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Rajiv Lall: Urban nightmares and the politics of land

Our inability to tax land value accretion that accompanies rising levels of urbanisation has distorted land markets and skewed the development of our cities

Rajiv Lall 

Rajiv Lall

There are few subjects that trigger as much emotion and debate as the acquisition of agricultural land.* For centuries, it was the relationship to land that defined the wealth and power equations in what were essentially agrarian societies. The state in pre-colonial India was no exception. It relied heavily on taxation of the peasantry for its resources. In the north, the Mughals created the zamindars or jagirdars as intermediaries, whereas in the Deccan the Marathas and other successors to the Vijayanagara kingdom collected taxes more directly from peasants under the less-onerous ryotwari system.

The British retained the local systems of oppressive taxation on the peasantry but gradually converted revenue payments to cash and imposed a legal system that helped convert traditional relationships into more structured property and tenancy rights. These arrangements helped create a nascent market for land but they only codified the deep inequities that survived from pre-colonial times in rural India.

Land reform was thus, a very powerful political battle cry for a post-Independence India looking to shrug off the legacy of the colonial era. Reforms came in three waves, starting with the successful abolition of zamindari in the first decade after 1947. The next generation of land reforms of the 1960s and 1970s that focused on strengthening tenancy rights and fixing land ceilings were less successful in delivering meaningful redistribution. But one of the most significant outcomes of the post-Independence political backlash against the historical injustices inflicted on agrarian India was the abolition of all taxes on agricultural income or wealth. Nearly seven decades on, it is still politically impossible to think about taxing agricultural land or the income generated from it. This has profound implications for urbanisation in India.

Urbanisation goes hand in glove with the rising share in gross domestic product (GDP) of industry and services relative to agriculture that is the hallmark of modernising economies. At the heart of this process of structural transformation is the change in land use from agriculture to other more remunerative activities that takes place at the edges of the expanding urban periphery. As land is put to other uses, its value increases. Location, rather than productivity, becomes the more important determinant of its value. Capturing a part of this accretion in value, most commonly through property taxes, can generate significant revenues for the state as urbanisation begins to take hold.

It is an abiding irony that in China, where all land belongs to the state, this has been done most effectively over the past three decades. Municipalities in China have generated huge surpluses by monetising the value of their land, and they have used these to fund essential infrastructure.

In India, the value accretion that comes with change in land use has been denied to the state. Instead, it is captured by private intermediaries in a process that has become subject to great manipulation. Between 2001 and 2011, the total urban area in India grew by about 24,000 sq km, which was roughly equivalent to the amount of agricultural land that was allocated to non-agricultural use over the same period. About 9,000 sq km of this was on account of Census towns, or areas that are urban in nature but are administered as rural. Their residents are not subject to any property taxes or capital gains taxes on the sale of land or change in its use, even though the price of such land has, on average, multiplied at least five-fold over the decade.

Even the land area administered under municipalities and urban local bodies attracts very low rates of property taxes thanks to the ubiquitous use of black money, low coverage and poor collection and enforcement. Nationwide, all our cities and towns together generate the equivalent of only 0.2 per cent of GDP in property tax revenues. In most Organisation for Economic Co-operation and Development countries, revenues from property tax amount to three to four per cent of GDP and comprise the bulwark of municipal finance. Our inability or unwillingness to tax land value accretion that accompanies rising levels of urbanisation causes the fiscal base of urban India to be structurally weak, making it much harder to invest in improving the quality of life in our proliferating urban spaces.

A second feature of our land markets that affects the pattern of urbanisation is the extremely inefficient utilisation of urban space. We have created artificial shortages of built-up space through a combination of policies. Most cities have now abandoned the Urban Land Ceiling Act, but this law served to severely restrict the development of built-up urban space.

The situation has been worsened because of rent control legislation and very tight restrictions on maximum floor area ratios (FARs) or floor space indices (FSI). The permissible average FARs/FSIs in most major cities around the world is above 10. In India, even in our largest cities, it does not exceed four. FAR/FSI rules are generally applied in a highly non-transparent manner - discretion over these decisions is a powerful lever for rent seeking. As a result, our largest cities have become amongst the world's densest in terms of population per hectare of built-up space, contributing to our very high cost of residential urban property.

In general, the cost of an affordable home should be no more than three to four times a family's annual income. In Mumbai and Delhi, an 800 sq ft flat costs 100 and 75 times respectively the average annual per capita income of the country. Formal housing is unaffordable for a very large segment of our urban population. The result is shelter depravity and a very large urban slum population. According to the Census, during the 2001-2011 period, our slum population grew by some 27 per cent to over 65 million. UN Habitat estimates our slum population to be over 100 million in 2010, or close to 30 per cent of the total urban population.

A third aspect of the politics of land that distorts the shape and evolution of our cities is the extent of underutilised government land, much of which was acquired under the doctrine of eminent domain introduced by the British. The provisions of the Land Acquisition Act of 1894 have been widely exploited by the state to take over large swathes of agricultural land for industrial projects but also for urbanisation under the often capricious Master Planning process of various development authorities.

Today, just the surplus land of the Railways, the land of 62 notified Cantonment areas of the defence forces, and nine port trusts, adds up to an estimated 2,200 sq km of prime urban land or about 2.1 per cent of the total urban land area of the country. If all publicly-owned lands are accounted for, they would comprise a material share of the country's total urban land area. Monetising some portion of this would unlock precious funds for urban infrastructure development as well as release underutilised land for densification.




The author is executive chairman, IDFC
*This article relies on, amongst other sources, two in particular: "The Price of Land: Acquisition, Conflict and Consequence, Sanjoy Chakrovorty, (Oxford University Press, 2013) and the Report on Indian Infrastructure and Services, 2011, prepared by the High Powered Expert Committee, of the Ministry of Urban Development, chaired by Isher Ahluwallia and of which I was a member

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First Published: Tue, January 28 2014. 21:46 IST
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