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Why we need land reform

Why we need land reform
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First Published: Mon, Jan 31 2011. 09 41 PM IST
Updated: Mon, Jan 31 2011. 09 41 PM IST
Ever since the 2G spectrum allocation scandal and leakage of Niira Radia tapes, there appears to be a heightened public awareness and articulation of the economic and social costs of corruption in India. Fourteen eminent Indians signed a joint letter to the political leadership of the country. A movement against corruption is holding rallies and conferences in different cities and it has come out with its own Lok Pal Bill draft (http://indiaagainstcorruption.org/doc/lokpal_bill_1.3.pdf).
In all this, it is important to remember two principles that Gopalkrishna Gandhi articulated in The Hindu on 25 December (“Democracy in crisis”):
“Politicians must be helped to see, and not through the mechanism of elections alone, but through responsible and calm public articulations that they cannot afford to be seen as a byword for financial impropriety, administrative dereliction and valuational grossnesses.
“‘Civil society’ and NGOs contain energies and means for political redressal that can be truly restorative if used with due care, non-vindictively and without generating its own counter-egoism.”
In terms of articulation of alternatives to a corrupt society, two problems have been frequent in the public domain. One is election funding and the other is land-use right, over which politicians through the government have enormous discretion. These are not only breeding grounds for corruption but also economically inefficient. It is heartening to see that a young member of Parliament such as Manvendra Singh has shared his thoughts with the public on these two issues in recent times.
India’s extraordinarily high real estate prices are a symptom of not only corrupt practices but also of muddled thinking. In fact, high home prices and real estate bubbles are generally features of advanced capitalist societies. Economies making the transition from agricultural to industrial, from rural to urban, from developing to middle income, usually see real estate prices rise in tandem with general prices and fall in relation to median incomes. Indeed, Shiller’s real home price index for the US actually showed a decline from 1890 to 1920 when the US was making a transition from an agricultural to an industrial society. Australia, another country for which we have large historical data, shows stable real home prices until the 1960s. Japan and South Korea both developed real estate bubbles after they had made the transition to middle income and beyond.
The reasons for these historical patterns are not hard to see. Urbanization and industrialization are generally accompanied by economies of scale in building construction and efficient use of land resources through vertical development. Moreover, in the early stages of economic development, land-use restrictions, floor-space constraints, and other forms of limitations on maximizing living space on a given parcel of land do not typically exist. So, supply is fairly elastic and generally responds quickly to rising demand, capping price increases. When society has reached a fairly high standard of living, people start looking for more ways to enhance their lifestyle and zoning restrictions start to mushroom. Urban planning regulations are the luxury of economic abundance, and they foster bubbles. In the US, home price increases were most acute in those places which Paul Krugman has termed the “zoned zones”.
Unfortunately, India has long had panoply of land-use restrictions, an accoutrement it can ill-afford when millions go without decent living space. The simplest reform that can be made is the trebling or even quintupling of floor space index (FSI) in India’s big cities. This would go a long way in making housing affordable. It would also facilitate efficient provisioning of urban amenities. Another reform—suggested by Sebastian Morris and Ajay Pandey of IIM Ahmedabad—is to merge the offices that record sale deeds and keep title documents, and to change the title-deed format so that all hypothecations and sale agreements are entered on the title itself.
The discretionary powers that governments hold over land allocation is a colonial hangover and our politicians have shrewdly hung on to their rights. As Singh wrote in Pioneer (“Neo-feudal landlord”, 26 January), once the colonial state emerged, land became the most commonly violated of liberties; “empowering the people means giving back the ownership of all that has belonged to them”.
Abnormally high land prices hinder development. They represent rent extraction and divert capital, which is scarce in developing countries, from productive investments that would lift living standards. When land-rent extracts a significant part of the economic surplus, it encourages speculation and reduces incentives for productive wealth creation. Such an economy is unlikely to ever make the transition to a developed economy.
In curbing corruption in resource allocation, non-governmental organizations can chip in by articulating and campaigning for reforms that take away government’s discretionary powers rather than designing better oversight bodies that have the discretion to be corrupt.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. This piece was co-authored with Srinivas Thiruvadanthai of the Levy Forecasting Institute. These are their personal views. Your comments are welcome at baretalk@livemint.com
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First Published: Mon, Jan 31 2011. 09 41 PM IST