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Shirish Sankhe: Urgent need for reforms

Shirish Sankhe |  Apr 23, 2010 12:21 AM IST

India is on the cusp of a dramatic urban transformation, the scale and speed of which is unprecedented. It took nearly 40 years for India’s urban population to rise by 230 million, but it will take only half the time to add the next 250 million. By 2030, 590 million people 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 populations of 10 million or more each.

Yet, India has barely engaged in a national discussion about how to handle 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 generate 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 development, and drive a four-fold increase in per capita income. Finally, cities represent perhaps the most cost-effective vehicle 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 urbanisation approach, our analysis suggests, will result in peak vehicle density of 610 per lane kilometre against a benchmark of 112. Likewise, water supply will drop to 65 litres per capita against the benchmark of 150, and slum population 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 international and 15 Indian cities suggests that nuts-and-bolts practices in urban renewal are common across developing and developed countries. Of the 34 recommendations that comprise a new operational model for India’s cities, we elucidate the three most critical ones:

Unlocking $1.2 trillion in new urban investments
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 capita spend from $17 today to $134. The need is even higher in Tier-I, where India needs to spend around $300 per capita annually. 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 assets effectively. MMRDA in Mumbai has shown that it is possible as it used land asset sales to fund a proposed $22 billion infrastructure programme. Second, India 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 operations and maintenance costs. Third, cities in India hardly leverage debt or private sector participation to finance building 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 consistent, formula-based system. A pivotal reform 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 having 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. However, it is unfortunate that despite the 74th Amendment to the Constitution, cities are run as distracted extensions of state governments. To achieve substantive change in city governance, India has a series of options to choose from, including converting 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 parliamentary democracy, in which India’s governance architecture is rooted. For efficient service delivery, India needs to embark on a reform uniformly adopted by every successful city in the world: creation of corporatised agencies with clear mandates, 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 opportunity to anticipate the next 20 years of rapid expansion and shape its portfolio of cities by acting simultaneously 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 density of cities is imperative to optimise costs, save land and reduce environmental 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 current state of deep inertia to one of a deep commitment to change backed by a sense of urgency. In particular, state governments need to be the front-runners. Progressive 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 political alignment and need to be pushed from the apex levels of the Central government. In the Jawaharlal Nehru National Urban Renewal Mission, the Centre 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 inclusiveness of India’s growth is at stake.

Shirish Sankhe, Ireena Vittal & 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



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