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A Pro-reform Lobby Is Born

The recent events in Greater Noida have created an influential lobby that will demand reform of land acquisition norms…

The Americans have a saying, “If it ain’t broke, don’t fix it”, which is a nice way of saying that you shouldn’t tinker with established policy, just for the sake of change, if things are working without a hitch. Indian policymakers take the attitude of maintaining the status quo to the extreme.

They don’t believe in policy change, even if there are glaring problems, until a point of no return is reached. Reform has never occurred in India except when forced by a crisis. The most obvious situation was during 1991-93, after the government went nearly bankrupt. It was only after the national gold reserves were pledged that the need for reform was reluctantly accepted.

An ongoing situation that urgently requires reform is the energy-subsidy policy. In 2001, it was acknowledged by the NDA government that the administered pricing mechanism (APM) for petrol and gas products had severe flaws. The successor UPA government agreed that APM needed review and appointed a series of committees and fact-finding missions and then sat on their recommendations.

For an entire decade, massive oil bond subsidies have pushed the fiscal deficit up and also fuelled huge `10,000 crore per annum scams in adulteration and black-marketing. The PSUs have suffered massive cumulative losses. Even now, APM has only been partially repealed. The prices of diesel, kerosene and gas remain controlled, leading to annual losses of over 2 per cent of GDP.

Real estate: reforms urgently needed
Another set of bad policies that have festered for decades are the ones governing real estate. Those flawed policies are directly responsible for the huge number of lawsuits clogging courts. They have led to the generation of vast sums of black money. Even worse, they are at least partially to blame for the Maoist insurrections and a host of agitations that the country faces.

Has it never struck you as odd that India’s real estate prices rival those in the US? America’s GDP is roughly 10 times as much as India’s and its per capita income is about 40 times as large. The reasons for inflated real estate prices lie in multiple distortions. These make it impossible to freely and transparently trade land and use it for any convenient purpose. That creates artificial scarcity.

What would happen if reforms made real estate transactions less complicated and opaque? It makes for an interesting thought experiment. Ideally, if policies related to real estate were reformatted to suit 21st century needs, several things would occur simultaneously.

One, real estate prices would drop as supply increased. Two, generation and circulation of black money would ease. Three, GDP growth would accelerate as it became easier to build infrastructure because land would be easily available. Four, litigation would drop, easing the pressure on courts. Five, agitations against land acquisitions would be less common. Six, there would be less support for Maoist insurrections.

Flawed approach
Let’s look at a couple of the most obvious problems. As things stand, the government can acquire land simply by invoking a legal concept called eminent domain. The government then decides what compensation it will pay to the dispossessed. The value of the land is multiplied by changing the designated use. After that, the land is sold, or long-leased at enormous profit.

This method of land acquisition has been disastrous. It’s very attractive for the industrialist or the real estate developer, who becomes the new land-user. In theory, it leaves the title clear and it saves the new owner the bother of negotiating with thousands of people to buy land. It is also very attractive to the babus and the netas working the system. They pull all the strings and set all the prices. Huge sums usually change hands under the table.

The backlash
In practice, this leads to stalled projects because previous owners can see how they are being cheated and they protest violently. It can lead to governments being overturned, as in West Bengal, where the Singur deal triggered the Left Front’s collapse. It has fuelled Maoist rebellions.

The laws in question are over a hundred years old. There’s ample evidence that they don’t work. At the same time, it is unquestionable that you cannot build infrastructure or an industrial base without land to put the structures on.

Roads to reform
There are many possible routes to reform. Any of them could work so long as the previous owners feel that they are being justly compensated and have a stake in the future. The draft Mines & Minerals Development & Regulation Act suggests that profits from mining could be shared with the previous land-owners. Factories and infrastructure projects could offer similar upsides. Or, compensation could be decided by a third-party (not the government or the new owner) by using some formula that takes future appreciation from changed land usage into account. Or farmers could be given the option to change designated land use themselves and sell directly to industrialists or developers.

In any of the possible models, the government would receive less money upfront as the real estate broker. The babus and netas who worked out the deal would thus be less amply compensated. But the government would also spend a lot less on policing a subsequently chaotic law and order situation or fighting court cases. Projects would not stall. GDP growth would accelerate.

Influential reform lobby is born
The recent controversy over land acquisition in the Greater Noida area could actually prove to be a trigger for beneficial reforms. Many real estate developers have been driven to bankruptcy by the court’s ruling that some acquired land be returned. Thousands of investors who bought into those developments have also been hit hard. Net-net, a lot of powerful and well connected people will lose money in Greater Noida, instead of making money as expected. Nobody takes note when poor people lose out, but as a bloc the losers in Greater Noida have influence. They also have an interest in changing land acquisition policy. An influential lobby for change now exists.

Will vested interests allow change?
At another level, real estate is the sector that generates the largest quanta of unaccounted cash and this occurs on a daily basis. Every real estate transaction anywhere has a black component (not to mention bribes paid to speed up registration, etc.) Again, the root cause of this is flawed policy and laws. There are vested interests across the entire establishment which would like this to continue. Unfortunately that means the situation will never be addressed. Ideally, the laws pertaining to the sector require a complete overhaul. Even partial overhaul would be an improvement. Who knows when it will happen?