Karnataka MLAs Love Houses, Hate Farmland

Politicians are usually adept at organising their finances. Here, we take a look at some of the special skills politicians display in managing their finances. For starting any objective analysis, we need authentic data.

I chanced upon this site which has details of all asset declarations filed before the Election Commission of India by all contestants in elections including MPs, MLAs, MLCs and Local Body elected officials etc. Since I am from Bangalore, the declarations filed by MLAs of Karnataka was of particular interest to me.

The chart given below reveals some interesting basic details in respect of winning MLAs of 2008 & 2013 from Karnataka.

The CAGR of 29.10 percent mentioned needs to be considered in light of the fact that they do not represent the growth of the same set of assets and hence may not be strictly comparable.

I first started with compiling comparable data. For this purpose , I took a sample size of 24 MLAs (11 percent of the total of 216 MLAs) who had won elections both in 2008 & 2013 and also had assets above 10 Crores. My analysis did reveal some very interesting facts. The chart below gives us a clear idea on how the assets of the identified MLAs grew between 2008 and 2013.

The average CAGR i.e. Cumulative Annual Growth Rate of their assets was 25.01 percent while the Nifty CAGR was a mere 2.80 percent.

Here are some observations on how the assets and liabilities of the 24 identified MLAs varied between 2008 & 2013.

It is interesting to note that the Total Net Worth of these MLAs increased from 497.33 Crores in 2008 to 1270.41 Crores in 2013.

Comments on the Changes in the Assets & Liabilities of MLAs between 2008 & 2013:

• The total assets of the identified MLAs grew by 117 percent between 2008 & 2013. However, the net worth of these MLAs grew by a whopping 155 percent during the same period. This was possible due to the reduction in liabilities as a percentage of assets in 2013.
  
• The average Liability outstanding of the 24 MLAs came to Rs.19.54/- crores in 2013.
  
• While investments in Land & Building reduced by a marginal 4 percent , investments in residential buildings increased by 125 percent. This increase can be attributed to two reasons: 1) Making existing buildings larger & more luxurious and 2) building additional residential accommodations for the purpose of letting out and thereby ensuring steady rental revenues.
  
• It is extremely interesting to note that in 2013 investments in Other Assets + FDs + NSS/Insurance had reduced by a whopping 56.32 percent. This reduction was redirected to Investment in Personal Loans ( to persons and companies where the rate of interest is known to be around 2 percent to 2.5 percent per month i.e. 24-30 percent per annum)
  
• It is interesting to note that in 2013 investments in Shares and Bonds ( essentially to companies belonging to family / friends), had increased by an impressive 43%.
  
• A perusal of the declarations by the identified MLAs makes it obvious that in 2013, borrowings from commercial banks had been made for construction of commercial and residential buildings. Non Capital expenses had been funded by other sources.
  
• Incremental investments in commercial buildings & residential buildings had also created a resultant increase in other liability (Advance Received, Rental & Refundable Deposits, etc).
  

Indians (long before the concept of ‘financial planning’ even emerged) have looked at three asset classes for meeting all their long term financial goals : Land (both agricultural and non agricultural land as well as buildings), Gold and Commodities.

Land and gold to this day have continued to be the most important assets for most Indians. Politicians are no different and are equally attached to land as the chosen asset class. The only advantage they enjoy is that they get to know about various governmental rules and regulations in respect of land much before others even get to hear about these. Devanahalli in Bengaluru, Haryana & Rajasthan etc, will bear this point out.

The average annual declared income of all the 216 MLAs in 2013 was Rs.0.87/- Crores. The MLAs are entitled to tax free salary (inclusive of all allowances) of around Rs.18/- lacs pa (current) while that of a minister could be around Rs.30/- lacs pa (current). Retired MLAs are entitled to a pension of Rs.4.80/- lacs pa (current).

It was interesting to observe that most of the MLAs had while filing their returns before the Election Commission of India declared themselves as either agriculturists or businessmen. The kinds of business these people were pursuing are very interesting : real estate, promoters and builders, civil contractor, educational institutions, sugar factory and power generation units, diagnostic centres, hotel, media, mining, blue metal crushing, to name a few.

The short point is, most MLAs had existing sources of income (other than inherited land and building) even at the time of filing of nomination. In addition these MLAs have been prudent enough to invest in commercial and residential buildings, which gave inflation adjusted rental returns. Similarly non agricultural land has been used extensively as an investment option. Most MLAs have also invested in business units of family members or friends with the idea of getting superior returns.

The graphgiven below gives us a clear idea on how investments were made in Physical and Financial Assets. Investment of up to 46.54 percent of the assets generated taxable income and 19.42 percent of the assets generated tax free income. 20.33 percent of the assets were made for the purpose of investments and 10.95 percent of the assets in production related investments.

The identified MLAs had followed a 60:40 formula while distributing investments between Physical and Financial Assets. The allocation of total assets has been in the approximate ratio of 5:2:2:1 between Taxable Income:Tax Free Income: Investment: Existing production Expansion, looks very interesting. This model may not be a freely replicable one but seems to suit the identified MLAs ideally. I must rush to qualify that none of these ratios have any finality about them and were indeed different in 2008. One fact that made me curious was that most of the MLAs did not have a term plan for themselves, whilst a few had endowment plans. Very few had invested in Ulips and Mutual Funds. We know that they are not foolish enough to completely ignore their long term financial health. It just might be ‘invisible’ in the data they submitted to the Election Commission.