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The role of politics in socio-economic development: Relationship between politics and real estate

politics

by Akhilesh Kumar

Paul Keating once said, “Good economics is good politics.” I have reason to believe that the vice-versa is also true. Politics and socio-economic progress are almost inseparable. Government intention, policy initiative and implementation apart, the stability of regime and continuation of policy initiatives have a strong bearing on the generally prevalent socio-economic conditions of an economy, which in turn also impacts the real estate sector.

A case in the point would be the demise of J. Jayalalitha, the former CM of Tamil Nadu in December 2016, post which there was an internal struggle of succession within the ruling party. This not only created an air of uncertainty but was also directly responsible for the delay in implementation of Real Estate Regulation Act (RERA) in the state. Consequently, the Tamil Nadu realty market witnessed a sharp drop of almost 50% in the launch of new projects in the period between January-September, in comparison with the previous year. As per a study conducted by Cushman and Wakefield, a paltry 2,700 new homes were made available for sale in this period.

It can be gauged from this example how political uncertainty leads to policy paralysis which in turn affects market sentiments. It would also be pertinent to mention in this context, that other sectors that have a global or national market scope may not have been as badly affected by local political developments. Realty, however, is largely dependent on local authorities for approvals and clearances.

From a national perspective, the liberalization of the Indian economy in 1990-91 has been the single largest factor for the resultant socio-economic growth that we stand to witness. Post-Independence, India’s economic policy was greatly influenced by our colonial experience. It, therefore, hinged on protectionism. Right up to the 1980’s our growth rate stagnated at 3.5% due to a banal license-quota-permit raj that reeked of red-tapism. After the balance of payments crisis in 1991, as part of the bail-out package, IMF compelled us to open our economy apart from pledging our gold. The then Prime Minister P.V. Narasimha Rao took some bold decisions despite being the head of a minority government.

Real estate was directly and indirectly impacted by liberalization. Improvement in GDP and per capita income along with population growth resulted in a steady increase in the demand for homes and commercial spaces. In 2004, home loan rates dipped to a record low of 7.5%. It proved an unprecedented period of boom before market corrections set in, in 2008.

At this point, the government of India recognized that the Indian real estate sector had been lacking a fundamentally strong regulatory framework. However, it took 8 years before political compulsions allowed the government to legislate the Real Estate Regulations Act (RERA) 2016.

Also, the government has taken the initiative to digitize land records and make them available through an online database. The Land Acquisition, Rehabilitation, and Resettlement Act (2014) has simplified procedures for acquiring land and determining fair compensation for sellers.  Real Estate Investment Trusts have also been established to boost investor confidence. Consequently, the Indian realty sector has improved its position in the Global Real Estate Transparency Index (GRETI) 2016.

Demonetization, the implementation of GST and the government’s announcement of its commitment to crack down on Benami properties have also had an impact on the realty sector, albeit unquantifiable as yet and with arguable rationale. The current government has made the right political noise by announcing their ‘Homes for all by 2022’ and Smart City initiative. It simultaneously augurs well for the economy and real estate sector.

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