What is Causing the Corruption in the Indian Real Estate Market?

The shockingly high prices of housing in India’s cities are not as shocking to us anymore. Young freshers in the country are said to receive an average salary of 2.2 Lakhs per annum, while an unfurnished 1BHK apartment with no power support in Bengaluru cost 70 Lakh rupees! Along with inflation and poor salary packages in the country, buying a house in a city in India seems quite impossible.

The reason for this condition of the real estate market is corruption within the market itself.

Floor Space Index (FSI)

Multistorey buildings were invented by humans for the cities to be able to accommodate the rising population. We know that our population is in no way low, but have you ever wondered why the skylines of Mumbai, Delhi etc. look so different from the skylines of foreign cities like New York or Singapore? This question brings us to one of the biggest reasons for the existence of corruption in the real estate sector, that is, the Floor Space Index or FSI.

The Floor Space Index represents the maximum area within a plot of land on which a builder can construct. The FSI value is set by the municipal authorities of the state government and is dependent on various factors.

The FSI in the city of Mumbai is 1.3. Let us take an example to understand what this number means.

If the FSI for a 100 m2 land is 1, it means that the builder can construct a single-storey building with a 100 m2 floor space, a 2-storey building with 50 m2 floor space in each storey, a 4-storey building with 25 m2 in each storey, and so on. Thus, we can see that the number of floors possible in a plot is directly correlated to the FSI of the plot.

Compared to the 1.33 FSI of Mumbai, the FSIs of major foreign cities are found to be as high as 25. In short, 100 m2 of land in New York can have a 1500 m2 building in it and the same land in India can only have a 130 m2 building. The highest FSI in India is around 3.5-4 in cities like Bengaluru and New Delhi. With this limitation in construction and the rise of population, it is only obvious that the cost of houses in India keeps increasing.

Why can’t the Government Just Increase the FSI?

Increasing the FSI would reduce the rent and create opportunities for young job seekers in the bigger cities in India. The reason why our country has such a low FSI in its cities is that the government fears that if it is increased, the already overcrowded cities of India would become even more congested. Needless to say, that this should not be an excuse.

Black Money in Real Estate

Real estate is an industry that still thrives on black money. Property investment is a very convenient means to convert black money into white, as well.

An extremely high property price also demands an extremely high tax amount. Property worth 1 Crore will cost the buyer an additional 20 Lakh as taxes, including the 12% GST and 8% stamp duty. To evade such a high amount of tax, the solution that the builder proposes to the buyer is to pay the circle rate (minimum market price) of the property in white money, and the remaining in black.

This enables the buyer to pay the taxes only for the minimum price, saving them a significant amount of money. A Mint article from November 2021 says that 70% of property buyers made the payment partially in black money in the past 7 years.

This corruption is also a major reason for the price hikes for properties in the market.

Bribery

An ethical 32-year-old IT professional in Navi Mumbai was illegally forced to pay the builder huge sums of money along with the cost of the apartment in the name of water and electricity connections, and a parking slot to seal the deal.

The builder claimed that he was helpless as he had to answer to government officials and politicians to be able to complete his project. This is more or less the story of every homebuyer in India.

The link between politicians, builders and businessmen in the real estate industry is quite huge. Even receiving a permit for construction is a tedious process in India and can require up to 60 approvals from the authorities! This causes extreme delays and will involve some form of bribery at every stage. The obliteration of corruption could reduce the prices of houses by up to 20%, according to HDFC chief Deepak Parekh.

In Summary

Strong actions are required from the part of the authorities to curb the corruption that exists in the real estate sector today. If not, people will always be forced to choose between their ethics and aspirations while involving themselves in the market.

The good news is, reforms have already begun to be made in Indian real estate to increase transparency in trade with some new government regulations such as RERA (Real Estate Regulation and Development Act) and the introduction of REIT (Real Estate Investment Trust).

Although, the industry still has a long way to go to be completely free from corruption.