6.1. Housing and Inflated Land Prices

A key factor contributing to inflated land prices in India has been the flow of illicit money into real estate. Therefore, attacking black money would have the important beneficial side effect of bringing land prices down and making housing more affordable for low-income families. One important factor encouraging the flow of black money into land is high stamp duty. Working with states to lower this duty would help bring land prices down.

At least four supply side factors have also contributed to the artificially high urban property values in India.

♤ First, as a legacy of the Urban Land Ceilings and Regulation Act, 1976, large chunks of vacant land have disappeared from urban land markets.

♤ Second, many sick public sector enterprises (PSEs) own large pieces of unused land in prime urban areas. Closure of these units can help bring substantial land on the market.

♤ Third, central and state governments own substantial urban land that remain unused or subject to encroachment. For example, railway, defence and civil aviation ministries of the central government own valuable unused urban land that they could monetize to finance infrastructure and other critical expenditures while also making the land available for housing and other uses.

♤ Finally, the Land Acquisition Act, 2013 fixes compensation for acquired land at rather high levels. In turn, this makes land acquired for affordable housing expensive and contributes to high costs. Short of amending the Land Acquisition Act 2013 for the purpose of acquiring land for affordable housing, there is no simple solution to this source of high price of land.

A further constraint on the supply of urban land is the stringency of land conversion rules. Vast tracts of land on the outer periphery of cities are potentially available for urban expansion. But this requires conversion of the tracts from agricultural to non-agricultural uses. For historical reasons, the power for such conversion has been vested in the state revenue departments, which are reluctant to allow the conversion. Shifting this power to agencies in charge of

urbanization and making conversion transparent and flexible would go a long way towards creating a vibrant land market in Indian cities.

Scarcity of horizontal space can be countered by expanding space vertically through the construction of taller buildings. The availability of this avenue depends on the permitted floor space index (FSI), which measures the floor-space in a building as a proportion of the area of the plot on which the building stands. Unfortunately, permitted FSI in Indian cities is extremely low, ranging from 1 to 1.5. Consequently, tall buildings are virtually absent from Indian cities. The topology of Mumbai closely matches that of Manhattan and Singapore but it has few tall buildings when compared to the latter cities. Available urban space can be expanded manifold by relaxing the permitted FSI.

Traditional rent control laws which disproportionately protect the tenant have led to paradoxical situation of unsatisfied demand for rental housing while many units lie vacant. There is clearly need for replacing the current rent control laws by a modern tenancy law, which would give full freedom to tenant and owner to negotiate the rent and the length of the lease.