//Breaking the realty-black money nexus

Breaking the realty-black money nexus

 

Unrealistic prices, a huge black economy and corruption will eventually inhibit economic growth
 
JAYAPRAKASH NARAYAN, Finacial Express , November 03, 2006

In the midst of robust growth, the black economy and its nexus with real estate cause concern. This parallel economy is estimated to account for 25-50% of India’s GDP. Its negative consequences are all too evident. Corruption is both a cause and consequence of unaccounted money. Competition is eroded with tax evasion, and genuine taxpayers find it difficult to survive in the market, while the tax-GDP ratio is depressed.

The consequent failure of public services and inadequacy of infrastructure are evident in India. With poor quality public goods, the poor suffer disproportionately. The consequent decline in productivity affects the whole economy. The parallel economy encourages wasteful spending, and resources are misallocated at the cost of pressing national needs. Unaccounted and untaxed money breeds envy and discontent in society.

In India, real estate is the sector which feels the impact of black money the most. Land prices are shooting up irrationally. True, land is a scarce commodity and can’t be created. This supply constraint is aggravated by our cultural obsession with land. Far too many people are in search of land as a safe investment outlet. The demand-supply gap is aggravated by bad policies as well as misadministration. Despite our small land mass (only 2.5% of the world’s land surface), India accounts for almost 12% of global agricultural land. There is also huge potential for developing residential and industrial areas. Mere building of roads and creation of infrastructure will open up vast areas for utilisation. Instead, development has been limited to small pockets, and real estate prices are reaching the stratosphere.

The development of new townships and special economic zones (SEZ) is hampered as landholders typically want to hold on to their property for speculative purposes. Experience says that land prices shoot up a hundred times or more with even modest development and, thus, no farmer or landholder is content with the measly compensation under the Land Acquisition Act. Even above market prices are offered to the owners, there is severe resentment, as farmers don’t share in the anticipated prosperity.

High stamp duties have traditionally fuelled the black economy, as sellers declare sub-market prices to reduce their tax liability. In a market dominated by unaccounted money, those who wish to disclose real prices are at a serious disadvantage. The seller has to pay high capital gains tax with full disclosure. If he wishes to buy property, he has to pay a large part of the sale value, typically 50%-70%, in cash, which again involves black money. So, people are forced to evade taxes and further enlarge the parallel economy.

Land registration has always been a source of corruption. Rent seeking for the placement of officials dealing with land records and transfer of property is ubiquitous. In turn, the officials extort payments from citizens for all land-related documentation and sale registration. The absence of periodic land surveys and poor record keeping add to the woes of citizens and companies. Land ownership is tough to establish, and unscrupulous real estate agents have cheated many innocent buyers. This further shrinks the supply of reliable land with assured titles, and leads to an escalation of land prices.

Corrupt state politicians and bureaucrats are increasingly using their control of government land and land records as a source of patronage and extortion. With the decline of the licence-permit raj, the control of land has become a key source of corruption. State politicians can drama- tically alter the fortunes of a few favoured individuals and firms with the allotment of land. There is no rational policy for land allocation, nor is there a proper assessment of realistic needs.

In alienation of government land, the market does not operate, as there is no competition and all decisions are discretionary. On the few occasions when land is auctioned, the prices are inflated unrealistically as realtors indulge in strategic high bidding to enhance the market value of their other assets, or some buyers pay unreasonably high sums in a state of irrational exuberance. Rent control laws further inhibit land development, and create scarcity by reducing supply.

Clearly, unrealistic real estate prices, a huge black economy and phenomenal corruption are a drag on the economy. This will eventually inhibit growth and enhance the risks to individuals and businesses. The government can take a few simple measures to disentangle the mess that we have created over the decades.

First, building roads and infrastructure can unlock more land for development. Second, stamp duties need to be rationalised, and land records updated by periodic surveys and computerisation, with full public access to the information. Third, in projects like SEZs, land losers can be given equity in the form of ownership of a portion of the developed land. This will give farmers a share in the prosperity and make available more land for development. Finally, all alienation of land for profitable activities should be non-discretionary and by public auction.

Simultaneously, a few concomitant steps need to be taken to curb black money in land related transactions. Giving right to charities to acquire land at 50% above the declared purchasing price within six months, high vacant land tax to inhibit speculation without development, and a reasonable estate duty on inheritance of non-agricultural land are measures which promote transparency and equity. The government needs to act with clarity and good sense before our growth is hampered by irrational land prices and the growing black economy.

The writer is the coordinator of VoteIndia, a national campaign for political reforms