Why are land prices so high in India? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why are land prices so high in India? 

A  A  A
In this issue:
» Corruption rules the roost in India
» Zoellick predicts the decline of the dollar
» Swiss banks propose 'wealth' tax
» Goldman, Credit Suisse eyeing Indian shores
» ...and more!

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If you are associated with one of India's leading housing finance institutions for more than three decades now and have been its Chairman for virtually half that tenure, you surely know a thing or two about the state of the Indian real estate market. Hence when we came across an interview of Mr. Deepak Parekh, Chairman of HDFC, in a leading business daily, we read it with much interest.

In this interview, Mr. Parekh has reiterated his view of having a regulator for the real estate industry, something akin to regulators for the petroleum and civil aviation industries. And the reason why Mr. Parekh believes real estate must have a regulator is to control greed that got companies and investors in this sector into big trouble in 2008.

Mr. Parekh has also blamed faulty land policy and politicians for having created artificial land scarcity in the country, which has led to unjustifiably high land prices. As he says, "A lot of politics is also involved. The lengthy approval process is another key reason why land prices remain so high. Multiplicity of approvals creates scarcity of supply, keeping prices elevated. Quick approvals will increase supply manifold, leading to lower prices. Land transactions have been made complicated to ensure that supply remains constrained and prices remain high."

01:08  Chart of the day
A lot has been said about the strong growth that India's GDP has logged in the past and the fact that the country is much better placed than its developed peers even during the current global downturn. But there are certain issues that are sure to act as impediments to India's growth in the long term. The first is the poor state of infrastructure in the country. The second issue, which also to a large extent is responsible for the first, is rampant corruption. Infact, when compared to the developed nations of US and Japan and the BRIC nations China and Brazil, India is perceived to be the least transparent as today's chart of the day shows. All of us in our lives have witnessed examples of corruption and red tapism in the country and this has over the years has been deeply ingrained in our psyche. If only, some strong measures were taken to curb this menace, just imagine the world of good it would do the nation's health in the long term.

Data Source: Tranparency International

Expert after expert has been writing obituaries on the decline of the US dollar. Robert Zoellick, the World Bank president is latest to join the chorus. And he has argued rather vehemently on the dollar's place in the global scheme of things. Zoellick is of the opinion that the US dollar would lose its favored position as the Euro and the Chinese Renminbi gain in influence. "The greenback's fortunes will depend heavily on U.S. choices. Will the United States resolve its debt problems without a resort to inflation? Can America establish long-term discipline over spending and its budget deficit?" is how Mr. Zoellick chose to put it across.

With the US Government hell bent on turning on its printing presses at full throttle, its balance sheet has started resembling that of a banana republic and such countries are quite likely to default on their interest payments, thus making the holders of the US dollar extremely nervous. Little wonder Zoellick feels that investors in the US dollar might switch to stronger currencies like the Euro and the Chinese Renminbi, thus increasing their influence and vastly reducing that of the US dollar.

India's persistence in tracking black money in Swiss banks may finally bear some fruit. After being forced to give details of money stashed away by Indians and other overseas clients with them, Swiss banks have offered to tax this wealth on behalf of the respective foreign governments and transfer the proceeds to them. Ever since the US received 4,450 bank statements of its citizens having Swiss accounts, India too turned on the pressure on the Swiss authorities to divulge information but to no avail at the time. Infact, India is set to begin talks in December for a new tax treaty with Switzerland in order to get details about the defaulters. This proposal could serve to thaw the ice between the two countries given that the prospects to recover black money before this looked bleak at best. Whether this will end up seeing the light of day, however, remains to be seen.

Do you think Indian government is serious about getting back the black money stashed away in Swiss accounts? Tell us.

Competition in the Indian banking sector is only set to intensify with some of the biggest names globally eyeing a share of the pie. Institutions like Goldman Sachs and Swiss banking major Credit Suisse have sought banking licenses from the RBI. Given the under penetration of financial products in the Indian economy and high savings and investment rate, the global majors are finding this market irresistible. This is because the financial markets in their parent countries are almost saturated and offer little scope for growth. While the RBI has been very hesitant in allowing foreign banks entry into the Indian banking sector, there is currently a long list of multinational banks that have applied to RBI for licenses. Recent additions to the list include Australian banks like ANZ and National Australia Bank, which want a larger role in the country. Whether or not the RBI allows access to these entities, the domestic banks surely need to take cues from these developments and make efforts to consolidate, so as to gain size and scalability.

When they come, they come in droves. Yes, we are talking about the foreign institutional investors (FIIs). As per a leading business daily, net FII investment in Indian markets has reached US$ 11.2 bn in 2009 so far. That more or less compensates for the US$ 11.9 bn they pulled out during entire 2008. Given that September 2009 alone has witnessed an influx of over US$ 2.25 bn, the arrival of FII money explains the rally in stock prices to a great extent. But given their short term focus and tendency to also exit in hordes, we believe investors should take the news with a pinch of salt.

Delhi's streets are bustling with activity. Work to refurbish the city's transportation systems and other infrastructure is in full swing in anticipation of the prestigious Commonwealth Games that will begin in the region exactly one year from now. But this race against time now has a new spanner in its wheel. As per reports, the Delhi Government's tax revenue collection has seen a fall of over Rs 4 bn in the first four months of the current fiscal. And this might just turn out to be its undoing, as the stretched finances of the government are expected to have an adverse impact on all these projects that are already in desperate need of being completed on time. Handling this adversity with grace seems to be critical if India is to avoid the mortification of having incomplete projects at a time when guests from world over start pouring in for the games.

The Indian markets opened the day's proceedings on a positive note and traded well above the dotted line throughout the larger part of the day. At the time of writing, the BSE-Sensex was trading higher by 148 points (1%). Gains were seen in software and energy stocks. At the time of writing, the Asian markets were trading firm. Europe began the day on a mixed note.

04:57  Today's investing mantra
"We want to be right on something that will work right now, not something that might work in the future." - Warren Buffett
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9 Responses to "Why are land prices so high in India?"


Oct 4, 2009

I fully agree with your views. Housing is a basic necessity. All the more because there is dearth of adequate housing in this county. It is an essential commodity in India. So no hoarding of flats. Land price must be regulated. So that there is no corruption and land is available at affordable price for construction of houses. No marketing on super built up basis. But only on carpet area basis. Flats must be earthquake resistant and must be cross ventilated to save electricity on account of air conditioning. Those who cannot afford airconditioning should not be suffocated.
Minimum size of each flat should not be less than 500 sq. feet so that at least hum do hamare do get privacy.
Price at which such a flat is to be sold should also be regulated. No compromise on this. This should be a benchmark. If builders cannot provide this. Encourage co-operative movement. People should build their own houses and builders shall only work for them (naukars) and construct houses for them as per above specifications. Impose strict penalty on builders/tekhedars/contractors if any lapse is noticed.




Sep 30, 2009

High Land prices in India.
Several laws which were created to protect farmers restrict land trading activity. These laws are working against the interest of the farmers by keeping their land prices lower. If free trade is allowed there will be many advantages.
1) Farmers creditability will improve and they will be able to bring in more capital to improve their earnings,
2) Small uneconomic holders will be able to get rid of their land at good price, and will be able to pursue other more rewarding occupations.
3)Consolidation of land will be possible , which will result in higher production of food grains.

So let us drop the Socialist Dogma of yester years and unearth the real value of farm land, as has been done in the case of stock maekets.

Like (1)


Sep 30, 2009

While I am not sure whether the Govt is serious about getting the Swiss money as most of the politicians would also be beneficiaries.
However there is a theory that it is the fear of disclosure that is prompting the Indian Swiss money to come back in to the stock markets through fictitious FIIs registered in Tax havens. This explains the never ending liquidity and the unbelievable stock market rise.

Like (1)


Sep 30, 2009

I dont think the government is serious about knowing the details of the money depostited in the swiss bank.
The govt can offer same immunity to the account holders and get back the money to india and use the same and avoid barrowing the amount from other countries.

Like (1)


Sep 30, 2009

Coming to your comment on "India's persistence in tracking black money in Swiss banks may finally bear some fruit"....according to what i have read, the swiss government would not disclose the names of the account holder and it would just transfer the proceeds to the Indian Government. Also, the interest rate in Switzerland is very low and so is the tax rate. So, i think there isn't much happening on this regard and the amount which Indian Government gets will be minuscule.....So, this whole brings us back to square one with India not achieving much of this decision by the Swiss authorities

Like (1)

Suresh Gupta

Sep 29, 2009

Dear Sir,
To comment on such issues is just to make mockery of our system. It is not the real demand and supply which governs prices in India. It is just the hidden wealth which moves under hands. People have so much money that they can pay any price just to grab real state at any price. Is there any property which has been registered at the market price? Everyone is familiar the reality but keeps their eyes closed? So what to comment?

Like (1)


Sep 29, 2009

If big investment banks like Goldman Sachs (who have strong hold in political circles)have applied to RBI for entry, they know how to get it done & they will get it done at any cost (irrespective of the size of carrot they need to offer to our politicians). Only thing RBI can do is start immediately to define the laws (as discussed in the G8 summit)for these Investment Banks so that they don't turn India dirty as they did in US. Try to minimize the impact of these giants.

If P-note (a financial product) found its way into India, why won't the founders of such product find their way. After all, we have a lot of greedy politicians out there....

Like (1)

sunilkumar tejwani

Sep 29, 2009

to my mind getting black money stashed in swiss banks is just a glib talk. after all we all know that who the owners are of all these accounts & why will they put their own interest at risk? just open & shut case.
as far honest advice is concerned about investing/trading in the market, very few adhere to the principle of "without vested interest" every analyst,adviser is full of some or the other vested interest. very few adhere to principle of honesty.

Like (1)

Raaj Arora

Sep 29, 2009

u know tht very well... nothing to say bout top leaders nd lots of buearcrats r very GOOD so we have to pay for thier goodness.. ab aap batao itna paisa kahan rakhe.. india mai kabhi bhi recession time nahi aane wala hai... arey yaar ab mai itne bade bade logo ke bare mai kuch bolunga to problem aa jaunga na.. aap samjh jao.. i know u r very intelligent. vaise land ab hai kahna jo price high hoga sab to bik chuka hai.. sirf INDIA naam reh gaya hai.. bhagwan na kare kahi vo bech na dale YE BADE LOG.

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