The Indian Economy Blog

January 13, 2006

Reality of Indian Realty!

Filed under: Business,Infrastructure,Regulatory reforms — Naveen @ 9:19 am

Shekhar Gupta in his article Who’s afraid of the bulldozer does point out to one true bottleneck affecting India.

Have you sometimes wondered why reform in some areas of our infrastructure proceeds much faster than in others? You will see a clear pattern there. Anything that does not involve real estate, moves much faster. Telecom is a good example. Anything that involves land takes much longer.

However his diagnosis is faulty. It indicts politicians instead of the regulations that provide those powers to politicians. Politicans are people like you and me and react no differently to their incentives. And land planning and regulations by governments in India provide huge incentives for a status-quo.

In Delhi, the archaic property rules and Master Plans do not take into account “natural markets” like the locations of office spaces and shopping destinations. It is easy to blame offices for encroaching onto residential space. However it may not be easy to see that property regulations and Plans by constricting supply of legal real estate (I mean land with infrastructure for commerical usage), push rates artificially higher. The Master Plan of Delhi in a self-diagnosis in the 1960s acknowledged its faulty foresight regarding the demand for office space and consequent transportation issues. However the powers granted to legislators and bureaucracies in Delhi regarding land mean that reforms will not happen soon. Incidentally the Master Plans and the Delhi Development Act serve as models for the other urban centres in India.

The demand for commercial space has also been magnified by the up-trend in the Indian economy.That only means more money for those willing to supply commercial property. Andy Mukherjee in his article Missed India’s Software Boom? Try Real Estate writes on this.

The entire country has a little more than 70-million-square feet of A-grade office space, less than Shanghai and Beijing put together. Technology services account for as much as 85 percent of India’s office space demand … An undersupplied market means that the net yield on office property in India is 11 percent … That yield is among the highest in Asia. Add to that a 20 percent to 40 percent price appreciation in the past 15 months, and office space in Mumbai, New Delhi and Bangalore starts to look like a very attractive asset class. Supply is expanding, though demand is rising at a faster pace.

A few caveats are in order. There are more than hundred (yes, 100) 19th century rules and regulations governing various aspects of land in India.

A few Central laws governing real estate are

* Indian Contract Act, 1872
* Transfer of Property Act, 1882
* Registration Act, 1908
* Special Relief Act, 1963
* Urban Land (Ceiling And Regulation) Act (ULCRA), 1976
* Land Acquisition Act, 1894
* The Indian Evidence Act, 1872
* Rent Control Act (state law)

Taxes and Stamp Duty Rates

* Stamp Duty
* Property Tax
* Entertainment Tax

These and other issues are covered here in the Planning Commission document on real estate in India, an unusually useful document, I must admit, given the scarcity of such information. Another useful article is here.

Deregulation of real estate will increase supply of housing as well. However this depends on the government’s initiatives in the supply of roads. This artificial scarcity of land is the prime reason for our problem of overcrowding. Again, our problem is not population but overcrowding. But that is fodder for another blog note.

11 Comments »

  1. Shekhar Gupta’s ideas are no more deserving of an intellectual analysis than the utterings of any fawning factotum of the Sonia darbar. Check out his latest: as the government is trying to do the Bofors middleman Mr Q a good turn, Gupta wants to divert attention away from this shenanigans to a non sequitur: that Bofors is a good gun.

    Comment by RR — January 14, 2006 @ 11:47 am

  2. I do understand your point but its a bit of a chicken and the egg problem here since many of these laws that slow progress (and are inherently myopic in nature) were spawned by politicians in a bit to garner votes.

    Comment by Neeraj — January 14, 2006 @ 5:47 pm

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  4. Indiatimes> Real Estate> Cities> Bangalore> Article
    Urbanisation, the Indian front
    Prathima Manohar
    [ TIMES NEWS NETWORK ]
    Today, India is poised at a defining moment of history. With the emergence of a global economy, for the first time, we have the prospect of playing a pivotal role in a world stage. Even as we have begun to ascend as an important player in the global political, intellectual and economic sphere – there have been numerous illustrations of total breakdown of the fundamental foundation of a nation’s advancement – infrastructure and urban systems. In the recent past, some of the major cities have experienced total infrastructure collapse.

    Prime Minister Manmohan Singh noted when he launched the urban renewal mission recently, “Rapid urbanization has not only outpaced infrastructure development, but has also brought in its train a terrible downside – the downside of proliferating slums, the downside of increasing homelessness , the downside of growing urban poverty and crime, of relentless march of pollution and ecological damage. This gives you an idea of the massive challenge that lies ahead.” At this moment in time, the future of India is largely pivoted in the way we plan our urbanization and in due course the efficiency of our cities.

    Over the last 50 years, the administration has never looked at urbanization as positive tendency. Ever since independence, the population of the country has escalated two and half times but urban Indian population has risen by over five times. But the focus on renewal of cities, creation of new urban centres or upgradation of urban infrastructure and services has been insignificant.

    Logistically, a country like India cannot sustain solely on agriculture. Cities drive the economic and social development of the country. The economic foundation of the nation is rooted in industries, business, trade and services present in cities. The usual notion of a mostly rural India is also misguided- approximately 30 percent of the India lives in cities and they contribute to over 60 percent of national income. We have to recognize that cities have incredible potential as drivers of economic and community development by creating employment and generating wealth. Therefore, we have to promote a developmental pattern that will reorganize the urban-rural coalition. Focussing on establishing a good ambience for industries and businesses in urban centres, which create jobs for larger population, will also eventually warranty the growth of our agricultural sector.

    Our urban policies have also been skewed and have always lacked long-term vision. Indian urban planners have a penchant to retard urbanization by promoting low density or low FSI thereby encouraging urban sprawl or larger municipal conglomerations. According to estimates, by 2050 the urban population in India is set to exceed 800 million , from the present 300 million. Our urban laws don’t even make an effort to tackle today’s population, let alone, even think about the unparalleled shift of our population to cities.

    Promoting policies that encourage low density and large spread out development can have detrimental consequence in the future. It is practically unrealistic to advocate low density spread out cities. The inadequacies of sprawl are huge: steady creation of new infrastructure; new roads; unmanaged growth; ecological degradation and disintegration ; and scattered services. Municipal structures, urban administration, transport, public amenities, infrastructure and services will become uneconomical and unfeasible in larger cities as they will need to be extended over a larger geographic area. Higher density compact cities are economically feasible given that infrastructure, such as roads and street lighting, can be arranged cost-effectively per capita.

    On a more significant note, larger endlessly growing cities have a critical ecological connotation. Land is not renewable resource. In a persistent manner, urban sprawl consumes rural agricultural tracts, which in turn forces the displaced agriculturists to convert forestlands into farms, increasing deforestation and permanently altering the environment. By limiting the size of city, land in the countryside is preserved; property in towns can be recycled for development even as our forests are preserved.

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    COMMENTS ON THIS ARTICLE
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    Comment by akhil — January 22, 2006 @ 8:15 pm

  5. I think the real problem is that the power is too dispersed and thus there are too many people you need to bribe in order to avoid the regulation. This was what happened in Russia after the commmunist government fell: previously you bribed one person, “greesed the wheel”, and you got through, now every junior officials had the power to stop you. What India can try to do is to concnetrate the power of authoriziing zoning change, and bribery will naturally work out a solution that bring land resources to best use.

    Comment by R-Squared — January 27, 2006 @ 11:31 am

  6. I agree with you. If power can be centralised, of course for better governance, the bribery may come down. and there need to be a superving committee to overlook the whole centralised system.

    Comment by river nile — January 31, 2006 @ 4:28 pm

  7. Industrialisation at main centres are creating this chaos. The focus needs to be shifted to provide more income source to sub-urban and villagers. this will certainly stop the influx for bread earners to the urban places and that probably will stop the ever increasing city limits and the problem associated with the increasing population in the urban areas.

    Comment by (miami paradise — February 1, 2006 @ 9:33 am

  8. We are developing in almost all the industrial sectors (rather blooming) but i agree that our policies need to be framed keeping in mind the long term effects. Pollution and ever increasing population need to kept in control severely. villages need to be provided with alternative source of earnings and forestation encouraged.

    Comment by riverbelle — February 1, 2006 @ 9:37 am

  9. Overcrowding is what really troubling us more than overpopulation. and that is the deciding factor in the imbalance of overall growth. Land ofcourse is scarce in urban places and that is pressing the local governing body on local aminities at a pace not normally matched by them. Developing phase does bring in chaos and that is what we are passing through right now.

    Comment by royale — February 1, 2006 @ 9:45 am

  10. An interesting proposition:-A major factor in rapid urbanisation and the population explosion could be the indian railways.Ask any migrant from Bihar or U.P how easy it is to relocate!Close to where I live the number of families of migrants grew from two in 1998 to around 60 in 2005-permanently relocated -thanks to the IR. Invariably all of them are the families of the younger sons and spans more than two generations.Reasons given was lack of livelihood due to small holdings of land that could not be divided any further. Apparently the IR acts as a safety valve

    Comment by radha narayanan — May 25, 2006 @ 9:37 pm

  11. Great take on realty in India.The larger densities are at issue.

    Comment by Sandy — September 18, 2006 @ 9:06 am

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