investments
URBANISING INDIA
URGENT NEED
FOR REFORMS
With 590 mn people in cities by 2030, a
business-as-usual approach will mean
urban India will look like one giant slum
SHIRISH SANKHE, IREENA VITTAL
AND AJIT MOHAN
ndia is on the cusp of a dramatic
I urban transformation, the scale and
speed of which is unprecedented.
It took nearly 40 years for India’s ur-
ban population to rise by 230 million,
but it will take only half the time to add the
next 250 million. By 2030, 590 million peo-
ple will live in cities, more than double the
290 million in 2001. India will have 68 cities
with populations of more than 1 million
each, 13 cities with more than 4 million
each and six megacities with popula-
tions of 10 million or more each.
Yet, India has barely engaged in a
national discussion about how to han-
dle this seismic shift. India remains caught
in debating whether urbanisation is good
or bad. This is a false dichotomy. The fate
of India’s villages and that of its cities are
intertwined. Particularly as cities will gen-
erate 70 per cent of new jobs, more than
70 per cent of India’s GDP, 85 per cent
of the tax revenue that will finance de-
velopment, and drive a four-fold increase
in per capita income. Finally, cities rep-
resent perhaps the most cost-effective ve-
hicle to expand access to basic services
and foster inclusive growth.
Not paying attention to our cities is
perilous and could result in massive
urban decay. Pursuing the current ur-
banisation approach, our analysis sug-
gests, will result in peak vehicle densi-
ty of 610 per lane kilometre against a
benchmark of 112. Likewise, water sup-
ply will drop to 65 litres per capita against
the benchmark of 150, and slum popu-
lation will balloon from 17 million to
38 million. Indeed, the hardest hit will be
urban India’s poorest.
However, India has not lost its
chance if it chooses to act with urgency.
International experience suggests it is
possible to turn cities around in a
decade. Although India’s development
model is unique, our study of five in-
ternational and 15 Indian cities sug-
gests that nuts-and-bolts practices in
urban renewal are common across de-
veloping and developed countries.
Of the 34 recommendations that com-
prise a new operational model for In-
dia’s cities, we elucidate the three most
critical ones:
Unlocking $1.2 trillion in new urban
India needs to break away from its
incremental approach to urban investments
as it will need to invest an average of $60
billion (Rs 2,70,000 crore) annually. This is
an eight-fold increase in annual per capi-
ta spend from $17 today to $134. The need
is even higher in Tier-I, where India needs
to spend around $300 per capita annual-
ly. Without such a scale-up, Indian cities
are at risk. Achieving this jump requires
India to unleash sources of funding that
have been traditionally under-leveraged.
First, India needs to monetise land as-
sets effectively. MMRDA in Mumbai has
shown that it is possible as it used land as-
set sales to fund a proposed $22 billion
infrastructure programme. Second, In-
dia has to quintuple property tax collection
to at least 0.3 per cent of property values
through better assessment and compliance.
User charges need to at least recover op-
erations and maintenance costs. Third,
cities in India hardly leverage debt or
private sector participation to finance build-
ing of infrastructure, an opportunity that
alone could be worth $12 billion a year.
With these changes, Tier-I and -II cities can
fund as much as 80 to 85 per cent of their
requirements. The balance must come from
Central and state governments, but not
in the current ad-hoc manner. Like other
countries, India needs to create a consis-
tent, formula-based system. A pivotal re-
form on this front is to allow Indian cities
to retain 18 to 20 per cent of the goods and
services tax (GST), resulting in them hav-
ing a material stake in their economic
future. For instance, China allows its cities
to keep 25 per cent of the VAT collected.
Empower cities, modernise
service delivery
In 2030, India’s largest cities will be
bigger than many major countries in both
population and economic output. How-
ever, it is unfortunate that despite the 74th
Amendment to the Constitution, cities are
run as distracted extensions of state gov-
ernments. To achieve substantive change
in city governance, India has a series of
options to choose from, including con-
verting its largest cities into states, e.g.
Delhi. Since this is politically difficult,
at the least India must institutionalise
directly-elected metropolitan mayors in
its 20 largest cities, like in the UK, a par-
liamentary democracy, in which India’s
governance architecture is rooted. For ef-
ficient service delivery, India needs to em-
bark on a reform uniformly adopted by
every successful city in the world: creation
of corporatised agencies with clear man-
dates, reliable budgets and empowered
chief executives.
Shape the distributed
urbanisation portfolio
Few growing economies have had the
chance to influence the distribution of
their urban population. India has the op-
portunity to anticipate the next 20 years
of rapid expansion and shape its port-
folio of cities by acting simultaneous-
ly on two fronts. First, India should pre-
invest in emerging Tier-II cities so they
do not emulate the trajectory of urban
decay of today’s Tier-I cities. Next,
development of cities has overlooked
urban form, design and internal shape.
Proactively designing the shape and den-
sity of cities is imperative to optimise
costs, save land and reduce environ-
mental damage. Prudent internal shape
can save India at least six million hectares
of potentially arable land.
If India adopts these reforms, the
prize is significant — it could boost
the economy’s long-term growth rate by
1 to 1.5 percentage points. For this,
India needs to transition from the cur-
rent state of deep inertia to one of a deep
commitment to change backed by a sense
of urgency. In particular, state govern-
ments need to be the front-runners. Pro-
gressive chief ministers must recognise
that managed urbanisation represents
a powerful populist vehicle aligned to
their political agendas as the nature
of electoral politics changes.
Equally, the Centre has a catalytic
role to play. Many reforms require po-
litical alignment and need to be pushed
from the apex levels of the Central gov-
ernment. In the Jawaharlal Nehru Na-
tional Urban Renewal Mission, the Cen-
tre has a readymade vehicle that can be
strengthened, including perhaps through
creating an incentive fund targeted
only at states that will embark on the
next generation of reforms.
Finally, citizens should shift from small,
reactive demands to a call for fundamental
institutional change for urban India. They
need to insist that political leaders fix the
institutions that “fix the roads” and not
simply “fix the roads”.
It is easy to be sceptical about India’s
ability to transform its cities. But we are
optimistic that it can be done. Nothing less
than the sustainability and inclusive-
ness of India’s growth is at stake.
Shirish Sankhe, Ireena Vittal and Ajit
Mohan are the lead authors of the
report, India’s urban awakening:
Building inclusive cities, sustaining
economic growth. Shirish is a director,
Ireena, partner and Ajit, engagement
manager in McKinsey & Company’s
Mumbai office