According to the 2011 Population Census data, urban India grew by 90 million people in the previous decade. During this period, 2774 new towns were born with over 90% of the new towns belonging to the category of census towns. Census towns are defined as places that satisfy the following three criteria:

1. a minimum population of 5,000;
2. at least 75% of the male main working population engaged in non-agricultural pursuits; and
3. a density of population of at least 400 per sq. km.

An estimated one-third of these new towns are located in close proximity to India's large cities (in a 50 km neighbourhood of million-plus cities). These suburbs occupying just 1% of India's land area provide about 18% of the country's employment. These statistics provide staggering evidence of India's rapid suburbanization in the previous decade. Places situated on the edge of India's cities like Sriperambudur near Chennai, Noida and Gurgaon near Delhi, and Raigarh near Mumbai have witnessed rapid growth.

A World Bank report titled 'Urbanization beyond Municipal Boundaries' investigates the cause of this phenomenon characterising India's urbanisation.

The report presents evidence of the stagnation of India's metropolitan cores. As the figure below shows, the metropolitan cores [includes an area with a radius of 10 km centered on the main metropolis. Suburban towns include urban areas 10 to 50 km from the metropolitan core, and suburban villages include rural areas in the same vicinity] of India's seven largest cities (Mumbai, Delhi, Bangalore, Kolkata, Chennai, Hyderabad, and Ahmedabad.) saw a decline in employment over 1998-2005 while the peripheral towns and villages witnessed rapid growth in high-technology manufacturing, real estate and other manufacturing sectors.

While suburbanisation is a common phenomenon in most urbanising countries, what makes India's predicament particularly worrying is that it is occurring at a relatively early stage of India's urban development.

The report outlines two fundamental causes for this development:

1. Weak institutional foundations for land valuation and transactions

The report argues that "India lacks many of the necessary institutions, such as a transparent system to convert land use, a clear definition of property rights, a robust system of land and property valuation, and a strong judicial system for addressing public concerns to facilitate land markets, land transactions, and land use changes." For example, India does not have a robust system to independently and reliably arrive at land valuations. Historically high stamp duties have created incentives to under-report the value of land and property.

Rapid urbanisation in recent years has created increased pressure on land in urban cores and combined with a weak institutional framework governing the valuation, transaction and acquisition of land, this has resulted in a distortion of the pace and shape of urban expansion.

2. Stringent regulation on land use

Indian cities have placed stringent caps on the density of cities through low FSI (Floor Space Index) regulations. The report argues that such regulations drive urban expansion towards the periphery of existing urban areas and encourages sprawl. For example, it is estimated that "FSI-induced sprawl" in Bangalore creates welfare losses of 2-4 per cent through increased commuting costs. Further, Indian cities impose blanket FSI norms across the city as opposed to international practices in cities like New York, Singapore that favour granularity or local variation in FSI norms.

The suburbanisation of Indian cities is creating new challenges for Indian cities. The report notes two challenges in particular:

1. Wide spatial disparity in access to basic services

The report reveals that there are wide core-periphery differentials in accessing services. For example, in India's seven largest cities, 93% of households living in core metropolitan areas have access to drainage. This proportion falls to 70% at a distance of 5km from the core. In cities like Bangalore, other utilities like access to piped water are largely concentrated in the urban core.

2. Transportation and movement of freight

Rapid growth of individual modes of transport, low ridership of public transport services, high costs of public transport (refer figure below) and slow commuting speeds have combined to create an exigent transportation challenge in Indian cities. Further, there is evidence that businesses located in peripheries are finding it increasingly difficult to access local and regional markets. Freight rates between metropolitan cores and peripheries in India are Rs. 5.2 per ton-km, twice the national average and five times the cost in United States.

Urban Reform

The report outlines three priority areas that warrant immediate attention.

First, there is an urgent need to reform the land valuation process in India. As the report argues, "land valuation is an integral part of land transactions and local revenue generation, because land values form the basis of property taxes, land sales, and leases." We have written previously on the importance of land as a tool for urban infrastructure financing. India requires robust institutional mechanism to govern land use conversion and land valuation.

Second, the efforts to leverage the potential of land markets as a financing tool needs to be complemented by an integrated urban planning process. The report notes how cities like Sao Paulo have used FSI limits as an effective urban planning/density management and infrastructure financing mechanism (For a detailed look at how Latin American cities have effectively used land as a tool for financing and urban planning, see our post here). Indian cities also need to improve connectivity between metropolitan cores and peripheries to ensure ease of mobility for individuals and business.

Third and perhaps most importantly, India needs to resolve the question of who is responsible for urban planning and reforms in a federal system where the multiple jurisdictions of national, state and urban local bodies overlap. As noted previously in this blog, the lack of financial autonomy of India's ULBs, and their over-reliance on upper tiers of governments are stifling our cities from unlocking their true potential.

By Vishnu Prasad, IFMR Finance Foundation