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Economy Feb 1, 2013

Why politicians are critical to add value to real estate deals

By Sunainaa Chadha

The cozy links between builders and politicians have burdened home buyers in the form of high property prices due to unfavorable housing policies, bottling up of land supplies, and lack of transparency.

Says Ramesh Prabhu, chairman of the Maharashtra's Societies Welfare Association, "Today realty in the best place to hide someone's black money, which is why this branch never runs on real demand and supply but on corrupt politicians' wishes."

Little wonder that politicians from every party, from cabinet ministers to chief ministers, have strong business associations with real estate companies. The latest is Anand Kumar, Mayawati's brother, who has elevated himself from clerk to owner of a large real estate empire during his sister's rule in UP.( Read more here)

Reuters

Since politicians have discretion over all land permits and clearances, they are in the best position to seek payoffs. Reuters

Unfortunately, when it comes to land, all political parties stand united, be it the National Congress Party's role in acquiring land in Lavasa, or the Rajasekhara Reddy regime, in which land concessions in Andhra Pradesh were doled out "on an ad hoc, arbitrary and discretionary basis". This is because, as Devesh Kapur & Milan Vaishnav point out in their research report titled 'Quid Pro Quo: Builders, Politicians, and Election Finance in India', land concessions are given only in return for election campaign cash.

Being the largest holder of land and the giver of all approvals, the government is the centre of power, and it wields it with impunity. Since politicians have discretion over all land permits and clearances, they are in the best position to seek payoffs. And because they hold large tracts of land they try and prevent the extension of city limits in order to prop up property prices. Once the land is overpriced, it leads to all kinds of corruption at each level.

As Indian Express columnist Pratip Bhanu Mehta rightly says: "The state still has inordinate power over capital. Business is vulnerable at the hands of the state at so many levels: at every moment it is taxed, licensed, stamped, assessed, audited, authorised, given permission. Liberalisation and reform have helped alter the structure of corruption in some sectors. But the blunt truth is that the state has such an extraordinary ability to convert even basic procedural rights into discretionary entitlements that we should not be too sanguine about corruption disappearing on account of reform alone."

And whether politicians are in power or not, they can speed projects and even get illegal land converted into legal for clearances. Since politicians have inside information about upcoming infrastructure projects, builders grant them a slice of their profitable pie in return for regulatory forbearance. The party in power can do miracles to appreciate the value of barren land by ensuring infrastructure is fast-tracked in the area. Moreover, when a builder acquires land for higher prices, he wants to maximise his profits by constructing beyond what the FSI (the measure of how much a builder can construct on a piece of land) allows. Hence there is no escaping from this give-and take relationship between builders and politicians since it is a matter of survival, especially when the market is sluggish and sales are falling. Without approvals, developers will continue delaying projects.

The Devesh Kapur & Milan Vaishnav report further highlights that "while politicians channel money to the real estate sector and provide discretionary access to land, builders in turn help to launder these funds safely in a rapidly appreciating asset."

However, politicians usually do not have a direct financial stake in real estate development. Usually relatives of politicians establish their own development firms to reap the rewards or politicians become backers of firms because they represent powerful entities whose support must be won and retained. An investigation by Outlook in 2001 revealed that a quarter of the Gujarat cabinet backs land sharks. The situation will not be different in other states.

While the post-Lehman crisis of 2008 and 2009 threatened this very nexus, going forward only slowing of credit from banks and private equity funds can break this chain.

You can read the full report on the nexus between builders and political donations here.

by Sunainaa Chadha

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