Reform in Practice: Kshitij Batra (TEAL) on India’s Land and Property Markets

What is one policy area in India that needs urgent reform?

I think the sector which has to be deregulated on priority is in the land and property market. There is a long legacy of the state playing a very heavy-handed role in these markets that has led to a lot of unaffordability of land and housing and commercial real estate in our cities. This has hurt liveability and made manufacturing more expensive.

So first in terms of the availability of land, a lot of land in core urban centres is locked in to poor inefficient use because it is owned by different government departments and ministries. So this could be the defence, ports, railways, utilities, public sector undertakings. So in fact that's one of the reasons which has prevented the disinvestment from a lot of public sector enterprises what to do with the land that they own and bureaucrats don't necessarily want to sign off on files that have to sell off very valuable land in urban areas.

But this what ends up happening is that you have this land that is either vacant, oftentimes encroached, but also more often underutilised and so it needs to be released into the public markets or at least be given as grants to municipalities maybe to keep it as green spaces and open it up for public use and maybe rounded property values can go up and more importantly even if you do have the land what you can build on it and grow vertically. There's a lot of restrictions that are imposed by Indian cities and this comes under the purview of all the urban planning and land use restrictions. For instance, FSI which is free FSI in Indian cities is some of the lowest that you have in the world.

There is a cost to building vertically by charging premium FSI which makes it very expensive to build up but also at the same time you have straight up height restrictions on buildings in different cities. So for instance in Delhi you would not find houses above four stories. There is a height restriction for many parts of the city.

You have building setbacks, you have minimum parking requirements, you have other restrictions that limit how much you can build and the cost of building that on a particular plot of land, the cost of supplying that built-up area. So what that does is increase the per square footage prices of homes in places which have the greatest need for supply. The next set of challenges comes when you have to actually transact on land and property.

So if you to buy that land you have to pay a very high amount in terms of transaction taxes, stamp duties, registration fees, cesses and surcharges and these can be often between five to nine percent of the value of the property in different states and these are some of the highest transaction taxes in the world which discourage obviously being able to declare the true transaction price of that property and create all kinds of other negative externalities across the board but also discourage the frequency of transactions that can happen.

What would a more effective alternative look like?

The right way to do this would be that you should not tax on the transaction and instead allow the appreciation of value to be taxed by the municipality so they can collect greater property tax revenues and have it be decentralised and locally controlled. Then the next set of costs that are imposed on the buyer have to do with the risk of title.

We live in a country which has a presumptive titling system. India follows a presumptive titling system which means that the onus of diligence on the title is on the buyer. They have to check the title of a property before they buy it.

The state does not guarantee that there's a registration done from party A to party B that party B actually owns that property. So there is a huge cost that is imposed on the buyer in terms of not just the cost of diligence but also risk of title. As we know there's a lot of litigation in Indian civil courts that have to do with land and property cases.

These cases take on average more than 20 years to get resolved. So there's a very high chance and sometimes very tragic consequences that you might be stuck in long litigation on when you buy a property. It could be your life savings is locked in a very lengthy litigation.

So it has some very negative consequences for different individuals and it stems from the fact that you have the state controlling various state being the gatekeeper of this information in different ways. So what should happen is that you should have transparency and accessibility of the records so anyone can go and check. So for instance if you have digitisation of property records in among the different departments and different ministries that have to control aspects of the property you should be able to in a low-cost way assess whether the title is clear for that property.

There's no litigation, there's no other encumbrance and so on. Right now this is a very costly and difficult process which limits not just transactions but also finance and development of that property. The next is on the construction side which is that if you do end up buying after paying all these costs and you know you manage to find some land then to build on it.

So there is a whole licence permit raj regime that exists when it comes to construction. It has to do with various permits from multiple different departments. There have been studies documenting since the ease of doing business time, various studies documenting how difficult and costly it is to actually build and supply any kind of housing or real estate in cities even after you have gotten the land and this is in a way what drives electoral finance in India.

Obviously parties have to find creative ways to be able to generate enough financing and one area of discretion that ends up being a tool for this is obviously the ability to give you know construction permits to different developers and you know and so on and so because of this channel which has you know developed along with all the other usual rent-seeking behaviours across different entities within you know state governments there is a big challenge of being able to ease these rules and simplify these rules because without having this thicket of regulations and restrictions you cannot offer discretion and if you cannot offer discretion you cannot demand payment for being able to ease those rules and continue with business. The net effect of all of these different restrictions of all of these different costs that are imposed by different state actors in terms of being able to transact property and land and build on it and supply housing and commercial real estate is that Indian cities have some of the worst price to income ratios in the world on a per square foot basis which means that essentially people are cramped into much smaller spaces, they're paying a lot related to their incomes or they're pushed into informality and so a lot of slums, unauthorised colonies you know informal settlements have come up as a result because there is an acute shortage of formal housing can be supplied by the market. So people are living in unsanitary conditions and in you know quite deplorable state and the effect that it has on manufacturing obviously is because it increases the cost of land and real estate where you can manufacture, it has a negative effect in making our industries competitive globally to be able to plug into global export supply chains.

So there is a very profound effect that a state involvement in this heavy-handed involvement of the state in land and property markets creates across the board, we experience a daily living in our cities when we pay for it in terms of higher costs and our industries are not able to be competitive and provide the jobs that are necessary in some of the most productive centres of our country.