Wednesday, November 17, 2010

Corruption trips India's rise

India's effort to break free of it's socialist past of threatened by its failure to create and enforce private property rights. It started with the Adarsh Housing Society in the mid-90's. It recieved 3,800 square meters of land at 15 % of the market price on the claim that it would provide low cost housing to soldiers and families who made sacrifices for the country. The society includes defense officials and relatives of politicians and bureaucrats.The root of all these ills could be traced back to the lack of private property rights in India, writes Barun Mitra in The Wall Street Journal.

Read the whole article here:

Just a few days ago, U.S. President Barack Obama was in Mumbai applauding India on its economic renaissance. Now his host in India's financial capital, Chief Minister of Maharashtra Ashok Chavan, has resigned due to serious allegations of malpractices concerning an apartment tower in the heart of the city. As well as presenting a startling juxtaposition between the hype over India's development and the rather more sobering reality, this case illustrates how the failure to create and protect property rights threatens the country's best efforts to overcome its socialist past.

It all started with an organization called the Adarsh Housing Society, which started in the mid-1990s with just a few members. The real action started in 1999, when Indian soldiers were fighting valiantly to push back an intrusion by Pakistani forces into the Kargil hills of the Kashmir region. A group of officials, military and civil, strategized to use this incident to lay their hands on a prime piece of real estate in downtown Mumbai.

The society claimed that it would provide low-cost housing to the soldiers and widows of soldiers who had sacrificed so much in the Himalayas. For this noble effort, it received 3,800 square meters of land at 15% of the market price so that it could build a six-storey block. Neither the state government nor the defense ministry was sure about the ownership of the plot.

This is hardly unusual in India, since in most of the country land settlement has not been undertaken since the departure of the British. Land records are in a pathetic state, and so are very easy to manipulate. Hardly any land transactions, particularly in urban areas, take place completely legally. In major cities like Delhi and Mumbai it is believed that typically 60% of the payment for high-end properties is made in cash under the table.

Today, the Adarsh Housing Society oversees a 31-storey tower, with 103 apartments, for which owners have paid between $140,000 and $180,000 for units between 625 and 1000 square feet. Market rates for these apartments are believed to be more than 10 times that value. None of the owners seems to have fought in Kargil or be related to those who did, and in addition to defense officials, the society includes relatives of senior bureaucrats and politicians.

The scandal has been brewing for the past two years, but it really hit the headlines in the past couple of months. Today, every department of the state and central governments, from the defense and environment ministries to land and revenue, are competing to point out the various violations by the society. Yet, the same departments by their acts of omission and commission allowed the tower to be built in the first place.

It is time to recognize that the legal and regulatory framework in India, particularly that surrounding land, is tailor-made to facilitate the wheeling and dealing of the powerful and privileged class, all in the name of providing the poor with affordable housing.

More than anything else, India's poverty can be traced to this single most important factor—the lack of respect for private property rights. This greatly limits the ability of the majority of Indians to harness the potential of the assets under their control. Coupled with arbitrary regulatory regimes, this allows powerful middlemen to extract value from transactions which in a society ruled by law would be routine.

President Obama may have pleased India's political leaders by praising India's rise, but most ordinary Indians will be unable to rise as long as they are weighed down by the systemic corruption of their regulatory regime.

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