Wednesday, January 26, 2022

A distorted landscape

Land markets are skewed by policies that urgently require correction.

Written by Gulzar Natarajan |
February 23, 2015 12:00:24 am
In order to improve the transactions process, we must change the land records system and reform the Registration Act, 1908. In order to improve the transactions process, we must change the land records system and reform the Registration Act, 1908.

As the budget session of Parliament, during which the government will have to get the legislature’s assent to the changes in the land acquisition act effected through ordinance, gets underway, it may be worthwhile to look at the economics of land markets in general. There is compelling evidence that India’s land market distortions are fast becoming a constraint on economic growth. The development of urban areas, the engines of economic growth, is being stifled because of the acute scarcity of land. Procuring land is among the biggest challenges for entrepreneurs starting a business.

Land markets across India are characterised by several distortions. Soaring land prices reduce affordability. Economic growth, especially rapid urbanisation, is fast causing the depletion of the stock of vacant land in growth centres. The demand and supply squeeze are exacerbated by several inefficient policies.

The changes to the land acquisition act by ordinance should ease some of the problems that had become a dampener for both public and private investment. The most egregious distortion is created by the wedge between the officially notified guidance value and the actual market value. The high taxes — stamp duty, registration fee, capital gains and conversion charges — encourage transactions to be registered at the lower guidance value. The difference gets transacted as “black money”, which most often flows back into real estate. Buyers and sellers benefit from evading stamp duty and capital gains taxes, respectively. Additionally, the fact that formal investment opportunities are limited implies that real estate, along with gold, becomes the preferred household savings instrument. This savings misallocation causes real estate bubbles, locks up investment capital, fuels black money creation and hinders the effective transmission of monetary policy.

In urban areas, the scarcity of land is exacerbated by restrictive zoning regulations, primarily rules on the maximum permissible height of buildings. It limits the buildable housing stock, thereby raising prices, lowers the per capita floor space available, and encourages sprawls that increase the cost of infrastructure provision. This scarcity stands in stark contrast to the large stock of unused land held by various government agencies.

Then there are the institutional problems. The information asymmetry because of the poor state of land records and pervasive property litigation add to the transactional challenges. For something so valuable, land records in India are archaic. No register that reliably confirms titles exists anywhere in the country. The process of land use conversion, especially important outside cities, is not only expensive but also takes inordinate time. The cumulative effect of all this, coupled with the well-known difficulty of navigating public systems, is to make land procurement a source of considerable harassment.

A series of policy reforms is required to address these distortions. The elimination of the dual-price market requires two complementary reforms. One, the combination of registration fees and stamp duty has to be lowered to no more than 2-4 per cent of land value to minimise incentives to low-ball registration values. Two, the guidance value should be increased in a phased manner to converge with the prevailing market price over a pre-announced period of, say, five years. The process of notification of registration values can then be dispensed with. In order to facilitate effective price dissemination, the government should support the creation of a nationwide database on land transactions that consolidates property sales data from different sources under a single platform.

Urban master plans should reflect varying floor space index (FSI) mandates — the FSI should be higher along important transit corridors as well as in city centres and should decline as one moves further away. To start with, locations around transit stations and newer developments should have higher FSIs. The former would promote transit-oriented development — dense population clusters around transit stations. The latter would maximise housing supply in greenfield locations, where, unlike in pre-existing areas, infrastructure carrying capacity is not a constraint. This has to be complemented with the calibrated releases of the vast tracts of vacant land held by the government and state bodies. These agencies should be encouraged to either relocate to the suburbs or, more realistically, fulfil their needs with smaller extents.

Finally, in order to improve the transactions process, we must change the land records system and reform the Registration Act, 1908. Some states have sought to do the former through one-time re-surveys and udating of records. But such a mission-mode approach is certain to open a Pandora’s box of litigation and acrimony, and is unlikely to succeed.

A more realistic approach would be to let the records evolve over a period of time through a two-track approach. New registrations should be done only with a digitised location map of the individual land parcel and after ownership has been established through the certification of documents by a competent authority. The registration will have to be notified and appeals disposed before the transaction enters the records. All land-related transactions — new property tax assessments, utility service connections, mortgages and bank loans — could be brought under a similar policy framework. Further, existing landowners should be given the option of proactively getting their property included in the records through this process. A simplified process, duly captured in online workflow automation software, can mitigate potential delays and harassment.

The amendments being proposed to the Registration Act, 1908, can be tailored to support this process. It should make land registration, which currently confers presumptive ownership that is liable to be disputed, a “guaranteed title certification” process. This would also enable the automatic updating of the record of rights and survey records, thereby linking registration and mutation. However, given the pervasiveness of disputes and litigation, it may not be possible to clearly demarcate boundaries and establish ownership in many cases. Such registrations can continue under the current rules.

The market will invariably price land to reflect the reduced risk from title certification. Incentives like lower stamp duty for transactions done under the amended process may encourage people to switch to the new system.

The mission-mode strategy of re-surveys, digitisation, verification and notification of titles could complement this. It can be done in smaller towns, where land values are still low and development potential enormous, or in villages, where records are more reliable and updated and, therefore, the marginal benefits from cleaning ownership records high.

All this, coupled with online workflow automation of all land related processes — registration, mutation, re-survey, land use conversion, etc — can significantly limit the harassment faced in property transactions.

The writer is an IAS officer, batch of 1999. Views are personal.

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