Business Reforms
A Zero-Cost Stimulus for India
By Raju (USA)
As
the global financial meltdown spreads like a forest fire, India has a
unique opportunity to seize the moment and enjoy 10% GDP growth. India
can create 100 million jobs and its GDP can grow at 10% rate, if the Parliament
can uncork India's potential by imposing taxes on urban land hoardings.
This article has no radical ideas; it discusses proven ideas employed by all western countries to contain land hoardings. If the suggested idea is implemented, India can get rid of its slums, give a face lift to its dilapidated middle class communities, create millions of jobs and above all, the government can make money while doing all this. A veritable zero-cost stimulus.
Let us compare Dallas (in US) and Hyderabad (in India). Hyderabad has achieved its global prominence in the last decade as an IT hub. Dallas is the provenance of the monolithic integrated circuit (invented by Texas Instruments' Jack Kilby in the heart of the city in 1958) and hence a key player in paving the first mile of the information superhighway that eventually forked to Hyderabad. The market capitalization of companies headquartered in Dallas metro comfortably exceeds a trillion dollars. Dallas' IT achievements far outstrip that of Hyderabad, yet land prices in these cities do not reflect this fact. Why?
Due to its new found IT eminence, land prices in Hyderabad's once-sleepy suburbs have gone up hundred-fold in less than a decade. As speculators with insatiable greed scrambled to get a piece of the pie, sky was the limit for land prices. Unbridled speculation made land undeservedly expensive, consequently curtailing economic activity to the tune of billions of dollars. Land prices in Dallas moved northward over the last 50 years, but an acre in Dallas suburbs costs a mere 5 times the per capita income of the US. In Hyderabad, an acre of land costs 5000 times the per capita income of India. Why is Indian land expensive by a factor of 1000?
The calculation of the ratio is based on an acre costing $2 lakh in Dallas and Rs. 20 crore ($40 lakh) in Hyderabad, even though, at the height of the euphoria, lands changed hands at a whopping Rs. 70 crore per acre.
Why is this ratio 5 in the US and 5000 in India? Is there a shortage of land in India? No, urban land is copious. Indeed urban land in India does not even account for 0.1% of the country's landmass, hence future supply is assured. New urban land is being created at a fast clip due to new highways, ring roads and the SEZs sprouting all over. Paucity of land, though often cited, can be safely ruled out as the culprit. Germany or New Jersey has population densities comparable to that of India. In neither country, land prices are anywhere near India's.
Are speculators in Dallas dumber or less greedy than their counterparts in Hyderabad? Rest assured that is also not the case. Dallas is home to many hedge funds, whose casino-like bets contributed partly to the ongoing financial tsunami.
The only cogent answer why Indian land is 1000 times pricier than US land: property taxation in the US balances the interests of land hoarders and land consumers. In the US, property owners pay an annual 2% property tax to the local body. This innocuous 2% tax aligns the interests of the landowner with that of the larger society. Here is how it works. If India imposes this simple tax, the landowner for an acre of land will be required to pay Rs. 40 lakh (2% of Rs. 20 crore) at the end of every year. Land prices will be appraised annually, so if the price of land doubles, so does the tax. As landowners do not earn income on vacant land, they would have to (a) pay the tax out of pocket year after year or (b) build on the land to make it productive or (c) sell the land. If the property owner defaults on tax payments, the city auctions the land on the same lines as a home foreclosure. When the landowner is compelled into building either for-rent or for-sale apartments, the new supply of buildings will bring down prices. As a last resort, property taxes will induce landowners to sell, which will bring in a supply of sellers. The seller's market for land will become a buyer's market and land prices will crash at least 10-fold.
In Hyderabad, individual landlords and industrial conglomerates have thousands of acres lying vacant, which virtually do not carry any tax burden. India's patently absurd property tax rates do not act as a deterrent against land hoarding. Indian realty majors like DLF have land banks that will not be exhausted until 2050 at the current rate of construction.
A simple calculation shows that the land in Hyderabad metro is worth more than the GDP of India. How is this possible? In actuality, less than 1% of the land mass in Hyderabad was transacted during the last decade, but the remaining 99% is priced as if there is money to pay for all of the land.
In the US, private property owners have the right to keep their land vacant as long as they pay the 2% tax - a reasonable penalty for the prerogative to hoard land. In the US, the interests of land owners and land consumers (aspiring homeowners, expanding businesses etc) are judiciously balanced. India will benefit immensely if the land market is turned into a buyer's market. Black money has flooded the land market; it remains a seller's market as long as more black can be pumped in to the market. Land changes hands at a glacial pace as sellers sit on their hands despite the meteoric rise in prices. Buyers will make beelines if property taxes are imposed, which will check land price appreciation and black money will be decimated as property prices head southward.
The local bodies can direct property tax revenue to expand city roads and improve civic amenities. Indian local bodies have the least tax revenue compared to their global counterparts. This accounts for deficient, or non-existent, service delivery.
Due to the exorbitant land prices, millions in Indian cities are being deprived of basic housing needs. India has an unacceptable shortage of 25 million homes and a vast portion of its middle-class housing stock, another 25 million units, is dilapidated and situated in labyrinthine, litter-strewn neighbourhoods. Popping the land price bubble will induce a seismic shift in the land market and unleash construction activity for 50 million housing units - translating into 50 million direct jobs. 50 million more indirect jobs will follow as schools, hospitals, retail shops and civic amenities are constructed, not to mention jobs created in the cement, steel, furniture, home electronics and transportation sectors. That is how we can build a $50 trillion economy by 2050. The bottom line: India's land prices are unsustainable and unjust and are unduly choking economic growth.
When any commodity is hoarded, it scuttles economic activity. Land is the prerequisite and source of all wealth creation. In this sense, the cost to the society of land hoarding far exceeds that of any other commodity. If one hoards 1% of India's rice stock, he will be jailed. Why not do the same to land hoarders? In actuality, there is no need to jail anybody. Just impose 2% property tax and everything will fall in place. This simple, effective, elegant system is working wonders in all western countries.
Private property ownership is the cornerstone of all democratic societies. India is one of the few countries where private property ownership is not counterbalanced by a pragmatic property tax regime. India can ill-afford to miss out on housing-induced GDP growth, more so now as the export-led growth dreams have been derailed by the global slump.
Before the property tax legislation is enacted, India can pursue a few short term measures like doubling floor space index ratios for middle class housing and quadrupling the ratio for low income housing. When an SEZ fails to take off, convert the project into a Special Housing Zone (SHZ) with meaningful limits on apartment prices. Double the area allocated to housing in all SEZs. Subject buyers of urban land should to commence building in a year or lose the land.
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