The economic impact of land and urban planning regulations in India

by Alain Bertaud

April 2002


Government intervention - in the form of regulations, infrastructure investments and taxation - has a direct impact on urban land supply and on the demand for land, and therefore on the price of land and housing. De facto, some regulations have the effect of allocating land administratively, ignoring demand and costs and bypassing market mechanism in allocating resources. Land regulations are necessary to the well functioning of markets but when poorly designed they can constitute a serious drag on economic development.

In India, the combined effect of multiple layers of poorly conceived central, state and municipal regulations contribute to an artificial urban land shortage. As a result urban land prices are abnormally high in relation to India’s household income, and households consume less floor space than they could afford if the regulatory environment were reformed. In addition, some regulations have a negative impact on the spatial structure of cities. By unreasonably reducing the amount of floor space that can be built in centrally located areas, and by making land recycling difficult, some regulations tend to “push” urban development toward the periphery. As a result, commuting trips become longer, public transport become difficult to operate and urban infrastructure has to be extended further than what would have been the case if land supply had been unconstrained.