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Will Poverty Derail Development in India?

India's astounding growth certainly catches the imagination of foreign investors. With annual GDP of 8.5%, property prices climbing by double digits, and the middle class multiplying — rising from 10 million to 50 million in the past decade — what's not to like?

But for the poorest 500 million, the miracle isn't looking so bright — particularly if the government just took away the land on which one grew food.

October alone saw two major demonstrations over the vast new special economic zones the government is developing in a few rural areas. A protest in eastern India regarding government land seizures ultimately led to 2,000 arrests. Further west, 25,000 people marched over 200 miles from Gwalior to Delhi, the capital, to protest government land policies.

The protesters' biggest concern is the new tax-friendly zones that the government has tried to push forward. These zones include a 22,000-acre industrial project in West Bengal, and a 37,500-acre parcel outside Mumbai.

Although the government began the special economic zone program two years ago in order to jump-start rural development, critics charge the zones are being created unfairly, driven by politicians who push poor farmers to sell their land for a pittance to enrich a few developers.

Fight stays rural

Local market watchers insist that the protests won't have much impact on foreign investors' prospects, which have been focused on government behavior and private developers.

In rural areas, however, the rules have changed already. In response to the protests, India's cabinet agreed to a number of changes in its practices, including a new rule to limit the government's purchase of land at submarket rates to 30% of an entire project rather than all of it, and to provide compensation in cases where tribes have lived on the same land for generations without any title.

Why should legislators care about people with no economic clout? Rural votes. In spite of a 1.1 billion population, 75% of India still lives in the country. “Every party is very concerned about the rural population, and they cannot have them in opposition,” says Abihishek Gupta, senior manager of research at Jones Lang LaSalle.

Anshuman Magazine, managing director of CB Richard Ellis in South Asia, says that establishing property titles in rural areas is often complex. If a grandfather gave a parcel to his three sons, and those sons each have two children, what do you do if one son doesn't want to sell?

A tendency of buyers to want to be paid in cash also complicates deals. The practice grew out of India's socialist past, when India's income tax could be 90% or more. “That kind of forced people to keep unaccounted money,” Magazine explains.

Sheer numbers of small landlords are a problem as well. Gupta says he recently spoke to executives at one development company who needed to convince 150 farmers to sell to the company their half- to 10-acre parcels. The company prevailed using a combination of cash and promises of jobs connected with the project.

Winning through cooperation

Such alternative deals that throw in jobs or some kind of share in the enterprise rather than a lump sum are becoming more popular now with rural dealmakers, according to Gupta.

“One fantastic method they have come up with is partnering with farmers,” Gupta says. One model that he likes in particular is offering a kind of annuity to farmers in lieu of a single cash payment.

Foreign investors may want to partner with developers who learn to create these kinds of socially sustainable deals. Mahatma Gandhi may not be remembered as a real estate guru, but in the case of India these developers seem to be taking one of his ideas to heart: “The rich cannot accumulate wealth without the cooperation of the poor in society.”

Bennett Voyles is a veteran commercial real estate reporter and National Real Estate Investor's Paris correspondent. For questions or comments, e-mail [email protected].

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