Jobs and growth: A way out

An important challenge facing the country is the lack of jobs and the relatively slow pace of economic growth. What we need is a fresh approach that takes care of both issues. At this stage, we can have urbanisation and real estate development as an engine of growth and job creation. Why and how?

Economic development tends to go hand in hand with urbanisation. And, the latter has been quite slow in India. It stands at 34 per cent (in China, it is nearly double at 65 per cent). So economic growth has been adversely affected in India. Now urbanisation requires real estate development. The latter is an important and an integral part of economic development. However, the real estate sector is often viewed as primarily “commercial” rather than “developmental”. This is unfortunate.

Besides the direct effect of urbanisation and real estate development on jobs and growth, there is a much larger story here. It is often not realised that approved and reasonable quality real estate in Indian cities is, on an average, quite expensive relative to the fundamental value and relative to market price of real estate in a developed country like the US; this is particularly true when we use the purchasing power parity instead of the market exchange rate. And, the high price of real estate, low quality, and poor urban planning have substantially reduced the ease of entering and expanding business in India.

More specifically, real estate development in existing and altogether new cities on a large scale can lead to availability of space for offices, retail business, wholesale trade, distribution, storage, financial and insurance services, start-ups, workshops, gas stations, and so on, at reasonable prices and in an organised manner. Also, we can have affordable housing, which can reduce the cost of hiring in cities. Urbanisation and real estate development also pave the way for more educational institutions, clinics and hospitals, old age homes, crèches, offices for public services, recreational centres, entertainment and hospitality hubs, sports facilities, eateries, bus terminals, train stations, airports, places for waste disposal, film studios, animal sheds, parking spaces for vehicles, economical venues for meetings and celebrations, parlours, and so on. Real estate development and urbanisation gives a push to “brick and mortar” structures as well as online and offline services. 

Clearly, the desirability of large scale real estate development can be hardly overemphasised. Let us come to the feasibility. Fortuitously, real estate development can be labour-intensive and India is a labour-abundant economy. It is true that we need capital as well, but the savings rate is high in India. So, there is not much of an issue here as well, provided urbanisation and real estate development are carried out appropriately by, for example, minimal use of high-rise buildings and “world-class expressways” that can be capital-intensive. 

Clearly, an important part of the suggested strategy is using more land for real estate development. But contrary to the widely held view, the need for additional land in the context of urbanisation and real estate development is actually quite small. For example, barely 0.75 per cent of the land in India is, as Ajay Shah showed, needed for decent housing for all. It is true that even though we do not really have a scarcity of land in the context of urbanisation and real estate development, the price of land to be “acquired” is nevertheless high. How can we resolve this problem?

Briefly here, the price of land in rural India is high primarily because the price of urban land is very high. And, the latter is rooted in a variant of the licence-permit-quota raj that is still prevalent in India, at least for the real estate sector. Relatedly, the public authorities do not provide for, or pave the way for others to provide for, adequate infrastructure that can enable the private sector to engage in real estate development on a very large scale in potentially upcoming new areas. All these policies need to change.

It is clear that we have here primarily a case of government failure to provide the appropriate policy framework within which urbanisation and real estate development can happen smoothly. It is much less a case of intrinsic market failure. 

Emphasis on the real estate sector as an engine of economic growth and job creation is not what we see in standard development economics but it is consistent with basic theory in economics and with SWOT analysis in management (with focus on strengths, weaknesses, opportunities and threats). It is also consistent with sound public finance, given that the approach does not require subsidies or incentives — at least not on a large scale. All we need is a change in mindset and policy. 

The writer is visiting faculty, Indian Statistical Institute, Delhi Centre. gurbachan.arti@gmail.com