Update India’s reform agenda: Freeing up urban land should be treated as an economic imperative

As states begin to operationalize the new codes, there is optimism that simpler rules will encourage the formation of new firms, investment and formalization.

As these changes take effect, a parallel and equally consequential part of our reform agenda remains untouched: deregulation of India’s urban planning and land-use regulations that are just as archaic and distortionary as our labour laws were.

Like our old labour laws, land regulations raise business costs invisibly but significantly, incentivize informality and inhibit scale. Unlike capital and labour, which can be optimized to drive productivity, land is a finite resource that cannot be substituted.

When neighbourhoods cannot add housing, cities cannot expand mass public transport and peri-urban growth is unplanned, productivity and affordability suffer. If labour reform is expected to spur job creation, planning reforms must unlock physical space for growth.

What does the failure of spatial regulation look like on the ground? Satellite imagery offers a picture of our urbanization patterns. Cities have long outgrown their municipal boundaries—as thriving cities do.

As economic activity spills into surrounding rural areas, built-up land expands in haphazard ways, with irregular plot subdivisions and almost no land secured for arterial roads, public use or mass transit.

The actual ‘economic unit’ in which people live and work exceeds the administrative unit for planning and governance. While statutory development plans are meant to guide orderly urban expansion, they are often delayed, far too prescriptive and ultimately unenforceable.

A second mismatch is between how agglomeration works and our planning system operates. India’s industrial growth is clustered in regions that span district and state boundaries.

This is a globally familiar pattern. According to the China Integrated City Index, by 2022, 19 megalopolises contributed 88% of GDP and housed 82% of China’s population; the three largest—the Yangtze and Pearl River Deltas and the Beijing-Tianjin-Hebei region—contributed 36.2% of GDP with 23.5% of the population.

Similar trends are visible in the US, where Silicon Valley, the Boston-Cambridge corridor and New York region account for a large share of GDP. India too has economic clusters, like the Mumbai-Pune-Nashik corridor and the Apple ecosystem in Tamil Nadu’s Hosur-Bangalore belt.

Yet, with few exceptions, metropolitan and regional planning is absent, fragmenting labour markets and raising the cost of supply chains and logistics.

A third pressure point is rising demand for space within cities as firms and households multiply. Accommodating this demand requires the liberalization of floor-space-index rules, together with improvements in mass transit systems and public spaces, particularly streets.

Done correctly, densification enables compact walk-to-work urban zones, which improves productivity and affordability while reducing carbon emissions.

Indian cities, however, oscillate between two failures; they either resist densification, thereby increasing costs and the urban sprawl, or allow it without requisite investments in streets and other public amenities, leading to congestion.

An improved public realm should be a crucial aspect of our reform agenda. Global evidence shows well-functioning cities use 60% of their land for buildings and 40% for streets, parks and shared infrastructure.

Bimal Patel’s research shows Indian cities use land very inefficiently, with only a quarter of it under buildings; another quarter, often less, is occupied by streets and 45-55% wasted in ‘setbacks’ (mandatory construction distances from streets etc), private spaces and compounds.

Combined with one of the most restrictive floor-space index limits globally, this leaves scarce urban land underutilized.

Our outdated planning regime manifests itself in high prices and limited mobility. The Centre for Social and Economic Progress calculates a price-to-income ratio of 11 for formal-sector housing in India, while the US, Australia and Germany have figures of 3.6, 7.6 and 9, respectively.

As Artha Global’s own work on supply constraints to affordable housing shows, the reasons are often structural, including constrained land supply.

In 2011, our urban housing shortage of 11 million units roughly matched the total vacant urban units, partly on account of weak rental policies, but often because these units were too far from workplaces and transit points.

While large businesses internalize costs through self-contained campuses—hardly an ideal solution—smaller firms need better land markets so that workers can live and commute within reasonable limits.

Change is possible. China and South Korea, for example, invested in regional planning to identify growth hotspots and secure land as well as transport corridors in advance. Greater Tokyo’s well-managed densification means that 90% of its 37 million population lives within 20 minutes of a transit station.

For India’s newly unshackled firms to grow, system-level reform and deregulation of planning is vital. We must enable orderly urban expansion, greater densification and productive regional economies.

This is not a niche urban agenda; it sits squarely at the heart of productivity, inclusion and sustained economic growth.

The authors are, respectively, CEO (India), Artha Global, and fellow, Harvard University.