The Telegraph
Since 1st March, 1999
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- The amazing effects of liberalizing capital account

One of my longest held beliefs has been that India should open up; I have written more than a million words arguing for it. When I got a chance, 15 years ago, to turn some theory into practice, however, my ideas of the benefits of liberalization were quite primitive. I thought basically of trade. There was one other consequence of opening up I had not anticipated, largely because it has arisen out of policies that were not on our reform agenda then. We had not really thought of liberalizing capital account at that time for two reasons. As long as the current account was precarious, it looked too risky to open up the capital account; and while the pseudo-nationalists were at our throat over all liberalization measures, they were more strongly opposed to foreign investment than trade.

Opening up of investment has been less far-reaching than of trade. Thanks largely to the commitment given to WTO, quantitative restrictions on imports were abolished in 2001; and tariffs have come down progressively except on agricultural goods. But on investment, quantitative restrictions are the order of the day even now. The pointless distinction on portfolio and direct investment continues. Portfolio investment has been considerably liberalized. But on foreign direct investment, the government applies a large number of detailed restrictions. On outgoing investment, Reserve Bank does it for the government. But even the limited capital movement liberalization that the government has deigned to do is having amazing effects. Just now we see the consequences in two developments in the DLF capital issue.

DLF once stood for Delhi Land Finance. It was founded in 1946, just before independence. At that time, floods of refugees from West Punjab and the Frontier Province were descending on Delhi. The government was putting them up in tents. But more permanent solutions were needed. The government was putting up some huts. Lord Mountbatten persuaded Nehru to look at Britain’s Nissen huts; they were prefabricated huts the British devised out of wood and board to house citizens who were bombed out of their houses by German bombs in World War II, as well as those who were sent to work in factories, ports and airports where there was not enough housing. The government set up Hindustan Prefab, but its programme of building public housing never got far. Instead, it started laying out new colonies in the farm lands south of New Delhi, and giving out plots to refugees. That is when Delhi Land Finance came up to build simple, single-story houses for them. It got quite good at the job; it built Defence Colony and Greater Kailash.

But that business slipped largely out of DLF’s hands by the 1960s. Although the government continued to hand out plots to bureaucrats, journalists, lawyers and other favourites, many small building contractors came up to serve them. Many of them put their own wives on a charpoy in the plot as building managers and engaged carpenters and masons to do the job. DLF then concentrated on building business premises.

The building boom in Delhi itself petered out. The socialist government set up a Delhi Development Authority. It inherited the land the government had, and got a monopoly of acquisition. But it was bureaucratic and incompetent. So little housing came up after it took over.

The neighbouring governments of Haryana and Uttar Pradesh saw an opportunity in Delhi’s haemorrhage; they set up satellite cities — Gurgaon in Haryana and Noida in Uttar Pradesh. By this time, the master plan model that Delhi brought into fashion, with residential townships served by community centres and markets, was getting outdated. Family houses were too land-intensive; floors had to go up. And families could not build high-rise buildings; they needed builders. The concept of the business centre was itself changing. It was no longer 12’x10’ shops topped by little offices; companies needed more space in a single location.

Noida was slower to wake up to these new realities; much of old Noida conforms to the old plan. Its development is too land-intensive; and since the families who were given land do not have capital, construction has been slow. Population density has a dynamic of its own. People hesitate to move into a locality with few houses – especially in a state with such a spectacular crime record as UP. But once population density reaches a certain threshold, people feel safe and start moving in. Many sectors of Noida have fallen short of the critical density and remained sparsely populated. And the sectors where the administrators could implement more modern land-use plans are further away from Delhi and have not attracted enough developers.

Haryana politicians do not believe in retail business; they prefer to deal with big fellows. The result is that even old-style housing colonies in Gurgaon have been given to corporates to develop. That is where land development companies, including DLF, got a chance; DLF has developed the largest residential colony in Gurgaon, and the one closest to Delhi, apart from the ultra modern DLF Towers. Gurgaon did not have an antiquated master plan like Delhi, so developers had more flexibility. They were better at reading the market than the government. They saw that after the reforms, many companies wanted a location in or near Delhi but could not get the kind of real estate they needed. They began to cater to this market. But those corporates had employees who needed to be housed as close as possible. So the developers developed the modern equivalent of Nissen huts — high-rise buildings packed with flats of 600-1,200 square feet, built around a central space that would have some grass, trees, water, a club and a playground. And for entertainment — and shopping, which is Indians’ greatest entertainment pursuit — they developed malls.

DLF has realized that this combination is India’s city of the future. For all India’s major cities have grown to a size — 2 million — where it is no more feasible to collect employees in buses and to transport them across crowded areas to their places of work. Places of work and residence must be built in proximity. And ours are times of change. Neither employers nor employees can be expected to stay in the same place forever. They will move in and out; what is needed is a standardized office or residence, built in thousands.

DLF is not unique in working this out; a number of developers had the same idea. What DLF had the foresight to realize, and the resources, is that this type of development requires large blocks of land. So it has spent the last ten years building up a land bank in 64 locations outside 19 cities. It has amassed 228 million square feet. All it has to do now is build standardized subcities and sell them. Even if it does nothing else, it has a great business plan for a decade. But it does not plan to do nothing. It announced a $2 billion IPO in April. It withdrew it, and now proposes to raise $3.5 billion. With such money, it will try something new. This is a company that knows its business in and out; I am curious to know where it is going next.

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