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Present Tense. Future Smart?

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Urban India is on the move.  It is estimated that around 30 rural dwellers relocate to cities every minute. A McKinsey Global Institute (MGI) study released in 2011 predicted that the population in Indian cities will go from 340 million in 2008 to 590 million by 2030, accounting for 40 per cent of India’s total population. In 2011, the Union Ministry of Housing and Urban Poverty Alleviation estimated the shortage of houses in the country at 24.7 million. Monitor Deloitte, a consultancy specifically working on the private affordable housing segment, indicates that the realistic and active demand from potential buyers of homes is a staggering 15.1 million.

With India’s rapid urbanisation, probably the fastest in the world after China, ‘homelessness’ is only going to increase. The population of slum dwellers in the country has shot up from 52.37 million in 2001 to 65.5 million in 2011, housing and poverty alleviation minister M. Venkaiah Naidu told the Lok Sabha recently. Maharashtra topped the list with a slum population of over 11.8 million.

Aware of the looming crisis, states have been pushing for mass-housing schemes at affordable prices. The largest-ever housing scheme by the Delhi Development Authority (DDA), which opened for applications recently, will have over 26,000 flats — mostly one-room apartments, priced at around Rs 15 lakh — spread over Rohini, Narela and Dwarka. On the other hand, the Mumbai Metropolitan Region Development Authority (MMRDA), which experimented with rental housing, has had little success. The 3,000 flats in Virar that were developed as rental stock will now be sold as low-income homes.
THAT SINKING FEELING: To improve the lot of city dwellers, drainage and sewage infrastructure will need attention (Photograph by Umesh Goswami)
At the central level, the government has done precious little to address the situation. Schemes like the Rajiv Awas Yojana and the proposed regulation Bill, aimed at protecting consumers from rapacious builders, have been non-starters. The annual budgets of the previous UPA government committed piddling funds and very little perspective. In this context, the NDA government’s recent budget — comprising a slew of measures intended to generate investments for the housing industry and address the problems of urbanisation — was a welcome change.

To spur investment in construction, finance minister Arun Jaitley’s budget has reduced the built-up area threshold from 50,000 sq. metres to 20,000 sq. metres and the minimum investment limit from $10 million to $5 million for foreign direct investments (FDI). He has also legalised Real Estate Investment Trusts (REITs), which will be a significant source of funding for builders. Additionally, the tax exemption on interest on home loans has been raised from Rs 1.5 lakh to Rs 2 lakh.
He has also alloted  a sum of Rs 7,060 crore to develop 100 ‘smart’ cities with modern connectivity, education and employment opportunities. But, will it be enough?

A Hundred Smart Cities
The existing cities are splitting at the seams; layer upon layer has been built without a plan to accommodate a galloping population. The constant migration to cities has put energy, transportation and housing resources under strain, so much so that life in a city today is a nightmare. To bring method to this madness, the government and planners are working on creating new cities and turning existing ones into satellite cities.

It is in this context that analysts have come up with the concept of ‘smart’ cities. There is, however, no clear definition. Jaitley too did not provide any in his budget speech. Broadly speaking, a smart city is one with good connectivity, both in terms of physical transportation as well as digital. The cities should have amenities that make life comfortable and less stressful for urban dwellers. Business consultancy Frost & Sullivan, having studied the trend of smart cities internationally, identified eight key factors that define a smart city: smart governance, smart energy, smart buildings, smart mobility, smart infrastructure, smart technology, smart healthcare and smart citizens. A city has to qualify at least on five out of eight parameters to be declared ‘smart’; those qualifying on just a few can only be called ‘eco-friendly’ cities.

Frost & Sullivan expects around 26 global cites to meet these rigorous ‘smart’ norms by 2025. Of these, 50 per cent will be in North America and Europe. Amsterdam, for one, has been ahead in implementing smart and intelligent systems, executing projects in energy and mobility and good governance. The consultancy estimates the potential of  the smart city market globally at $1.5 trillion.

Back home, the NDA’s plan for 100 ‘smart’ cities is a continuation of the Gujarat discourse — under which  24 new ‘smart’ cities, most of them along the Delhi-Mumbai Industrial Corridor (DMIC), were planned —initiated by then chief minister Narendra Modi. However, when and how the funds will be raised to develop these 100 cities has been left to conjecture. The outlay of Rs 7,060 crore, barely $1.15 billion, may not be even be sufficient for the planning process.

The satellite cities project too has been plodding along for some time now. The Mumbai Metropolitan Region, a 130-km multi-nodal corridor running in a semicircular arc from Virar in north Mumbai to Alibaug in the south, is said to have satellite cities in the Vasai-Virar region, Kalyan-Bhiwandi, Panvel and Uran areas. High-speed rail and road connectivity is also being planned along this arc. If  these plans turn into reality, Mumbai can hope to see a major decongestion process as these new townships become alternative settlement magnets for the migrants.

“Land for the corridor has been identified, and the acquisition process has begun; but it is a long way from implementation,” concedes U.P.S. Madan, the MMRDA commissioner handling the project.
FOR A SMOOTHER RIDE: To create smart cities, the government will have to spend more on transport options such as the monorail (Photographs by Subhabrata Das)

We are indeed a long way from smart cities. For instance, a new airport planned at Navi Mumbai — a crucial link in the chain that will herald Mumbai’s progress — was embroiled in environmental disputes for five years before crossing the hurdle. But for the past two years, the state government has been unable to acquire land for the project in the face of high demands for compensation. A final package — offering 22.5 per cent of developed land in exchange for the farm land acquired for the airport — has been hammered out recently, but it remains to be seen whether fresh glitches emerge. Meanwhile, there is no new airport on the horizon.

Similarly, nothing happened to the small village of Dholera that was declared a ‘smart’ city site by Modi. Planned as a 903 sq. km layout, it was billed to be twice the size of Mumbai. It even found mention in former finance minister P. Chidambaram’s budget speech last year. After years of effort, Dholera remains the village it always was.

In the current context of land acquisition laws, and without a consensus on the need for rapid urban expansion, the call for 100 ‘smart’ cities will remain little more than a slogan.

Housing For All
One of the keys to building good cities is providing homes. The finance minister in his budget speech and the NDA government in repeated pronouncements have committed to housing for all by 2022. While rural folk are not the best housed, over the years they have been able to find do-it-yourself answers to shelter. In the urban swathes land comes at a huge premium, thereby making the problem of shelter acute. Housing for all by 2022 is obviously a tough call.

The problem is not lack of demand. There is a massive shortage of 24.7 million homes. The problem is also not lack of supply. Between Mumbai and the National Capital Region (NCR), the inventory stands at over 4 million sq. ft of residential space. The real problem is that these homes are unaffordable.

In fact, there is runaway demand at affordable prices. The Maharashtra Housing and Area Development Authority (Mhada) in Mumbai sells 5,000 homes priced between Rs 15 and Rs 50 lakh every year through a lottery system. To illustrate the kind of demand these homes generate, sample this: the housing body received 87,647 applications for 1,244 houses put on the block in June 2013. For a single one-bedroom flat, priced at Rs 30 lakh, at Pratiksha Nagar in the middle-income group, Mhada received 1,500 applications!

But when the same 500 sq. ft flats are priced at Rs 1 crore by private builders, the demand evaporates.

The other problem is that the private sector does not construct enough homes in the mass, affordable segment as the margin for these products is thin and marketing costs high.  Ashish Karamchandani, CEO of Deloitte Monitor, estimates that over the last decade only 78,000 units were sold in this budget category that has a potential demand of Rs 9 lakh crore!

There is no robust data on how much government housing bodies are doing in this area; but it is nowhere near what needs to be done. DDA, which is serving the NCR, is among the largest public sector players in mass affordable housing. It has 44 ongoing schemes, currently open for bookings. The Bangalore Development Authority follows a do-it-yourself model, selling land in developed layouts and leaving house-building to the land buyer.  It claims to have developed 62 layouts and made about 2 lakh site allotments since 1976. In Mumbai, MHADA has been averaging 5,000 budget homes annually, whereas the demand is ripe for unloading 100,000 every year.

In the post-liberalisation phase, in 2005, the central government redefined its housing policy, recasting itself in the role of  ‘facilitator’ from that of a ‘builder’ of homes. According to the policy, the government would provide land and other infrastructure, and leave construction and marketing to private developers. It hasn’t,  however, worked out well as builders prefer operating in more lucrative segments such as middle-income and luxury.  And, they refuse to  drop prices despite a huge glut of housing stock.

The Issue Of Land
Prominent Mumbai-based builder and promoter of the ‘Rustomjee’ brand, Boman Irani, says the flexibility for builders to drop prices is minimal due to “high cost of land, increasing cost of building infrastructure, construction material and permissions”.

He claims 38 per cent of all capital investment in a project goes to government taxes, with last-mile taxes — service tax, stamp duty and labour cess — accounting for as much as 11 per cent. “Cut stamp duty on homes from 5 per cent to 1 per cent and ensure all approvals in three months, and we can drop prices by 25 per cent,” says Irani, who is also vice-president of the Maharashtra Chambers of Housing Industry (MCHI).

In this pack of cards, land is the ace. It is not only the most expensive but most elusive too. Anecdotal evidence collected from builders shows that in metropolitan areas, the cost of land makes up about 70 to 80 per cent of the total project cost, while in tier-II and tier-III cities, it is in the range of 40-50 per cent. Such a high fixed cost doesn’t allow builders to drop prices of apartments.

On a larger plane, land acquisition represents a huge challenge for the government or any development authority building townships. The Land Acquisition Act 1894, which was in force until last year, was challenged by farmers and landholders for its draconian provisions of eviction  in case of acquisition for public purpose under the ‘urgency’ clause and the pittance it allowed in the name of compensation. It did not help the government acquire land and, instead sparked social movements and unrest.

The old Act has now been replaced with the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, which has enhanced compensation to twice the market value for urban land and four times for rural land. It also made the consent of the landholder necessary for non-government projects.

The Jairam Ramesh-piloted Act has not, however, solved the crying need for land for rapid urban development. “It only freezes land acquisition through lengthy procedures and the imposition of high costs that render projects unviable,” says Chandrajit Banerji, director general, Confederation of Indian Industry (CII). Gujarat, in September 2009, enacted its own law with the Special Investment Region (SIR) Act, but that too has been unable to tackle bottlenecks in land acquisition.
There have been some brave attempts to cut through the clutter. The Ahmedabad Urban Development Authority, for instance, has institutionalised the voluntary surrender of land by owners on the outskirts of the city. The development board, after aggregating the land, putting up roads and water lines, etc., returns the balance land to the original owners. The land owners, sensing a sizeable appreciation in the value of the land  with urban layouts, are only too happy to participate. This process bypasses the land acquisition stage completely.

But even if the government has the land, where would it get money to build infrastructure? McKinsey Global Institute estimates India will have to spend $2.2 trillion on cities over the next 20 years, including $1.2 trillion in capital investments. Japan has been contributing to India’s urban infrastructure development through the Japan International Cooperation Agency, which lead-financed the Delhi Metro and the Delhi-Mumbai Dedicated Freight Corridor.

India also partnered with the US to launch the $10-billion dedicated Infrastructure Debt Fund in 2010. The private sector invested $225 billion or roughly 12 per cent of GDP, between 2007 and 2012, in urban infrastructure; but a steady stream of investors has exited in the last two years citing lack of returns and ever-changing norms of compliance. Meanwhile, the amount of money required to fix the urban landscape continues to rise.

Despite the bleak scenario, the march of urban India is irreversible. By 2030, India will have 68 cities with more than 1 million people, 13 cities with more than 4 million, and 6 mega-cities with 10 million or more, of which Delhi and Mumbai will be among the five largest in the world.

Cities are not about congestion and pollution alone. They are about high income levels and powering the growth of the country. MGI forecasts that cities will generate 70 per cent of new jobs created till 2030, 70 per cent of the GDP, and a four-fold growth in per capita incomes.

Smart cities are the only future we have. We have to invest in them in a big way.           
Twitter: @gurbir110

(This story was published in BW | Businessworld Issue Dated 08-09-2014)