Raghuram Rajan, the new governor of the Reserve Bank of India, said at his inaugural news conference last Wednesday that he would try to change this. "Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures," he said.
Bimal Jalan, a former chief economic adviser to the Indian government who was also the governor of the central bank from 2000 to 2004, said in a telephone interview from New Delhi that the broader Indian economy could escape serious harm even if real estate prices did decline. India has low rates of homeownership, so families are less likely to be worried about falling home prices and cut household spending.
Housing finance has played a small role in the Indian banking system, so Indian banks are less vulnerable to real estate downturns than banks in the West, Mr. Jalan said. Regulatory obstacles have slowed the pace of construction and limited the number of buildings to finance.
The construction of the Orbit Grand here illustrates many of the issues in Indian real estate, including costly regulatory delays. The Orbit Corporation, a publicly traded Mumbai developer, began building the complex and several others in western India with a $62 million loan in 2008 from LIC Housing Finance, based in Mumbai. But a combination of litigation over whether Orbit had full title to the entire site, which Orbit did not win until last March, together with a new set of municipal real estate regulations introduced in late 2010, slowed the pace of construction and prevented Orbit from preselling apartments. The company actually had to erect two separate buildings, with plans to join them together later, because the litigation, a chronic problem in Indian real estate, delayed construction on the 30 percent of the site's acreage that was in question.
"This led to a severe cash crunch at the company and resulted in the stalling construction of the project," said Ramashrya Yadav, the chief financial officer at Orbit.
Orbit defaulted on the LIC loan at the end of last year with a little more than a third of the original balance not yet repaid. LIC put the Orbit Grand into receivership in early August. But as often happens in India, Orbit has kept control of the sites.
Mr. Yadav said that Orbit had now raised the money to finish the projects, and it received the needed environmental clearances four weeks ago. The Orbit Grand stalled with 10 stories completed out of 26, although the firm is seeking regulatory approval to extend the building up to 36 stories. Another project, less than a mile away, Orbit Terraces, stalled with 40 of 60 floors built.
Orbit requires the permission of LIC to sell units, and any sales must go toward the defaulted loan. Mr. Yadav predicted that Orbit would be able to repay the defaulted loan within seven months, while acknowledging that the company faced a tough market for selling apartments. "As liquidity dries up, a price fall is also imminent," he said. LIC declined to comment.
While foreign investors in Indian real estate are licking their wounds after the 17.5 percent fall in the rupee against the dollar since the start of May, they do have one consolation. The longstanding shortage of space in many Indian cities because of regulatory barriers to new construction translates into high occupancy rates and steady rental incomes for commercial and residential real estate, at least in rupee terms.
"In terms of the underlying portfolio, tenant demand has been very good — there has been limited construction in the last few years because of tight credit, and that has slowed the supply of new offices," said Christopher Heady, the Blackstone partner overseeing Asian real estate investments. The asset management firm Blackstone has invested $600 million in Indian real estate, mainly office complexes in Bangalore, a center of the information technology and outsourcing industries in southern India.
These sectors have a lot of multinationals and big Indian companies that are reliable renters, Mr. Heady said, adding that these clients are "continuing to grow pretty rapidly."
But leaving aside a few exporters of services like computer software, most of the economy is struggling. Manish Jain moved his jewelry store last January into retail space at the base of the unfinished Orbit Grand, but has found that customers are more interested in pawning jewelry they already have — and the people doing the pawning are increasingly those wearing suits, not just shirts or saris.
"They are going through a tough financial crisis," he said. "At first, we only saw people from the service class, lower-income people, but now we are seeing business people, too."
—By Keith Bradsher and Neha Thirani Bagri, The New York Times.