Urbanise fast for high growth: India’s land policies are at the bottom of its economy failing to take off

Rapid urbanisation is a key feature of economies that have sustained 8-10% growth for two to three decades. In South Korea, urban population as a proportion of the total population rose from 28.8% in 1966 to 85.7% in 1995. In China, it grew from 19% in 1981 to 51.3% in 2011. Both economies went from low income to upper middle income status during these phases. Rapid growth of labour intensive manufacturing, which drove this growth, created well-paying jobs and pulled vast numbers of agricultural workers out of the countryside into gainful employment in established or emerging urban centres.

In comparison, urbanisation in India has progressed at snail’s pace. It rose from 17.3% in 1951 to 31.2% in 2011. This change represents just 2.3% increase per decade. Urban centres in India have not been able to emerge as magnets for good jobs for rural masses on a scale seen in South Korea and China. Even during the fast growth phase of 2001-2011, India added only 3.4% to urbanisation.

Reasons for the slow migration of workers from rural to urban areas are many. An extremely important one among them, which is the subject of this column, is the absence of affordable rental housing in urban India. When workers migrate to cities to take advantage of better paid jobs, they need to be able to find a place to live at low rent, in a neighbourhood that is either close to their workplace or accessible to it via inexpensive and rapid transportation systems.

Illustration: Chad Crowe

Unfortunately, such rental housing is not available in most states in India. Housing policy of the central government has focussed nearly exclusively on subsidies on houses that those already in the cities get to own. At the same time, with one exception – Rajasthan – rental laws in Indian states are heavily tilted against the landlord so that owners not occupying their units prefer to keep them empty rather than risk renting them to tenants. Adventurous migrants who do dare move to cities often end up living in slums, which have mushroomed.

In most well run cities, commercial rental housing fulfils the housing needs of migrants. Unfortunately, such housing is rare in Indian cities. This is not just because rental laws are stacked against its potential providers. Even if these laws could be amended to balance the rights of tenants and owners, commercial rental housing will fail to emerge because urban land in India is overpriced.

This fact has meant that the rental yield, which measures the return on investment in housing, falls well short of the interest rate. Mumbai offers an extreme example. Already low at 6% in 2006, the average rental yield there fell to 3.5% in 2009 and just 1.5% in 2011. No investor can afford to provide rental housing at such low rental yields.

If India is to achieve faster urbanisation, an essential element in economic transformation, it will need to make its cities rental housing friendly to potential migrants. But this cannot happen unless states reform rental laws to balance the rights of tenants and owners, and both Centre and state governments take steps to increase the supply of urban land and hence bring down its price. Numerous steps must be taken to achieve the latter objective.

First, Centre and state governments own many enterprises that have vast volumes of land. Typically, the production activity of these enterprises takes place in a fraction of the land on which they are located. The excess land should be hived off and sold on the market.

Similarly, many government owned educational institutions are located on land areas running in hundreds of acres. Often the institutions even fail to safeguard the land from illegal encroachment. Excess land owned by these institutions may also be hived off and brought on the market. Many ministries, most notably defence, railways, shipping and civil aviation, also own large tracts of unused urban land. These tracts too should be brought on the market.

Second, Indian cities have traditionally set the floor-space index (FSI), which measures the square footage of living space allowed to be built as a proportion of the total square footage of the plot, at super-low levels such as 1.3 or 1. The low FSI disallows buildings from going vertically up and increases the demand for horizontal land manifold. No wonder that today Shanghai has many times more square feet per person of space available than Mumbai despite having a significantly larger population.

Third, Indian cities need more liberal laws governing its conversion from one use to another. Urbanisation often entails amalgamating agricultural land on the periphery of cities into them. Laws that impede such amalgamation hinder urbanisation.

Fourth, the culture of parking black money in real estate also raises land prices unduly. Therefore, the anti-corruption drive is good not just for the usual reasons but also because it will help urbanisation by lowering land prices.

Finally, India needs to reform the Land Acquisition Act to permit acquisition of land at speed and at market prices. Given ill-defined land titles in India, such acquisition is necessary for medium and large firms as well as building rental housing.

DISCLAIMER : Views expressed above are the author’s own.

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