To Provide Homes For Everyone, Government Should Incentivise Private Development: Nirvikar Singh

Nirvikar Singh teaches economics at the University of California, Santa Cruz, and has been an advisor to several startups in the Silicon Valley. One of the most talented economists of Indian origin, Singh's areas of research include information technology, electronic commerce and economic reforms in India. In an exclusive interview to PropGuide, he discusses the Indian government's plans for the infrastructure and real estate sector in India and proposes an alternate plan for developing the low cost residential projects.

Key excerpts:

PropGuide: The Indian government wants everyone to have a home by 2022. What should the government do?

Nirvikar Singh: The government should give incentives to private developers to provide homes at the lower end of the income spectrum including all the associated infrastructure. I wish someone would estimate the overall cost and fiscal requirements for such projects and suggest appropriate designs. These designs will vary tremendously by region, depending on the climate. Energy efficiency also needs to be considered in new designs. There is not much real thinking going into operationalising the slogans and schemes as yet. But, it is not clear that the government has the fiscal capacity to build homes for everyone. Presumably, the government plans to build homes for the urban poor and working classes. Certainly, the government needs to focus on the associated infrastructure including roads, water supply, electricity and sanitation. But, even that will be a challenge.

PropGuide: Why do you think that greater foreign investment in infrastructure and the mission to build homes for everyone would complement each other?

Nirvikar Singh: Internationally, there is great technical knowhow in designing the residential projects and infrastructure. With foreign investment, India will be able to tap into such expertise. There will be greater competition. Now, only a few large domestic players bid for residential projects. There is more of a danger of collusion. Home buyers do not get the best deal possible. There are complications at every stage like bidding for the projects, project selection and actual implementation. India should be open to foreign direct investment (FDI) because the government or the corporate sector in India does not have enough funds to build infrastructure.

PropGuide: What are the major flaws in India's land use policy?

Nirvikar Singh: In India, land ownership and titles are not well-documented. Land markets are imperfect with very high transaction costs, including those imposed by the government. There is a tendency to neglect the externalities associated with the development of the land. These externalities include the costs a developer imposes on existing power, roads, water supply and sewage infrastructure. Taxation is inadequate (especially property tax) to cover maintenance of the necessary infrastructure. India's land use policy is completely dysfunctional.

PropGuide: But the government can raise money. The Delhi Metro wants to offer developers a higher floor space index (FSI) for devoting a fraction of their projects to low cost residential development.

Nirvikar Singh: Yes. In principle, the government can allow high density building near metro corridors and use the money for low cost housing. But, there is substantial corruption in such land deals in India. Developers make great profits. There are luxury projects being built near where I live in Delhi which impose uncompensated costs on the existing government-built infrastructure. 

PropGuide: Please give me an example.

Nirvikar Singh: Traffic congestion, for example. Some land near where I live in Delhi was earlier earmarked for public use, like public parks. But, now developers are building luxury housing projects there. The government allows the builders to build residential projects for high income people, but not enough residential projects for the low income people are being built. The government is virtually giving a free pass to many developers. In the US, developers are expected to build high quality infrastructure to go with the luxury residential projects. This includes ancillary roads, water and sanitation infrastructure and electricity access.

PropGuide: The cost of building infrastructure is often much lower than the value of the land it unlocks.

Nirvikar Singh: Exactly. So, the government should have a more rational strategy. If the government does not under-price the land, the revenues land deals generate can be ploughed into tackling the externalities created by the private development. Developers can provide the necessary underground parking so that there is no need for extra street parking. But the traffic in and out of residential developments is now channelled into main roads which are already congested.

PropGuide: Should the government charge for driving through roads?

Nirvikar Singh: Yes, in some cases. But, having efficient tolls or congestion pricing for urban driving is going to take a long time to design and implement. And you cannot do that for a neighbourhood road. Roads themselves are in a bad shape, with potholes everywhere.

PropGuide: If the government allows high rise development along the metro corridors, that would solve road congestion to a degree because more people will use mass transit. Many cars and rickshaws wait near transit stations waiting to pick up people.

Nirvikar Singh: Yes. It is possible. But I do not think that is a huge advantage, since many people will still need to travel some distance to the metro stations. You can solve the parking problem with parking structures. But developers are not dealing with all the negative externalities they create for traffic, water, power and sanitation. The use of hundreds of extra air conditioners would impose costs on the electricity infrastructure for people who do not live in such projects.

PropGuide: But, in high-rises, many people would share the air conditioners?

Nirvikar Singh: Yes. With density we would have economies of scale. But you are still creating externalities for people who do not live in that development. The problem is ultimately in the supply of electric power.

PropGuide: Much of the real estate Indian railways own is not properly developed. But, the government wants to redevelop transit stations. The Singapore Metro makes huge revenues from stalls. Indian railways can do this too.

Nirvikar Singh: If done in the right manner, Yes. The Nehru Place metro station in Delhi has done a good job. But in the Lajpat Nagar metro station, there isn't any land fit to be developed. It depends. You know, in general, land use and urban planning in India is very poor. Much of this has to do with the corruption in the process. But, some of this has to do with expertise. Of these two, the political problem is more difficult to solve.

PropGuide: An interesting argument is that there is no shortage of land in India. But, there is a shortage of urban land. If the government allows metro and railway lines to extend to every part of the country, the shortage of urban land would disappear. Metro lines do not extend to many parts of Noida and Gurgaon.

Nirvikar Singh: Yes. If there is a better transportation network, that would allow many people to live far away from the city center. Transportation networks in large western cities are very large and extensive. That would be great for Indian cities.

PropGuide: Thomas Sowell said that the third world cities are crowded because traveling to suburbs is costlier that living in the inner city.

Nirvikar Singh: It is probably more complicated than that. It depends on how the infrastructure is being developed. Many parts of Delhi are very crowded because the infrastructure is developed very poorly. The land is developed very poorly. Part of the problem is centralisation. Many decisions should be made at the city level rather than at the state or national level, as currently happens. There is so much that can be done today, just by paying attention to the simple economics and basic principles of urban planning.