & investors : borrowed money from banks)
Investors Money = Personal Savings + Investors Bank Loans
Builders Money = Investors Money + Builders Bank Loans
Govt Money = Partial of Builders Money
Farmers Money = Partial of Govt Money
In-depth balance sheets –
Builders Books should account for the Investors Money, Builders borrowed money from bank for the project, Land Cost, Bribes to Government Officials, Actual Project Cost (to be few majors).
Builders Profit = Investors Money + Bank Borrowed Money – Land Cost – Project Cost – Commissions
(Commissions here include bribes paid to Govt Officials for allocating land & commissions handed to agents for selling their properties)
Case Analysis : Judiciary says return the Framers Land
Government will return the Land Cost to the Builders. Now the main concerns are –
1. will Govt also return the commission / bribes they received – NO
2. money given as commissions to agents will also not come back.
3. money already invested in starting the building work, will not come back. (which includes Investors Money and Bank Borrowed Money)
4. now the money left is not enough to be returned back to investors and the bank. (builders profit is directly proportional to investors money, now he is in a fix. if he sold flats at high rates, he needs to return the same money back or if he sold the flats in nominal rates, he still needs to return back).
5. builders are in a bigger problem here. however the kind of people they are, its extremely difficult to extract out the Investors money. they are in such a grave problem, that they cannot do anything but to delay the payments, or give back a small token of money.
6. investors who are the common people will be crushed. they have already taken loans, they EMI’s have started (some cases) and they see no future.
What is going to happen ahead –
1. farmers can’t use these lands for agriculture again. that’s why they sold in the first case.
2. farmers said the Govt took land at a very cheap rate, they have never denied the fact – they are open for re-negotiation.
3. after the political situation settles down a little, they are going to re-negotiate.
4. Govt will again sell the same land at revised rates to the Builders, they will again receive their commissions.
5. Builders will further pass on their new cost to apartment owners on pro rata basis.
6. in the end the investors, will be required to pay more – whether he likes or dislikes. (as this is approved by the Government)
Money invested in the supply chain is going to yield better results be it Banks, Builders, Government, Farmers. (quantum is huge)