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Policy Change and Floor Space Index

This article explores the key features of contemporary floor space index policy in Mumbai to contribute to the ongoing debates and provide the context for evaluating the proposed urban policy changes. Contemporary FSI in Mumbai exists in a policy network of exemptions, incentives, and development rights.

Many debates about urban dev­elopment in Mumbai focus around the question of floor space index or FSI levels, and have been explored in the pages of EPW. FSI and related urban policy instruments are an important source of government revenue and play a role in creating aff­ordable housing, slum redevelopment and in achieving other urban goals. Int­roduced in the development plan for Mumbai in 1964, FSI is defined as the ­ratio of the total built-up area to total plot area. It determines the volume or bulk of a building and the floor space that can be constructed. As a simple example: if the FSI is 1 and the entire plot is built on, the building can only be constructed to one floor. If half the plot is left as open space, then the building can be built to two floors, and so on. The FSI in the ­Island City was set at 1.33 and in the suburbs it was 1. However, the “consumed” FSI varies in the city from 0.93 to 7.35 (MCGM 2006: 87).

While some urban economists have advocated for deregulation or increasing the FSI limits in ­Indian cities, especially Mumbai (Bertaud 2011; Glaeser 2011: 160; Brueckner and Sridhar 2012), some urban planners have been sceptical. Shirish Patel (2013) has argued that ­relaxing FSI could result in densification, overcrowding, and infrastructure shortfalls. In light of these debates, this article puts forth two important features of contemporary FSI policy as providing the context for evaluating proposed changes to FSI policy. The argument of this article is that contemporary FSI ­exists in a policy network of exemptions, incentives, concessions, and development rights. Policy change to FSI regulations must take this into account—multiple stakeholders are implicated and any change in FSI levels or to the related instruments and exemptions will have an impact on stakeholders differently.

The first feature of FSI policy is that FSI is not a single policy; rather it exists along with various exemptions and concessions, which include FSI premiums, bonuses, fungible FSI, and transferable development rights (TDR) (see Issar 2022 for more details on definitions and FSI history). What is common to these exe­mptions is that they allow for greater FSI to be consumed on a plot, whether by paying a fee to the government (premium), or through a grant from the government (bonus), or by buying extra FSI in the market (TDR). It has been the long-term strategy of the state and local governments that increases in FSI, whether in the development plan or in response to a crisis like Covid-19 to stimulate the housing sector, are in the form of these “incentives” instead of the deregulation of the FSI levels that is often proposed by economists.

In other words, instead of raising FSI from say 1.33 to a higher level, the Maharashtra government and the Municipal Corporation of Greater Mumbai (MCGM) change the exe­mptions and concessions. We can see this in the Mumbai Development Plan 2034, unveiled in May 2018, where the increase in permissible FSI occurred through payment of premiums and greater allowances for TDR loading (Knight 2018). This provision for increased FSI resulted in extensive public critique, especially from civil society and environmental non-governmental organisations who claimed that the city’s infrastructure would not be able to support the additional housing demands, and would only benefit builders (Merchant 2018).

Similarly, in 2021, in a measure to stimulate housing construction that had been stalled as a result of the global pandemic, the state government reduced the construction premiums that developers pay by 50%—FSI premiums are a significant component of these construction premiums (Thomas 2021). Some developers who were interviewed about this policy change did not consider it having downward effects on real estate prices, partly because the premium reductions would only apply to certain projects, and would not affect the unsold inventory of real estate in Mumbai (Thomas 2021). Two points are noteworthy here: instead of deregulation through increased FSI levels, the policy change focused on the premium charged for excess FSI. This allowed the Maharashtra government to maintain FSI as a policy lever—as a revocable and changeable incentive—in its own hands. As it currently stands, premium FSI and TDR are an important revenue generation tool for the MCGM, Mumbai Metropolitan Region Development Authority, and the state government (for details, see Gandhi and Phatak 2016). By extending premium FSI to the island city, which was previously only available in the suburbs, the state government could stand to increase its revenue even further. Any changes to FSI therefore affect the revenue streams of state and local governments.

The second feature of FSI policy relevant to this article is that the relationship of FSI levels to land values and housing costs appears to be a source of contention among local experts. From just one news article (Chitnis 2018), we can see the following views: a real estate dev­eloper noted that increase in FSI has long been an industry demand. A property consultant argued that increases in FSI will increase values of land parcels benefiting those that own these parcels (the unsaid part of this argument might be that higher values would make owners of developable land more likely to release this land into the market, thereby increasing supply). The literature in urban economics suggests that developers have heterogeneous preferences for urban regulations with those owning developed land favouring regulatory constraints (to maintain price levels) and those owning undeveloped land preferring looser regulations (to maximise profits from building new units; Hilber and Robert-Nicoud 2013). Patel (2008) had noted that the Mumbai “land mafia” welcomed restrictive regulations (that is, low FSI) as a way to maintain high land prices. We can also imagine that some developers have interests in both developed and undeveloped land, or have projects in different stages of progress—the impacts of increased FSI or changing premiums on such developers are likely to be mixed. For example, although it is assu­med that the increase in FSI would be an unmitigated good for developers, the shares of Sunteck Realty dropped by ­almost 3.5% after the Maharashtra government reduced FSI premiums in 2019, because it had already paid for additi­onal FSI on its ongoing projects (Bavadharini 2019). In other words, developers have heterogeneous preferences and these preferences cannot be deduced from the textual levels of FSI but must take into account factors such as the develo­per’s portfolio and their exposure to the TDR market. The secretary of urban ­development, in an attempt to allay concerns about carrying capacity, said that increases in FSI would be linked to inc­reased infrastructural all­owances. An environmentalist argued that input costs might not decrease and instead vertical slums might result. And a realty expert argued that increased FSI would not be enough on its own to reduce input costs or bring housing affordability (Chitnis 2018). Been et al (2019) identify “supply scepticism” as the “disbelief that additional market-rate housing helps make housing more affordable, and indeed a view that it may increase rents and prices” (p 25). Some of the comments from different stakeholders in Mumbai seem to reflect such scepticism. Even in the context of affordable housing in the United States, it is argued that any loosening of supply res­trictions will not by itself create affordable housing without government incentives and subsidies such as inclusionary zoning and density bonuses (Been et al 2019; for the Indian context, see Shirgaokar 2013; Issar 2020).

Conclusions

What are the implications for urban pra­ctitioners and policymakers from this analysis of FSI and its related policy ins­truments? We need to shift our analysis from textual policies of FSI restrictions and their absolute levels (for example, FSI of 5 or 4 or 1.33): FSI policies on the ground are always combined with exe­mptions, premiums, and incentives and the effects of FSI policy on housing aff­ordability and urban density emerge in conjunction with these incentives. If de-r­egulation is a goal, policymakers will need to consider the knock-on effects on different instruments and stakeholders implicated in FSI policy: for example, an increase in FSI levels will affect TDR holders (including parastatals) through a decline in TDR values. While some dev­elopers could benefit from this incre­ased FSI, others would lose out if they hold TDR. Similarly, a decrease in premium FSI affects government revenue and in turn, the infrastructure financing needed to balance out excess density. Policy change that targets absolute levels of FSI has generated public opposition in the past as compared to changes that affect premiums or bonuses. Future policy rese­arch could analyse FSI levels and exemptions (premiums, TDR) together, providing a more complete picture of the current urban policy landscape.

References

Bavadharini, K S (2019): “Home-buyers Stand to Benefit from Cut in Premium for Additional FSI in Mumbai,” Hindu Business Line, 21 August, https://www.thehindubusinessline.com/news/real-estate/home-buyers-stand-to-benefit-from-cut-in-premium-for-additional-fsi-in-mumbai/article29199003.ece.

— (2021): “No Premium on FSI-free Areas on Rehab Units of Mhada Colonies: Bombay HC,” Hindustan Times, 7 February, https://www.hindustantimes.com/cities/mumbai-news/no-premium-on...n-rehab-units-of-mhada-colonies-bombay-hc-101612637323100.html.

Been, Vicki, Ingrid Gould Ellen and Katherine O’Regan (2019): “Supply Skepticism: Housing Supply and Affordability,” Housing Policy Debate, Vol 29, No 1, pp 25–40.

Bertaud, Alain (2011): “Mumbai FAR/FSI Conundrum: The Perfect Storm, the Four Factors Restricting the Construction of New Floor Space in Mumbai,” Working Paper, http://alainbertaud.com/wp-content/uploads/2013/06/AB-Mumbai-FSI-Conundrun-Revised_June-2013_kk-ab1.pdf, viewed on 25 May 2021.

Brueckner, Jan K and Kala S Sridhar (2012): “Measuring Welfare Gains from Relaxation of Land-use Restrictions: The Case of India’s Building-height Limit,” Regional Science and Urban Economics, Vol 42, pp 1061–67.

Chitnis, Purva (2018): “FSI Increased for Residential, Commercial Buildings in Mumbai,” Bloom­berg Quint, 27 April, https://www.bloombergquint.com/business/fsi-increased-for-residential-commercial-buildings-in-mumbai.

Gandhi, Sahil and Vidyadhar K Phatak (2016): “Land-base Financing in Metropolitan Cities in India: The Case of Hyderabad and Mumbai,” Urbanisation, Vol 1, No 1, pp 31–52.

Glaeser, Edward (2011): Triumph of the City: How Our Greatest Invention Makes Us Richer, Sma­rter, Greener, Healthier, and Happier, Penguin Press.

Hilber, Christian A L and Frederic Robert-Nicoud (2013): “On the Origins of Land Use Regulations: Theory and Evidence from US Metro Areas,” Journal of Urban Economics, 75, pp 29–43.

Issar, Sukriti (2020): “Conceptualising the Connections of Formal and Informal Housing Markets in Low- and Middle-income Countries,” Housing Studies, doi.org/10.1080/02673037.2020.1831444.

 (2022): “The Financialisation of Floor Space, Mumbai 1880–2015,” Urban Studies, https://doi.org/10.1177/00420980221076745.

Knight Frank (2018): “Mumbai Development Plan 2034: DCPR 2034—Deciphering Mumbai’s Future,” https://content.knightfrank.com/research/1004/documents/en/india-topical-reports-dcpr-2034-deciphering-mumbais-future-5994.pdf.

MCGM (2006): “Report on Draft Development Plan 2034 (RDDP),” Municipal Corporation of Greater Mumbai, May.

Merchant, Murtaza (2018): “Realty Check: Mumbai Development Plan Evokes Mixed Reaction,” Outlook India, 29 April, https://www.outlookindia.com/newsscroll/realty-check-mumbai-development-plan-evokes-mixed-reaction/1297498.

Patel, Shirish (2008): “Mumbai and Shanghai,” Economic & Political Weekly, 22 November, Vol 43, No 27, pp 89–90.

 (2013): “Life between Buildings: The Use and Abuse of FSI,” Economic & Political Weekly, 12 October, Vol XLVIII, No 6, pp 68–74.

Shirgaokar, Manish (2013): “Limitations of the Anti-floor Space Index Position,” Economic & Poli­tical Weekly, Vol XLVIII, No 29, pp 123–25.

Thomas, Tanya (2021): “Home Prices Unlikely to Drop in Mumbai,” Livemint, 14 January, https://www.livemint.com/companies/news/home-prices-unlikely-to-drop-in-mumbai-11610589763822.html.

 

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Updated On : 20th Jun, 2022
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