Since it was first proposed on 24 February, the new development plan of the Municipal Corporation of Greater Mumbai (MCGM), which intends to provide a roadmap for urban development until 2034, has aroused much commentary, largely negative. This stemmed from factual errors in the development plan, along with concerns about the proposed increases in the floor space index (FSI). The FSI governs how large and tall a structure may be built on any given plot of land. Because of the controversy, the Maharashtra government has returned the draft development plan to the MCGM, and asked it to revise the plan.
A key question is whether the revised plan will drop the proposed large increase in FSI, which was the centrepiece of a lively closed-door discussion at the IDFC Institute, a Mumbai think tank, of which I am a fellow. It became evident from the meeting that vested interests—including the builder lobby and officials tied to the current regime—strongly opposed liberalizing FSI norms and supported the status quo.
What is the economics behind this?
In a nutshell, as lucidly explained in a research note for IDFC Institute by architect and urban planner Bimal Patel, FSI rules have remained largely static since they were originally framed in 1964, while the property market has burgeoned. The result is scarcity (or an excess of demand over supply). In other words, FSI rules which have not kept pace with growth in the market effectively constrain how tall builders can build.
As a matter of textbook economics, a government can create scarcity in a given market by one of two mechanisms—it can either fix a price that is artificially low, or, alternatively, it can fix a quantity (that is, a quota), which, again, is artificially low—by “artificially low” I mean a level of economic activity which would be below what would prevail in a competitive market without government intervention.
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About us
MCHI-THANE has always been very clear that fine housing complexes and shopping malls cannot stand in isolation. A great City is the sum total of great buildings, great infrastructure and great people. MCHI has been committed to growth of the real estate sector and is credited with the harmonious growth and rise in quality and standards of construction in Thane City in the past decade.
Its aim as an Association of Developers has been to seek rational rules and regulations which are uniformly applied across the board as this will to a great extent result in speedy construction, cost reduction, fair pricing and a push for better quality standards at par with the developed world, with a high level of transparency.
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