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ow can India reduce the severe distortions in
land regulation and acquisition to ensure that
land facilitates rather than impedes develop-
ment? We propose four policy reforms.
Obtaining approvals for land-use change is a major
source of corruption. The government must, therefore,
legislate to automatically allow non-irrigated agricul-
tural land to be used for industrial purposes, subject only
to obtaining environmental clearances. This could be
achieved by introducing a new “general purpose” clas-
sification, which would provide that all dry land not cur-
rently classified as industrial, commercial, etc, will be
deemed “general purpose”. This action alone could
sharply increase the supply of land for industrial pur-
poses and stymie a key avenue of corruption, especial-
ly on the outskirts of cities.
A second policy change relates to the artificial scarci-
ty created by floor space index (FSI) limits, which effec-
tively determine the height of urban construction.
Seeking approval for relaxations of the FSI limits are, like
those for land-use changes, a major source of corruption.
The romantic aversion to high-rise concrete jungles
that drove this policy was flawed and has long been
overtaken by its adverse consequences, and by the
imperatives and desirability of urbanisation. Our pro-
posal would be to eliminate the approval for relaxing the
FSI to create something like a “choose your FSI” policy.
Each builder or occupant could choose his/her FSI
with an important rider. The FSIs beyond the current
limits would have to be paid for, to reflect the marginal
cost of providing infrastructure for such urbanisation.
Cities can calculate the “long-run marginal cost” of
additional sewage, water, electricity and other infra-
structure per additional square foot deducting the long-
run marginal savings in transport infrastructure costs
(denser cities require less transport).
This calculation is feasible, albeit not easy — but, in
this case, unobtainable precision should not come in the
way of workable approximation. The planning author-
ity would then distribute these funds to the utilities in
proportion to their financing needs. All of this has to be
transparently accessible to any citizen. The merit of
this proposal is to remove government discretion in
granting approval but also to raise money for urban
infrastructure development.
Third, India needs to do away with income tax con-
cessions that encourage purchase of housing (which
were further increased in the latest Budget through a
higher deduction for interest on home loans).
Effectively, the current tax law gives an incentive to
buy land (and use scarce river sand) in a country with
inflated land prices. For example, there is now believed
to be over 40 per cent vacancy in the already con-
structed flats in the information technology corridor
of Chennai — but new employees continue buying
flats, because interest and principal are tax-deductible,
while rents are not.
The economic case for encouraging home ownership
is no more valid than for encouraging car ownership or
share ownership. Citizens should be encouraged to
make their own “rent vs buy” housing and investment
decisions, and public policy should distort those deci-
sions as little. This fiscal distortion is favoured by pow-
erful lobbies from banks to construction magnates.
Finally, India needs to improve and enforce urban
property taxation and ensure that property values are
updated periodically. There are many reasons to
increase property taxes from their derisory current lev-
els: it would be a progressive tax; it would foster demo-
cratic accountability and more effective decentralisa-
tion; it would raise resources for urban infrastructure; it
is imposed on a non-mobile good, which can with
today’s technologies be relatively easily identified and
mapped; it is also a tax imposed on a good (property)
whose values can only increase, and, therefore, has in-
built tax buoyancy; and, finally, just as a financial trans-
action tax would put sand in the wheels of finance, it
would do the same for property speculation. In today’s
India, there are few tax proposals that are as compelling.
But the key question that poses itself is whether
these reforms are politically feasible. Clearly, all status
quodecisions have a rationale, and the fact that this has
been the situation for decades suggests strong inter-
ests favouring it. Our proposals fall into two categories:
those within the purview of the Centre (removing
income tax concessions), and those controlled by the
states and/or local bodies (changing land-use require-
ments and the FSI approvals, and increasing/impos-
ing property taxes).
Income taxes are a central subject. The new govern-
ment can, therefore, on its own, eliminate the income
tax concession for housing. It will have to take on the
vested interests described above. One way to imple-
ment this policy would be to make the tax changes
prospective, to soften their opposition. And, if accom-
panied by a commensurate increase in the overall
deduction for savings, it can also minimise the opposi-
tion from middle-class taxpayers.
Another action that the Centre can take, since it
controls wealth taxes, is to place ceilings on the current
very generous wealth tax exemptions for residential
property (one piece of property is exempt irrespective
of value).
Our other proposals will encounter greater difficul-
ty both because vested interests will be against them
(political and bureaucratic, as well as the politically con-
nected builder lobby) and because the Centre does not
control the underlying policy instruments. So how will
change happen?
One scenario involves a handful of strong state lead-
ers and/or bureaucrats taking the initiative to implement
change. Assisted by technology to improve methods of
land valuation, assessment and collection, a few suc-
cesses can be achieved. And these successes can travel
to other parts of India. But this is a process of exogenous
and probably slow change.
The Centre can play a role in providing incentives
for such change mostly by granting or withholding fis-
cal transfers – under the centrally sponsored schemes
– conditional on states simplifying land-use and the FSI
rules and on urban local bodies imposing property
taxes along the lines we have proposed. The Finance
Commission could also play a role given its influence
in determining Centre-to-state transfers. (In a recent
article, two of us elaborated on this idea:
In India, land’s life-giving, mothering and nurturing
qualities are evoked in the common and popular image
of Dharthi Mata (Hindi for Mother Earth). But there can
be a Mata only if there is some Dharthi in the first place.
Creating bountiful dharthi is a major challenge ahead.
Series concluded
Devesh Kapur is director of the Centre for the Advanced
Study of India at the University of Pennsylvania;
T V Somanathan is a member of the IAS; and
Arvind Subramanian is a senior fellow at the Peterson
Institute for International Economics and Centre for Global
Development. These views are their own
Land-shackled – II
Devesh Kapur, T V Somanathanand Arvind Subramanianprescribe
the cures for India’s problems with land