Land Reforms in India - How they are going to affect investment options over the next three decades?

Hi Friend,

The Origin: 

• Continued pressure from the public to plug corruption - What better way to reduce corruption than closing down the avenues where ill-gotten money can easily be hidden i.e. Land/real estate?

• Socio-economic issues like naxalism etc.,

How it is being done?

New Land Acquisition Act: 

• The parliament has recently passed land acquisition bill which makes it difficult to grab land in the guise of industrial projects etc., from ordinary people that too without paying a proper price. 

• The bill mentions “Market price” for compensation indicating that the government’s valuation of land will converge towards reality. Please check the following link for further information, http://www.livemint.com/Politics/FXZ9CrJApxRowyzLd8mb2O/All-you-wanted-to-know-about-new-land-acquisition-Bill.html

Increase in Registration values of land 

• It is already being done so that it reflects reality and also to increase government revenues in this tough economic environment. 

• As the registration values increase the buyer (who in some states need to produce PAN at the time of registration) will be prone to tax risk. If asked by the tax department, has to prove his / her income sources. 

• Net affect is, Black Money will be discouraged from entering Real estate there by reducing real estate returns in the longer run. 

Modernization / Computerization of land records: 

• Four States – Haryana, Tripura, Gujarat and Karnataka – had completed the process and with central government’s push the rest are on their way to do the same. 

• If all the land records are computerized at the click of a mouse the government can easily find out who owns what and so can the tax department. 

• Benami holding of land becomes that much more difficult and so will hoarding of land. 

• Please check the following link to know more, http://www.thehindubusinessline.com/industry-and-economy/modernising-land-records-next-on-agenda-jairam-ramesh/article5146707.ece

Draft policy wants States to limit land holdings to 15 acres: 

• The result is bigger guys will be discouraged from buying large tracts of land so it limits the sudden surges in land prices in particular areas(which has always been the tempting factor for most us). 

• Fifteen acres land limit may be too small to get the bigger guys interested and their money will look for alternative investment options. 

• Please check the following link on Draft policy,       http://www.thehindubusinessline.com/economy/draft-policy-wants-states-to-limit-land-holdings-to-15-acres/article4509303.ece

TDS on transfer of immovable property: 

• Anyone buying an immovable property (other than agricultural land) exceeding Rs 50 lakh in value will now have to deduct 1% TDS (tax deducted at source) before making a payment to the seller. 

• The tax deduction will be 20% if sellers do not disclose their Permanent Account Numbers (PANs). 

• The 50 Lakh limit is an initial limit and may be applied to all the transactions at a latter date as is happening with e-filing of income tax returns. 

• Taxation of real estate properties will reduce the attractiveness of real estate as an investment avenue, thereby reducing the rate of price rise. 

• Please check the following link to know more about this provision, http://www.moneycontrol.com/news/tax/all-about-tdstransferimmovable-property_902596.html

The net effect of these land reforms:

• It makes land transactions transparent. 

• But, it will also reduce the returns on real estate in the longer run say 10-15 years down the line and force people to look for alternative investment options that would yield better returns. 

• Where would this money go then? 

• What are the other options available which could absorb such huge money (even a small percentage of what is invested in Real estate at present could be in lakhs of crores of rupees)? 

• The obvious choice seems to be business or equity.

How Investors in Equity based mutual funds will benefit from this change in investment choice over the next Three decades or even beyond:

• We know that Indian Equity markets are dependent on Foreign investments for their growth. 

• Our markets go up or down based on Foreign investors’ mood and perception. 

• If most of the Indians feel that Equity is the only best alternative then our dependence on foreign flows will reduce resulting in less volatility in our equity markets. Lower fluctuations make our markets more attractive thereby encouraging more people to invest. 

• Valuations of the market will improve significantly. 

• To put it simply what people are willing buy for Rs.10/- today may be willing to buy for say Rs.12/- or for even more then.

• Availability of more capital means less dependence on debt (making fixed income instruments like FDs, Bonds etc., less attractive).This causes interest rates to fall there by making businesses even more profitable. If businesses are more profitable then investors who invest in them get higher returns.

• When the cost of capital decreases more businesses will spring to life creating a higher employment in the country and higher growth in the economy which is a definite positive for the markets.

Who will benefit the maximum from the above changes that are happening:

The investors who have the courage and discipline to invest in these troubled times and are patient over the next 10 years would have invested a meaningful amount of their capital and would have positioned themselves to reap these benefits over the next Three decades.

Happy investing.