India: Space, Services and the State

Given the crucial role of cities and towns as centres of economic activity and engines of economic transformation, the importance of well-functioning life in them and their orderly growth can scarcely be underestimated. Unfortunately, however, in India, scant attention has been paid to either the development of new cities or the maintenance and expansion of the existing cities. Basic urban services such as housing, water, electricity, sewage, solid waste and transportation are poorly supplied in much of urban India. Indeed, much of the emphasis of longer-term planning, which formed the backbone of policy-making until the 1991 reforms, was on the countryside, with developments in the cities largely governed by short-term responses to the day-to-day needs of the urban population.

The Indian constitution, with its federal structure, vests much of the power to govern the cities and towns in the states, including the power to enact laws for them. Though urban local bodies such as municipalities and municipal corporations must attend to the daily needs of the citizens, they lack the power to make rules, design policies or do long-term planning in areas of local concern. The state government controls both the budgets of the local bodies as well as significant decisions. This creates a serious free-rider problem whereby local bodies blame the state government for mismanagement and vice versa.

The 74th Constitutional Amendment Act of 1992 tried to correct this situation by mandating the setting up of elected municipalities as institutions of self-government but the devolution of real power has been at best limited. There is a lack of clarity in the assignment of functions and, even more importantly, the local jurisdictions lack adequate financial resources to fulfill even their core functions. They are neither in a position to raise their own tax revenue nor do they receive adequate transfers of financial resources from the state. Most of the local-level decisions remain subject to approval by the state government, with the latter having decisive power to alter urban plans. Therefore, states have a crucial role in undertaking massive reforms in issues of concern to the cities and towns. There are three critical and inter-related areas for reform: land markets, water and waste services, and transportation.

Bigger Indian cities suffer from an acute shortage of space. A number of factors have contributed to the enormous shortage of space in urban land.

First, the Urban Land Ceilings Act (ULCRA) of 1976 led to the withdrawal of vast tracts of urban land from the market. This act imposed tight ceilings on the ownership and possession of vacant lots. The act provided for the acquisition of the excess land by the state, for the common good, at extra-low prices. Seventeen states and three union territories adopted the act, which applied to 64 urban agglomerations within them. Given the negligible compensation, landowners had no incentive to allow the acquisition of their excess lands. The act had provided exemptions on grounds of public interest, hardship and building houses for weaker sections of society. Nearly all owners with excess land claimed one or more of these exemptions. With the power to grant these exemptions vested in the state governments, politicians and bureaucrats sought and received large bribes. Owners who failed to access the exemptions went to court and the land became tied up in lengthy legal battles. The result of these developments was that neither could the government acquire much of the excess land, nor could the owners sell it on the open market. In turn, the cities subject to ULCRA came to face huge land shortages, with prices in large cities such as Mumbai rivaling those in Tokyo and New York City. By the late 1980s, the harmful effects of the act were widely recognised, and it was repealed in 1999. This sufficed to end the ceilings in some areas but required additional action by state governments in the majority. The process of state-level action has been painfully slow. In the interest of making unused land available for industrial and commercial development and housing, states need to make repeal effective.

The second source of shortage of land in the cities around India has been the exceptionally low floor space index (FSI), also called the Floor Area Ratio. The FSI is the ratio of maximum floor space permitted to the area of the plot. For example, if the FSI is two, maximum floor space permitted on a plot of 1000 square meters is 2000 square meters. If the building stands on half of the plot area, the FSI translates into a maximum of four floors. The FSI in Indian cities is much lower than the international average.

Some Indian cities including Mumbai have tried to raise the FSI through so-called Transferable Development Rights (TDR) whereby municipalities trade a higher FSI to a land-owner (whose land they acquire for public purpose) in exchange for a part of their land. Land-owners can then use the TDR to create extra floor space by building up vertically or sell them to someone who needs them. But rather than systematically helping to build a more spacious central business district, such ad hoc trades have led to taller buildings on plots in dispersed locations. What the cities need, instead, is a systematic rise in the FSI over entire areas.

The presence of overly tenant-friendly rental laws, including rent control, also adversely impact the availability of residential and office space. Though reforms have taken place in the last 15 years in several states including Karnataka, Rajasthan, Maharashtra and the union territory of Delhi, overall the laws still continue to be favourable to the tenant.
Once rented, tenants refuse to move out – for decades, even – though alternative uses of the space are likely to become far more productive as the city undergoes transformation. Making it difficult for the owner to reclaim their space from the tenant discourages them from renting out the space in the first place. The result is the proliferation of empty flats, despite a massive shortage of rental properties.

The efficient use of urban land often involves its conversion from one use to another. Warehouses may be converted into office space, declining factories into housing and peripheral agricultural land into factory space. Indian cities are subject to myriad rules and regulations that prevent such conversion and even when permitted, the process can be prohibitively cumbersome.

Water and waste services in India remain in a deep crisis that threatens to get deeper. The problem arises from the delivery of services by the state and local authorities. Having water and sewage connections is not enough to avail of these amenities: the services must be supplied reliably and regularly. What can governments do to improve matters in these areas? As Jagannathan points out, the key problem of the existing decision-making process in the delivery of water is its highly centralised nature at the level of the state. The same state-level agency or department performs the bulk of the remaining functions, including policy-making, regulation, financing, designing and building infrastructure, management and delivery. When the leadership at the top is highly motivated, competent and hardworking, such a system may produce occasional successes. But given the work culture of Indian bureaucracy, such a system produces vast scope for avoiding accountability, with one arm of the concerned department blaming the other for breakdowns and poor delivery. When it comes to design and management, the centralised system is also far removed from local conditions and fails to adequately take account of the needs of the customers.

There is a case here for unbundling the major functions of the actual acts of delivery, tariff setting and policy making. The actual delivery of water supply within a specified jurisdiction should be assigned to an autonomous local body with separate finances. The autonomous body should be given the responsibility of maintaining the infrastructure, undertaking necessary capital investments, installing and reading meters, billing the customers and collecting revenues. An independent state-level regulatory agency should be charged with tariff setting and regulating all aspects of delivery such as 24×7 supply and minimum quality standards of water in all jurisdictions. Finally, the relevant department at the level of the state should be entrusted with the responsibility to make policy within which the regulatory agency operates.

Transfer of operational authority to the local body in this manner will go some way toward bridging the gap between the service supplied and service demanded by local residents. It will also open the door wider to forging partnerships with private companies to deliver the service more effectively and efficiently. For instance, the autonomous local body could use variations of the PPP and franchise models to improve service.

States need to design more systematic reforms for the delivery of services. This will, of course, require strong commitment on the part of the state leadership. Those currently in charge of building and running the water delivery system have a vested interest in maintaining the status quo. The leadership will have to overcome this opposition. Giving greater authority to local bodies where they exist and creating them where they do not can be effective in improving sanitation and solid waste management as well. There have been success stories in waste services in Navi Mumbai, Rajkot and Surat: the question is whether these successes are the result of exceptional leadership in certain government offices, or if they can be easily replicated in other cities.

Given the significance of transport in cities, coordination among different components of the transportation system is critical. This suggests that while the private sector can play an important role in supplying and operating the rolling stock, effective public sector coordination is likely to be central to the success of the overall transportation system. Unsurprisingly, the public sector remains actively involved in the provision of in-city transportation in virtually all the major cities of the world.

While basic transportation systems have existed for many years in at least the larger cities of India, rapid transit systems are still in the process of being developed in most cities. Successful experiences with both bus and rail-based rapid transit systems have emerged recently, the former in Ahmedabad and the latter in Delhi. In 2006, Ahmedabad Municipal Corporation launched the Bus Rapid Transit System (BRTS), designed partially after Bogotá’s TransMilenio. When fully completed, it will provide high-speed transportation over the length of 155km.

The system involves a dedicated lane on the road for the buses that can be monitored at all times from a control room. This allows rapid response to emergencies and breakdowns along the transportation route. A Special Purpose Vehicle, Ahmedabad Janmarg Limited, (registered as a subsidiary company of Ahmedabad Municipal Corporation) governs BRTS operations. The success of Ahmedabad BRTS has led Bangalore and Chennai to opt for similar systems. These are currently under implementation.

In 1995, Delhi decided to build its rail-based Mass Rapid Transit System (MRTS) via the instrumentality of Delhi Metro Rail Corporation, a public sector company with equal equity participation by the Government of India and the Government of the National Capital Territory of Delhi. This is an ambitious project consisting of six lines with a total length of 190km and 142 stations. The system connects Delhi to Gurgaon on the western side and Noida and Ghaziabad on the eastern side. Daily ridership rose from the initial level of 82,000 passengers in December 2002 to the record figure of 2.3 million on February 11, 2012.1

Other larger cities in need of rapid transit systems could learn from Delhi and Ahmedabad. Delhi Metro is undoubtedly the far more expensive option in terms of cost per passenger carried than Ahmedabad BRTS, but it is also one that has the benefit of linking many surrounding towns in the adjoining states of Haryana, Uttar Pradesh and Rajasthan to the nation’s capital. These links promise to play a critical role in the future economic development of the wider national capital region. On the other hand, Ahmedabad BRTS model offers a less expensive option. The rapid transit systems in Ahmedabad and Delhi complement the older, larger and denser transportation systems.

In order for urbanisation to proceed smoothly and for urban residents to have healthy lives, economic policy and reforms must be aimed at progress in each of these three areas. Because of interconnections among these components, progress in one or more areas can make progress in other areas easier. By the same token, bottlenecks in one area can create bottlenecks in others. In particular, the problems are often local while all the decision-making authority rests at the level of the state. What is required is the creation of entities at the local level that are entrusted with the responsibility to oversee the service, and a greater devolution of authority and financial autonomy to them. This structure will also allow the local entities to forge partnerships as necessary.

1 See “Delhi Metro records highest ridership of 23 lakh on a single day” in the Times of India, February 12, 2013.

This article is based heavily on Ch. 7 of Arvind Panagariya, Pinaki Chakraborty & Govinda Rao, State Level Reforms, Growth and Development in Indian States.

Arvind Panagariya is Professor of Economics at Columbia University, and has been awarded the Padma Bhushan award.