Rethinking the 100 new cities plan

… the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

J M Keynes (1936)

An important mission of the public authorities in 2014 was to build 100 new cities that would also be smart. Over time, there was a shift to the Smart Cities Mission under which a hundred existing cities would become smart. Some exceptions aside, the idea of 100 new cities has not taken off. Is it possible to revive the original mission? Yes. What follows is a simplified explanation of what is otherwise a complex but interesting story.

India is a huge country. It has 28 states and eight Union Territories. So, the mission of 100 new and environment-friendly cities is actually not very ambitious, given that only a few new cities have come up since 1947 and given that the urban population in India still remains low at about 35 per cent (in China, it is 65 per cent). This needs to change. Urban real estate development, broadly defined, is a part and parcel of economic development and job creation. So, it is imperative that we have several new cities, and not just extension of existing cities, which can be a messy and costly affair.

It is interesting that very little land is needed to build new cities. Consider some data. The top 10 most populous cities occupy only about 0.2 per cent of the national land mass (Prashant Das, et al, 2019). Even urban areas as a whole occupy 4 per cent of the land base in India (Renuka Ramnath, 2017).

It is true that we do need to worry about the Land Acquisition Act, 2013, that makes acquisition difficult and costly. It is also true that an attempt to amend the 2013 Act was made but it failed. However, there is still a way out.

The 2013 Act had not come out of the blue; it was the culmination of the long-standing disparity between the prices of rural and urban land. The price of rural land had been very low relative to the price of urban land even though it is rural land that is acquired for urbanisation. This implies that the root cause of the 2013 Act lies in the high price of urban land! This brings us to the other important and different part of the whole story.

Though the licence-permit-quota Raj was abolished in the manufacturing sector in 1991, a variant of this Raj has remained in the urban real estate sector. Relatedly, the government has neither provided nor enabled the private sector to provide infrastructure for the much-needed additional real estate development on a large scale. This has kept supply limited relative to the demand, which has, in turn, kept the market price of urban real estate high. The way out now is to phase out the licence-permit-quota Raj in real estate development. This can lead to an expansion of supply and, therefore, a reduction in the price of urban real estate. This can, in turn, provide the justification for an amendment of the 2013 Act, which can pave the way for easier and economical acquisition of rural land.

Abolishing a variant of the licence-permit-quota Raj in the real estate sector is not just about expanding supply in the existing cities and their extensions. An important part of it is, in fact, about gradually expanding supply in 100 new cities. Now, besides the difficulty in acquiring land, an important reason why the mission of 100 new cities could not take off is that the government does not have the funds for development, or the planning and the implementation machinery. But these are not necessary.

The government needs to have an appropriate long-term policy framework that can enable and incentivise the participation of big private real estate companies in making the mission of 100 new cities real. These companies can profitably conceive, plan, raise resources, construct, carry out the marketing, and basically expand supply within the policy parameters laid down by the government in public interest (think of, mutatis mutandis, the development of much of Gurugram).

It is true that in the last seven-eight years, there has been a build-up of unsold inventory of apartments in several cities. This may suggest that we have inadequate demand, in which case any massive expansion of supply may seem irrelevant. However, the so-called inadequate demand is at market prices that are very high relative to the fundamental values. At substantially lower prices, we have massive demand. And, such lower prices are possible over time with the policies suggested above.

To conclude, the original idea of 100 new cities is a good one but the basic approach needs to change substantially.    

The writer is visiting faculty at the Indian Statistical Institute, Delhi Centre