Deregulating Land, Building, and Construction: A Path to Economic Growth

On January 31, 2025, India's Chief Economic Advisor emphasized the urgent need for deregulation in the construction sector, particularly concerning land use, building codes, and construction regulations. The current framework—characterized by stringent restrictions on setbacks, floor-area ratios (FAR), and parking requirements—has increasingly become a barrier to economic growth. As cities expand and urbanization accelerates, it is crucial to rethink these regulations to foster a more conducive environment for businesses and citizens alike.

Case for Construction Reforms

The Burden of Current Regulations

The existing regulatory landscape imposes significant constraints on urban development. Restrictions on setbacks and FAR limit the efficient use of land, driving up costs for developers and ultimately consumers. For instance:

• Setbacks: These regulations dictate how far buildings must be set back from property lines. While intended to ensure safety and aesthetics, excessive setbacks can waste valuable land that could otherwise be used for commercial or residential purposes.

• Floor-Area Ratios: FAR limits the total floor area of a building relative to its plot size. While this regulation aims to control density, it often results in underutilization of land, particularly in rapidly urbanizing areas where demand for housing and commercial space is high.

• Parking Requirements: Mandated parking spaces can further exacerbate land scarcity. In densely populated urban environments, allocating significant space for parking can detract from potential residential or commercial developments.

Additionally, Tamil Nadu has amended its building regulations 12 times in the past decade. In some cases, compliance with these building regulations can require developers to forgo up to 69% of a plot, severely limiting the effective use of land and increasing costs for construction projects. Multiple reports document the burdens imposed by these compliance requirements, highlighting the need for reform in building regulations to alleviate these pressures on developers and promote economic growth.

These regulations not only inflate construction costs but also contribute to housing shortages and increased prices for consumers. As a result, businesses face higher operational costs, which can stifle innovation and economic growth.

The Need for Change

Deregulating land use and construction regulations is essential for several reasons:

1. Encouraging Investment: A more flexible regulatory framework can attract both domestic and foreign investment by reducing compliance costs and enhancing the viability of projects. According to the Economic Survey 2024-25, enhancing economic freedom for individuals and small businesses is crucial to bolster India's medium-term growth prospects.

2. Promoting Affordable Housing: By allowing developers greater freedom in design and construction, cities can address the pressing need for affordable housing. Increased density can lead to more housing units being built in desirable locations.

3. Enhancing Urban Efficiency: Flexible zoning laws can facilitate mixed-use developments that combine residential, commercial, and recreational spaces. This not only optimizes land use but also fosters vibrant communities where people can live, work, and play.

4. Stimulating Economic Growth: A streamlined regulatory environment can lead to faster project approvals and reduced time-to-market for new developments. The Economic Survey highlights that India needs to achieve a growth rate of around 8% at constant prices over the next decade to realize its economic aspirations of becoming a developed nation by the centenary of independence.

Supporting Data from the Economic Survey

The Economic Survey 2024-25 provides compelling data supporting the need for deregulation:

• Growth Projections: The IMF projects India to become a USD 5 trillion economy by FY28 and reach a size of USD 6.307 trillion by FY30. This translates into an annual nominal growth rate of nearly 10.2% in USD terms for FY25 to FY30.

• Investment Climate: The survey emphasizes that enhancing economic freedom is vital for driving growth in line with these ambitious projections. It also underscores that India must shed regulatory burdens that hinder business operations.

• Urbanization Trends: With urbanization rates rising significantly—expected to reach over 57% by 2022—there is an urgent need for policies that support efficient land use and development practices.

Examples of Successful Deregulation

Several global examples illustrate how deregulation in the construction sector has led to positive outcomes:

• Singapore's Urban Redevelopment Authority (URA): Singapore has successfully implemented flexible zoning laws that allow for mixed-use developments. This approach has not only optimized land use but also created vibrant urban spaces that cater to diverse needs.

• New York City's Zoning Resolution Reform: In 2016, New York City undertook significant reforms of its zoning resolution to promote affordable housing development. By easing restrictions on FAR and allowing greater flexibility in building heights, the city has seen an increase in new housing units while addressing affordability concerns.

The Role of Micro Data in Decision-Making

For deregulation efforts to be effective, it is imperative to incorporate more micro-level data into decision-making processes. This data-driven approach will enhance transparency and accountability in urban planning:

• Understanding Local Needs: Micro data allows policymakers to gain insights into community needs and preferences. By analyzing patterns in housing demand, traffic flows, and public service usage, cities can make informed decisions that align with residents' priorities.

• Improving Policy Outcomes: Data-driven decision-making enables local governments to assess the impact of deregulation on various stakeholders—residents, businesses, and the environment—before implementing changes.

• Facilitating Adaptive Management: With robust data collection mechanisms in place, cities can monitor the effects of deregulation over time. This feedback loop allows for adjustments based on real-world outcomes rather than theoretical models.

Conclusion

The integration of Product-Service Systems into urban governance frameworks presents a transformative opportunity for Indian cities facing complex challenges associated with rapid urbanization. By combining products with services, cities can enhance their operational efficiency, improve data collection methods, and ultimately provide better services to their citizens. The successful implementation of PSS requires careful planning, collaboration among stakeholders, and a commitment to standardization—but the potential benefits make it a critical path forward for sustainable urban governance in India.

As Indian cities continue their journey towards becoming more livable and resilient spaces, embracing innovative frameworks like PSS will be essential in addressing the pressing challenges of today while preparing for the uncertainties of tomorrow.

In summary, deregulating land use and construction regulations is not just about easing compliance burdens; it is about unlocking economic potential that will drive India towards its ambitious growth targets while ensuring sustainable urban development. By leveraging micro-level data for transparent decision-making processes, India can create an environment where businesses thrive and communities flourish.