Why Is India's Ranking Low In The International Property Rights Index?

Real estate development is flourishing in Tokyo. According to Financial Times, while Tokyo began construction of 142,417 houses in 2014, while England during the same time could begin construction of only 137,010 houses. Only 83,657 housing permits were issued in California in 2014, though California's population (38.7 million) is nearly thrice as much as Tokyo's (13.3 million) . Such rampant real estate development, however, has not led to a rise in housing prices in Tokyo.  

Unlike in many Indian or American cities, such real estate speculation has not led to price distortions. In fact, prices have hardly risen. This is not because the demand for real estate is not high in Tokyo. Tokyo is densely populated. Tokyo's population has risen much in the past few decades.  Tokyo is not a city that is insulated from price distortions and speculative either. From 1986 to 1991, property prices have widely fluctuated, leading to a boom and subsequently, a bust. Tokyo has had its own share of housing woes. The reason is that the city reformed zoning rules and other real estate regulations in the 1990s. There is, of course, another reason. As George Mason University economics Professor Alex Tabarrok points out, property rights are strong in Tokyo. So as long as landowners comply with zoning laws, they have absolute right over their property. According to the Japanese Constitution, the right of a citizen to his property is absolute. This is in stark contrast with India, where real estate developers and local governments may seize your property for arbitrary reasons.

The Indian constitution does not respect the sanctity of property rights enough. In the International Property Rights Index (IPRI) 2015, India was positioned at 62, among the 129 countries surveyed. Among the 20 Asian countries ranked, India's position is 10. India's performance was better in earlier years. The performance declined in aspects like legal and political environment, judicial independence, physical property rights, registering property, intellectual property rights and ease of access to loans. Why is India's position so low in the index?

The developed West has taken property rights for granted for very long. But, this is not true of many developing countries. The developed West has taken property rights so much for granted that the problem of tracing the right owners of property does not even emerge in many cases. In India, much of the economy is not formal, and this is not true. It is not just that property rights are not clear. Enforcement is quite weak, too.  

The consequences of weak property rights are poorly understood. In countries where property rights are respected, living standards are much higher. Where property rights are high, housing is not very expensive, relative to income levels. In such countries, floor space consumption is greater and more people are better housed.

Weak property rights prevent the large majority of the people in India from meaningfully participating in the formal economy. Weak property rights also force people to always remain in the informal economy. Negotiating contracts with strangers is very difficult when you cannot expect the legal system to ensure that people honour their contracts. For example, a person who does not have clear property titles will not be able to use it as collateral to apply for a home loan. He will not be able to use it as collateral for a loan to start a business. He will not be able to sell the land to a corporation either, without the help of intermediaries like local politicians. This is perhaps why large-scale land acquisition is so difficult in India  and usually, involves government intervention.

Weak property rights also lead to poor infrastructure. Why? 1) Municipal corporations build infrastructure, and connect houses to citywide water and sewer networks when property titles are clear, and when housing is formal. 2) It is much easier to build infrastructure in areas where property titles are clear because that makes land acquisition easier. 3) Clear property titles allow real estate developers are corporations to build infrastructure, spreading the costs over a large area. 4) Weak property rights have also led to encroachment, even on public infrastructure like bridges, pavements, and drainage systems.

Weak property rights are one of the reasons why economic progress is not fast enough in India. When property rights are not secure many transactions that otherwise would have happened would not happen. Imagine how impoverished the society would have been if the Indian business tycoons cannot engage in transactions because the legal system is dysfunctional. This is true of the informal economy too, because it is large enough. Economist Hernando de Soto estimates that the informal economy in countries like India is many folds higher than the entire assets of the government.

 

But why are property rights so weak in India? India inherited a reasonably high respect for property rights from the British. The formal law respects private property more than in some countries that are comparably poor. Even though the original draft of the Indian constitution guaranteed absolute right to property, this right was never absolute. The right to property was weakened over the next three decades, and by various legislations later.

But in the recent past, there is growing recognition that property rights are human rights and that private property is a solution to many problems. In the context of housing affordability, few things are more important than secure property rights.