Informally Yours: How Clear Property Titles Would Help India's Economy Grow

In a developed economy, land, buildings, machinery, and other forms of assets are formally documented and have legal validity. However, this is not true of many developing nations, including India. When economist Hernando de Soto and his team of researchers studied the status of property titles in most developing countries, they noticed that the value of the assets people in economically weaker sections of the society own far exceeds the value of assets owned by governments, and the foreign aid these countries receive. This is a problem of enormous significance, as these assets are often not part of the formal economy. India is among the nations that face this problem. This is why the government had invited de Soto to suggest reforms to handle this situation in 2010.

A look at how large India's informal economy is and how secure are property rights here:

The history

Since Independence, the right to own, use and dispose of property has seen many changes. At present, the Right to Property in India is a constitutional right, and not a fundamental one. It is to be noted that when western economists and researchers proposed property reforms, they failed to pass on one of the underlying tenets of developed countries: clear titles to private property. The fact that a significant fraction of India's population does not have clear property titles to the assets they own was not taken into account. This is why much of the reforms they proposed, though revolutionary in itself, were not enough to liberalise India's economy.

Most people defined as homeless in India live in informal settlements, with vague property titles, if any. In the absence of clear property titles, they are not able to use their property as collateral when they apply for, say, a home loan. They would also not be able to sell the land on which their property stands to corporations, even when their property could have fetched them a fortune, if it had clear titles. In many cases, people live in illegal settlements because the bureaucratic process to obtain legal titles is too time consuming, expensive and mind-numbing. This encourages unaccounted property transactions. If residents of, say, Dharavi slum in Mumbai were given clear property titles, they would be able to be part of the formal economy and sell their assets at the market value. In 2013, newspapers reported that some residents expect their shanty, in the Dharavi slum, to fetch them more than Rs 1 crore. If slum dwellers had formal property titles, they would have been able to fetch much larger amounts of money.

Acting locally

The Maharashtra state government has been trying to tackle the problem through slum redevelopment schemes. The Slum Rehabilitation Authority (SRA) had planned to rehabilitate 800,000 households in Mumbai two decades ago over five years. They have rehabilitated about 150,000 households so far. Designed by architect Hafeez Contractor, Imperial Towers has also been built as part of a slum redevelopment scheme.

The SRA is now preparing to identify major encroachers and send them legal notices, and acquire such land when they do not wish to comply with the law. Authorities face many constraints in doing so. While many dwellers oppose such a step, other encroachers have already sold out their property. Slum dwellers in Worli Koliwada oppose rehabilitation because many of them own multiple properties. They may lose their assets when rehabilitation happens.

The proposal

Urban planners and economists, including de Soto, have been proposing that if private property titles were given to slum dwellers, they can collectively use their land as collateral to fund entrepreneurial projects, or hand over their land to private developers who would then build more floor space. The revenues such projects generate would be enough to build formal houses for slum dwellers. To get such projects rolling, our country would require greater transparency in real estate laws.

However, there are arguments against de Soto's proposal. Even if the government regularises illegal colonies and slums, this may encourage squatters. It is also true that even when property titles were granted to poor in many developing countries such as Peru, they were not able to immediately use their assets as collateral and become entrepreneurs or apply for home loans. Even when they have clear property titles, banks and financial institutions would still be hesitant to lend to low-income individuals, as the experience of some of these countries have proven. Nevertheless, private property rights are necessary, though not a sufficient condition for empowering the homeless.