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Saturday, July 20, 2019
Indian elites holding back wealth tied in slums. And here’s what Modi govt can do
Elites view encroachers as disruptors of property rights system, and oppose regularisation. But that’s what India needs to free up capital held in slums.
Indian children work at a construction project in New Delhi, India | Daniel Berehulak | Getty Images
If India’s GDP growth rate has to cross 10 per cent, the government will have to create a system that empowers entrepreneurs at the bottom of the economy with considerable capital in their possession.
These enterprising risk takers reside in India’s many slums, but predominantly in Mumbai, and are best positioned to implement Peruvian economist Hernando de Soto’s idea – of adding the wealth held by them to the deploy-able stock of fungible capital.
As we saw in the previous article, de Soto’s idea is basically about converting assets held by the poor in the informal economy into full-fledged capital in the formal property system in such a way that the capital becomes capable of multiple uses in the wider economy.
Incomes generated at the bottom of the income pyramid have a higher growth momentum in terms of velocity and spread. For the Left and the Right, de Soto’s ideas offer a way to add to the stock of capital in the economy and enhance its efficiency and productivity. However, the attempts to empower capital so that it is used outside the formal system have always met with stiff resistance from both sides.
Among the many objections to giving the squatters full rights to the property in their possession are the problems of setting up perverse incentives, equity, and objections from a land-use perspective. Most powerful objections, however, come from the elites who see encroachers as lawless elements vitiating an orderly system of property rights. Another objection often cited is that regularising a slum doesn’t help in eradicating it. Let’s examine these objections in detail.
We need to distinguish between the primary act of encroachment, which is illegal, and subsequent transactions carried out on the property encroached upon. Nothing justifies encroachment. It is the for the government to protect its property and it should be given a reasonable time, say 10 years, to move the encroachers out. In a lawful society with an organised system of property rights, there can be no dilution of this principle. However, over time, these slums gather huge chunks of savings and investments. It is therefore imperative to bring this potential capital into the formal system in the larger interest of the society.
By and large, encroachers are people from economically poor background. But remember that we are dealing with a slum that has been in the making for 30 years or more. It has physically expanded to its maximum capacity for the locality. The property rights system within the slum have matured. Everybody within the slum knows who owns what. At this stage, the grouse against regularisation is usually that regularisation gives away windfall gains to the undeserving. While that appears to be the case at first glance, the reality is far different.
Properties change hands many times over the lifetime of a slum. So, slum dwellers are at best a floating population, both due to generational changes as well as secondary market transactions. At every change of hands, the value of the property generally goes up. However, even late stage buyers are generally from the weaker sections of the society. So, regularisation is not unfair to the poor as some textbook Leftists argue. Instead, it is the equivalent of land reforms in an agrarian society where tenants are given the title of the land they till. These tenants are not necessarily the neediest but they are poor and unlucky.
Does regularising slums, and bringing in the assets locked in there into the capital stock of the economy, help dissolve slums by ushering in faster economic growth for people in the slums? The answer to the question has to be at two levels. Firstly, just by making the assets fully legal to hold and fungible with the capital in the economy increases their market value three to five times, bringing a huge windfall gain to the slum dwellers.
Moreover, the conversion of property held by slum dwellers into proper capital with marketable titles not only increases their stock of capital but through multiple uses, vastly enhances the property’s earning capacity. Both these processes work not only to increase the wealth and prosperity of the slum dwellers but that of the economy as a whole. Over time, the increase in income generation and wealth of the slum results in upgrading the quality of life and the value of the assets, thereby effectively dissolving the slum itself.
Politically driven process
Keeping in mind the need to avoid setting up perverse incentives, we could start the process of converting the informal property into the capital by selecting compact, contiguous slums that have little scope for further encroachment and have been in existence for over 30 years to kick off the process.
Most such slums have the basic wherewithal for determining who owns what, which a survey could help establish. Once clear titles are established, marketable title deeds should be issued to owners without any restrictive clause. Residents should be free to cash out if they wish to by selling off the property in the secondary market subject to impact tax.
In order to speed up the process of development in a way that the natural upgrade dissolves the slum as quickly as possible, the state must invest in the required utilities, sanitation and access infrastructure while looking at the potential impact tax for recompense.