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The housing industry in India has been struggling along since independence. The government has to be blamed for the current state of affairs, so too the builders and developers. The time has come to take stock of the situation and act immediately. Several experts including the McKinsey Group, educational institutes and builders’ associations have proposed various ideas and plans for the housing industry. The problems are numerous, the solutions are obvious and clear, but the choices are difficult and few. The advantages of implementing these changes far overcome all the negative and political issues, which have kept the problems dormant for so long. India does not have any option, but to act strongly and immediately. This will provide the impetus to get the Indian economy back on the track for a double-digit growth. Figure I shows the various barriers, which are keeping the GDP growth in India at 5.5% in 2000, and the resulting GDP growth of 10.1% with complete reforms by 2010.
Figure I
REAL ESTATE ISSUES AND SOLUTIONS
- Urban Land Ceiling Regulation Act (ULCRA): The central government has repealed this archaic law in 1999/2000, but the state governments have not followed the lead. Some states like Punjab, UP, MP, Rajasthan, Gujarat and Haryana have repealed this act. States like Maharashtra, Karnataka, Kerala and Orissa are yet to act on it. In fact, Maharashtra wants to repeal the ULCRA and enact another one of its own. This law has been a failure and this is the right time to act on it and to release more land into the market. This will definitely lower the price of land, which accounts for about 50% of the price of the real estate property in India, unlike the developed countries, where it is much less. See Figure II for the breakdown of the cost of housing in India and the US.
Figure II - Distribution of Cost of Housing in India and USA 
- CLEAR TITLE: 90% of all the lands in India do not have clear titles. The ownership is unclear and hence, the land is off the market, thereby creating a scarcity of land. This is due to poor record keeping and complicated outdated processes. All this must be revamped and bought into the 21st century. All updated records must be computerized to increase transparency in land ownership. And special fast track courts must be set up to clear all legal land disputes in a short period of time, so that titles become clear for the buyers. This will open up avenues for financing and investment for development and lower the overall cost of projects.
- STAMP DUTY & REGISTRATION: The cost of transferring land titles must be reduced from rates of 10+ % stamp duties to reasonable levels of 3 to 5 %; similar to prevailing rates in developed countries. This will encourage sellers to pay the lower stamp duties, instead of trying to cheat the government of the stamp and registration costs. The government collections will also increase due to this lower rate of stamp duty and wider collection base. The high duties have also encouraged unaccounted moneys being used in most real estate transactions in India. The registration procedure should also be made transparent and simple, so that changes/deletions and corruption are minimized. Some states have realized that lower rates of stamp duties will translate into increased revenues from registration of land documents, and have planned and acted accordingly.
- RENTAL LAWS: Obsolete tenancy and rental control laws keep a large part of the urban properties off the market. The rental laws must be revised to protect the owner and his/her property from the tenant. Allow the termination of old tenancies, remove restrictions on increase of rentals and empower owners to reclaim their properties without any court proceedings, which currently takes decades in some cases. Here the market should be allowed to set the rental amounts and the owner must have full protection for his/her property. This will provide security to the landlord and reduce the deposit amount required with the lease agreements. Once the laws are enacted and strictly enforced, more investors will enter the real estate market to utilize the rental fees as income. This is especially true for the commercial sector. The tax laws must be revised to make renting of properties a financially viable option. Some states like Maharashtra, Goa, Bengal and Karnataka have already made amendments to the rent act.
- FORECLOSURE LAWS: Though the level of foreclosures for the housing finance companies (HFC) are relatively low at around 1.5 to 2 %, the foreclosure laws must be revised and made up-to-date to suit the current context. The laws for non-payment of Equated Monthly Installments (EMIs) and consequent foreclosure and repossession of the property must be revised, so that the financing companies have the final rights on the property, which is the collateral for the housing loan. Once enacted, these laws must be enforced. This will further boost the housing finance business.
- BUILDING CODES, STANDARDS & PERMISSIONS: Although there are several building guidelines and standards in various cities and states, the developers have not followed them; nor have the authorities implemented them. The system needs to be made more transparent and direct, so that there is no room for ambiguity and confusion. Presently there are too many different permissions and requirements in the construction industry. They need to be centralized, simplified, streamlined and made transparent, so that there is no scope for corruption and time delays. There must be a single window clearance for all building and construction requirements. This will reduce time, paperwork and corruption at all levels. And attract further investment capital. Included here are mandatory ratings of developers and projects by rating agencies like NAREDCO, ICRA, CRISIL, etc. to safeguard the interests of the public and increase investor confidence. The quality of construction has improved considerably with the building standards and codes.
- FOREIGN DIRECT INVESTMENTS (FDIs): The government must allow foreign direct investments (FDIs) in the real estate industry, so that finance is easily available at reasonable interest rates for the developers. There should be certain conditions to safeguard against the flight of capital from this business as occurred in south-east Asia in the 1990s. FDIs will also enable new technologies to be introduced in the housing industry, which will make the business far more efficient and cost effective. Recently FDIs have been allowed in real estate projects with certain restrictive financial, time and area constraints. This will allow FDIs in large townships like Noida, Gurgaon and Navi Mumbai. But more needs to be done to encourage cheaper capital, modern systems and technology. Innovative financing schemes such as real estate investment trust (REIT), real estate mutual funds and mortgaged backed securitisation will provide access to low cost and long-term funds.
- DEVELOPMENT & PLANNING: The city or state authorities must use professionals to plan and execute all development plans for cities and towns, with the future developments in mind. This must be done without any political compulsions. The plans must be prepared in advance and executed, without any exceptions and all regulations must be strictly enforced. The central and the state governments must lay down specific overall guidelines for the city/town corporations to follow and enforce them strictly. This will allow proper zoning within cities and towns, green areas and other infrastructure systems to fall into place as the development plans unfold.
- INFRASTRUCTURE: (Electricity, Roads, Sewage, Drainage, Water Supply)
This is one problem area, which needs to be tackled on a war footing. Most Indian cities lack the infrastructure as infrastructure fails to keep pace with the growth in population and development. The central and state governments must provide sufficient power, water and roads to cope up with the growth. The electricity boards must be able to provide reliable power and the corporation must charge reasonable property taxes to cover the costs of roads and water supply. The assessment base of property tax must be changed from historical value to capital value. The user charge for water, sewage and electricity and other municipal services must cover the actual cost of delivering these services. Privatising municipal corporations and state electricity boards may have to be considered very seriously. Presently, the property taxes do not cover the infrastructure costs, plus there is pilferage and actual charges are not collected. The government cannot continue to subsidize these infrastructure costs indefinitely.
- RECOGNITION OF HOUSING AS AN INDUSTRY: This is one issue that the government cannot afford to ignore any longer. The Indian real estate industry has been lagging behind the rest of the world for too long. And this is one industry which can provide a boost to the overall economy, as was very clearly emphasized in the McKinsey Report of September 2001. The 2002 Budget must take up this point in its agenda to boost the Indian economy and to pull it out of the doldrums. The direct impact of this recognition to the housing industry will be easier access to capital and tax incentives, which will jump-start the entire housing industry. The government can provide further incentives such as tax holidays, larger depreciation and increased equity support from HUDCO and NAREDCO.
SUMMARY:
The present contribution of the housing construction industry in India is small when compared to developing and developed nations. This sector contributes only 1% of GDP in India, as compared to 3 to 6% in other developing countries. If the above issues are addressed and the economy were to grow at 10% a year, the housing sector would grow at 14% a year and create over new 3.2 million jobs over the next 10 years. Figure III shows the impact of the increased growth rate on employment in India. And best of all, housing prices could fall by as much as 40%. This would make housing even more affordable and could start off a chain of events to boost the real estate industry, which will culminate in an overall positive impact on the Indian economy.
Figure III
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