UNLEASHING URBANIZATION
A Kind of Urbanisation
Amal Sanyal, Department of Accounting, Economics and Finance, Lincoln University New Zealand 1/1/2011 1:10:29 AM
India’s urban growth is fed by a number of parallel processes. First, the classic process of the migration of rural workers to industrial towns continues. It is augmented by the natural growth of the existing population of these industrial areas. Secondly, there is a continuous transformation of rural into semi-urban and semi-urban into urban areas. This process too is partly fed by migration and partly by natural growth. A third process is the emergence of urban centres through the establishment of new industry conglomerates in formerly rural areas. This process which occurred vigorously in the first three Five Year Plans, has gained renewed momentum of late as state governments compete to attract large scale private investment. In this article, I do not want to discuss any of these processes but will focus on a fourth process that is fast becoming a dominant issue– for both economic and political reasons. It is the process of development of new townships with the following three characteristic features: (i) they are in the outskirts of our largest cities; (ii) they do not result from industrialisation of these areas; and (iii) they are not spontaneous but are initiated by the government.
In the years since independence, several state governments have tried sporadically to establish satellite towns around their congested state capitals or new ones close to them. In these programs, overall planning and construction activities were overseen by state governments while funds came from the state as well as the centre. Of late, this process has acquired unprecedented momentum after a number of government decisions and reforms. Several initiatives of the ministry of urban development and change in the way the state governments can now contest for central funds like that of JNNURM and similar programs have been instrumental. Also instrumental is the rapid growth of the middle and upper income groups with large effective demand for high class housing and public amenities. The initiatives originating from the central government and the Planning Commission are based on a vision of urban development which is quite promising. They are expected to start a new and healthy chapter of urbanisation. Though it has brought some notable successes, the implementation has failed to keep up with that vision and expectation. The process now appears to be much different from the vision and the blueprints.
The objective as initially conceived was to produce infrastructure and amenities for the satellite towns, connect them by transport and produce residential complexes. Also on the agenda was to promote economic activities in these areas so as to make part of the resident population less dependent on the hub city. The residences were visualised for low and middle income people who would be enabled to acquire ownership with support from the state and the central governments and commercial banks. Initiation of local economic activities would be encouraged by the same agencies as well. State level politics and vested interests have however undermined the vision in most cases in course of execution. As infrastructure got built and road and rail connections established, the areas became potentially suitable for high income residences away from the central business districts.
In these areas land for infrastructure was to be acquired by the state government while residential land was supposed to be bought from local inhabitants. Private construction companies were to acquire the land from the state government to build the residential complexes. Arrangement connecting the state governments and builders in these projects differs across states and across projects. The common feature seems to be that private builders have been able to use them to divert a large part of the land for construction of residence for higher income people. The supply of dwelling units for lower income families has not increased significantly, and the congestion of living space and public amenities in the main cities has continued unabated.
In result, we see the proliferation of high-cost residential apartments developed by private business in self-contained towns ready with civic amenities and shopping areas. Two ‘models’ can be identified. In one the state government has built the infrastructure and then residential land has been made available to private builders under various types of contracts. The contracts have turned out to be porous enough and/or the political clout of builders strong enough for the diversion of significant part of the land for high income residences. Some neighbourhoods have been created for low cost housing as part of those contracts; but they are too few and too shabby. Low profitability of low-cost housing leads to the transfer of land and resources to high cost housing to the extent tolerated by local politics. In an alternative model, developers acquired land from the government around newly-built urban facilities and infrastructure, developed them further and sold residential plots for large stand-alone dwelling units. The resulting towns in both models have come up with amazing speed in the last two decades. They are significantly better provided with civic amenities and local public goods than the larger cities around which they have been built. Apartment and land price in these townships include the cost of amenities, maintenance, security as well as exclusivity, and hence are affordable by only very rich people. Because housing for lower income families has not taken off significantly, decongestion of the cities has not succeeded. But commercial success of the development business has popularised these models. They are now emulated around the second tier cities and many district headquarter towns as well.
Land Deals
The towns are built on rural land bordering our larger cities. As a rule, the land is arable because our major cities had developed in the middle of large tracts of agricultural hinterland. Inhabitants of these places are typically small and marginal holders. Land for developing infrastructure is generally acquired by paying a compensation unilaterally fixed by the state government. Land for residential complexes is purchased from their owners. One of the most important issues of current urbanisation is the failure of the land market in these transactions, resulting in extremely unfair price for sellers. No less problematic is the compensation rate for acquired land.
Markets for land transaction in these places are in the most rudimentary state. In most cases commercial land transactions are taking place perhaps for the first time in memory and so sellers have no benchmark of expected price. Hence fair and efficient prices can be established only after a sufficient amount of search for equilibrium price through bargaining. This cannot take place because of the asymmetric bargaining powers of buyers and sellers. Deals that have been interpreted as fair by state governments or government-appointed contractors offer sellers something close to the capitalised value of the land’s prospective earnings. However in the undeveloped market conditions surrounding the sellers, the opportunity cost of land is much more than the capitalised value of its produce. Most sellers do not have education, non-farm skill or other forms of capital. So, after the land is sold their income becomes unsteady, and the sale money has to support current consumption. It cannot be invested and hence the capitalisation equivalence makes no sense in this situation. Any realistic estimate of the opportunity cost of land should include the value of an appropriate form of capital that can earn the seller income in the future. In a reasonably free bargaining, sellers should be able to register their reservation price, which would include these factors evaluated as they think fit. On the buyers’ side, if the market had a number of competing buyers, then they would be willing to pay up to the capitalised value of profit flow from the development activities. A price between this and the reservation price of sellers is expected to emerge in a better market environment. But generally the price offered is below what should be the sellers’ reservation price. In some cases sellers have promised jobs for family members or dealership of building material etc in the future, apart from a cash offer of capitalised land value. This acknowledges that the opportunity cost of land is larger than the present value of its future product. Unfortunately these promises are rarely kept and there is no mechanism for remedy.
Efficiency
Inability of the land market to work properly has ramifications beyond fairness. How do we decide if the conversion of a cluster of villages into a residential area is an efficient reallocation of the land in question? To settle this we require information on the direct and indirect cost of moving land out of its present use. As I stated, offered land prices understate these costs by a large margin. Hence the profitability of residential construction is no indication that land is being efficiently re-allocated. The profit partly reflects the demand of the middle and upper income classes for living in less congested neighbourhoods better provided with local public goods. To satisfy this demand is certainly necessary and socially valuable. But we cannot conclude about the merits of the reallocation of a particular land area to meet this demand, until we have estimates of the cost of moving it from its present use. Because land is bought at arbitrary prices, large profit itself does not settle the issue.
In some places those who had sold land previously for these projects are retrospectively agitating for a fairer deal and demanding compensation. Depending on the political situation of the state, governments may be forced to arrive at a compensation formula in some cases. This kind of retrospective bargaining with the help of political parties wastes significant number of working days, undermines governance and vitiates politics. We should replace it with a procedure and a pricing formula worked out at the national level with only local details to be filled in for a given project. Offer on the lines of the formula should be treated as an initial offer on the basis of which price bargain may be started. It will be also necessary to provide for legislation and effective mechanism to prevent intimidation in the bargain process. In principle, the process would ensure that (i) conversions would occur only if the effective demand for housing exceeds social cost of land reallocation, and (ii) individual sellers sell voluntarily.
I have no illusion that working out such a procedure is easy. It will require inputs from and consensus of various quarters and is eminently prone to get politicised on the way. Yet we need such an arrangement to proceed with this strand of urbanisation, which is very important at the present stage of our economic development.
Corruption
We need this sort of standardised procedure for another reason. It is necessary for cutting out the space for discretion of state governments and local politicians. Given the very high profits from high-income residential construction, land around large cities has become a most coveted resource. As of now, state governments have enough discretionary power to acquire or purchase land and transfer it to private business for construction. This discretion is being grievously misused making land around large cities one of the biggest sources of corruption. The nexus of land developers and politicians in the states are open secrets. The room for discretion in the matter has corrupted an important industry as a well as local politics. We should count the further downstream effects too. Politicians’ share of developers’ profit is partly invested in maintaining a stable of vicious and violent party workers who play an important role in the proceedings. Politicians have been blamed of using their help to overcome sellers’ resistance to low land prices. This and the rest of the polity’s response to it have been increasing the level of violence in the political system of the states for some time.
The nexus between politics and residential construction is further responsible for undermining a variety of regulations. Fisheries, water sources and forest areas around big cities or alongside highways have been often reclassified by local authorities to help residential construction. Regulations related to water conservation, social forestry etc. are often waived. This sort of violation can be curbed significantly if politicians are not obliged to the building industry. This in turn can be achieved by setting up a discretion-free mechanism for land acquisition and purchase.
Social Issues
We generally worry more about the economic and political aspects of these issues. I think we ought to care about the sociological fall out as well. Serious damage appears to be occurring to the rural society because of the callous and corrupt handling of land. Various official and media reports and claims of political parties indicate three broad groups among the people from whom land is acquired. The first is a small group that benefits rather than loses. Families of this group have sizeable amount of land, own other businesses and have some political clout. They generally manage to sell at very good price. In fact in many cases it is these land holders who lobby for the development and promotion of the areas where their land belong. As they promote themselves and get visibly richer, they get distanced from the rest of the community. When they get distanced, they in turn feel less obliged to do their community duties and start down a path that eventually leads to bigger separation and disruption of the community.
The second is a group with a moderate amount of land. Head of the family would be generally literate and work in the government or at private jobs. If these people have to sell their land, they generally would use the money for worthwhile financial or real investment, including children’s education. In general, their living and means are not affected by the sale of their land per se. But they are affected to the extent that land gets underpriced. Having got education and being informed, they try out all the available means to plead and bargain for better prices for land. This also helps others in the village or the area. But as they continue, they risk being identified as leaders by land developers and politicians. In sharply polarised political situation, these people are in demand by both sides of the political divide — the ruling and the opposition groups. Thus the disruption of the community is deepened.
The third group is made up of small and marginal holders and is the most numerous. These holders are not literate and work on their own land and as daily labourer. They cannot bargain unless mobilised and led by a political party or group. Typically they end up consuming the sale money pretty fast as it is used for current consumption and a variety of pending claims, including loan repayment and wedding expenses. Often these families are forced or lured to sell even their homestead in order for developers to get contiguous land. Family members, often including children, then look for unskilled job and makeshift living places in the emergent township or in the main city. As they leave in search of alternative places to live, the disruption of the community is complete.
It is clear that the purpose of decongesting the city is defeated. So is the provision of better living space for low income people. Further the existing society and traditional institutions in these areas completely breakdown by the processes described above. The families that manage to hold on and stay back become out of place and get more and more marginalised as the new urban community gets settled. The families that are dispossessed of home and income settle at random in places that offer the least resistance, only to be uprooted when there is a demand for that block of land. They get disengaged from their previous community, in place of which no new meaningful community springs up. Some get separated from families. Socially unconnected and bitter about the system these people are often used by political parties and criminal groups. Overall erosion in social values in the average Indian city has to be partly attributed to this process. Quite ironically, the process is a planned process and the intention most certainly is to build not destroy.
We Can
I should end this essay by emphasising that much of the social disruption, corruption, hardship and political violence arising from these projects can be arrested by being serious about the conditions of land purchase and acquisition. We should produce a central and standardised set of procedures for pricing. Make the procedures and formulas public all across the country. The local variations that are possible should be part of the rule too and made public. Unambiguous conditions should be specified about what constitutes an offense and punishments should be severe enough to deter. Any deviation from the pricing rule would automatically reverberate through the media even if the sellers are hesitant to blow the whistle. We should build up whistle-blowing websites accessible to all and monitored by a body empowered to take actions.
In this scenario, the government would pay sufficient subsidy to get houses built for low income people wherever it is needed; but would not allow price of land to fall below the formula. If that price is too high for developers to build residence for non-subsidised buyers, they will automatically avoid the cluster. This will in fact ensure that no land is reallocated for urban development unless marginal benefits exceed marginal cost, except for housing the very poor people. In short, we can do both: to proceed with a meaningful urbanisation and not marginalise the poor people living in the neighbourhood of big cities.
(Mr. Amal Sanyal is associate professor in Economics at Lincoln University, New Zealand. He had also been a former holder of State Bank of India national chair on public policy, former Economic Advisor to the Ministry of Economic Planning in Mauritius and consultant in demand modeling and pricing strategy for core sectors like power, coal, petroleum and steel.
The views expressed in the write-up are personal and do not re?ect the official policy or position of the organization.)
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