How Housing Can Help India Become World's Fastest Growing Economy

According to a new study done by Harvard researchers, India has the potential to become the world's fastest growing economy over the next one decade. Being the second-highest job creating sector after agriculture, the real estate sector will certainly play a major role in this. Another study of Global Construction Perspectives and Oxford Economics suggests that India will become world's largest construction market, with 11.5 million new houses every year.

A look at how the government can enable the housing sector and the construction industry to be the driving force behind India's growth story:

Investment in urban Infrastructure

Infrastructure in many Indian cities is inadequate to meet the needs of its people. Even in cities where home buyers and real estate investors have been active, many households do not move into houses they bought because of under-developed infrastructure. When there is no water supply, well-maintained roads, metro lines, sewage systems, electricity and other amenities, moving into a newly constructed house may not be an ideal situation. If there is greater investment in infrastructure in areas that need such amenities, this will lead to opening up of more urban land for development. This will make Indian cities more productive by increasing connectivity through transportation networks and by ensuring greater proximity among people. People will also have greater access to diverse, potential employers, and diverse forms of art, food and consumer goods. Housing will become less expensive when there are water mains and sewerage systems in suburbs. More people will be able to live away from employment centres and major markets. Roads will become less congested when there is greater access to mass transit.

Land acquisition and conversion

Mangu Singh, the managing director of Delhi Metro, once said that it was almost impossible to acquire land for Delhi Metro under the new Land Acquisition Act. It is also difficult to convert agricultural land for other purposes. Due to these constraints, real estate developments is very expensive. There were many cases in which home buyers had to wait for the courts to allow them to take possession of their flats because developers became entangled in legal battles over land. Making land acquisition easier would have a positive impact on real estate in India.

Private property rights

Data show that nearly 17 per cent of India's population lives in slums. At 65 million, India's slum population is larger than the population of prosperous nations like UK and Italy. One of the reasons why many Indians live in informal settlements in slums is that regulations have made construction in India very expensive. When it is difficult to build formal houses abiding by all regulations, people tend to live in informal houses in slums without water supply, surfaced roads, toilets and sewage systems. As most of them do not have clear titles to property, they do not have much of an incentive to invest in improving their housing standards. When property rights are not secure, households will not have access to finance either. Lack of clarity on property titles freezes valuable urban land. If some shanties in, say, Mumbai's slum area Dharavi cost above a crore, imagine how valuable they may have been, if property tiles were clearly defined. If the government finds a way to legalise these settlements, India's informal economy could be brought under the ambit of formal law. This will make many households prosperous, raise floor space consumption, and allow India's economy to grow by opening up more land for development.

Rent control

In India, merely 11 per cent of the entire housing stock is in the rental market; it is many folds higher in developed countries. Since 1961, the fraction of the houses in the rental market has declined by over 70 per cent in cities like Greater Mumbai. Such a decline has not happened in major cities across the world where rent control legislation was imposed during the World War-II. This is because such cities repealed or eased rent controls, while allowing development of buildings by raising the floor space allowed on a certain plot. As most households with low-income levels cannot afford to buy houses, the function of the rental housing market is of great importance. Rent controls and other legislations need revision because:

There are very few houses in the rental market.

It is expensive to rent a house.

It is financially unviable to redevelop expensive property in the heart of large Indian cities.

The unofficial rent in India's expensive markets is unusually high.

Many houses and buildings are poorly maintained. In fact, many expensive buildings in central Mumbai and Delhi are dilapidated. As the Ministry of Housing And Urban Development plans to reform laws governing rental housing, this may change in the near future.

Large corporations are not yet in the business of renting out houses.

A large section of India's urban population live in slums.

Space is congested in major Indian cities.

Height restrictions

Major Indian cities are unique in two major aspects when it comes to building height restrictions:

The FSI (ratio of the maximum floor space allowed to the size of the plot) in major Indian cities is often in the range of 1 to 2. This is not true in any of the major cities where FSI is often in the range of 5 to 25. As Indian cities are densely populated and face scarcity of land at times, restrictions on the height of buildings make floor space expensive and space extremely congested.

The ratio of the highest FSI to the lowest FSI in large cities is often high. In some cities, it is even higher than 30. This is because a high FSI is allowed in the central city, while a low FSI is allowed in the suburbs and the periphery. This is to allow greater development where floor space is in great demand. Better urban planning has ensured that the demand for floor space is met to a large degree in most of the best cities. But, this is not true of Indian cities where the ratio is low. So, the height of buildings bear little relationship with the demand for floor space in major Indian cities. 

FSI restrictions also prevent redevelopment of buildings, lowers open spaces, and raises the average commute. As buildings in Indian cities are spread over a large area, the need for urban infrastructure is greater. FSI restrictions also lead to declining forest cover and green spaces.

As FSI is low, the revenues from real estate taxes is also low, and this leaves less room for investment in urban infrastructure. If such restrictions are repealed, floor space will become abundant in India, and the average floor space consumption sill rise, as it did in Chinese cities like Shanghai that were once as congested as Mumbai.