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 Mumbai: Self-inflicted wounds

Arvind Panagariya

At Rs 22,000 to Rs 40,000 per square foot, land prices at Nariman Point in Mumbai are comparable to those at Park Avenue in Midtown Manhattan. Even correcting for a speculative bubble, these prices are abnormally high for a city located in a low-income developing country. Land prices in Singapore and Shanghai are much lower.

High land prices are but one manifestation of a highly distorted land market. Other, less dramatic but far more painful manifestations are to be found in the hardships the residents of Mumbai endure every day: rundown yet scarce housing, shrinking office space, long and arduous commutes, extreme shortage of schools and hospitals, poor water and sanitation facilities, and high cost of personal and domestic services.

In an excellent recent paper, urban planning expert Alain Bertraud explains how the government policies have turned the crown-jewel city of India into an everyday nightmare for its citizens. The city is located on a peninsula with limited scope for horizontal expansion. Other cities with similar topography such as New York, Singapore and Hong Kong have solved this problem by choosing to grow vertically through tall buildings. But a variety of regulations have prevented the same from happening in Mumbai.

Begin with the floor space index (FSI). The FSI is the ratio of the total floor space in a building to the area of the plot on which it is built. For example, suppose a building covers half of a plot that is 1,000 square metres in size. If this building has 10 floors, it exhibits an FSI of five. Most cities regulate the FSI for zoning purposes. Commonly, the FSI varies from five to 15 in the central business district to 0.5 or less in the suburbs. In cities such as Manhattan, Hong Kong and Singapore, it is permitted to go higher.

The FSI regulation in Mumbai was first introduced in 1964 and set at 4.5. The standard practice in cities with limited land is to raise the permitted FSI over time to accommodate urban growth. But in its infinite wisdom, the Bombay Municipal Corporation (now Municipal Corporation of Greater Mumbai) has gone the other way, lowering the permitted FSI to a paltry 1.33 in 1991.

Virtually all of the buildings in Mumbai with FSI exceeding 4.5 were constructed prior to 1964. Under the current rules, new buildings including those in the central business district are subject to the FSI of 1.33. If an existing building with higher FSI has to be demolished and rebuilt, unless an exception is granted, its FSI must go down to 1.33. For this reason and due to rent control (as explained later), owners choose not to rebuild dilapidated buildings until they collapse, an event far too common in Mumbai. Currently, The Remaking of Mumbai Federation consisting of 50 associations from different walks of life has been negotiating an FSI with the government that would make the redevelopment of 20,000 pre-1940 buildings financially feasible.

Complementing this restriction on the supply of land vertically is the Coastal Zone Regulation (CZR) that restricts land supply horizontally. The CZR forbids construction within 500 metres of high tide zone. In a peninsular city, this restriction results in the loss of a very substantial amount of what could be prime land for the development of hotels and office space. Instead, the land ends up being occupied by squatters. If Manhattan, where I live, were to adopt the same regulation, it will not be the city it is today.

Sadly, the story of self-inflicted wounds of Mumbai does not end there. Efficiency requires easy purchase and sale of land so that it can be converted to its best use: from warehouses to office buildings and from closed down factories to apartment buildings. But such transactions face many barriers in Mumbai. In particular they are as follows:

The Urban Land Ceilings Act (ULCRA), 1976, which Maharashtra is yet to repeal, allows the government to buy vacant land in excess of 500 square metres at a throw away price. This prevents the owners of such land from putting it on the market in the first place.

Land owned by public entities cannot be easily sold at market prices. In the suburbia, conversion of agricultural land into land usable for alternative purposes is also difficult.

Rent control laws vastly favour the tenants. In many cases, inflation has been driving the real value of rents to near zero. The tenant is even able to transfer his unit to children upon death or collect a vast sum in pagdi if it is transferred to another tenant. This eliminates any incentive the landlord has for even minor repairs. With the majority of the buildings accounted for by residential buildings under rent control, there has been virtually no land and building development in half of Mumbai in the last 50 years.

Legal status of the ownership titles in India is always in question. An individual owns a property only so long as he has its possession and his ownership of it is not challenged. Once challenged, the legal battle for the ownership may extend into decades.

The land shortage translates into insufficient land to build schools, hospitals, roads, railroads and water and sanitation systems. High land prices also mean high prices of many personal and domestic services. If Mumbai is to turn into a world-class city, it will have to overcome various political obstacles and raise permitted FSI uniformly to something close to 10 in the CBD and five or less elsewhere. It will also have to repeal the CZR and ULCRA.

But these measures will not yield adequate return without an end to the rent control. While the control may be ended gradually in a phased manner to minimize the pain of adjustment for the tenants, it is essential to restore the owner’s incentive to maintain and develop the buildings.

Concurrently with these measures, Municipal Corporation of Greater Mumbai must introduce a property tax to relax the severe revenue constraint it currently faces. Using these revenues, it can then seriously begin to build the city’s infrastructure including bridges and tunnel to connect the peninsula to the mainland. In return for raising the FSI, it can also claim additional land from owners for widening roads as the city is rebuilt.

It is of utmost importance that the municipal corporation adopts a well considered FSI policy to build a Mumbai for tomorrow. Its current approach of granting a higher FSI on an ad hoc basis only leads to haphazard development of the city. Even the much-advertised Dharavi redevelopment project is building for yesterday rather than tomorrow. It has been permitted an FSI of four for slum houses, 3.1 for Municipal and government land and 1.3 for private land. Given the proximity of Dharavi to the central business district, a much higher and approximately uniform FSI is warranted.

Intellectuals in India have been vigorously debating how to turn Mumbai into a Global Financial Centre by 2020. But they need to understand that this ambition is hollow if we cannot turn Mumbai into a global city. The governmemt of India sponsored report on this subject, issued on April 2, 2007, acknowledges the importance of urban infrastructure (chapter 14) but shows little appreciation of the depth of the problem the city faces.

(The author is a professor at Columbia University)

Economic Times August 27 2007

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