How Clear Property Rights Can Make India and Its People Richer

Nobel laureate Amartya Sen was once amused when a boy attempted to sell a pirated copy of his book while the economist waited in his car at a traffic light. While the sales of pirated books are not in the official records, it is a common practice in many developed markets. The unofficial market has something in common with many other transactions that happen in India and in many developing economies.  

India's real estate market, for example, sees many unofficial transactions happen and much of this is due to insecure property rights.

Recently, the Supreme Court had said the right to property was a part of human rights. “The right to property having been elevated to the status of human rights, it is inherent in every individual, and thus has to be venerably acknowledged and can, by no means, be belittled or trivialised by adopting an unconcerned and nonchalant disposition by anyone,” the SC said. The apex court said that the government should not have the right to deny people the right to property in an arbitrary fashion. The idea behind the court ruling has been maintained by political philosophers for long. The view that property rights are inherent in every individual has been a common philosophical position for thousands of years now.

Right or wrong

While the right to property is often seen as a right that exclusively benefits the rich, evidence does not support this view. Large fraction of urban Indians live in the informal settlements. If property titles are granted while simultaneously raising floor space index (FSI) in slums, these households in large Indian cities would become prosperous overnight.

When economist Hernando de Soto and his team of researchers studied the status of property titles in the developing economies, they found that the informal economy in such countries was larger than the assets of the government, the assets traded on the local stock exchange and foreign direct investment put together. They also found that in the Third World countries and in former communist nations, nearly 85 per cent of the assets were in the forms that made conversion of assets to capital difficult.

For example, if a farmer's son in India wants to buy out his siblings' share and increase the size of his land holding, the vagueness of property titles, a complex legal system and other constraints would make the process difficult. Similarly, various regulations make it difficult for farmers to own large tracts of land. They are also unable to use their existing land holding as collateral to expand their wealth. This is a form of inequality because the wealthy generally have legal titles to the property they own. They are also able to raise capital from banks and from stock exchanges. Farmers and low-income households, those living in informal settlements, are unable to do so.

Such regulations, however, end up harming every section of the society. When actor Amitabh Bachchan once tried to buy agricultural land in Uttar Pradesh, he was expected to adduce proof that his ancestors were engaged in farming in the state. The wealthy, at times, end up paying for the same plot of land again, if others later claim ownership over it.

When corporations try to acquire land, they also find it difficult because:

• Farmers do not own large tracts of land.
• Property titles are often not secure, clearly defined or valid.
• Conversion of agricultural land for other purposes is not allowed. 
• Farmers are not allowed to lease out land, or trade it in exchange for shares or bonds. 
• Various regulations make it difficult for corporations to find alternatives. In cities, even civic infrastructure can be improved, if private developers are allowed to buy large tracts of land, and if people are allowed to consolidate their land holdings. Now, it is the small size of the landholdings of private corporations and developers that stop them from building civic infrastructure.

Documented in history

It is not merely property titles that matter. Transactions in property should be secure, too. de Soto points out that in advanced economies, every piece of land, every real estate asset, and machinery is represented in a property document, and is made accessible to all potential traders by the government. Potential traders can also find the credit history, information related to tax payments, and other details from a unified system. Much of this practice came into being in the 19th and 20th century, as a result of a long struggle. India can replicate this model which has been successful everywhere in the world.

In India, real estate is seen as an unstructured market in which little information is in public domain. People are hesitant to buy homes online. This may change with time as people can know more about a property online than by physically inspecting it. This already happens in the commodity exchange markets in the West.

It is often argued that government should not legalise informal settlements. But, European countries that were more willing to do so became far more prosperous than that countries that were not willing to do so. When there are many benefits from legalising such properties, it is only wiser to do so.