these causes and consequences of parallel economy are well-known.
In India, real estate is the sector which feels the impact
of black money most. Our land prices are shooting up irrationally.
True, land is a scarce commodity, and cannot be created.
This supply constraint is further aggravated by our cultural
obsession with land. Far too many people are in search of
land as a safe investment outlet.
land is a scarce commodity by definition, the demand-supply
gap is aggravated by bad policies and misgovernance. Despite
our small land mass (2.5% of the world's land surface),
India accounts for almost 12% of the 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 utilization.
Instead, development is limited to small pockets, and real
estate prices are reaching the stratosphere. The new development
of townships and special economic zones is hampered because
land holders typically want to hold on to their property
for speculative purposes. Experience teaches us that land
prices shoot up a hundred times or more with even modest
development, and therefore no farmer or land-holder is content
with the measly 'compensation' offered under the Land Acquisition
Act. Even if above market prices are offered to owners,
there is severe resentment as farmers do not share in the
stamp duties have traditionally fueled black economy, as
sellers declare sub-market prices to reduce tax liability.
In a market dominated by unaccounted money, those who wish
to disclose real prices are at a great disadvantage. The
seller has to pay high capital gains taxes with full disclosure.
If he wishes to buy a property, in turn he has to pay a
large part of the sale consideration - typically 50 to 70%
- in cash, which in turn needs black money! Most people
are therefore forced to evade taxes and further enlarge
the parallel economy.
registration has always been a source of corruption. Rent
seeking for 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 registrations. Absence of periodic land surveys
and poor record-keeping have added to the woes of citizens
and corporates. Land ownership is difficult to establish,
and many innocent buyers have been cheated by unscrupulous
real estate agents. This further shrinks supply of reliable
land with assured titles, and leads to escalation of land
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 license-permit
raj, control of land has become one of the key sources of
corruption. The state politicians can dramatically alter
the fortunes of favoured individuals and corporates by 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, 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 have further
inhibited development of land, and created scarcity by diminishing
unrealistic real estate prices, 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 act in a few simple ways
to disentangle the complicated mess we have created over
supply can be enhanced by opening up more land for development
by building roads and infrastructure. Second, stamp duties
need to be rationalized, and land records updated by periodic
surveys and computerization with full public access to all
information. Third, in all developmental projects like special
economic zones, 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.
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 6 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
governments need to act with clarity and good sense before
our growth is hampered by irrational land prices and the
growing black economy.