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4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

GAME

KOTAK INSTITUTIONAL EQUITIES RESEARCH

ForewordIndia is no longer a land of villages. In a time when value

is generated through manufacturing and services, people

are moving to cities to realize their new-age aspirations.

The trend is determined and unstoppable, though erratic. It

promises to double the country’s urban cover by 2025. But

let us not worry or fret, it will still be less than 1% of the

country’s land cover.

The phenomenon demands an audacious approach to city

planning. We need an urban development policy that grows

India’s top cities into model cities whose spokes spawn

new hubs around them, all offering jobs and decent living

standards and services. We see tremendous common and

private good deriving from investment in urban infrastructure.

Consider the fact that our growing cities will consume 3-4X

the current capacity of steel and cement in the next decade.

This juggernaut will lap up 1.5 mn km of new roads and 35

bn sq. ft in new housing. None of this will work without the

wholehearted participation of all stakeholders, which means

that city residents will have to pay enough for their water,

gas, sewage, garbage and electricity to be assured of high

quality services.

Flexibility, scalability and quality are the gamechangers in

twenty-fi rst century urban planning.

GAME CHANGERCHANGER

ABOUT GAMECHANGER

GameChanger offers perspectives on ideas and developments that can potentially alter the course of the market.

The series explores and analyzes ideas, challenges conventional wisdom, plays advocate or devil's advocate depending on research conclusions. The factors that we identify as market changers could come from anywhere – from policy or politics, from people or ideas, from rain or from regulation. They could change the game for the better or for worse.

GameChanger research has implications for macro socio-economics and for long-term market behavior. Read it and stay ahead of the India story.

2 KOTAK INSTITUTIONAL EQUITIES RESEARCHKOTAK INSTITUTIONAL EQUITIES RESEARCH

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Contents

Elasticities: How Cities Grow: Hubs and Spokes ................................................................11

Organicities: Urban Development Models: Grow, Don't Sow ............................................25

Domesticities: Urban Housing: Build Scale, Build Stock .....................................................31

Velocities: Urban Transport: Good Public Infra Beats Private ..............................................41

Capacities: Urban Infrastructure: Build and Bill ..................................................................49

GameChangers: Flexibility, Scalability, Strong City Governments .......................................57

3KOTAK INSTITUTIONAL EQUITIES RESEARCH

GAME CHANGER

Growing cities

India’s urban map is growing inexorably, its dogged and demanding expansion taking town planners and

cartographers by surprise. The next leap in India’s urbanization will be defined by (1) services-led growth –

as against manufacturing, which grew some of the world’s large old cities, and (2) organic expansion – the

spread of existing city hubs into multiple suburbs that will then become hubs of commerce themselves; the

trend says more citification, but not necessarily more cities. We would define the key elements of a city as

(1) employment opportunities and (2) affordable and accessible housing, transport and basic utilities. The

prospects present exciting opportunities alongside daunting challenges. This report looks dispassionately at

both.

India’s urbanization will propel the next leg of growth

India’s steady urbanization has the potential to bring in investments of Rs120-150 tn over the course of

the next 11 years till FY2025E (see Exhibit 1). City expansions will call for a dramatic increase in (1) housing

stock, (2) transport infrastructure, and (3) utilities (like power and water). We estimate investment in these

segments at US$2-2.5 tn over the next 11 years to FY2025E, noting that India’s GDP in FY2014 was

US$1.9 tn. India will therefore need to invest between 8 and 10% of its GDP on developing its urban

infrastructure. For context, we note that India overall invested 34.7% of its GDP in FY2013.

Exhibit 1: India's urbanization highlights large investment opportunities

Estimates of investments required due to India's urbanization, March fiscal year-end, 2025E

Pricing PotentialDemand (Rs/sq. ft) market size Private or public

Real estate

Residential 35 bn sq. ft of new 1,000-1,500 Rs35-52 tn Mainly private investment; significant governmentproperty required intervention in bottom-of pyramid segment possible

Commercial and retail As for residential 1,000-1,500 Rs35-52 tn Private-sector spending

Potential investment in real estate Rs70-100 tn

Transport

Urban roads 1.4 mn kms and associated Rs25-30 mn/km. Rs35-42 tn Investments by local urban bodies, financed byinfrastructure (traffic signals, property tax, land auctions and perhaps user charges pavements, lighting)

Mass transit systems 63 cities with 1mn+ population, Rs2-3 bn/km. Rs5-8 tn Mainly public investment or PPP if the model stabilizes.about 40 kms of metros/city. We have not estimated investment in private two andInvestment in buses, BRTS and four wheelers and other intermediate transport, mono rails will complement in which the private sector will investinvestment in metros

Potential investment in transport Rs40-50 tn

Infrastructure

Power utilities Transmission and dsitrbution Rs1-3 tn Mainly public investment; user charges will need to fund infrastructure

Water Supply of clean water and Rs1-3 tn Mainly public investment; user charges will needclean-up of sewage to fund infrastructure

Potential investment in transport Rs2-4 tn

Total urbanization spend potential until FY2025E Rs120-150 tn

Total urbanization spend potential until FY2025E US$2-2.5 tn

Notes:(a) The pricing refers to current estimates; they do not take into account inflation over the next decade or so.(b) In real estate calculations, we do not take into account the price of land but only construction costs.

Source: Kotak Institutional Equities estimates


Our projections for India’s urbanization call for 2.5 bn tons of cement, 650 mn tons of steel and 4.6 mn

tons of paints over the next 11 years. To put this in perspective, installed capacities in these sectors as at

the end of FY2014 are: 369 mn tons of cement, 94.3 mn tons of steel and 2 mn tons of paints (see Exhibit

2). We would encourage you to look at these numbers to get a sense of the orders of magnitude involved,

rather than to get a very precise estimate of the industry sizes. The magnitude of investments required for

this scale-up in urban infrastructure – in terms of capital goods as well as services – is large enough to kick-

start India’s moribund capital cycle and trigger the next leg of economic growth.

Exhibit 2: India's urbanization can throw up very large investment opportunities

Estimates of investments required due to India's urbanization, March fiscal year-end, 2025E

Steel Cement Paint

Comments mn tons Comments mn tons Comments mn tonsC

Real estate

Residential 35 bn sq. ft of new 4.5 tons of steel 157.5 20 tons of cement 700.0 1.3 ton of paint 2.3property required required per required per required per 1,000 sq. ft 1,000 sq. ft 20,000 sq. ft

Commercial and retail Similar to residential 5.5 tons of steel 192.5 20 tons of cement 700.0 1.3 ton of paint 2.3 required per required per required per 1,000 sq. ft 1,000 sq. ft 20,000 sq. ft

Potential investment in real estate 350.0 1,400.0 4.6

Transport

Urban roads 1.4 mn kms and associated 200 tons of steel 280.0 800 tons of cement 1,120.0 NA NA infrastrcuture (traffic signals, required per km required per km footpaths, lighting)

Mass transit systems 63 cities with 1mn+ 10,000 tons of steel 25.2 2,000 tons of cement 5.0 NA NA populations expected, required per km required per km about 40 kms of metros per city. Investment in buses, BRTS, mono rail to complement investment in metros

Potential investment in transport 305.2 1,125.0 —

Total cumulative urbanization spend potential until FY2025E 655.2 2,525.0 4.6

Capacity of the relevant sectors (end-FY2014) 94.3 369.0 2.5

Source: Kotak Institutional Equities estimates


GAME CHANGER

Footing the bill

These investments will need to come from private and public sources. As Indians invest in improving their

own housing stock, they will demand better transport infrastructure and associated utilities. Over the past

two decades, India has experimented with public-private partnerships in developing infrastructure like roads,

metro trains, power and water. The success of these partnerships has been patchy at best given that the

state has been keen on shielding its citizens from paying the actual cost of delivery of an infrastructure project.

Cities and their governments will need to be inventive in raising resources to meet the aspirations of its

citizens. User charges, property taxes, land auctions will all need to play a critical and complementary

role in funding cities for their growth. Many commentators have pointed out to the idea of developing

the municipal bond market to augment the resources at the disposal of urban local bodies: we are more

circumspect on the development of this market given the currently still-born corporate bond market. As

Indian cities acquire more financial powers and local governance institutions, maybe a municipal bond

market will become meaningful: till such time, it will at best be a marginal resource base.

Growing cities: organic expansion the best way

As India re-imagines its urban landscape, we argue that it needs to focus on making its top-100 cities livable

rather than creating 100 new cities. Indian cities rank very poorly when compared to their international

counterparts (see Exhibit 3). The idea of ‘creating’ new cities belongs to the era of manufacturing-led growth,

something that has not been the case for India. Even if this evolves with the development of infrastructure

like the Delhi Mumbai Industrial Corridor (DMIC), which is expected to give a big push to manufacturing,

we believe that this will lead to the seeding of, at best, a handful of cities (seven planned currently).


Exhibit 3: Top Indian cities rank very low compared with their global peers

Ranks of cities according to various indices, August 2013

Spatially Adjusted Liveability Index EIU Liveability index

Hong Kong 1 10

Amsterdam 2 8

Osaka 3 3

Paris 4 5

Sydney 5 2

Stockholm 6 4

Berlin 7 7

Toronto 8 1

Munich 9 9

Tokyo 10 6

Rome 11 18

London 12 22

Madrid 13 15

Washington, DC 14 11

Chicago 15 12

New York 16 23

Los Angeles 17 17

San Francisco 18 21

Boston 19 16

Seoul 20 25

Singapore 22 20

Moscow 27 30

St Petersburg 28 29

Beijing 30 32

Shanghai 33 35

Shenzhen 34 37

Kuala Lumpur 37 34

Tianjin 38 33

Guangzhou 39 40

New Delhi 46 52

Dalian 47 39

Manila 48 47

Bangkok 49 46

Istanbul 51 49

Mumbai 52 53

Jakarta 56 56

Hanoi 57 57

Tashkent 58 54

Damascus 59 59

Ho Chi Minh City 60 60

Tehran 61 65

Phnom Penh 64 63

Karachi 65 67

Dhaka 68 70

Harare 70 69

Source: Economist Intelligence Unit, Kotak Institutional Equities


GAME CHANGER

India’s services-dominated economy will see its current pint-sized cities burgeoning into massive urban

sprawls. Consider Mumbai’s density, where 17.7 mn people live within an area of 546 sq. kms, while

Shanghai’s 22.7 mn citizens sprawl across 3,626 sq. kms, an area 6.5X larger than Mumbai. Tokyo, with

twice the population of Mumbai, is 15X larger - the world’s most populated city has 37.6 mn citizens

sprawled over 8,574 sq. kms (see Exhibit 4).

Exhibit 4: Indian cities are small and tightly packed

Estimates of population and land area of various cities, May 2014

Population Land area Density

Country City (mn) (sq. kms) (people/sq. km.)

Japan Tokyo-Yokohama 37.6 8,547 4,400

Indonesia Jakarta 30.0 3,108 9,600

India Delhi (NCR) 24.1 2,072 11,600

South Korea Seoul-Incheon 23.0 2,266 10,100

Philippines Manila 22.7 1,580 14,400

China Shanghai 22.7 3,626 6,200

Pakistan Karachi 21.6 945 22,800

US New York (NY-NJ-CT) 20.7 11,642 1,800

Mexico Mexico City 20.3 2,072 9,800

Brazil Sao Paulo 20.3 2,849 7,100

China Beijing 19.3 3,756 5,100

China Guangzhou-Foshan 18.3 3,432 5,300

India Mumbai 17.7 546 32,300

Japan Osaka-Kobe-Kyoto 17.2 3,212 5,400

Russia Moscow 15.9 4,662 3,400

US Los Angeles 15.3 6,299 2,400

Egypt Cairo 15.2 1,761 8,600

Thailand Bangkok 14.9 2,461 6,100

India Kolkata 14.9 1,204 12,400

Bangladesh Dhaka 14.8 337 44,000

Source: Demographia World Urban Areas May 2014 update, Kotak Institutional Equities

Even if India’s area under urbanization doubles in the next decade, it is important to note that it will still

account for a mere 0.6% of the country’s land area (more on this in the next chapter). This should belie

concerns that cities will overrun agricultural or forest land in India – fears that underpin many of the policy

constraints in urban expansion.

The pull of the city

As people move away from farming to seek work in manufacturing and services, the link with land as the

key factor of production becomes tenuous – making way for more densely populated regions.

A cost-benefit analysis of congregating in a city versus staying back in a rural area pits the private benefits

of large groups living in proximity against the public costs imposed by such congregation. Private benefits

would include the facility to work, to trade and to collaborate and compete for these goals while the

common costs would include congestion and pollution. A city continues to expand, according to theory, till

the benefits outweigh the costs.


Note that we tag the benefits of city living as private (i.e. benefits accruing to individual citizens of the

city) and costs as public (i.e. accruing to the society as a whole). For an individual in a rural area, it makes

personal sense to move to the city; however, for the city itself, the potential city-dweller must bring in more

value than he will cost the city. There comes a time when cities become simply too large to accommodate

growth; as their public services are capped, they become unattractive to live in.

Two factors can change this equation: (1) creation of adequate infrastructure helps reduce public costs (for

example better roads lead to lower congestion and better refuse management leads to lower pollution) and

(2) as communication and/or transport technology evolves, it changes the shape of the city. Infrastructure

and technology can significantly reduce the costs of living in a city, thereby enhancing the utility of staying

in one.

Pull 1: Mobility

Cities that latch on to the dominant employment trend benefit from it (think of IT for Bengaluru and

Hyderabad, for example). A city that stops producing new jobs or remains stuck in obsolete employment

structures stops attracting good talent. The exceptions to this are citizens who journey to a city to escape

even worse prospects in their rural hometowns (think Kolkata). Over the last seven years, urban India has

generated almost all the incremental employment opportunities. A city must be an effective employment

generator: the promise of a city has to be one of upward social mobility.

Employment creation: This is an outcome of a good business environment which allows for new

economic opportunities to be readily converted into business ventures, leading to job creation. Employment

creation depends on (1) an educated, skilled and employable workforce and (2) lower implicit and explicit

costs of doing business.

Pull 2: Affordability

The largest costs of staying in a city are shelter and associated infrastructure services, for example,

transport, power, water and sewage, power, education and health. To make a city livable, it is imperative

to keep these costs low. India has been trying to make its citizens pay for many of its utilities, a goal

stymied by a history of free services and the contemporary reality of populist politics. However, there are

encouraging signs of greater political will and support for the idea.

Keeping costs low for the citizens does not mean offering any of these infrastructure services for free,

which would only compromise the quality of the utility. Low-revenue-generating utilities typically

malfunction, compelling the poor to pay an even higher price for basic necessities. The rich survive by

subscribing to private infrastructure.


GAME CHANGER

� Housing: Indian cities typically follow a master plan approach - these take a 15-25 year view of a city

and planners envision growth and expansion to demarcate areas for various purposes. Unfortunately

for India, the planning process itself is long drawn and plans typically get finalized deep into the vision

period – for example, the 20-year Delhi master plan of 2001 (which was to update the 1980 master

plan) was finally approved and promulgated on August 1, 1990. Similarly, final touches are still being

given to the 2021 master plan for Delhi.

A key ingredient of housing cost is land. A rigid master plan makes it difficult to increase the availability

of land quickly during a plan period. Similarly, as cities expand in area (more in the next chapter), they

typically need to co-opt agricultural land. The process of converting agricultural land to non-agricultural

land (popularly called NA land) is rife with hurdles tied into corruption. Even as the city authorities need

to be concerned about the provision of basic facilities as the city expands (i.e. roads, hospitals, schools,

etc), surrounding area landowners should have some flexibility in deciding on how to use their land.

Opening up the land market and reviewing building strictures (height restrictions for one) can help

bring down the costs of city living considerably.

� Transport: Intra-city commute and freight movement are critically important for services-led urban

development. The intra-city movement of passengers and freight needs to be fast and cheap. There has

been significant emphasis on public transport globally and India needs to improve its public transport

quality and quantity so that the newly emerging consuming class does not necessarily see the need for

personal vehicles. India has invested a great deal on its many high quality inter-city roads but ironically,

intra-city transport systems (roads, public transport, rapid transit systems, etc.) are woefully inadequate.

� Water and sewage: Water services (both delivery of clear water and sewage disposal) are all but free

in India, leading to a collapse of urban utilities. It is not an uncommon sight across many cities (for

example, Mumbai) to see water tankers plying the streets to affluent housing societies as well as poor

localities, which simply do not have access to public water supplies. The populist approach to pricing

water fails the poor who pay a high price for this basic utility. Sewage disposal, that other insurer of

life and dignity, is not adequately priced. The breakdown in this service also hits the poor the most.

Poor sanitation takes a toll on health as well as employment, burdening the individual, industry and the

state.

� Power: Of late, many states have begun increasing the price of power with the implicit promise of

providing higher quality power (both in terms of voltages and also in terms of number of hours that

power will be available). Indian cities have large unmet needs for power even where electrification is

largely complete (estimates suggest that 94% of urban households have access to electricity). Many

labor-saving and modern devices (mixer-grinders, vacuum cleaners, washing machines, dishwashers,

refrigerators, air-conditioners, etc) are only now making their presence felt in Indian homes. Cities that

offer their citizens low-priced access to uninterrupted electricity can ensure greater productivity from

their citizenry.


� Health and education: It is difficult to classify health and education as a private or public good.

Clearly, the benefit of good health and good education accrue to the person concerned; however,

better education and health of its citizens creates a positive virtuous cycle for society as a whole. Indians

across the board – and especially so in urban India – have started meeting their health and education

needs through private means. This is a classic case of the private cost of public failure. Public services in

the field of education and health should be credible competitors to private players.

We do not include issues like security (the police system) and justice (the legal system) in the cost of living

in an urban area simply because they are necessary public goods which the state should be duty-bound to

provide both effectively and efficiently. We will look at some of these issues in detail in subsequent sections;

for now we turn our attention to sizing up Indian cities.


India is no longer a land of villages

Census 2011 put to rest the romantic idea that India lives in its villages. According to Census 2011, for the

first time in recorded Indian history, the population of urban India grew faster than that of India (see Exhibit

5). Importantly, this data does not factor in those census towns, which for all practical purposes are urban

but are not recognized as such by the state. As we look ahead in time, we expect that the rural population

will, in absolute terms, stagnate at the 833 mn mark and all the incremental growth in Indian population

will be urban (see Exhibit 6). A large portion of rural working-age persons will move to urban India (see

Exhibit 7), meaningfully changing the composition of rural India and shaping the new urban India. This is

not surprising since most of the employment creation in India over the last decade has been urban (see

Exhibit 8).

Exhibit 5: Urban population growth was higher than rural population growth for the first time

Population of India in rural and urban areas, census year-ends, March 1961-2011 (mn)

1961 1971 1981 1991 2001 2011

Population

Rural 360 439 507 622 742 833

Urban 79 109 157 215 286 377

Total 439 548 664 837 1,028 1,210

Change in population

Rural 78.8 68.0 115.0 120.0 91.0

Urban 30.2 48.3 58.0 70.4 91.2

Total 109.0 116.3 173.0 190.4 182.2

Source: Census of India, Registrar General of India, Kotak Institutional Equities

Exhibit 6: All incremental growth in population in India is expected to be urban

Estimated households and size of households in India, March fiscal year-ends, FY2011-25E

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Number of households (mn)

Rural 169 170 172 174 175 177 179 181 183 184 186 188 190 192 194

Urban 81 84 88 91 95 98 102 106 110 114 118 122 126 131 135

Grand total 249 254 260 265 270 275 281 287 292 298 304 310 316 323 329

% urban 32 33 34 34 35 36 36 37 38 38 39 39 40 41 41

People per household

Rural 4.9 4.9 4.8 4.8 4.7 4.7 4.7 4.6 4.6 4.5 4.5 4.4 4.4 4.3 4.3

Urban 4.7 4.6 4.6 4.5 4.5 4.4 4.4 4.3 4.3 4.3 4.2 4.2 4.1 4.1 4.1

Number of people (mn)

Rural 833 833 833 833 833 833 833 833 833 833 833 833 832 832 832

Urban 377 389 400 412 424 436 448 460 472 485 497 510 522 535 548

Grand total 1,211 1,222 1,233 1,245 1,257 1,269 1,281 1,293 1,305 1,317 1,330 1,342 1,355 1,368 1,381

% urban 31 32 32 33 34 34 35 36 36 37 37 38 39 39 40

Source: NSSO - 66th round, Census 2010, Kotak Institutional Equities estimates


GAME CHANGER

Exhibit 7: Working-age population typically moves to urban India

Distribution of population by age and location, calendar year-end, 2000 (%)

0

2

4

6

8

10

12

14

0 -

4

5 -

9

10 -

14

15 -

19

20 -

24

25 -

29

30 -

34

35 -

39

40 -

44

45 -

49

50 -

54

55 -

59

60 -

64

65 -

69

70 -

74

75 -

79

80 +

Urban Rural

Source: United Nations, Kotak Institutional Equities

Exhibit 8: Urban areas have created all the job opportunities over the past seven years

Labor force population (ps+ss) in NSSO 61st, 66th and 68th round surveys, June year-ends, 2005, 2010, 2012 (mn)

Rural Urban Rural+Urban

Male Female Person Male Female Person Male Female Person

NSS - 68th round: July 2011 to June 2012 239 104 342 113 29 141 351 132 484

NSS - 66th round: July 2009 to June 2010 236 106 342 103 24 127 338 130 469

Difference between 68th and 66th rounds 3 (3) 1 10 5 14 13 2 15

NSS - 61st round: July 2004 to June 2005 227 129 355 92 26 117 319 156 474

Difference between 68th and 61st rounds 9 (23) (13) 11 (2) 10 20 (26) (5)

Source: NSSO rounds, Kotak Institutional Equities estimates

The big driver of urbanization across the world has been people giving up their agricultural vocations for

more attractive prospects in manufacturing. This took place over multiple generations (indeed centuries)

in the West and happened more quickly with the East-Asian miracle economies (see Exhibit 9). India has

surprisingly seen little of both these phenomena. Even after a quarter of a century of liberalization of the

economy, around half the labor force in India is still associated with agriculture, but producing less than a

sixth of India’s GDP (see Exhibit 10).


Exhibit 9: Countries have taken generations to move people across sectors

Sector-wise split of the GDP of various countries over time (%)

1820 1870 1913 1950 1992

US

Agriculture 70 50 28 13 3

Industry 15 24 30 34 23

Services 15 26 43 54 74

Total 100 100 100 100 100

France

Agriculture 49 41 28 5

Industry 28 32 35 28

Services 23 27 37 67

Total 100 100 100 100

Germany


Industry 29 41 43 38

Services 22 24 35 59

Total 100 100 100 100

UK

Agriculture 38 23 12 5 2

Industry 33 42 44 45 26

Services 30 35 44 50 72

Total 100 100 100 100 100

Japan


Industry NA 18 23 35

Services NA 22 29 59

Total 100 100 100 100

Source: The Missing Middle, ICRIER Working Paper # 230, January 2009, CII-BCG report, Kotak Institutional Equities

Exhibit 10: Agriculture still employs almost half the population and contributes only a sixth of GDP

Break-up of GDP and employment, March fiscal year end, 2012 (%)

GDP Employment

Agriculture and allied activities 17 49

Manufacturing 14 13

Service sector 65 38

Other industries 4 1

Source: CSO, NSSO 68th round, Kotak Institutional Equities

India has been a reluctant urbanizer

India’s rate of urbanization has been very slow compared to most of the larger countries in the world (see

Exhibit 11). There are two important reasons for this: (1) a large part of India’s labor force has still not been

able to free itself from agriculture and (2) Indian rules do not recognize the extent of India’s urbanization.


GAME CHANGER

Exhibit 11: Four models of urbanization: India, China, South Korea and Germany

Historical and projected urban populations, calendar year-ends, 1950-2050E (%)

0

20

40

60

80

100

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

E

2020

E

2025

E

2030

E

2035

E

2040

E

2045

E

2050

E

India China Republic of Korea Germany

Source: United Nations, Kotak Institutional Equities estimates

India still employs a large number of people in agriculture because of the dearth of opportunities in

manufacturing. Over the past few years, the Indian government has demonstrated its keenness to make

manufacturing the backbone of growth. The National Manufacturing Policy aims to raise the share of

manufacturing to 25% of GDP by FY2025 from 14% in FY2014. Assuming that GDP growth averages 7%

over this period, this would imply a manufacturing growth rate of 12% CAGR. If indeed, this target were

realized, India could possibly spawn a few more new cities.

India’s urban population is considerably larger than official numbers indicate. This is simply because too

many Indian towns are officially classified as rural areas as their status has not been updated in official

records. To qualify as urban, a town must (1) be recognized as such by the government and have an

urban governance mechanism (municipality, corporation, etc.) and (2) satisfy three criteria: (a) a minimum

population of 5,000; (b) a density of over 400 people per sq. km. and (c) over75% of the male working

population should be engaged in non-agricultural pursuits.

Villages with over 5,000 residents (‘large villages’) accounted for only 9.6% of the rural population in 1961;

by 2001, they accounted for 21.8% of the rural population. Applying this rate of transition to the 2011

census (data for which is not yet available), we estimate that over 25% of the rural population now lives

in ‘large villages’ or ‘towns’. If such villages are labelled ‘urban’ (since they satisfy one of the three criteria

required), as much as 49% of India can be said to be ‘urbanized’, compared to 31% as reported in the

Census 2011 (see Exhibit 12).


Exhibit 12: About half of India may already be "urbanized"

Urbanization in India, census year-ends, March 1961-2011

1961 1971 1981 1991 2001 2011

Population (mn)

Rural 360 439 507 622 742 833

Urban 79 109 157 215 286 377

Total 439 548 664 837 1,028 1,210

Proportion (%)

Rural population to total population 82 80 76 74 72 69

- of which >5,000 population rural villages 10 13 15 18 22 25

Urban (A) 18 20 24 26 28 31

"New" urban population (mn)

Population of >5,000 population rural villages 35 55 78 113 161 211

"New" urban popualtion 114 164 236 329 447 588

"New" urban proportion (%) (B) 26 30 35 39 44 49

Under-reported urbanization proportion [(B)-(A)] 8 10 12 14 16 17

Source: Census of India, Registrar General of India, Kotak Institutional Equities estimates

Services-led growth: implications on space needs

India’s service-sector led growth means that India may not create as many new cities as countries that

relied on manufacturing. Manufacturing has two interesting and critical features that help in the growth of

new cities: (1) the knowledge of manufacturing has matured and standardized across the world leading to

lower spillover benefits from agglomerations (or bunching-up in one place) and (2) land is a critical input

in manufacturing and as more units and people start coming together, land begins to get expensive and

industries are compelled to look beyond city borders where they seed new clusters.

The services sector thrives where there is a large congregation of people in one place: people offer

services to each other. Given its nascent nature in human history, significant new changes (inventions,

developments, etc.) are taking place in the services sector and hence it helps if people associated with this

sector congregate. Services typically do not require as much land as manufacturing: a typical manufacturing

unit in India would be a discrete one-floor structure, while a high-rise building could house a clutch of

service businesses.

We see the impact of this clearly as we note the larger number of bigger cities that China has compared

to India – and the prognosis for the same (see Exhibit 13). If the current trajectory of services-led growth

continues, India would do well to focus on improving the lot of its current cities and their outgrowth and

managing them well.


GAME CHANGER

Exhibit 13: India's mode of urbanization is very different from that of China and the US

Size, class of urban settlement, India, percentage of urban population, 1955-2025E

1955 1965 1975 1985 1995 2005 2015E 2025E

Cumulative population in various types of cities (%)

India

10 mn or more — — — 5 15 15 17 21

5 to 10 mn 7 7 11 9 2 8 9 5

1 to 5 mn 13 17 14 12 15 15 17 20

500,000 to 1 mn 5 5 8 13 10 9 7 10

Fewer than 500,000 75 72 67 61 57 53 50 45

Total 100 100 100 100 100 100 100 100

China

10 mn or more — — — — 3 5 11 13

5 to 10 mn 7 5 4 5 4 9 8 13

1 to 5 mn 18 20 20 18 23 25 25 28

500,000 to 1 mn 10 11 14 11 9 14 16 17

Fewer than 500,000 65 65 63 66 61 47 39 29

Total 100 100 100 100 100 100 100 100

US

10 mn or more 11 11 10 14 14 13 17 17

5 to 10 mn 9 10 10 4 4 8 13 17

1 to 5 mn 18 25 29 31 35 33 30 31

500,000 to 1 mn 12 10 10 10 9 11 11 12

Fewer than 500,000 49 45 41 40 38 35 30 23

Total 100 100 100 100 100 100 100 100

Number of such cities

India

10 mn or more — — — 1 3 3 4 6

5 to 10 mn 1 1 2 2 1 4 5 3

1 to 5 mn 5 7 8 10 20 29 47 54

500,000 to 1 mn 5 7 17 34 34 43 49 75

Total 11 15 27 47 58 79 105 138

China

10 mn or more — — — — 1 2 6 7

5 to 10 mn 1 1 1 2 2 7 9 17

1 to 5 mn 9 13 15 23 45 67 97 139

500,000 to 1 mn 11 20 31 35 54 117 173 218

Total 21 34 47 60 102 193 285 381

US

10 mn or more 1 1 1 2 2 2 3 3

5 to 10 mn 2 2 2 1 1 3 6 8

1 to 5 mn 11 19 25 28 33 34 38 45

500,000 to 1 mn 19 21 23 25 28 35 41 54

Total 33 43 51 56 64 74 88 110

Source: United Nations, Kotak Institutional Equities


India’s urbanization will more probably lead to mega-urban regions. In this context, we note the NCR (the

National Capital Region) and the extended city of Mumbai have expanded in every direction so that they

could find or create land. We should expect to see cities start to coalesce towards each other (Indore-

Dewas, for example). If infrastructure like the Delhi-Mumbai Industrial Corridor spurs manufacturing

activities along its length, we may well see the phenomenon of the urban corridor develop. We note in

Exhibit 14 that, according to the projections made by the United Nations, by FY2025E five Indian cities will

feature in the top-25 cities in the world (in terms of population).

Exhibit 14: Five Indian cities will feature among the top-25 most populated cities by 2025E

Estimate of population by 2025 (mn)

Country City Population

Japan Tokyo 38.7

India Delhi 32.9

China Shanghai 28.4

India Mumbai 26.6

Mexico Mexico City 24.6

US New York-Newark 23.6

Brazil São Paulo 23.2

Bangladesh Dhaka 22.9

China Beijing 22.6

Pakistan Karachi 20.2

Nigeria Lagos 18.9

India Kolkata 18.7

Philippines Manila 16.3

US Los Angeles-Long Beach-Santa Ana 15.7

China Shenzhen 15.5

Argentina Buenos Aires 15.5

China Guangzhou, Guangdong 15.5

Turkey Istanbul 14.9

Egypt Cairo 14.7

Democratic Republic of the Congo Kinshasa 14.5

China Chongqing 13.6

Brazil Rio de Janeiro 13.6

India Bengaluru 13.2

Indonesia Jakarta 12.8

India Chennai 12.8

China Wuhan 12.7

Russian Federation Moscow 12.6

France Paris 12.2

Japan Osaka-Kobe 12.0

China Tianjin 11.9

Source: United Nations 2011, Kotak Institutional Equities estimates


GAME CHANGER

Growth of cities: RoW

The idea of a city brings to mind the cliché of the ‘concrete jungle’ with its implication of dense

congregations, high rises and congestion. This is in contrast to the notion of rural living with its visions of

vast fields, single-floor huts and single-storey buildings. As people leave rural lands for cities, it is critical to

understand how Indian cities will evolve. Many countries have been urbanizing steadily over the past 200

years, and there are lessons to be learned. (1) As more people come into cities, do cities typically become

more dense or do they start to expand outwards? (2) Could they actually expand outwards so much that

they decongest their old hubs? An understanding of these issues, their drivers and their projections can

help guide India in its urban planning.

Cities in the developing world are far more dense than those in the developed world. The order of

magnitude of over-crowding in developing world is 3-5X the density of the developed world (see Exhibit

15). The high-density urban phenomenon we discussed above is a feature that defines the developing

world. This is simply because it costs too much, in time and money, for urban populations in the developing

world to commute to work from distant suburbs.

Exhibit 15: The population density of developing countries is 5-7X that of developed countries

Average built-up area densities in three world regions, calendar year-ends, 1990, 2000 (person per sq. km.)

0

4,000

8,000

12,000

16,000

20,000

Developing countries Europe and Japan Land-rich developed countries

Global sample, 1990 Global sample, 2000 Universe of cities, 2000

Cities in the developing world have been losing density consistently over the last century. Note the steady

decline in the average annual density of 20 cities in the US over the twentieth century in Exhibit 16. We

note the density of cities in the US in the early 1900s is similar to that of cities in India today. The de-

densification of these cities took place even as the absolute number of citizens in these cities increased

substantially. Cities have grown meaningfully in area to accommodate a larger number of citizens even as

they have provided more space to each individual.


Exhibit 16: Urban areas in the developed world have been consistently losing population densities

Average tract density in US cities, calendar year-ends, 1910-2000 (persons/sq. km.)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

Source: 'Making Room for a Planet of Cities', Lincoln Land Policy Institute, Kotak Institutional Equities

As cities expand, the other interesting feature is the distribution of density in the city. The centre of the city,

not surprisingly, is typically the most dense. Paris typifies this phenomenon (see Exhibit 17). The number of

people who live away from the centre form a much larger proportion of the population than those who

live near the centre. This requires good transport systems that allow people to move across large distances

quickly and cheaply.

Exhibit 17: Cities lose population density as one moves away from the city

Population density curve for Paris, France, 2000 (persons/sq. km.)

0

5,000

10,000

15,000

20,000

25,000

0 5 10 15 20 25 30 35

Distance from city center (km)

Density Density curve

Source: 'Making Room for a Planet of Cities', Lincoln Land Policy Institute, Kotak Institutional Equities


GAME CHANGER

Transport

The story of the development of urban centers over the last century has been the development of cheap

and quick public transport, epitomized by metro/subway systems or railway lines across different cities.

Many of the largest cities in the world (London, New York, Tokyo, Paris, etc) have famous metro/subway

maps which are not just an essential ingredient of daily life but also works of art. High quality buses and

taxis also incentivize people to use public transport.

If commuting is fast and cheap, a city naturally expands outwards as we can see from the example of

several Indian cities, a case in point being Mumbai. In the past two decades, average speeds of suburban

trains have increased to dramatically reduce travel time. For instance (see Exhibit 18), the time taken to

travel between Churchgate and Borivili (32 kms) today is about the same as the time it used to take to

travel between Churchgate and Bandra (16 kms) several years earlier. This allows people to live further

away from work, allowing for geographic proliferation of the city. Indian cities are now investing in metros,

bus rapid transit corridors, etc. We explore this in greater detail in the chapter on transportation where we

demonstrate how and why good transport helps a city de-densify.

Exhibit 18: India's suburban commuters travel longer distances within the country

Average distances traveled by passengers, March fiscal year-ends, 1951-2008

1719

21

26

31 33

16

0

5

10

15

20

25

30

35

1951

1961

1971

1981

1991

2001

2008

Source: Transport Demand Forecasts: Short-Term & Long-Term Projections, Total Transport System Study, Planning

Commission, Kotak Institutional Equities

Indian cities: lay of the land by 2025

Exhibit 19 notes various scenarios that may play out depending on how Indian cities develop. If Indian

cities grow by becoming more dense, contrary to our thesis, India will likely convert 745 sq. kms of virgin

territory into urban land annually (or more than the current area of the city of Mumbai). However, if India

follows the global model of more people in more space, India will need to double its urban land area. Even

if cities don’t de-densify, they will nevertheless expand their coverage area as populations increase. In both

scenarios, India has little choice but to plan for large new urban tracts. Regardless of the specific lay of

urban land in India, by FY2025E the density of population in Indian cities will still be meaningfully higher

than in developed countries.


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GAME CHANGER

In absolute terms, the Indian urban cover will likely be between 110,000 sq. km and 200,000 sq. km, up

from the current ~100,000 sq. km. We would allay the fears of civil society and policy makers who foresee

this determined urbanization eating into the country’s agricultural interests. It is important to note that the

most aggressive urbanization growth numbers imply total urban land in India at 200,000 sq. kms, which

represents less than 1% of the overall area of India (on a base of 3.3 mn sq. kms). We note that India’s

cropped area is ~160 mn ha or ~1.6 mn sq. kms. A doubling of urban land, from 0.1 mn sq. kms to 0.2 mn

sq. kms, will shave but a whisker off India’s land under cultivation. This perspective reinforces the case for

governmental and political will to meet India’s growing urbanization needs head on.

Indian cities: new technologies alter the roadmap for growth

India’s urban development is likely to mimic global precedents in many ways, while differing on account

of twenty-first century influences. We foresee an increase in the organic emergence of satellite hubs

– spawned by special interests - connected to primary ‘flagship’ hubs. Modern city development and

expansion is defined by (1) the wide variety of jobs on offer and (2) the development of communication

technologies. A variety of jobs calls for an equal number of skill specializations; no longer are cities known

for only the single industries they are built around. New communication technologies, will increasingly

reduce preoccupations with commuting, while nurturing the formation of multi-hub (or multi-modal) cities.

This highlights the need for flexibility in the development plans of the cities.

Exhibit 20 shows the population of Indian cities and their sizes (unfortunately, there is no good data on the

area of the cities in 2011). We note the ambiguity on how and where city boundaries are drawn for the

purpose of these calculations – the parameters may differ for the cities listed. However, it is easy to see that

Indian cities are significantly more dense than the cities of the developed world.

Exhibit 20: Indian cities are very dense

Area, population and densities of various Indian cities, March fiscal year-ends, 2001, 2011

2011 2001

Population Area Population Density

(persons) (sq. km.) (persons) (person/sq. km.)

Mumbai 18,414,288 603 11,978,595 19,865

Delhi 16,314,838 431 9,879,290 22,917

Kolkata 14,112,536 186 4,580,513 24,596

Chennai 8,696,010 174 4,343,562 24,963

Bengaluru 8,499,399 226 4,313,266 19,065

Hyderabad 7,749,334 173 3,658,477 21,184

Ahmedabad 6,352,254 281 4,514,988 16,063

Pune 5,049,968 430 2,538,290 5,903

Surat 4,585,367 213 2,702,404 12,716

Jaipur 3,073,750 485 2,322,395 4,792

Source: Census of India, Demographia World, Kotak Institutional Equities


Indian cities are small in size compared to the larger cities of the world – with which Indian cities compare

in population. The geographic expansion of Indian cities will be driven by (1) easy intra-city travel, aided by

increasing purchasing power and better infrastructure and (2) by the growth of satellite hubs that focus on

particular specializations.


Growing cities: scaling-up more robust than seeding

India’s urbanization is more a fact than a mission, which puts the spotlight on space. In the absence of

defined spaces, this juggernaut will roll where it will. The government has begun talking of creating 100

new cities – triggering important discussions on the merits of creating new cities versus scaling-up the old.

India’s urban development history has many examples of manufacturing spawning cities in the past century.

Like elsewhere in the world, manufacturing plants create ecosystems around themselves, becoming the

kernels of small towns. This took place in several sectors: iron and steel (Jamshedpur, Bokaro, Rourkela,

Bokaro, etc), automobiles (Pune, Chennai, etc), oil and gas (Jamnagar, Digboi, etc) and mining (Bellary,

Dhanbad, Asansol) among others. If India’s manufacturing sector grows exponentially in the next

decade, India may spawn a few new cities. There is little to indicate this kind of growth - on the contrary,

manufacturing’s contribution to India’s GDP has remained rather stagnant. On the other hand, we note the

rising share of services-dominated growth in the past decade and in most projections. This phenomenon

favors the strengthening and scaling-up of existing cities.

India has had little success in seeding new cities. Mihan near Nagpur, for example, created from scratch and

invested with roads, power and associated infrastructure, is beginning to see a glimmer of economic activity

after more than a decade of lying fallow. Lavasa, a city near Pune, saw a slow pick-up despite having in

place all the infrastructure people look for in a city. It remains to be seen whether GIFT near Ahmedabad

will see large private companies setting up shop there. In most cases cities require an economic engine for

people to congregate there which may or may not be available or may or may not take root in a new city.

India is hoping to seed seven new cities along the Delhi-Mumbai Industrial Corridor. Any manufacturing

activity that picks up in this corridor will attract investments in local infrastructure as well as workers with

skills that are in demand. Thus, indeed, are cities born. However, corridors like this one cannot absorb

all India’s urbanization needs and potential. On the other hand, smaller cities in India are growing briskly

with residents aspiring to better services and employment. India’s census towns are demanding a greater

share of attention from its authorities and India would do well to focus on these centers and provide urban

amenities and governance to these areas. In our view, new drivers of employment favor expansion as a

more sustainable urban development model than the planting of new cities.

Growing cities: the global experience of planting cities

Government cities: Many countries have tried to seed new cities by moving their seats of government

away from existing cities to new virgin territories. This is typically done to decongest the old city and to

give the administrative machinery more room. Given that most of the activity is related to the business of

government, these cities tend to have a very limited populations compared to the main cities. Exhibit 21

shows that most of these capital cities, even though they are almost a fourth or a fifth of the size of the

main city, host only a tenth of the population of the economically important cities. The densities of these

towns are hence significantly lower than the densities of the larger towns.


GAME CHANGER

Exhibit 21: Administrative cities are far smaller than the large cities

Area and population of the administrative city and largest city in various countries, May 2014

Area Population Density

(sq. kms) (#) (people/sq. km.)

Australia

Administrative capital city Canberra 472 382,000 809

Largest city Sydney 2,037 3,980,000 1,954

Brazil

Administrative capital city Brasilia 673 2,426,000 3,605

Largest city Sao Paulo 2,849 20,273,000 7,116

Canada

Administrative capital city Ottawa 502 956,000 1,904

Largest city Toronto 2,287 6,345,000 2,774

Malaysia

Administrative capital city Putrajaya 49 67,964 1,387

Largest city Kuala Lumpur 1,943 6,635,000 3,415

Gujarat, India

Administrative capital city Gandhinagar 560,497

Largest city Ahmedabad 5,585,528

Notes:

(a) The data for Gujarat, India is based on Census 2011.

Source: Demographia World Urban Areas, Kotak Institutional Equities

These administrative capitals require meaningful investments to develop the infrastructure of buildings and

transport which gets funded by the State. However, most countries have shied away from this model simply

because it is simply too expensive to maintain a city for such limited use.

University towns: The world has many examples of thriving university towns, such as Boston in the US,

Oxford-Cambridge in the UK, Konstanz in Germany and Manipal in India. However, a country can have only

a handful of such towns at best and here too the reputations and size of the city takes decades to form.

Also, unless the town cultivates another attractive specialization, it is likely to remain limited in size without

sufficient opportunities to attract new residents.

In twenty-first century India, nurturing organic expansion appears to be the appropriate model to expand

the country’s urban footprint. This approach can be very successful if the government accords it the kind of

strategic planning and investment it appears eager to pour into creating new cities.

Twenty-first century urban development: city CEOs and scalable systems

Urban policy for contemporary times – and for the future – demands a brutal review of policies regarding

local governance and funding. Many rural areas are morphing into census towns (or what for every

practical purpose are urban areas but not recognized as such) while many cities are outgrowing their

administrative or master-plan boundaries. However, they continue to be governed by structures like gram

panchayats or powerless municipal corporations.


The 74th amendment to the Constitution of India assigned local governing bodies larger in governance.

This was intended to give greater responsibility to municipal corporations and their equivalent in rural

areas (Gram Panchayats) to bridge the distance between citizens and the state and central governments.

However, these institutions have still lacked the financial and legal muscle required to put in place

effective programs for growth in their jurisdictions. City councils in particular (municipal corporations) find

themselves at the mercy of a plethora of agencies differing in purview, scope (national, regional or city-

level) and purpose. A consolidated city plan typically has no identifiable champion.

A few Indian cities do have mayors, whose roles are purely ceremonial. In many large cities including China

and the US, city mayors have onerous responsibilities and governance powers – in such cities, the mayoral

position is often a stepping stone to national political office. A mayor who is directly elected by a city’s

populace can be held accountable for the well-being and growth of the city. More important, a mayor can

provide a clear vision for a city’s growth – compelling all departments mandated to create and maintain

public services to integrate their plans into the overarching vision.

City taxes are great revenue generators for local state governments: these monies are then allocated

across the state, particularly in the direction of important vote banks wherever in the state they may lie.

As urbanization alters voter demographics, we expect a sharper focus on the governance of cities. We

have noted that half of India may well be urbanized already (depending on definitions) – it is a question of

time when the semantic ambiguity is resolved and these areas are classified as urban. As the urban voter

finds his/her voice being spoken in the political mainstream, Indian cities should expect to get an ability to

determine their own destinies.

City building: who pays?

City governments are constrained to raise revenues on their own, making them dependent on the state

or on the centre or on schemes like the Jawaharlal Nehru Urban Renewal Mission (JNNURM) (see Exhibit

22). A city dependent on external funding is typically beholden to the interests that fund it, the priorities of

which (in terms of what projects need to be executed, where and when) can be very different from what

a city needs. More important, different authorities typically end up working in silos which impedes the

development of a grand master-plan for the city.

Exhibit 22: Municipalities in India are highly dependent on grants from states, and they run a deficit

Proportion of total revenues of municipalities in India, March fiscal year-end 2008 (%)

'Own' revenues - primarily property tax 34

'Own' revenues - non-tax 19

Grants, assignments and devolution by sate government 33

Grants by central government 5

Grants from Finance Commission 2

Others 7

Total income 100

Revenue expenditure 64

Capital expenditure 42

Total expenditure 106

Source: Thirteenth Finance Commission quoted in PK Mohanty's paper 'A Municipal Financing Framework',

Kotak Institutional Equities


GAME CHANGER

Cities will have to turn to their residents for funds. Residents will have to be co-opted into the development

plans and funding for their cities. Good infrastructure raises the value of real estate in a city, which the city

needs to harness to fund itself. We look at these funding options in some detail below.

� Usage charges: A public good, by definition, needs to be available to all for use and its access should

not be restricted by an inability to pay for it. We noted earlier that utilities that under-price their

services typically get run down rather quickly. This is true of power and water utilities (more on this in

subsequent chapters). Roads are a public good that do not get priced appropriately even as larger

numbers of private vehicles continue to ply on them. It is simply not viable for cities to give its citizens

free infrastructure or price it so low, the revenue is insufficient either for maintenance or upgrade.

Typically, a large chunk of city residents can afford to pay for the development and maintenance of

infrastructure. The model followed by toll roads, telecom and to some extent, the power sector, sets an

example.

� Property taxes: For most Indian urban households, the roof over their heads is the most valuable

thing they own, accounting for the largest chunk of their net worth. The quality of urban housing

in India is poor, by and large, with high-end constructions offering the rich some choice only in the

past decade (more on this in the chapter on housing). Cities could well tap into the net worth of their

populations by instituting effective property taxes. As cities go about developing infrastructure, it leads

to a surge in real estate prices. This is especially so of transport infrastructure to areas that previously

not connected or poorly connected – as illustrated by rising property rates near the metro in Mumbai

and Delhi or around ring roads in cities like Hyderabad. This increase in capital value needs to be shared

equitably between the city and the citizen. Of course, the increase in property taxes needs to lead to a

concomitant increase in the quality of services which are not specifically billed, e.g., road lighting, fire

services, sewage, draining or garbage disposal.

� Land auctions: Cities can tap their new and old areas for funding. The new areas may develop either

on their own or their growth can be calibrated through the development of infrastructure. If the areas

develop spontaneously, cities miss out on the opportunity to shape their development and hence the

development can end up becoming haphazard. Cities would do well to imbibe a ‘transport-oriented-

development’ model to nudge the population to newer areas. Land in such areas can be auctioned

for development. Similarly, as older parts of the cities die, cities need to redevelop those land parcels

to continually revive the city. Mumbai’s conversion of its old mill area into a thriving business district

demonstrates the potential for this. Future conversions need not be as protracted and challenging if

approached more strategically and holistically, taking into account contentious issues like rehabilitation,

laws and litigation while creating a master plan for the area proposed for conversion. Auctions of high-

value, like Mumbai’s mill land, can significantly enhance the resource base for cities.

� Debt markets: The idea of city corporations accessing debt markets is a seductive one. However, we

believe Indian city treasuries are quite far removed from accessing this pool of money as is evident from

(1) the corporate bond market, which is typically much larger across the globe, not having yet taken off

in India for a variety of reasons, and (2) their lack of stable or reliable cash flows to support the issue of

debt. When cities show signs of financial independence through the measures outlined above, issuers

will be more comfortable accessing bond markets and investors will have greater conviction as well.

Even if a few municipalities manage to raise funds from the debt market, it is expected to remain a

niche and marginal resource base.


New cities would find it even more difficult to generate funds. If built from scratch, such cities would see

long gestation periods between investing and building smart infrastructure and attracting residents to live

and pay for the same. This can be costly, but more worryingly, it may turn out to be wasteful.


Shelter: a basic need

Exhibit 23 shows our calculations of the number of sq. ft of built-up area required by India as it urbanizes.

Urban India needs to almost double its built-up area to around 75 bn sq. ft in FY2025E from the current

~40 bn sq. ft – most of this in bad shape. As India builds out an average of 3 bn sq. ft of residential supply

every year over the next decade, it needs to improve dramatically its quality of housing as with increasing

prosperity, buyer profile and requirements will change rapidly.

Exhibit 23: India's residential housing demand will evolve meaningfully

Number of households and built-up sq. ft of residential demand, March fiscal year-ends, 2014-25E

2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Number of households (mn)

Real rich 2.1 2.4 2.8 3.2 3.6 4.1 4.5 5.0 5.6 6.1 6.7 7.3

Upper class 2.0 2.1 2.2 2.3 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0

Prospering 5.4 5.4 5.6 5.5 5.6 5.6 5.7 7.7 9.8 11.9 14.1 16.2

Evolving 12.5 15.4 18.3 21.3 24.8 29.2 33.6 36.1 39.1 42.2 45.5 48.9

Emerging 39.4 41.5 43.8 46.0 48.1 49.5 51.0 52.5 53.2 54.0 54.7 55.4

Surviving 29.7 27.7 25.6 23.7 21.4 19.0 16.5 14.0 11.7 9.4 6.9 4.6

Total 91.0 94.6 98.3 102.0 105.8 109.7 113.8 117.9 122.1 126.4 130.9 135.4

Cumulative built-up sq. ft required (bn)

Real rich 3.1 3.6 4.2 4.8 5.4 6.1 6.8 7.6 8.4 9.2 10.1 11.0

Upper class 2.0 2.1 2.2 2.3 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0

Prospering 4.0 4.1 4.2 4.2 4.2 4.2 4.3 5.7 7.3 9.0 10.5 12.1

Evolving 6.2 7.7 9.1 10.7 12.4 14.6 16.8 18.0 19.5 21.1 22.8 24.4

Emerging 15.8 16.6 17.5 18.4 19.3 19.8 20.4 21.0 21.3 21.6 21.9 22.1

Surviving 8.9 8.3 7.7 7.1 6.4 5.7 4.9 4.2 3.5 2.8 2.1 1.4

Total 40.1 42.4 44.9 47.4 50.0 52.8 55.7 59.2 62.8 66.4 70.3 74.1

Incremental built-up sq. ft (bn)

Real rich 0.5 0.6 0.6 0.7 0.7 0.7 0.8 0.8 0.8 0.9 0.9

Upper class 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Prospering 0.0 0.1 (0.0) 0.0 0.0 0.1 1.5 1.6 1.6 1.6 1.6

Evolving 1.5 1.4 1.5 1.7 2.2 2.2 1.3 1.5 1.6 1.7 1.7

Emerging 0.8 0.9 0.9 0.9 0.5 0.6 0.6 0.3 0.3 0.3 0.3

Surviving (0.6) (0.6) (0.6) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7)

Total 2.4 2.4 2.5 2.6 2.8 2.9 3.5 3.6 3.7 3.8 3.9

Source: Kotak Institutional Equities' RUPEES model

These calculations are based on modest assumptions of housing space needs (see Exhibit 24). Even at 1,500

sq. ft of space for an average ‘real-rich’ household, it amounts to a per-capita housing space of around 300

sq. ft. In the ‘Survivor’ category, the per-capita housing is barely 60 sq. ft, not much more than a prison

cell many countries. However, even these modest assumptions imply a significant upgrade of the current

housing facilities for Indians. The NSSO 63rd round survey had pointed out that 32% of all urban houses

were less than 258 sq. ft and 39% of rural houses are less than 312 sq. ft which shows the poor housing

conditions that Indians live in.


GAME CHANGER

Exhibit 24: As Indians move up the income categories, they will want bigger homes

Estimates of area per house and per capita area availability in the residential sector (sq. ft)

Classification of households Unit area per house Per capita area

Real rich 1,500 300

Upper class 1,000 200

Prospering 750 150

Evolving 500 100

Emerging 400 80

Surviving 300 60

Source: Kotak Institutional Equities' RUPEES model

Residential demand accounts for about half the demand in any urban development. There is concomitant

demand for commercial, retail and to some extent, industrial buildings in a city. Applying this rule-of-

thumb, it is easy to envisage the magnitude of construction required in urban India. If India is to build out 6

bn sq. ft of building every year, at a current costing of Rs1,000 per sq. ft to Rs1,500 per sq. ft, it represents

an annual construction industry valued at Rs6-9 tn. We have, in the introduction section, highlighted the

amount of cement, steel and paints that will be required for this build out.

Housing paradox 1

India’s housing represents another aspect of the paradox of low FSI and high density: Indian cities have one

of the lowest floor space indices in the world (typically between 1 and 2 in most cases, compared with 4 or

more in many large urban locations). The paradox is that these small spaces accommodate among the most

dense populations in the world. Low FSI causes the price/value of land to surge, making it unaffordable

for many and this leads to a large number of people simply squatting on the land. What people cannot

afford economically, they try to grab politically through the sheer force of their numbers. In this context, it is

instructive to look at the slum regularization policies that many governments have followed, especially near

election time, particularly in cities like Delhi and Mumbai. The Census of India notes that 65.5 mn – more

than the entire population of the UK - people live in slums across urban India.

Few in urban India can afford to purchase the newer, well-constructed but expensive homes. The average

age of houses in urban India is ~20 years though there has been significant construction in the last decade

with 35% of all houses in urban India less than 10 years old (see Exhibit 25). However, we note that there

has been significant improvement over the last decade in the quality of housing in India (see Exhibit 26)

though a lot remains to be done.


Exhibit 25: Urban Indian houses are, on average, 20 years old

Percentage of households residing in dwelling units for different durations in perceived conditions excluding the non-

serviceable katcha housing, March fiscal year-end, 2011 (%)

Condition of structure

Good Satisfactory Bad Total

Less than 1 year 0.7 0.1 0.0 0.9

1 to 5 years 4.7 0.9 0.2 5.9

5 to 10 years 18.2 8.9 1.6 28.7

10 to 20 years 17.8 13.0 2.5 33.4

20 to 40 years 9.2 9.4 2.1 20.6

40 to 60 years 2.5 3.6 1.0 7.1

60 to 80 years 0.5 1.1 0.4 2.0

80 years or more 0.4 0.8 0.3 1.4

53.9 38.0 8.1 100.0

Source: Ministry of Housing and Urban Poverty Alleviation, Kotak Institutional Equities

Exhibit 26: Substantial improvement in quality of housing though a lot remains to be done

Households by ownership status, quality and amenities, March fiscal year-ends, 1991, 2001, 2011 (%)

2011

1991 2001 2011 Rural Urban

Households by material of roof

Grass/thatch/bamboo/wood/mud, etc. 31.3 21.9 15.0 20.0 4.6

Tiles 36.1 32.6 23.8 28.7 13.2

GI/ Metal/ Asbestos sheets 8.6 11.6 15.9 15.9 15.9

Concrete 10.8 19.8 29.0 18.3 51.9

Others 13.2 14.1 16.3 17.1 14.4

Total 100 100 100 100 100

Households by material of wall

Grass/thatch/bamboo, etc. 10.3 10.2 9.0 11.9 2.7

Mud/unburnt bricks 41.5 32.2 23.7 30.5 9.3

Stone 10.1 9.4 14.2 13.6 15.0

Burnt brick 34.2 43.7 47.5 40.0 63.5

Others 3.9 4.5 5.6 4.0 9.5

Total 100 100 100 100 100

Households by material of floor

Mud 67.0 57.1 46.5 62.6 12.2

Stone — 5.8 8.1 6.2 12.2

Cement 21.3 26.5 31.1 24.2 45.8

Mosaic/floor tiles 3.8 7.3 10.8 3.7 25.9

Others 7.9 3.3 3.5 3.3 3.9

Total 100 100 100 100 100

Households by source of water

Tap 32.3 36.7 43.5 30.8 70.6

Hand-pump and tube-well 30.0 41.2 42.0 51.9 20.8

Well 32.2 18.2 11.0 13.3 6.2

Others 5.5 3.9 3.5 4.0 2.4

Total 100 100 100 100 100

Source: Census India, Kotak Institutional Equities


GAME CHANGER

Housing paradox 2

Thanks to its love for real estate investments, India is in the curious position of having more houses than

it has households. India’s households increased by 60 mn to 247 mn by end-FY2011 from 187 mn at end-

FY2001. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 mn to 331 mn

from 250 mn. The urban increase is telling: 38 mn new houses for 24 mn new households (see Exhibit 27).

This does not mean that the housing shortage problem has been solved: as of end FY2012, urban India had

a deficit of 18.7 mn new houses and rural India was short of 43.1 mn (see Exhibit 28) houses.

Exhibit 27: 81 mn new housing units were created in the last decade; only 60 mn new households were created

Housing stock, Marsh fiscal year-ends, 2001 and 2011 (mn)

FY2001 FY2011 Delta

Rural Urban Total Rural Urban Total Rural Urban Total

Occupied 168 65 233 207 99 306 39 34 73

of which,

Residential 129 50 179 160 76 236 31 26 57

Residential-cum-other uses 6 2 8 6 2 9 — — 1

Non-residential 33 13 46 41 21 62 8 8 16

Vacant 10 7 17 14 11 25 4 4 8

Total houses (A) 178 72 250 221 110 331 43 38 81

Number of households (B) 132 55 187 168 79 247 36 24 60

Difference (A) - (B) 46 17 63 53 31 84 7 14 21

Source: Census of India, Kotak Institutional Equities

Exhibit 28: Congestion is the biggest housing problem in India

Summary of households that have a housing shortage, March fiscal year-end, 2012 (mn)

Households living in non-serviceable katcha housing 1.0

Households living in obsolescent houses 2.3

Households living in congested houses requiring new houses 14.9

Households in homeless conditions 0.5

Total urban India 18.7

Households living in temporary houses 20.2

Households living in obsolescent houses 7.5

Households living in congested houses requiring new houses 11.3

Households in homeless conditions 4.2

Total India 43.1

Total India 61.8

Source: Ministry of Housing and Urban Poverty Alleviation, National Housing Bank, Kotak Institutional Equities

More than three-fourths of urban residents live cheek by jowl in cramped spaces. The irony of this amidst

plenty arises from two critical impediments: (1) low FSI ratio, which makes land very expensive and (2) the

inability to commute cheaply and quickly, which means that people have to congregate in and around areas

where they can find economic activity and public infrastructure.


Affordable housing: not an oxymoron

As much as 70% of the urban housing shortage therefore arises from the bottom four deciles of

households whose ability to pay is severely constrained, see Exhibit 29. If one looks at the monthly per-

capita expenditure (MPCE) at the 40th percentile and calculates the ability to pay for a house (as we do in

Exhibit 30), we find that the buying capacity of such households is capped at ~Rs300,000.

Exhibit 29: The lowest deciles are priced out of the market

Housing shortage by tenure categories, March fiscal year-end, 2012 (mn)

Average MPCE Average HH size

Decile (Rs) (number) Self-occupied Rented Total

1 521 5.9 2.8 1.0 3.8

2 722 5.3 2.3 1.0 3.3

3 870 5.1 1.4 0.8 2.2

4 1,028 4.7 2.1 1.7 3.7

5 1,420 4.6 0.4 0.4 0.9

6 1,688 4.2 0.8 0.8 1.7

7 2,051 4.0 0.8 0.6 1.4

8 2,681 3.6 0.6 0.4 1.0

9 5,673 3.3 0.4 0.2 0.7

10 2.7 0.1 0.1 0.2

Total 11.7 7.0 18.7


Exhibit 30: The low-cost housing needs to be very affordable given the low MPCE

The ability of the 40th percentile household to pay for housing, March fiscal year-end, 2012 (`)

MPCE at 40th percentile (A) 1,028

Annual expenditure per capita (B*12) 12,335

Number of people in an urban household (average) 4.7

Total annual household expenditure (C) 58,469

Annual household income (125% of C, assuming some savings, etc.; D) 73,086

Housing to income ratio (E) 4.0

Possible value that the household can afford (D*E) 292,344


MPCE numbers are typically significantly understated and even if we were to adjust for that, a large portion

of the unmet housing needs are at an economic value of Rs0.5-1 mn. Assuming that households of five

members can crowd into spaces of 250-400 sq. ft, housing stock of Rs1,250-4,000 per sq. ft would be

needed to address the needs of people up to the 40th expenditure percentile.


GAME CHANGER

Three significant changes can help keep costs in control: (1) availability of a larger land area on the

periphery of the city, (2) cheap and fast transport to and from the city’s commercial hubs and (3) higher FSI,

such that the available land can be made more productive. Raising the FSI ratio is in itself no panacea as

a higher FSI will need to go hand-in-hand with improved access to infrastructure (of transport, schooling,

health, leisure, water, etc). The creation of infrastructure, especially transportation, creates its own positive

externalities and this can be financially harnessed to develop infrastructure.

It is not very difficult to meet these pricing expectations, especially as the three points start getting

addressed. However, the ability to finance 4X the gross income (as we have assumed in our example above)

typically does not exist as the household is not considered credit-worthy by conventional banking channels.

Many unorganized or non-banking channels offer credit to such households but at significantly higher rates

of interest and lower tenures, thereby reducing the multiple to gross income that the households can get to

buy their homes for. Developing a financing market for this segment is important.

Another alternative that India has rarely seriously considered (given the high “ownership” rates here, see

Exhibit 31) is the development of a rental market. Residential housing in India typically offers very low yield:

this low yield expectation should be harnessed to develop a thriving rental market. The ability of many

households to live in better conditions can be strengthened if they could move to secure long-term rental

houses. Large rental colonies owned by investors populated by a population that is finding its economic

feet in a city can be a meaningful game-changer.

Exhibit 31: More than five out of six households in India own their homes

Ownership and rentals of homes, March fiscal year-ends, 1991, 2001 and 2011 (%)

2011

1991 2001 2011 Rural Urban

Owned 86.3 86.7 86.6 94.7 69.2

Rented 11.8 10.5 11.1 3.4 27.5

Others 1.9 2.8 2.3 1.9 3.3

Total 100.0 100.0 100.0 100.0 100.0

Source: Census of India, Kotak Institutional Equities

The challenge of housing for the segment below the 40th percentile of the expenditure bracket is daunting.

We have noted that more than 70% of the housing deficit is in this segment. The solutions will lie in

(1) making economic growth trickle down further via good education, employability and employment,

(2) requiring development of low-cost housing nearby if higher FSI is offered, and (3) development of

‘transit rental housing’ strategies where the government can be the owner of well-constructed housing,

which is given out on rent for a set number of years till a person/family can find its feet in the city, say for a

decade or so.

We note that it has never been a prudent or successful strategy to move people far from economic centers,

which defeats the main reasons why people move to a city – better opportunity and proximity to work.

Delineating distant suburbs for the poor is therefore an unworkable or impractical solution, too many will

chose to live in closely packed quarters closer to their places of work. Cities must have housing units at

various price points in their various hubs, including the cheapest.


The South Korean model has some answers

When South Korea went through a phase of high growth in the 1980s, it faced similar housing problems.

Good quality housing was restricted to few and the average quality left a lot to be desired. Having lost a

fifth of its housing stock in the war of 1950s, the Korean government had made multiple announcements

in the intervening decades on the construction of new housing. By the mid-1980s, the number of houses to

households was only around 70%, leading to sky-high prices. Unaffordable housing became the platform

on which Mr Noh won the presidential election of 1987. The presidency was clinched by his promise to

create four million new housing units on a base of around six million units (see Exhibit 32). This plan was

later scaled down to around two million units, of which 0.9 million were built in and around Seoul. A

quarter of a million units were allocated for low-cost housing. Notably, the project relied heavily on private

capital financing: 67.7% was provided by prospective home buyers through pre-sales, 22.3% by loans from

the National Housing Fund and only a minor portion (around 10%) came from the government.

Exhibit 32: The Korean government intervened in the housing market, creating superior physical outcomes

Indicators of housing stock in South Korea, calendar year-ends, 1980-2010

unit 1980 1985 1990 1995 2000 2005 2010

Housing stock '000 5,318 6,104 7,160 9,204 10,959 12,494 13,884

Housing space per capita m2 10 11 14 17 20 23 25

Housing space per household m2 46 46 51 59 63 66 67

Number of people per room person 2.1 1.9 NA 1.1 0.9 0.8 0.7

Housing units with warm water % 10 20 34 75 87 96 98

Housing units with water-borne toilets % 18 33 51 75 87 94 97

Housing supply ratio* % 74 70 72 86 96 106 113

Housing units/1,000 people unit 142 151 170 215 249 280 302

Notes:

(a) * Housing supply ratio = (total housing units)/(total number of households); based on the 2010 census definition of a household.

Source: Managing Housing Market Volatility: Korean Case, Man Cho, Professor, KDI School; World Bank Institute,


Land acquisition for the plan was a particular challenge. In the 1960s and 1970s, land supply for residential

development was mostly through negotiations between private parties – landowners and developers.

Realizing the need for large-scale land acquisition for residential development, the government instituted

a land expropriation system from the late 1970s. In particular, the Housing Construction Promotion

Act was revised in 1977 to empower the Korea National Housing Corporation (KNHC) to conduct

housing construction and supply projects. The Act gave KNHC the right to expropriate land for housing

development.

The Land Development Promotion Act in 1980 further enabled the government to (1) re-zone large tracts

of agricultural land or forested areas, allowing their conversion into residential land, and (2) mandate

that landowners sell such land to the government at prices determined by a publicly certified appraisal

organization. The compensation was determined before the designation and up-zoning, which led to

heated differences between landowners and government agencies. [Facts on Korean Housing are drawn

from a World Bank paper by Prof. Man Cho of KDI School.]


GAME CHANGER

Co-opting landowners into the urban growth story

It is moot that governments need to make land more easily available and then generate a supply shock

such that housing does not end up becoming a luxury. The history of land acquisition in India suggests that

government expropriation will not work in India. Co-opting landowners in the periphery of a city as it plans

its growth is hence critical.

Most often, the land on the periphery of a city is agricultural. Exhibit 33 notes that land designated for

urban use - commercial, industrial or residential - is valued at 30-50X the value of agricultural land. As the

unit of measurement gets calibrated more finely, switching from hectares to square feet, a lot of value gets

created in the process!

Exhibit 33: Land prices increase as we move closer to a city

Economics for the farmer assuming two crops, none fail

Rural - irrigated Rural - unirrigatged Semi-urban Urban

Location Mangrol Mangrol Sehore Misrod

Description 120 kms off Bhopal 120 kms off Bhopal 5 kms from Sehore 12 kms from Bhopal

Land price (Rs/acre) 500,000 300,000 1,000,000 20,000,000

Source: Discussion with landowners, Kotak Institutional Equities

Cities can expand more easily if andowners are able to benefit from this value transition. This requires two

critical things to fall in place: (1) clear and enforceable title to land and (2) easy tradability. India has begun

to digitize its land records, but it will take a while before we see the benefit of this through more efficient

and transparent property trading (see Exhibit 34).

Exhibit 34: Various state governments are progressing briskly towards digitization of land records

Status of land record digitization across Indian states

Whether Whether legal Whether Whetherhand-written sanctity given to ROR map

record computerized available available State discontinued ROR on web Website address on web Date

Assam Yes Yes Yes http://10.177.15.67/webdharitree No Jan 18, 2012

Bihar No No No No Jan 18, 2012

Chhattisgarh No Yes Yes http://cg.nic.in/cglrc Yes Mar 28, 2012

Goa Yes No Yes http://dslr.goa.nic.in No Jan 18, 2012

Gujarat Yes Yes No No Jan 18, 2012

Haryana No Yes Yes http://www.jamabandi.nic.in No Jan 18, 2012

Himachal Pradesh Yes Yes Yes http://admis.hp.nic.in/himbhoomilmk No Jan 09, 2012

Karnataka Yes Yes Yes http://bhoomi.karnataka.gov.in/ No Jan 18, 2012 landrecordsonweb

Kerala No No No No Jan 19, 2012

Maharashtra No Yes Yes http://mahabhulekh.maharashtra.gov.in No Jan 18, 2012

Sikkim Yes Yes No No Jan 18, 2012

Tamilnadu Yes Yes Yes http://taluk.tn.nic.in/eservicesnew/home.html No Jan 31, 2012

Tripura Yes Yes Yes tsu.trp.nic.in/jami No Feb 03, 2012

Uttarakhand Yes Yes Yes http://devbhoomi.uk.gov.in No May 26, 2012

Uttar Pradesh Yes Yes Yes http://bhulekh.up.nic.in No Jan 18, 2012

West Bengal Yes Yes No No Feb 16, 2012

Total 11 13 11 1

Source: National Land Records Modernization Programme, Department of Land Resources, Kotak Institutional Equities


Easier tradability requires that the state does away with the artificial distinction of what is agricultural land

and what is not. Given the wide arbitrage in value, the current distinction only creates scope for corruption.

More important, a closed market where only a farmer can buy agricultural land from another farmer

only creates less liquidity and poorer price discovery; people anyways find ingenious ways to change their

vocations in official records.

If the owners of land on the periphery of a city can be made champions of urbanization, the process of

development of a city can be quick and rewarding for all (as the famous Magarpatta example of Pune

illustrates).


Mobility

A city’s roads are its arteries. The economic vitality of a city depends on the ability of its citizens and goods

to move around the city to create economic value. A quick and cheap way to move both makes for a

thriving city. As we noted earlier, an efficient transport system allows the city to expand out, further from

its business district. More important, in an economy dominated by the services sector, different services

congregate in different places in a city – the ability to quickly and cheaply move around to and from various

hubs is important.

The importance of mobility can be gauged from the fact that urban planners now talk of ‘transit-oriented-

development’ rather than ‘development-oriented-transit’. The current thinking in urban planning suggests

the primacy in developing transit modes so that they guide the development of the city – this is in stark

contrast to the earlier thought process that transit modes should follow development. ‘Build and they will

come‘ is now the guiding philosophy.

The potential build-out

Modern cities go significantly beyond conventional conduits of transport like roads. Many have successfully

introduced modes like the metro, trains and waterways. Even if we focus on the two big aspects of

transport, urban roads and metros/trains, we find the build out will be quite meaningful – in terms of

physically expanding current networks and the money that will be required for the same.

Indian urban planning guidelines (Service Level Benchmarks of the Ministry of Urban Development)

propound that roads should occupy 11% of every sq. km of urban area in a city (7% for towns). The other

service-level benchmark of the same policy is that the road density should be 12.25 kms per sq. km of area.

Using the 12.25 kms per sq. km criterion, we find that (1) Indian cities fall significantly short of planned

road acreage (see Exhibit 35; we must point out that we are skeptical of the quality of data, which suggests

that West Bengal has a fourth of all the urban roads in India) and (2) the build-out will need to be 5X the

current available stock of roads over the next 10 years (see Exhibit 36).


GAME CHANGER

Exhibit 35: Urban Indian roads are only a third of what the Indian benchmark suggests, and in poor shape

Length of urban roads by type of surface in India, March fiscal year-end, 2012 (kms)

Total Surfaced Unsurfaced

States

West Bengal 108,337 80,062 28,275

Uttar Pradesh 77,205 50,723 26,482

Karnataka 42,972 28,946 14,026

Tamil Nadu 22,250 19,872 2,378

Gujarat 21,870 17,808 4,062

Maharashtra 20,620 15,379 5,241

Odisha 19,042 11,763 7,279

Kerala 18,922 15,732 3,190

Punjab 14,699 12,582 2,117

Madhya Pradesh 14,570 10,383 4,187

Andhra Pradesh 13,759 10,935 2,825

Rajasthan 12,599 10,685 1,914

Haryana 10,492 7,128 3,364

Bihar 8,918 3,819 5,099

Chhattisgarh 8,116 6,140 1,976

Assam 6,710 4,742 1,967

Uttarakhand 4,464 3,167 1,297

Himachal Pradesh 2,257 1,802 456

Jammu & Kashmir 1,762 1,752 10

Jharkhand 671 635 36

Goa 591 522 69

Mizoram 377 324 53

Tripura 280 211 69

Manipur 212 156 56

Sikkim 162 160 2

Meghalaya 110 106 4

Nagaland 98 96 2

Arunachal Pradesh 53 53 —

Union territories

Delhi 29,511 20,825 8,686

Chandigarh 1,802 1,797 5

Puducherry 682 645 37

Andaman & Nicobar Islands 138 138 —

Daman & Diu 39 39 —

Lakshadweep 5 5 —

Dadra & Nagar Haveli — — —

All India 464,294 339,131 125,163

Urban area (sq. kms) 102,220

Road density (km/sq. km.) 4.54 3.32 1.22

Benchmark 12.25

Source: State departments of municipal administration/urban affairs, Directorate of Works, Engineering in Chief's Branch,

Integrated HQ of MoD (Army), zonal railway headquarters, major port trusts, state maritime boards, Kotak Institutional

Equities


Exhibit 36: Investment in urban roads requires a Rs40 tn investment until FY2025E

The net new urban area required every year, March fiscal year-ends, 2011-25E

2012E 2025E

Urban area (sq. km.) 105,331 148,635

Stock of urban roads required (mn kms) 1.3 1.8

Current road length (kms) 0.5

Incremental roads required (mn kms) 1.4

Cost of urban road (Rs mn per km.) 30.0

Total spend on roads (Rs tn) 40.7

Notes: (a) The benchmark of 12.25 kms of urban road per sq. km. of urban area is derived from the Ministry of Urban Development,Government of India.

Source: Census of India, Shlomo Angel, McKinsey report on urbanization in India, Kotak Institutional Equities estimates

If India were to build out these roads and we take a conservative costing of Rs30 mn per km. for urban

roads, India will need to budget for Rs40 tn worth of roads. Given that by 2025E, 63 cities in India are

expected to have populations of more than a million people, all such cities will, according to the current

thought process of the Ministry of Urban Development, be eligible for metro systems of their own. If we

add this component -- metros under consideration and construction -- India’s transport spend on these two

accounts alone will be upwards of Rs50 tn.

India has successfully been able to communicate to its citizens the idea that for inter-city roads, a toll needs

to be paid to make the project economically viable. This is not necessarily the case with urban roads which

are typically provided to the citizens as a free common public good. Even if the idea of tolling urban roads

is both a difficult sell and a difficult one to execute, India needs to move towards congestion pricing, high

parking charges, property taxes, etc. to generate revenue for maintenance and development of its roads.

Railway/metro pricing is increasing – though the current spat in Mumbai between the operator and the

state government shows that a wide chasm remains between what the state thinks its citizens have a

capacity (or willingness) to pay for and what makes a project economically viable.

Transport in urban India – in a sorry state

The rationale for making these large investments is to offer the urban consumer better quality travel

facilities. Unfortunately, there are limited large-scale surveys on the same and the best data that is available

comes from a 2007 report commissioned by RITES.

Exhibit 37 shows the quality of commute in urban India in terms of (1) the mode of commute, (2) the

average speed of travel and (3) the average distances travelled in various types of cities. We also note that

larger cities see much longer commutes in terms of distance. If we juxtapose them with the slower speeds

in larger cities, the travel time exponentially expands. Pollution caused by transport ranks as one of the

largest pollutants across large Indian cities (see Exhibit 38). Investment in infrastructure is critical if cities are

not to choke on themselves; however, a detailed substantial debate is required on the relative merits and

demerits of the various modes of transport.


GAME CHANGER

Exhibit 37: Two-fifths of transport in India is still non-motorized

Mode share of trips in urban India, March fiscal year-end, 2007 (%)

Mode of transport Average Average

Two Public speed trip length

City category Population Walk Cycle wheeler transport Car IPT (a) (km./hr) (kms)

Category-1a >0.5 mn with plain terrain 34 3 26 5 27 5 26 2.4

Category-1b <0.5 mn with hilly terrain 57 1 6 8 28 — 2.5

Category-2 0.5-1.0 mn 32 20 24 9 12 3 22 3.5

Category-3 1.0-2.0 mn 24 19 24 13 12 8 18 4.7

Category-4 2.0-4.0 mn 25 18 29 10 12 6 22 5.7

Category-5 4.0-8.0 mn 25 11 26 21 10 7 19 7.2

Category-6 > 8. mn 22 8 9 44 10 7 17 10.4

National 28 11 16 27 13 6 7.7

Notes: (a) IPT = Intermediate Public Transport

Source: Study on Traffic and Transportation Policies and Strategies in Urban Areas in India, Wilbur Smith and Associates,

Ministry of Urban Development, Kotak Institutional Equities

Exhibit 38: Road dust and transport are the two largest causes of pollution in Indian cities

Different causes of pollution in India in six Indian cities, 2012 (%)

Pune Domestic, 11

DG Sets, 4

Transport, 7

Brick Kilns, 16

Waste burning, 5

Road dust, 57

ChennaiDomestic,

11

DG Sets, 14

Transport, 43

Brick Kilns, 7

Road dust, 57

Others, 11

Kanpur Domestic, 11

DG Sets, 4

Transport, 43

Waste burning, 5

Road dust, 57

Industries, 8

Delhi

Domestic, 7

DG Sets, 9

Transport, 14

Waste burning, 17Industries, 8

Dust+Construction, 45

Mumbai

Waste burning, 16

Industries, 13

Dust, 35

SIA, 15

Marine, 4 Transport, 17

Bengaluru

Transport, 18

Road dust, 57

Industries, 9

Secondary, 8

Domestic, 4

DG Sets, 11

Source: India Transport Report: Moving India to 2032; National Transport Development Policy Committee, Kotak Institutional Equities

Even as India improves its public transport, it needs to take into account the large influx of private vehicles.

As in the rest of the world, as more Indians become financially stronger, they aspire to private transport

(see Exhibit 39). India’s penetration rate of cars is so low currently that if India were to go the way of the

developed world, its car population can rise to more than 50X the current size!


Exhibit 39: Indian motor vehicle population can explode if India follows the global trend

Penetration of vehicles across various countries, calendar year-end, 2010

Per 1,000 persons

Country GNI per capita (US$) Passenger cars Two wheelers Total motor vehicles

Developed

US 47,350 627 27 797

UK 38,140 457 20 519

Japan 42,050 453 27 491

Germany 42,970 517 47 572

Australia 46,200 556 30 695

Developing

Mexico 8,930 191 10 275

Malaysia 7,760 325 332 361

South Africa 6,090 112 7 165

Brazil (a) 9,540 178 75 NA

China 4,270 44 75 58

South Korea 19,720 276 37 363

India (b) 1,260 15 96 132

Notes:(a) Data relates to 2009.(b) Data regarding passenger cars, total motor vehicles and two wheelers relate to 2012.

Source: Basic Road Statistics of India, 2011-12, Kotak Institutional Equities

Two wheelers have been the favorite mode of private transport in India even as cars pick up steadily (see

Exhibit 40). This is symptomatic of the low purchasing power in India but more important, it is because the

road space is so limited that a two wheeler is a more efficient mode of transport than a four wheeler.

Exhibit 40: Dramatic increase in private transport

Registered motor vehicles in India, March fiscal year-ends, 1951-2012 ('000)

All vehicles Two wheelers Cars, Jeeps and taxis Buses (a) Goods vehicles Others (b)

1951 306 27 159 34 82 4

1961 665 88 310 57 168 42

1971 1,865 576 682 94 343 170

1981 5,391 2,618 1,160 162 554 897

1991 21,374 14,200 2,954 331 1,356 2,533

2011 141,866 101,865 19,231 1,604 7,064 12,102

2012 159,491 115,419 21,568 1,677 7,658 13,169

Notes: (a) Includes omni buses since 2001.(b) Others include tractors, trailers, three wheelers (passenger vehicles)/LMV and other miscellaneous vehicles which are not classified separately.

Source: Offices of State Transport Commissioners/UT Administrations as reported in Basic Road Statistics of India,

2011-12, Kotak Institutional Equities

It is important to note that the carrying capacity of two wheelers and four wheelers in India is now much

more than the carrying capacity of busses (see Exhibit 41). This shortage of public transport manifests itself

on Indian roads where buses almost always carry significantly beyond their certified capacity – so too the

suburban railways.


GAME CHANGER

Exhibit 41: Carrying capacity of buses is significantly lower than that of private transport

Registered motor vehicles in India and their carrying capacities, March fiscal year-end, 2012 ('000)

Two wheelers Cars, Jeeps and taxis Buses

Number of vehicles 115,419 21,568 1,677

Typical carrying capacity (#) 2 4 40

Total carrying capacity 230,838 86,272 67,080

Source: Offices of State Transport Commissioners/UT Administrations as reported in Basic Road Statistics of India,

2011-12, Kotak Institutional Equities

The cost of public transport is kept significantly low, in many cases much below the economic cost of

operating the same. This leads to a deterioration of the public service and forces people to opt for personal

transport, clogging the streets. Converting citizens to public transport requires (1) changes in economic

incentives in favor of public transport and away from private transport, coupled with (2) improving the

quality of the commute. The suggestions here are obvious and have been reiterated in multiple committee

reports. We note in Exhibit 42 that many cities in India are now developing or planning to develop their

own metro systems.

Exhibit 42: Several more cities will require metro systems over the next 5-10 years

Metro projects under execution and being planned

Length Project cost Completion

Metro Awarded to (km) (Rs bn) date

Operational

Delhi Metro Phase I Central and state 62 106 Dec-05

Kolkata Metro Phase I-III State 24 NA Dec-10

Delhi Metro Phase II Central and state 125 161 Aug-11

Mumbai Metro Phase I line I ADAG Group 11 24 Jun-14

Under execution

Jaipur Metro Rail Project State 33 91 Jun-13

Bengaluru Metro Phase I State 42 116 Dec-13

Mumbai Metro Phase I line II State 32 120 Dec-14

Gurgaon Metro rail project ILFS-DLF consortium 6 21 Mar-15

Chennai Metro State 43 146 Dec-15

Delhi Metro Phase III Centre and state 103 350 Mar-16

Kolkata Metro Project Phase II Centre 93 134 Mar-16

Kochi Metro rail project Centre and State 25 52 Mar-16

East West Metro rail project (Kolkata) State 14 49 Jul-16

Hyderabad Metro rail project L&T 71 121 Jul-17

Bengaluru Metro Phase II State 72 250 Dec-17

Under planning

Pune Metro rail project State 74 80

Ahmedabad - Gandhinagar Metro Rail Project State 101 120

Ludhiana Metro project State 28 103

Nagpur Metro Project State 45 80

Total 1,003 2,123

Source: News reports, industry sources, Kotak Institutional Equities


Telecommuting for work, entertainment, shopping

The nature of regular travel is undergoing a sea change and is likely to evolve rapidly in the immediate

future. Planners would do well to take cognizance of these changes:

Communication technology: Most travel is on account of work, education or leisure – all of which

require the physical presence of a person. As communication technologies evolve, they are allowing people

to enjoy many of these things from the comfort of their homes.

Multi-hub city models: Cities are seeing the development of satellite hubs that are increasingly self

sufficient, assuming the character of flagship cities with time. As cities themselves move towards a mixed-

development model, distances traveled will potentially decline even as the frequency of trips may increase.

Urban city design needs to take into account the movement of freight in a city. The pattern of intra-city

freight movement is changing dramatically thanks to the development of e-commerce. Where consumers

went to shops and lugged their purchases home, we now have e-shopping seeing a large set of goods

delivered to consumer doorsteps. E-commerce valuations hitting the headlines these days are an indicator

of the potential of this trade. Freight forecasting must take this into account as it can only grow.

Typically freight movement in an Indian city is enabled by fleets of vehicles of all sizes as well as non-

motorized transport (handcarts, rickshaws, etc.). Freight movement requires the planning of loading and

unloading points. Warehouses located close to the city can interfere with the flow of passenger traffic while

those located too far compound heavy-vehicle traffic and increase costs. Given the importance of non-

motorized freight in India to the day means that the average speeds of road transport in India typically is

determined by the slowest-moving freight vehicle.


Infrastructure for the city

The key to making city life affordable lies in providing all citizens with access to high-quality but affordable

infrastructure services like power and water. We note that citizens don’t necessarily look for the cheapest

(or free) delivery of these services – what is valued more is consistency, quality and quantity of delivery.

Traditionally, these are services that have been significantly subsidized in India and in many cases these low

resources have compromised the quality of the utility: what is provided free is not valued by the consumers.

Water: drinking water demand

India’s National Water Policy 2002 prioritizes drinking water over other uses of water. However, as with all

policies Indian, there is a sub-clause which allows for re-prioritization, if so required. The drinking water

segment has been stealthily privatized due to the failure of urban water utilities.

India prices its water low and compounds this sin by failing to collect these charges efficiently. As we note

in Exhibit 43, the all-India average (20 cities) price of water is less than Rs5/cu meter. However, 31.8%

of this is unaccounted for water (UFW), i.e. it is not billed. The water availability is limited to an all-India

average of only 4.3 hours in a day. Unfortunately, such is the state of apathy in this sector that the last

benchmarking exercise in this sector was done by the Asian Development Bank in 2007. We saw similar

apathy in the previous chapter on the urban transport sector where we worked off 2007 data.

Exhibit 43: Water utilities in India work at less than operating costs, providing poor service

Parameters for the functioning of urban water utilities, March fiscal year-end, 2007

Average tariff Unaccounted for water Revenue O&M Operating ratio Availability

(Rs/m3) (%) (Rs mn) (Rs mn) (X) (hours/day)

Ahmedabad 1.4 NA 223 318 1.4 2.0

Amritsar 9.3 57.0 172 234 1.4 11.0

Bengaluru 20.6 45.0 4,255 3,414 0.8 4.5

Bhopal 0.6 NA 100 282 2.8 1.5

Chandigarh 5.0 39.0 404 548 1.4 12.0

Chennai 10.9 17.0 3,127 1,388 0.4 5.0

Coimbatore 3.7 41.0 135 111 0.8 3.0

Indore 2.8 NA 165 881 5.3 0.8

Jabalpur 1.5 14.0 62 104 1.7 4.0

Jamshedpur 4.5 13.0 532 328 0.6 6.0

Kolkata 1.1 35.0 260 1,228 4.7 8.3

Mathura 0.6 NA 9 28 3.1 2.0

Mumbai 4.6 13.0 8,789 4,284 0.5 4.0

Nagpur 6.6 52.0 561 424 0.8 5.0

Nashik 4.3 60.0 182 214 1.2 3.5

Rajkot 5.1 23.0 92 148 1.6 0.3

Surat 1.7 NA NA NA NA 2.5

Varanasi 3.2 30.0 140 182 1.3 7.0

Vijayawada 2.2 24.0 91 104 1.1 3.0

Vizag 8.6 14.0 525 411 0.8 1.0

All India avg. 4.9 31.8 19,823 14,629 1.6 4.3

Source: Asian Development Bank, Kotak Institutional Equities


GAME CHANGER

Larger cities like Chennai, Mumbai and Bengaluru are more ‘profitable’ than others, their operating ratio

(the ratio of their costs to their revenues) being less than one. Jamshedpur, the only city whose water utility

is in private hands, is also able to recover costs. Across India, however, water utilities are plagued by water

theft and high operating ratios.

The failure of public utilities is evident from daily scenes of bulk water delivered to some residential societies

by water tankers in towns and cities; each carrier bears a load of up to 10 cubic meters of water. The

tankers source their water from ground water or from municipal supplies and provide them to localities

which are not connected to the urban water supply grid, or which get less than they need from allocated

supplies. They charge upwards of Rs1,000 in Mumbai for a payload of 10 cubic meters, as against

municipality charges of Rs50 for a similar volume.

The failure of utilities has also fuelled the growth of the packaged water industry and water purifiers. In

effect, the failure of a public utility has posed a private cost on its residents who now need to spend time

and money cleaning up the water that comes to their homes. We covered these segments in some detail in

an earlier GameChanger report: Water – A Deluge of Opportunity. [May 2010]

India also does not treat its waste water. According to estimates by India’s Central Pollution Control Board,

as much as 69% of India’s water goes untreated (see Exhibit 44). The same report also states that 39% of

the actual operating capacity does not meet the government’s standards for the safe disposal of water.

Exhibit 44: Seven-tenths of waste water in India is not treated

Amount of waste water treated/left untreated in India (mn liters per day, 2006)

Population Sewage Treated Untreated % treated

Metro > 1 million 15,644 8,040 7,604 51

Class I cities 100,000 to 1 million 19,914 3,513 16,401 18

Class II towns 50,000 to 100,000 2,696 234 2,462 9

Total 38,254 11,787 26,467 31

Source: Status of water supply, wastewater generation and treatment in class-I cities and class-II towns of India, Central

Pollution Control Board, Kotak Institutional Equities

Municipalities across the world price water significantly higher than the current price in India (see Exhibit

45). The pricing of water by municipal bodies in developed economies typically includes charges for

cleaning the waste water generated after consumption but not so in India. Some water utilities like Delhi

have, over the last few years, raised water charges by up to 50%, imposed fixed monthly service charges

and added sewerage maintenance charges. Mumbai has made only tepid attempts to price its water

effectively, and failed in these attempts. Tentative steps to create water utilities are discussed in cities like

Delhi and Mumbai, but so far there has been no tangible movement. If the creation of water utilities takes

off, just like the creation of distribution companies in the case of the electricity sector, it can open up

investment opportunities.


Exhibit 45: Indian water charges are meaningfully low, though they are rising

Water and waste water charges across various countries, March fiscal year-ends, 2009, 2011 (US$/cu. m.)

2009 2011

Water Waste water Domestic use (lpcd) Water Waste water Domestic use (lpcd)

China 0.27 0.12 95 0.34 0.12 95

Denmark 8.83 — 114 4.32 4.52 114

France 3.58 0.66 232 3.24 1.31 232

Germany 3.12 1.75 151 3.33 2.02 151

India 0.08 — 139 0.14 0.01 139

Russia 0.35 0.24 NA 0.61 0.39 368

South Korea 0.49 0.16 552 0.56 0.20 552

UK 2.03 2.20 139 2.07 2.19 139

US 1.03 1.42 616 1.29 1.69 616

Source: Global Water Intelligence, Kotak Institutional Equities

Privatizing water is a sensitive issue, and not just in India. Attempts to privatize water in Latin American

countries triggered mass protests, followed by city governments backing down. The rallying case for

opponents of privatization is Cochabamba in Bolivia, where violent protests by residents on increased

water-usage charges spooked the government into backing out of its agreement with a private company.

In India, Delhi and Mumbai have experimented with limited privatization, without success. Smaller towns,

however, have taken the lead in experimenting with the privatization of water management and service

delivery. Nagpur’s water is managed and provided by Veolia, a private party. Veolia is also working with

the government of Karnataka in smaller cities like Gurburga and Hubli-Dharwad. As cities begin to get

more comfortable with the idea of the private sector handling their water needs, the trend may pick up in

earnest across the country.

The power situation

Indian cities’ demand for power is growing meaningfully, at 7% a year, faster than the rate of growth of its

urban population, which is expected to be 2.7% over the next 10 years (see Exhibit 46).


GAME CHANGER

Exhibit 46: Demand for electricity will double across major cities in urban India

Energy requirement of larger cities in India, end years of various plan periods (mn units)

XIth plan XIIth plan XIIIth plan

Fiscal year-end 2012 2017 2022

Ahmedabad 7,862 11,133 16,097

Bengaluru 12,300 16,260 21,219

Chennai 15,273 21,434 26,236

Delhi 22,393 31,905 45,793

Hyderabad 13,528 20,652 29,730

Indore 2,007 3,325 5,292

Jaipur 3,905 6,743 10,683

Kanpur 3,046 4,023 5,131

Kolkata 15,528 20,006 25,588

Lucknow 4,840 6,796 9,074

Mumbai 22,107 30,568 43,039

Nagpur 2,311 3,193 4,820

Pune 7,760 12,819 21,111

Surat 8,029 11,053 15,225

Total 140,889 199,910 279,038

Source: Report on Eighteenth Electric Power Survey of India, Central Electricity Authority, Ministry of Power,


This demand push is coming from not just the consumer sector but from the commercial sector too (see

Exhibit 47). The Report on Eighteenth Electric Power Survey of India states, “The increasing trend in the

commercial category is primarily due to the rapid pace of increase in consumption due to development

of malls and other related activities. The drop in industrial utilization is primarily due to shifting to service

industries from manufacturing units”. Even as one arm of the government prepares to make manufacturing

25% of India’s GDP, other arms seem to have a healthy skepticism about the same. More pertinent, latent

demand in urban India is high with hardly any meaningful mechanization having taken place.

Exhibit 47: The domestic sector will continue to lead power demand

Power demand from sectors over various plan periods (%)

XIth plan XIIth plan XIIIth plan

Domestic 35.8 35.3 35.4

Commercial 23.4 24.6 26.2

Industrial 32.6 31.8 30.5

Others 8.2 8.3 7.9

Total 100.0 100.0 100.0

Source: Report on Eighteenth Electric Power Survey of India, Central Electricity Authority, Ministry of Power,



Power utilities suffer from the same fate as water utilities: they are required to meaningfully under-price

their services. Unlike water, where the pricing decisions rest with every urban local body, power is a state

subject and prices are typically set at the state level. State electricity boards run into steep losses because

of the policy of under-pricing power. States have, over the last couple of years, started to raise the power

prices (see Exhibit 48) but a lot remains to be done to avoid losses.

Exhibit 48: Various states have announced tariff revisions

Details of announcements of tariff revisions by states

Revenue/unit (Rs/kWh)

State Last hike (%) 2010 2011 2012 2013 2014

Andhra Pradesh 20% 2.7 3.2 3.2 3.8 4.6

Bihar 12% 3.0 3.9 4.4 5.0 5.6

Chhattisgarh 18% 2.9 3.1 3.6 4.3 5.0

Delhi 21% 4.5 3.8 4.2 5.0 6.1

Goa 0% 3.2 2.9 2.9 2.9 2.9

Gujarat 3% 3.9 3.8 3.9 4.2 4.3

Haryana 13% 3.4 3.4 3.4 4.0 4.6

Himachal Pradesh 13% 4.0 3.4 3.7 3.7 4.2

Jammu & Kashmir 9% 2.4 2.9 2.9 3.2 3.4

Jharkhand 0% 2.8 3.0 3.3 3.9 3.9

Karnataka 0% 3.3 4.0 4.0 4.0 4.0

Kerala 8% 3.4 3.5 3.5 4.6 5.0

Madhya Pradesh 1% 3.5 3.6 3.6 3.9 3.9

Maharashtra 0% 4.2 4.6 4.6 5.5 5.5

Odisha 2% 3.0 3.8 4.6 5.1 5.2

Punjab 9% 2.6 2.6 2.8 3.0 3.3

Rajasthan 13% 2.7 2.5 3.1 3.7 4.2

Tamilnadu 0% 2.8 3.1 3.1 4.2 4.2

Uttarakhand 5% 3.3 3.4 3.4 3.7 3.9

Uttar Pradesh 5% 3.0 3.7 3.7 4.3 4.5

West Bengal 0% 3.9 4.4 4.4 5.7 5.7

Notes:(a) The average tariff for a year is computed as ARR for the year/number of units sold (actuals/estimated).(b) In case of multiple distribution utilities, the tariff hike is averaged over the utilities for which orders are issued.(c) The tariff hike is assumed only for a case in which the ARR petition has been approved.

Source: SERC, Infraline, Kotak Institutional Equities

In many cases, it is not just about raising the cost of power. Power is delivered as inefficiently as water –

older cities use infrastructure created during British rule. A recent World Bank report notes the success of

the Bhiwandi distribution franchise (Bhiwandi is a textile hub in Maharashtra near Mumbai). In a matter of

four years, AT&C losses fell to 15% from 58.5%, collection efficiency shot up to 99% from 58% and load-

shedding became a thing of the past (see Exhibit 49).


GAME CHANGER

Exhibit 49: Bhiwandi has shown the way

Operating and other paramaters for the power utility in Bhiwandi, March fiscal year-ends, 2007-11

2007 2011

AT&C losees (%) 58 19

Number of transformers 2,254 2,611

Distribution transformer failure rate (%) 42 3

Metering (%) 23 98

Load-shedding (hours/day) 10–12 —

Collection efficiency 58 99

Number of feeders 46 86

Extra high voltage capacity 550 1,000

Customers 174,000 235,000

Use of information technology None SCADA, AMR

Source: World Bank report, More Power to India, Kotak Institutional Equities

Pricing and collection are critical

The privatization of utility services conjures images of profiteering. It is important to note that it is the

maintenance and operation of the utility that is up for privatization and not the commodity itself, whether

water or power. This requires a strong state governance mechanism to prevent the private sector from

using its natural monopoly position to make super-normal profits from essential utilities.

India needs to structure the pricing of its water and power utilities right. All developments on the demand

side as well as conservation efforts will get a significant boost once the signaling mechanism of pricing is

in place. Indian urban utilities also suffer from long delays in collecting their dues with average debtor days

being more than half a year for both water and power utilities. Complete metering, economically viable

pricing and ensuring that the sums due are collected requires strict enforcement. This is critical to ensure

not just generation of revenue but also to foster a culture of compliance. If a few people get away without

paying, it invariably creates a question in the minds of the compliant population. Across the agriculture,

industry and residential segments, the pricing and collection of these utilities can lead to the realization of

their economic value, prompting more efficient use.


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Flexible and integrated master plans

Indian cities will grow significantly larger in area. Many city master-plans take into account incremental

growth in population around a single economic hub. India’s urban growth will deviate meaningfully from

that on city blueprints on account of our forecast trends in (1) de-densification and (2) multi-model (or

multi-hub) development. The modern city must provide for flexible land use – it must create processes to

facilitate the process of land conversion from agricultural to residential/commercial land. This will also allow

the city treasury to benefit directly and officially from such conversions, currently a gray and shadowy area.

A consultative and flexible planning process could respond quickly to changing needs of the city. This is

easier said than done in light of the plethora of laws and agencies that govern the process of urbanization.

The consultative approach must take into account the long-term growth of the city, and offer its residents

the opportunity to live and work outside the heart of the flagship city. This requires city limits to extend

and build out land outside the city to develop new hubs. Stakeholders in a city’s development therefore

include not just its current residents but its future residents who live in adjacent areas as well. Inevitably and

inexorably, the city will stretch to include these residents in due course.

City master plans must take into account projections for population growth and the character of

surrounding lands, making provisions for new city centers.

Mayoral system – localized city representation

Robust cities need empowered and directly elected leaders for their city governments. Whether the

leader is called a mayor, city president or CEO is moot – such a role comes with accountability and the

responsibility to develop and execute integrated city development plans. As the gap between the number

of urban Indians and rural Indians begins to close, we will see a sharper focus on the governance of

cities. The mayor’s office can be the one that defines the overarching vision for the city’s development

and co-ordinates between all the providers of services and capital goods needed to realise the vision. We

expect that as urban voters become stronger political constituencies they will demand locally responsive

governments.

Financial prudence

Indian cities have typically very poor levels of governance simply because they do not have the ability to

fund their own maintenance and development and hence remain vassals of the state or the centre. Property

taxes and utility prices need to rise simply so that cities can create utilities that function.

Indian cities are small when compared with most other larger cities in the world. As India prepares to de-

densify, it should use the building of infrastructure in the periphery of the city to complement its increase

in property taxes or development charges. If Mumbai has to grow to the size of New York, it will need to

grow 5-20X its current land area (depending on what estimate we take of the land area of these cities).

Covering such large areas will require pre-emptive setting up of infrastructure – the value of which will

need to be financed by eventual residents.


GAME CHANGER

India remains a poor country and the pricing of utilities is an issue typically fraught with political

sensitivities. However, we have noted examples of how utilities need to improve outcomes through effective

and efficient management so that a larger populace is able to get the service from the utility: today, given

the decrepit nature of various utilities, many neighbourhoods get excluded as there is no money to build

infrastructure. In most cases, a well regulated private entity can bring efficiencies.

Development of housing capacity

The poor quality and quantity of housing in India means there will be a massive push towards better

housing. Our calculations suggest India will need to build an average of 6 bn sq. ft of capacity every year

over the next decade. The real estate industry in India is tightly controlled and large parts of it remain

unorganized. India needs to streamline rules for housing to allow more organized players and timely

approval and completion of projects.

Low-cost housing. This involves two shifts in present thinking: (1) increasing bankability for a large section

of the population so that they are credit-worthy at low rates of interest and (2) opening up large areas of

land so it is cheap and available for construction. The city must explore the idea of an easy, secure leased-

housing market for new migrants. India can pick up helpful hints from South Korea, which induced a

massive supply shock in the mid-1980s, to ensure that almost everyone owned a home.

Significant investment in moving people and goods within the city

A concomitant requirement of the increase in the land area of cities will be the need to develop very large-

scale transport solutions. A large part of the transport need is being met privately (people buying their

own 2- or 4-wheelers), cities must improve and then incentivize public transport to reduce congestion and

pollution. Mixed-use housing (following a pattern of ‘transport-oriented development’) should mean that

travel distances decline even as the frequency of trips may increase. The challenge in building in transport

infrastructure is to figure out how to make these utilities recover investment and pay for operational costs.

"I, Akhilesh Tilotia, hereby certify that all of the views expressed in this report accurately reflect my personal

views about the subject company or companies and its or their securities. I also certify that no part of my

compensation was, is or will be, directly or indirectly, related to the specific recommendations or views

expressed in this report."


NOTES

GAMECHANGER VOL. V.1 - August 2014

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