Indian elites holding back wealth tied in slums. And here’s what Modi govt can do

If India’s GDP growth rate has to cross 10 per cent, the government will have to create a system that empowers entrepreneurs at the bottom of the economy with considerable capital in their possession. These enterprising risk takers reside in India’s many slums, but predominantly in Mumbai, and are best positioned to implement Peruvian economist Hernando de Soto’s idea – of adding the wealth held by them to the deploy-able stock of fungible capital.

As we saw in the previous article, de Soto’s idea is basically about converting assets held by the poor in the informal economy into full-fledged capital in the formal property system in such a way that the capital becomes capable of multiple uses in the wider economy. Incomes generated at the bottom of the income pyramid have a higher growth momentum in terms of velocity and spread. For the Left and the Right, de Soto’s ideas offer a way to add to the stock of capital in the economy and enhance its efficiency and productivity. However, the attempts to empower capital so that it is used outside the formal system have always met with stiff resistance from both sides.

The squatter problem, or the illegal occupation of private and government lands, has existed since hunter-gatherers began to settle down to take up agriculture. The very concept of property arose out of the necessity to recognize private property and to protect it. While land in the wild was once free for the taking, today they are owned by the government unless specifically devolved to a person. Encroachers are the settlers who occupy such property, usually when nobody has any use for it. Over time, with enterprise, initiative, and hard-earned savings, slum dwellers invest enormous value into the property. Once valuable, we are reluctant to let the property go to those who nurtured its value.

Among the many objections to giving the squatters full rights to the property in their possession are the problems of setting up perverse incentives, equity, and objections from a land-use perspective. Most powerful objections, however, come from the elites who see encroachers as lawless elements vitiating an orderly system of property rights. Another objection often cited is that regularising a slum doesn’t help in eradicating it. Let’s examine these objections in detail.

We need to distinguish between the primary act of encroachment, which is illegal, and subsequent transactions carried out on the property encroached upon. Nothing justifies encroachment. It is the for the government to protect its property and it should be given a reasonable time, say 10 years, to move the encroachers out. In a lawful society with an organised system of property rights, there can be no dilution of this principle. However, over time, these slums gather huge chunks of savings and investments. It is therefore imperative to bring this potential capital into the formal system in the larger interest of the society.

Balancing the two considerations is not easy. One way out is to set a time limit before such properties are admitted into the formal system, say 30 years, which represent roughly the active economic life of one generation of squatters. In other words, encroachers have little hope of seeing their encroachment, and the investments they have poured into the property, to bear fruits. This time limit should filter out opportunistic encroachers. It would also avoid setting up perverse incentives for encroachment because the rewards are uncertain and far into the future.

By and large, encroachers are people from economically poor background. But remember that we are dealing with a slum that has been in the making for 30 years or more. It has physically expanded to its maximum capacity for the locality. The property rights system within the slum have matured. Everybody within the slum knows who owns what. At this stage, the grouse against regularisation is usually that regularisation gives away windfall gains to the undeserving. While that appears to be the case at first glance, the reality is far different.

Properties change hands many times over the lifetime of a slum. So, slum dwellers are at best a floating population, both due to generational changes as well as secondary market transactions. At every change of hands, the value of the property generally goes up. However, even late stage buyers are generally from the weaker sections of the society. So, respecting the value of the property even at the hands of late-stage buyers is not entirely iniquitous especially if one recognises the fact that a robust secondary market allows investors in the slum to cash out where it is imperative for them. So, regularisation is not unfair to the poor as some textbook Leftists argue. Instead, it is the equivalent of land reforms in an agrarian society where tenants are given the title of the land they till. These tenants are not necessarily the neediest but they are poor and unlucky.

Does regularising slums, and bringing in the assets locked in there into the capital stock of the economy, help dissolve slums by ushering in faster economic growth for people in the slums? The answer to the question has to be at two levels. Firstly, just by making the assets fully legal to hold and fungible with the capital in the economy increases their market value three to five times, bringing a huge windfall gain to the slum dwellers. Some of this can be captured into an impact tax to be collected from secondary market transactions over a period of time while the state invests upfront in the needed infrastructure in the slum in areas such as roads, sanitation, access and utilities among others.

Moreover, the conversion of property held by slum dwellers into proper capital with marketable titles not only increases their stock of capital but through multiple uses, vastly enhances the property’s earning capacity. Both these processes work not only to increase the wealth and prosperity of the slum dwellers but that of the economy as a whole. Over time, the increase in income generation and wealth of the slum results in upgrading the quality of life and the value of the assets, thereby effectively dissolving the slum itself. The process is effectively aided by secondary market transactions that validate the enhanced value of the assets held in the erstwhile slum.

The idea of regularising a slum or an encroachment over time is not new. However, we have come to view the process as something of a giveaway to the poor from which society as a whole doesn’t benefit. Secondly, the process is seen as encouraging encroachment and elicits wide opposition from the elites. The lack of a defined process of incorporation of property in slums into a capital in the economy prevents the state from systematically investing in the public infrastructure of the slum on one hand, and capturing such value through an impact tax on the other. The result is delay, disruption, and waste of usable capital.

Keeping in mind the need to avoid setting up perverse incentives, we could start the process of converting the informal property into the capital by selecting compact, contiguous slums that have little scope for further encroachment and have been in existence for over 30 years to kick off the process. Most such slums have the basic wherewithal for determining who owns what, which a survey could help establish. Once clear titles are established, marketable title deeds should be issued to owners without any restrictive clause. Residents should be free to cash out if they wish to by selling off the property in the secondary market subject to impact tax. In order to speed up the process of development in a way that the natural upgrade dissolves the slum as quickly as possible, the state must invest in the required utilities, sanitation and access infrastructure while looking at the potential impact tax for recompense.

Sonali Ranade tweets @sonaliranade. Sheilja Sharma tweets @ArguingIndian. Views are personal.