Buying land for India’s smart cities

Mint Opinion Page article with Mr Kaushik Dutta
Sept 20, 2014

The govt and its agencies will need huge tracks of land for housing and office complexes, civic and social infrastructure, manufacturing and other economic activities 

Prasanna Mohanty |  Kaushik Dutta

India is very rapidly urbanising and the pressure on its physical and social infrastructure is palpable. Urban population has increased from 285 million in 2001 to 377.1 million in 2011, forming 31.16% of the total. According to a 2014 UN report, the number may go up to 814 million by 2050, contributing the maximum to the world’s urban population, surpassing even China. When that happens, half of India’s population will be living in urban areas. 

Most Indian cities haven’t had the structural changes to accommodate such a large influx in decades, giving rise to conflicts and strife. How will they handle the additional pressure? Or will most of India’s urban space simply turn into slums? There is a real scare. Even a cursory look at the 2011 Census data presents a grim picture. Some of the top cities have a large population living in slums—41.3% in Mumbai, 29.6% in Kolkata, 28.5% in Chennai and 8.5% in Bangalore. The civic facilities have crumbled; power cuts, water shortages, flooding, traffic congestion etc. have become regular features of these cities. 

Realising this, the union government did announce a plan to develop 100 “Smart Cities” as satellites of the existing ones. The plans are at a formative stage now, but when the process gathers pace the first challenge that the government will face will be acquisition of land. The government and its agencies will need huge tracks of land for housing and office complexes, civic and social infrastructure, manufacturing and other economic activities. The present land acquisition scenario does not seem promising at all. Jharkhand is unable to secure or acquire land afresh to set up Indian Institute of Technology and Indian Institute of Management campuses. Chhattisgarh is battling for one-and-half decades to build its new capital, Naya Raipur. There are many such cases that show that land is holding up much of urban expansion and renewal. 

One of the root causes of land acquisition can be traced to the land pricing methodology. The archaic Land Acquisition Act of 1894, which caused widespread social conflicts in the past decades, may have been replaced with a new one—The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act of 2013 (LARR Act)—but the basic pricing mechanism remains the same. That is, the “circle rate”. 

A circle rate is the minimum rate below which a land or a house can’t be transacted. District administrations fix the rates on the basis of the average value obtained from the sale deeds. The outliers are disregarded; the average value represents the normal distribution and has been the basis of developing the circle rates. It is common knowledge that the sale deeds don’t reflect the market value as sellers often quote a lower price to save tax. The LARR Act recognises this and uses a multiplier—1 in urban areas and a number between 1 and 2 in rural areas—to the circle rates. It then adds a solatium of equal amount to work out the final acquisition price but doesn’t address the flaws inherent to the circle rates. 

In a recent study, Delhi-based think tank Thought Arbitrage Research Institute (TARI), in collaboration with the rural development ministry and German development agency GIZ, demonstrated what these flaws are. The study showed that the circle rates don’t reflect the true economic value of land. In fact, they grossly undervalue the land. The rates are revised from time to time and yet haven’t kept pace with inflation. Revisions do not follow any clear rationale nor are uniform across the states. Worse, the rates don’t take into account several economic and locational factors, such as size and productivity of land, level of industrialisation and connectivity of the area, and also the post-acquisition change in land use, which influence the value of land. 

Many developed countries have designed their pricing mechanism taking such factors into account. That we don’t hear about social conflicts there is a testimony to their success. Urban land has some unique characteristics. Several additional factors come into play, like land regulations—urban ceiling, rent control, land conversion and recycling, floor space area etc.—taxation & infrastructure investment, and impact the supply of and demand for land. When designed well and tuned in to the market, these factors make more space available and vice versa, thus, influencing the price of land. 

What is, therefore, needed is a complete rethink on the valuation of land in urban areas. Its unique characteristics, multiplicity of land use and an opportunity to generate far better returns on investments make urban land or land meant for urbanisation very distinct. Not only do we need a scientific and data-driven methodology, we need to factor in all these aspects in the valuation so that the fair price of the land to be acquired is discovered and the expectations of the land owners are met. 

Once that happens, social conflicts will end and there will be little to stop India’s march towards urbanisation. Prasanna Mohanty and Kaushik Dutta work for Thought Arbitrage Research Institute, a not for profit research think tank in areas of governance, sustainability and public policy.

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