The rise of Indian Cities: Jobs vs Development

Indian cities suffer from a grave paradox as they are reported to have the lowest floor space index of construction in the world, but are among the most densely populated. It is also evident that India devotes a disproportionately high percentage of its land to agriculture at 48 per cent. The rise of cities is inevitable, with a decline in agricultural employment from 75 per cent in early post independence years to 58 per cent in current times. According to a 2014 working paper by Denis and Zérah, the number of people for whom farming was the main occupation declined from 103 million to 98 million between 2001 and 2011. In 2014, a survey of farmers conducted by CSDS found that 62% of those surveyed were willing to leave farming for a job in the city. A Lokniti survey estimates that 60% of farmers want their children to settle in cities, and only 19% think that village life is better than city life. Meanwhile, India’s farms have significant problems of under-productivity, so the country would do well to focus on non-farm avenues of growth as it works to increase the efficiency of farms.

As the pull of a city is the promise of upward mobility and affordability across public goods, India is slowly drifting towards a services dominated economy. This rural to urban transition suggests that an increasing number of people would gather around fast growing cities, resulting in India’s metropolitans to grow larger even as small towns congregate to become ‘urban’. Therefore, if India has to absorb the large numbers of people leaving agriculture and having aspirations of a better life, it cannot afford to ignore its urban areas. Urban areas means not just large metropolises, but also the smaller cities, towns, and large villages, where much of the job creating economic activities like manufacturing, small-scale industries, and construction are taking place. To match demands over the next decade, India will need to annually invest between 8 per cent and 10 per cent of its GDP on developing its urban infrastructure. Investments in infrastructure and amenities along with skill development would be vital for augmenting employment productivity in these areas. India will possibly double the size of its urban area over the next decade from 3 per cent of overall land area to 6 per cent and to make cities more inclusive to an increasing number of citizens, there is a drastic need for flexible master plans and strategic investment in incremental planning.

But first, transfer of land for urbanization will require land titles to be clear and land acquisition to be transparent and participative. Second, to fund such large investments, cities will have to look towards its own citizens, whether it is through monetizing of its lands, higher usage charges for public goods, or higher property taxes. Hence, the slow, bottom-up changes should be supplemented from the top, with a policy direction that recognizes urban India, and leverages this demographic change to spur economic development.

Impact of Smart Cities on Indian Infrastructure

The Indian real estate sector has undergone a phenomenal transition in the past decade due to accelerated rate of urbanization, liberalization of the sector through Foreign Direct Investment (FDI), sound development of Real Estate Investment Trusts (REITs) and overall increased competitiveness and job creation. Prior to 2014, what looked like extreme urbanization trends concentrated in only five global cities of India such as, Delhi, Mumbai, Bangalore, Kolkata and Chennai, the Smart City initiative seems to have shifted the discourse to investments in tier 1 and tier 2 cities. Let us observe how the development of India’s smart cities becoming significant catalysts for economic growth impacts the Indian infrastructure in the years to come.

Urban areas are expected to house 40% of India’s population and contribute 75% of India’s GDP by 2030. This requires comprehensive development of physical, institutional, social and economic infrastructure. Smart Cities is an innovative initiative by the Government of India towards improving the quality of life and attracting people and investment, setting in motion a virtuous cycle of growth and development. Projections are such that, not only will investment into sectors like roads, airports and smart cities create better quality infrastructure, but it will also generate private equity investment opportunities into the core sectors. Though it is a very nascent concept especially in India because of the existing socio-economic conditions, but an effective leadership and an optimum utilization of the resources by the players in each sector involved in this concept can deliver smart infrastructure.

In the approach to the Smart Cities Mission, the objective is to promote cities that provide core infrastructure, a clean and sustainable environment and application of ‘Smart’ Solutions, thus, improving quality of life of all citizens. The focus is on sustainable and inclusive development, catalyzing the creation of similar Smart Cities in various regions and parts of the country. The mission requires development through retrofitting, redevelopment and greenfield planning applied across cities, which in turn creates employment opportunities in the real estate sector. First, the growth of a Smart City project can give way to massive opportunity, particularly when we talk about demand for affordable homes. The smart cities projects are increasingly allocating enough land and housing for low-income groups (LIGs), thereby increasing the demand for realty in the country. Second, smart cities also offer an excellent investment options with a sustainable scope for price appreciation, especially for a long-term investment purview. Third, the smart cities project will be an amalgamation of commercial and residential projects in India, in close quarters. Evolution of these smart cities will push the demand of office spaces as well as hotels, in addition to service apartments and shopping malls. The real estate sector contributes about 6% to India’s GDP. With the vision of building 100 smart cities, many expect this share to increase to 10-12 percent by 2022. Thus, the developers will get a huge window of opportunity to offer new projects in the upcoming smart cities, which boost the regional, social and economic infrastructure.

Affordable Housing: Plugging the gap

Rapid urbanization in India has not only boosted the country’s housing sector but also presented complex affordability challenges that need to be resolved to harness economic, social and environmental opportunities associated with urbanization. Broadly speaking, “affordable housing refers to any housing that meets some form of affordability criterion, which could be income level of the family, size of the dwelling unit or affordability in terms of EMI size or ratio of house price to annual income.”

What is India’s affordability challenge?

India’s affordable housing customers comprise a huge mass of the bottom of the pyramid living in cramped, poorly constructed homes in squatter settlements, located in and around the city with lack of available housing options and minimal access to home finance. The current housing deficit has been assessed to be more than 19 million units in urban areas, and 95% i.e., 18 million units of the same fit the economically weaker sections and low-income groups of the society. When we talk about aggregate annual demand, our country requires more than five million units in the affordable segment. To plug the gap in the supply chain, which is merely 10% of the total demand, we as developers need to bolster our execution capabilities to tackle not just the challenge of access to affordable housing, but also delve to improve living conditions on a macro scale.

Factors like identification of the right target group, micro financing mechanisms and self help groups for scalability with flexible paying mechanisms to cater to variable income flows need immediate focus on the demand side. Whereas on the supply side, incentivizing on the two policy initiatives such as ‘Housing for All (Pradhan Mantri Awas Yojana)’ and ‘Smart Cities Mission’ is not only necessary to address issues of funding and incentives for developers and buyers, but also to tackle issues of land availability, poor infrastructure facilities and the overall informal housing scenario. There has been a slow but promising shift from marketability of premier development projects to developers diving into projects having small formats with reduced down payments. Parallel to the emerging private sector investment, the state must step in and arrive at clear guidelines as to what affordable housing should be and provide approvals without any constraints, then the onus is on us developers to apply ideas and deliver truly affordable houses to customers.

It is safe to say that in the existing political landscape, PPP is the way forward to bridge the affordable housing deficit. For affordable housing to flourish, three critical factors need to come together. First is capital in real estate, second is ability to deal with the local reality in India (land approvals, sand mafias and so on varying in each state) and third is mindset for affordable housing, where low cost and high volume production is vital.

Home ownership in India comes with an aspirational value attached to it and planned, sustainable and inclusive urbanization is not a choice but the need of the hour for India’s growth story. Affordable housing thus calls for collaborative, multi pronged and concerted effort from all stakeholders, which include long- standing dialogues with urban dwellers.