Tuesday, February 16, 2010

Property titling has to extend to everything

New Delhi: Peruvian economistHernando De Soto has pioneered the concept of empowering the poor with the use of market principles of property titling. This single action managed to blunt the extremist threat in his own country. De Soto was in India recently to participate in a day-long session on inclusiveness, hosted by the Federation of Indian Chambers of Commerce and Industry (Ficci). Alongside, he met Prime Minister Manmohan Singh, senior government officials and politicians such as Congress general secretary Rahul Gandhi. The government will be consulting him to fine-tune its strategy to make the economy more inclusive. The economist spoke to Mint on a range of issues, including his conversations with officials and impressions of Gandhi. Edited excerpts:

What brings you to India this time?

I was invited by Ficci to give a few conferences and to meet a few people in government that had an interest in the sort of things I was talking about. I just met your Prime Minister (on Saturday). We talked about his projects of inclusion. And he felt that I could be of assistance to them during our discussion and if some of the things that we had learnt that worked and didn’t work in the world could be of benefit. So we have agreed that I would write up something to that effect and we will meet very shortly again.

I’ve also had a very good, frank talk with Rahul Gandhi. And I will also be meeting three or four of your ministers, explaining what it is we do, because India very much wants to get into the inclusion programme, and we know inclusion. This time I’ve toured a lot of slums and in Mumbai I was accompanied by the press and they say: “What do you find particular about India?” Well, apart from the fact that I saw much of the scenes I’d envisioned in Slumdog Millionaire, which was of course thrilling to see, the reply is not much. It’s pretty much the same reality.

What gives you the impression that this government is serious about inclusion?

The first thing is it’s an important government. I mean, this is not a government of a Central American country with a population of five million. This is the Central government of a country with nearly 1.2 billion. So the government, I suppose, doesn’t get into a subject unless it is a crucial subject. To me, it is quite clear in my discussions with them that they have identified the problems. Everything I have seen in my talks with your Prime Minister and with all the government officials I’ve talked to or members of Parliament, they’ve got a clear idea where the problems are and I got the feeling that we can contribute.

What are these problems?

They are of various sorts. One of them is how you tackle the issue (of poverty). There are some people who believe that what you should do is give away property titles. That is not the way it works. That’s a Western way of looking at it; the Western world in the 21st century. To make it really simple, if you go to somebody that I have seen in Dharavi and you say I am going to give you security over your home, he will say thank you, but he won’t say much. He’ll take that piece of paper and he will slip it in the desk and not recirculate it again.

Why? Because from what I have seen in Dharavi, he not only has a home, he has an industry. So his question will be, you are telling me that it’s okay to have my home, but you’re not telling me if my industry is okay and you’re not telling me what you’re going to do with taxes. So, you cannot title homes in developing countries. You got to title everything.

Today, in the West you can say that, because you live in one place and you work in the other. But in the 19th century, Americans had industries in their home too. And they didn’t go around just titling homes. They did the whole thing. The first thing, no titling process of homes is going to work unless you include all other aspects of life—commercial, business, identity, credit and you wrap it up. We learnt that the hard way. It doesn’t work.

So what is the solution you will offer?

The discussion we had in Mumbai was how were you able to defeat terrorists in Peru, (for) which I designed a policy. For example, I found out that the Shining Path, the Maoists, were protecting the assets of the poor. How can a group that is murderous get the allegiance of poor people unless it is doing them a service? You have to look for a reason. So I said, if I were Indian, what were the services that they were giving. And you will find out that it is exactly the formalization of everything.

Because the government can’t give it, doesn’t know how to give it—it wants to, but hasn’t yet found out—well, the terrorist groups will give it to them at gun point. And so, anything that you are looking at that you don’t like in India—you want education, you want clean water, you want all sorts of things. The issue is, can you do any of the things that creates the wealth to get that without one way or the other getting property to people and my reply is still—no.

This holistic vision runs contrary to what the government does in practice, which is direct cash transfers that helps it politically. How does this contradiction play out?

Well, you know, I have a good case, because I have thought it out and because I dedicate a lot of time to it. But I still don’t pretend to have a silver bullet. So I’m not saying that what we do is the only thing you have to do. And a lot of the solutions I propose are rather medium- to long-term simply because to identify the assets of everybody is a major issue that requires all sorts of information and incentives in place.

And governments have to, in the mean time, do something to keep the short-term alive. You remember the Keynesian thought that in the long term, we’re all dead. So you have to do something. So, I cannot talk about the Indian government about what it does. All I can tell you is for the medium-long-term, I think from all the people I talk to, I see eye to eye.

What is your impression of Rahul Gandhi?

Oh, I liked him. I felt sincerity, a real concern. All of his questions were, “How do I, how can I, how can the government help assist the poor in ways that we do not know.” Now, that to me is already pretty good because the tendency of anybody who is a politician in such a large country—you’re not just any politician. And especially if you come from a smaller country like I do.

It’s happened to me with Brazilians. When you talk to the highest level, well, I can assure you that (Brazilian President Luiz Inacio) Lula is going to say, “What do I have to learn from somebody who comes from a smaller country.” And so, when you come to a country that is seven times bigger than Brazil, and the person says you may have seen something that we didn’t, I come out well impressed.

You are aware that India has launched a huge programme to give an ID to every citizen.

Absolutely. The general idea behind this is that when you look at developed countries, even say Germany, 130 years ago, it was 50 or 60 little countries. But since then, it has become a country of 80 million and the world’s become a country of seven billion, and there’s just no way we can get to know each other if it is not through documentation. And documentation means identity.

The property system is one of many ways in which you are able to identify. It doesn’t tell you as much about the biometric distance between your eyes and ears, but it essentially tries to tell you a little bit about what you own, what risks you run. It gives you a history of the asset; and because the asset changes hands, it also gives you a history of the transactions and the enterprise. So when you are talking about identity, of course what you want to know is where are the one billion and 100 million Indians and how can I find where they are to help them better... I would consider, as I said before, anything that relates to property formalization or business formalization is a close cousin of identification, because it is essentially about knowing how things relate to each other.

Since your visit to India in 2007, the world has undergone a dramatic reality check on market economics. Do you still believe in the power of the markets?

I asked my friend Chris Cox, over in 2009, who was chairman of the Securities and Exchange Commission, how much there was, of these derivatives. And he brought out a reply in an article saying his estimate is that there were $600 trillion (Rs27,840 trillion today) of them. Now to get an idea what this means, the whole production of the United States—the GDP (gross domestic product)—is $13 trillion. The whole production of the world altogether is $55 trillion. So $600 trillion is nearly equivalent to 12 times the production of the world. That’s a lot of money..., but it’s not written.

But now, we are going to find that truth will be established. I figure, the next two-three years, as all of a sudden everybody starts beginning to understand that the recession we’re facing, is basically an epistemological crisis. It’s the lack of knowledge of how much paper there is representing wealth that could be either very deflationary or very inflationary... So I maintain my faith in markets that are ruled by law. When markets are not ruled by law, they become shadow economies. And what is surprising since the time you and I last met, is that I would have expected a developing country to produce the biggest shadow economy. It is the West that has produced the largest shadow economy.

What happens to your thesis of empowering the poor through the power of the markets, when the market itself is undermined in this manner?

It works better than ever. Because what I’m telling you is, look what happens to countries where they don’t have property rights. They get into a crisis. All I’m telling you is, the poor are in a permanent crisis. If the poor had their assets identified, over time, they would become a lot more interesting than even these derivatives. So my argument is that everything that is secure and identified is a lot better than anything that is insecure and unidentified.

Do you believe that market economics are a natural corollary to democracy?

Yes. Very much so. In one case you are accepting political vote, an independent vote; and in the other case, you are thinking of an economic vote, which is, do I buy this or do I buy that? So, I do think that they are complementary. I don’t think that market economics means that there’s one model. There are many models. So you’ve got the Norwegians, who believe in lots of government, lots of government services, generally high taxation, the Nordics generally do it. And you’ve got others like the Americans, who don’t even want a national identification system, they want to be so independent from government.

So within the market economy, you’ve got all sorts of variants. You also have a lot of political variants. The Swiss have seven presidents at the same time. The Americans have a president, the British have a prime minister, but not at all like the Swedish prime minister. So, they all come in different variants. Yet, in each of them there is a degree of freedom of choice.

Real estate players line up demands from Budget ‘10

Real estate players line up demands from Budget ‘10

Developers are re-calculating the upwards swing in the real estate industry, especially housing, provided Government pays special attention the
sector. Various developers voice their expectations from Budget 2010.


Talking from common man's perspective, the bank interest rates should be stabilised. Most importantly, stamp duty should be reduced as it puts financial burden on the buyers; it would be a real relief for the common man who has to bear the burden. Besides, for the new projects many clearances are required; if they can be done through a single window, it will be a major breakthrough.


Expectations from the budget are very high. We need something that will help the real estate sector to grow leaps and bounds. Government should take steps to bring more transparency and simplicity to the processes involved in the real estate. Affordable housing must get maximum support from the government. The authorities must understand that the demand is for affordable housing and we need to bridge gap between demand and supply.


We expect the finance minister to provide specific tax incentive and rationalise stamp duty registration charges, which will lead to further investment in affordable housing projects, which would in turn drive urban development. The budget should make high-priority provisions for the laying down of the necessary infrastructure so that new areas can be opened up. This should result in creating and linking up satellite settlements to main cities that will help tackle the demand-supply mismatch.

Further, we look forward to flexibility in FDI norms. Additionally, the budget should offer clarity on the introduction of a real estate regulator, which may not necessarily decide on rates, but should put down firm principles in terms of property dealings and also quality parameters in terms of rating of constructions.


Indian real estate sector is passing through a transition phase, where every eye is lying on budget 2010 as the tool to heal the loss. The finance minister needs to focus on offering easy interest rates with more flexible EMIs so that middle class people can come forward to buy their dream house. We should also target foreign investors or NRIs to invest their money in India.

Ashwini Prakash, executive director, Paramount Builders

I expect a lot from the budget 2010-11 as it can be used as an important step by our government to bring real estate market back on the track. I strongly feel that finance minister would certainly work on promoting real estate investment through various fiscal tools like, continuing income tax rebate on home loans.

And at the same time interest rate on home loans should be made more affordable to bring it up to the reach of a common man. In the last two years IT sector and the real estate sector have been the most affected areas and in order to reconcile the earning capacity and to build a sense of security for citizens the government should offer some aid packages to these sectors in Budget 2010 like the US government did.


The budget must think seriously on decreasing the excise duty to decrease the costs of infrastructural projects. The current economic situation requires the sector to be revived so that the demand for the housing industry increases. To achieve this, the government must look at reducing the property and related taxes along with the taxes on cement and steel, which together contribute to the growing infrastructure needs.

Besides, the realty sector would definitely expect some cuts and provisions in the license fee and the service tax being levied in order to
revive this ailing industry, apart from measures by the Government to reduce the interest rates on loans to the housing sector. Also, amount of rebate must be increased by Income Tax department for housing sector.


As real-estate sector in India contributes five to six per cent of our GDP growth, the sector needs special attention. Our expectations are not very high but are rational. Government must think seriously about low cost housing. Since the stimulus package, bailed out the Nation from recession, we expect that same should continue for at least two more fiscal years.


While developing the housing for low strata income category, for example, economically weaker section (EWS) and lower income group (LIG) housing, the developer is not able to utilise entire floor space index (FSI) since the height is kept at ground plus three to keep the costing low. So amendment should be made for the balanced FSI usage. In the same lines, some cross subsidisation can be called for, such as refunding the stamp duty to developer once the project is complete.

If sec 80 (IB) is restored, nothing like it. Under Section 80 IB (10), in the case of construction of housing projects, 100% of the profits derived in the previous year from a housing project can be deducted if the total commercial space in the project did not exceed 5% of the total built-up area or 200 sq ft, whichever is less.


The finance ministry has allowed external commercial borrowing (ECB) in realty projects, which includes integrated townships of 25 acres or 50,000 sq m. However, the Reserve Bank of India has not yet notified it. ECBs should be permitted for funding construction costs of at least those real estate projects which qualify for 100% FDI.

I would expect that limit of Rs 1 lakh specified for deduction for repayment of principal amount of a home loan for self occupied residential property should be extended to Rs 2 lakh.

I also wish that extension of tax holiday for housing projects under Section 80 IB (10) should be allowed for conceptualising of new projects while also encouraging more projects to come up in view of the incentive that would be coming.

Budget hopes of the real estate and infrastructure sectors

Budget hopes of the real estate and infrastructure sectors

The global economic meltdown radically impacted the infrastructure and real-estate sectors, reminisces K. T. Chandy, Senior tax professional, Ernst & Young. The decline in demand, the supply excesses, and the high debt position of most Indian developers were some of the factors that contributed to the decline of the real-estate sector over the last two years, he adds, during a recent pre-Budget email interaction with Business Line.

The Budget should come up with measures that can offer the much-needed stimulus to the real estate and infrastructure sectors for sustaining broad-based and inclusive growth, Chandy argues.

Excerpts from the interview.

On the impact of stimulus packages

The fiscal stimulus packages introduced by the Government did help the sectors achieve greater liquidity level, but did little to improve retail demand. It is important that the sectors continue to receive Government support through tax policy, which will help the sectors move firmly towards the path of economic recovery.

Budget 2009 surprisingly had very few proposals that directly benefited the sector despite the fact that the global crisis was at its peak and the real estate and infrastructure sectors were more badly affected than most other sectors. The sectors are hopeful that this time around, the Finance Minister will be more responsive to the needs of the sector.

The re-introduction of direct and indirect tax incentives would go a long way in meeting the current challenges faced by these sectors.

On affordable housing

The resurgence of the affordable housing segment has resulted in a win-win situation for developers in terms of improving demand, for consumers in terms of affordable real-estate, and for the Government in terms of meeting its objectives of providing quality housing to the population at large.

Given that the margins derived from the affordable housing segment are lower than the mid to luxury segments, the Government would do well to re-introduce the tax holiday available for low-cost housing that had lapsed on March 31, 2008.

On sops for infrastructure projects

On the infrastructure front, presently, a tax holiday is available for profits from infrastructure projects such as roads, highways, water supply projects, ports, airports and so on. Budget 2010 should extend the scope of the tax holiday to include projects involving development of integrated townships, which we believe will certainly provide a fillip to such large developments.

Further, while several infrastructure projects are eligible for tax holidays, the same projects are liable to tax under the Minimum Alternate Tax (MAT) provisions. This besides being inequitable has an adverse impact on cash-flows.

It would be a welcome relief, therefore, if such infrastructure projects were exempted both from normal corporate tax provisions and the MAT provisions in accordance with the spirit of the policy to exempt projects with long gestation periods.

On service tax woes

The abolition of service tax on commercial real estate would also be welcome relief to the real-estate sector and for consumers of such real estate. Currently there exists quite some uncertainty on whether the levy is applicable given judicial precedent on this issue. While the tax office seems to be enforcing the collection of such service tax on rentals, a legislative amendment doing away with the levy would help significantly reduce litigation on this matter.

On other policy measures

To improve liquidity and as a matter of policy, the Government may consider broad-basing the external commercial borrowing (ECB) regulations to include other eligible real estate borrowers to tap overseas debt opportunities besides integrated townships, which is currently permitted. This would help the infrastructure/ real estate community invest into new projects and would give the sector sufficient time to repay the loans.

Also on the policy front, it would help if Press Note 2 of 2005 is suitably relaxed to factor in the economic circumstances that have been faced by the real estate sector over the last few years. For example, a clear process could be formulated for a foreign investor to exit investments, which do not appear to have current economic potential.