Professional Documents
Culture Documents
SUMMARY
The housing construction sector in India is small and unproductive. The sector
contributes only 1 per cent of GDP in India, as compared to 3 per cent in Russia
and 6 per cent in Brazil. Labour productivity in the sector is less than one-fifth its
potential.
There are two key reasons for the poor productivity performance of the sector. The
first is the artificial scarcity of land created by various distortions in the land
market. The second is the lack of standards for building materials and the poor
enforcement of the standards that exist.
These factors create a situation where competition in housing construction is not
based on construction costs, but is instead based on securing access to land and
managing material costs. As a result, players are profitable despite the inefficient
and unproductive construction practices.
If the land market barriers are removed and the material standards enforced, the
sector will experience dramatic growth. In fact, if these issues we re to be
addressed and the economy were to grow at 10 per cent a year, the sector would
grow at 14 per cent a year and create over 3.2 million jobs over the next 10 years.
Productivity performance
At around 8 per cent of US levels, labour productivity in the Indian housing
construction industry is currently lagging behind other developing countries such
as Brazil, Poland and Korea. Indian brick home construction productivity, both for
Multi-Family Homes (MFH) and Single-Family Homes (SFH), is around 15 per
cent of US levels while productivity within the SFH-Mud segment is significantly
lower at around 2 per cent of US levels.
The productivity potential in the SFH-Mud segment is inherently low as the nature
of materials used limits the service value provided. In contrast, Indias
productivity potential at current factor costs for MFH and SFH-Brick segments is
very high, at around 90 per cent of the US.
Industry outlook
If these barriers were removed, the housing construction sector could witness
significant growth over the next 10 years. If all the sectors were reformed, and
assuming that GDP grew at 10 per cent per year, we estimate that the housing
sector would experience output growth of around 14 per cent per year. Higher
economic growth and the resulting faster format mix evolution, i.e., a shift from
mud to brick segments, would also increase productivity growth to 8 per cent per
year from the current 2-3 per cent. As a result, employment in the sector would
increase rapidly at around 6 per cent per year creating over 3.2 million new jobs
over the next 10 years. And housing prices could fall by as much as 40 per cent.
Policy recommendations
To achieve this considerable potential in output, productivity and employment
growth, the following actions need to be taken:
Clarify ownership rights of land titles: We propose four steps to
achieve this. First, the state government needs to set up specialised courts
to handle all land title disputes. Second, it must simplify and modernise
the current registration system for land titles. Third, it should rescind the
Urban Land Ceiling Act and, finally, it should lower the stamp duty, thus
minimising tax evasion and reducing the costs associated with registering
titles.
Increase collection from property tax and user charges: Local
governments should raise property taxes by de-linking them from
currently controlled rents. The government should strengthen
enforcement of property taxes and privatise water, sewerage and the
electricity services that are still under its control.
Introduce modern standards for construction material and
strengthen enforcement: The central government should lead the
initiative to introduce modern standards for construction materials and
ensure the enforcement of these standards. To facilitate widespread
disbursement, the government, via the National Housing Bank, should
link public funding for housing to the adoption of these new standards.
Finally, it should introduce consumer protection laws and establish
special courts to safeguard buyers against the use of sub-standard
materials.
Housing Construction
For the purposes of this study, we have used t he housing construction industry as
representative of the entire construction industry an understanding of the barriers
to growth in the housing sector will contribute towards a better understanding of
issues confronting the Indian construction sector.
The housing industry is also important because it directly addresses one of the
basic needs of society shelter. Improvements in productivity and output in the
housing sector, i.e., lower prices and wider availability of affordable housing will
therefore have a direct impact on the living standards of most Indians.
Our study reveals that productivity in this sector is well below potential. Currently,
in spite of a severe housing shortage, the sector contributes only 1 per cent to
Indias output and employment and is growing slowly at 4 per cent per year. This
is largely due to unclear titles of land, ineffective collection of property tax and
user charges, and inefficient enforcement of standards on construction material.
Our definition of the housing construction industry encompasses all construction
work done at a building site and includes: excavation/foundation, structure
building, masonry/plastering and painting/finishing work. We have excluded land
acquisition, property selling and renovation in our study of the sector (Exhibit
1.1).
INDUSTRY OVERVIEW
In comparison with most other countries, the Indian housing construction sector is
small in terms of both output and employment. For instance, of the 4,000,000
people (Full Time Equivalents FTEs) employed in this sector in 1993-94, as
many as half were unskilled workers. Moreover, housing construction in India
represents only around 1 per cent of both output and employment as opposed to
the over 3 per cent of Russia, Korea and Brazil (Exhibit 1.2). The sector has also
exhibited relatively slow growth of around 4 per cent in spite of the current low
per capita stock and a severe housing shortage (Exhibit 1.3). Per capita housing
stock in India stands at around 5 square metres per capita as compared to the over
19 square metres per capita of China and Russia (Exhibit 1.4). As a result, some
sources estimate that the 1997 housing crisis occurred because they were short of
as many as 33 million homes (Exhibit 1.5).1 This problem is compounded by the
poor quality of most Indian dwellings, which increases the need for replacement
and upgrading.
Participants in Indias housing construction industry
The construction industry consists of numerous fragmented firms. Developers
engage main contractors who, in order to maintain minimal overheads, subcontract
most of the construction tasks to smaller, non-registered groups of workers.
Although these subcontracted (mostly blue-collar) workers have some
specialisation in their respective trades, almost none of them provides truly
professional and specialised services to construction firms. The industry then is
made up of de velopers, contractors, subcontractors and workers.
Developers: Property developers, typically small landowners, start the
construction process by commissioning construction work to contractors.
The government and big corporations account for only a small share of
housing construction as they develop large projects of multi-storied
buildings. Developers devote most of their efforts to procuring land and
obtaining building permits, cutting through multiple layers of red tape.
Contractors: Main contractors, mostly small registered companies, are
responsible for construction work at the site. After receiving the contract
from the developer, main contractors typically subcontract all
construction work and concentrate on top-level supervision and material
procurement. In the case of individually built houses, the contractors
function is typically undertaken by the house-owner.
1 The shortage of dwellings is measured as the difference between the number of habitable dwellings and the number
of separate households. See India Construction Statistics (NICMAR, 1998) for more details
units produced (12 per cent of total output, after accounting for quality
differences) and 55 per cent of hours employed in housing construction.
PRODUCTIVITY PERFORMANCE
We estimated that labour productivity in the Indian housing construction industry
was around 8 per cent of US levels. The figures show that Indias productivity is
the lowest among the countries we have studied, lagging behind other developing
countries such as Brazil, Poland and Korea, as well as developed countries such as
the US, France and Germany (Exhibit 1.6).
As in the US, productivity performance in India does not vary significantly
between the MFH and SFH-Brick segments (Exhibit 1.7). Indian MFH and SFHBrick productivity is around 15 per cent of the US and anecdotal evidence
suggests that it is growing relatively slowly, at not more than 3-4 per cent per year.
In contrast, productivity levels within the SFH-Mud segment, which accounts for
55 per cent of employment, is significantly lower, averaging around 2 per cent of
US levels and ranging from 1- 4 per cent. It is necessary to give a range of
estimates for this segment due to the lack of comparability with construction
methods common in our benchmark countries. Productivity in the SFH-Mud
segment is also likely to be growing at a low rate. Most of the improvements are
mainly driven by a faster construction mode resulting from a steadily decreasing
amount of idle time for owners and higher alternative employment opportunities
due to growth in the overall economy.
INDUSTRY DYNAMICS
Competition among existing players in the housing construction industry in India
is largely based on factors other than construction cost. In such an environment,
the pressure to cut construction costs and improve efficiency is weakened. Most
companies exhibit low productivity but are neither driven out of the market nor
forced to improve their performance. Moreover, a non-level playing field also
distorts competition in the SFH segment to the advantage of single-plot SFH-Brick
and SFH-Mud dwellings. Finally, although international contractors are virtually
absent in India, the lack of international best practice players is not significant
enough to explain productivity differences, as construction remains largely a
domestic sector even in best practice countries. Moreover, industry fragmentation
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limits the competitive pressure that could be introduced by a few big international
players and increases the importance of strong competition within the domestic
market.
In this section we look at the effect of low domestic competitive intensity on the
three segments in the housing sector and briefly discuss the effect of a non-level
playing field on productivity.
Domestic competitive intensity
Low domestic competitive intensity affects every player in each segment of the
industry differently.
Multi -family Homes MFH: There is minimal price-based
competition in the Indian MFH segment. Starting with developers,
players along the production chain focus their attention on every issue
but productivity at the site (Exhibit 1.17).
Developers: Most Indian developers focus most of their efforts on
land procurement, clearing red tape and push selling, paying little
attention to building design and putting minimal pressure on
contractors to reduce costs. They are able to maintain high profits by
getting favourable land deals and not abiding by building/zoning l aws.
Despite high profits, competitors are unable to enter the market
because of the scarcity of land and a lack of clarity about property
rights on existing land titles. Only a few well-connected developers
are able to overcome these obstacles.
Average profit margins for developers have been quite high at
around 20-25 per cent. Although profit margins are volatile due to
real estate price fluctuations, they have not fallen below 15-20 per
cent (compared to 5-8 per cent margins in the US), and have even
reached peaks of over 50 per cent during a boom in the market.
Rather than lowering construction costs, developers typically
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INDUSTRY OUTLOOK
The housing construction sector could witness significant growth over the next 10
years. This growth would be the result of both an increase in the number of
dwellings built and an improvement in their size and quality. Growth in the
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number of dwellings will be especially high given the current housing shortage
and ongoing migration to urban areas.
In order to evaluate the outlook on output, productivity and employment, we have
considered three possible future scenarios for the competitive environment: Status
quo, reforms in housing construction alone and reforms in all sectors (see Volume
I, Chapter 4: Synthesis of Sector Findings):
Status quo: In this scenario, we estimated that Indias per capita output
and productivity would continue to grow at its current rates of around 4
per cent and 2-3 per cent per year respectively. As a result, employment
would increase only slightly, at less than 2 per cent per year.
Productivity growth in the MFH and SFH (Brick) segments would be
driven by continued improvements in project planning and
supervision at the site. Furthermore, slowly rising incomes in rural
areas would also enhance productivity through the ongoing increased
penetration of the SFH-Brick segments.
New construction within city limits as well as upgrading of dwellings
in rural areas would ensure continued output growth in housing.
Despite this growth, the housing stock within city limits would be
likely to continue to deteriorate, mainly as a result of a lack of land for
new construction. Moreover, new developments in city suburbs would
be likely to remain limited due to the local governments continued
inability to finance new infrastructure development. Finally, given
current population growth rates, the severe housing shortage would be
likely to remain while slums would continue to increase, driven by the
rising number of rural migrants who would be unable to find cheap
accommodation in large cities.
Reforms in housing construction alone: In this scenario, land titles
would be cleared, local governments would improve their financial
conditions (mainly due to higher property taxes and user charge
collection), and well-enforced standards for construction materials would
be introduced. These reforms, together with the removal of the remaining
barriers, would result in faster productivity and output growth of around
8 per cent and 6 per cent per year, respectively. As a result, employment
would decrease by 2 per cent per year over the next 10 years, thereby
destroying close to 800,000 jobs.
Increased competition throughout the industry would drive
productivity growth in the MFH and SFH-Brick segments. Greater
pressure on de velopers and contractors would likely lead to rapid
improvements in project planning, improved building design,
investment in viable capital, and increased use of standardised
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construction material. Under this scenario, productivity in the SFHMud segment would increase only slightly as a result of better
financing leading to better planning and a higher share of the urban
mode of construction. Finally, the format mix would also improve
under this scenario as a result of faster upgrading of SFH-Mud
dwellings and lower penetration of slums in large cities.
Output growth would be the result of increased demand following
lower land costs, improved financing and higher investment in the
rental market. Despite these changes, the lack of reforms in other key
sectors of the economy would be likely to limit the potential benefits
of reforms on output. As a result, we estimated that the Indian housing
sector would grow at around 6 per cent (compared to the current 4 per
cent) thereby increasing its share of total GDP only slightly from 1
per cent to around 1.5 per cent (closer to Korea and Brazil).
Reforms in all sectors: In this scenario, GDP will grow at 10 per cent a
year while the housing sector will experience very rapid output growth of
around 14 per cent a year. Higher economic growth and the resulting
format mix evolution would also increase productivity growth which we
would expect to reach around 8 per cent per year from the current 2-3 per
cent. As a result, employment in the sector would also increase rapidly at
around 6 per cent per year creating over 3.2 million new jobs over the
next 10 years.
As in the previous scenario, productivity in both MFH and SFH-Brick
segments would also be spurred on by improvements in OFT and
DFM. As a result, productivity in t hese segments would increase at
around 7 per cent per year, reaching around 28 per cent of US average
levels by 2010. Rapid productivity growth is not unusual in housing
construction once key barriers to land development are lifted. For
example, starting from conditions similar to current Indian conditions,
a Brazilian best practice company was able to achieve productivity
growth of up to 12 per cent per year over a period of 12 years after
reforms increased housing loans and new standards were introduced
(Exhibit 1.28).
Under this scenario, productivity in the SFH-Mud segment would also
rise, albeit slowly, driven by quicker construction due to increased
financing. Finally, the format mix would also improve following a
decrease in the penetration of the SFH-Mud segment led by overall
economic growth as well as an increase in financing. (Exhibit 1.29).
Output growth would be the fastest under this scenario, averaging
around 14 per cent per year, as reforms in other sectors would allow
housing to achieve the full benefits of sector-specific reforms. This
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POLICY RECOMMENDATIONS
Our policy recommendations focus on the most important external factors as well
as on the main political economy issues that need to be addressed.
A productive and growing housing construction sector is critical for the economy.
Low housing penetration (in terms of square metres per capita) and poor housing
conditions have severely affected the living conditions of most Indians. Moreover,
employment in this sector plays a key role in the transition process from an
agricultural economy to a modern one. In India, most migration from rural areas
will comprise unskilled and sometimes illiterate workers who are likely to find
suitable jobs only in sectors such as construction and retailing. These sectors often
act as a port of entry into cities for migrating rural workers in search of higher
incomes.
To achieve the considerable potential in output, productivity and employment
growth, state governments would need to solve the land titles issue and improve
their revenues from property taxes and user charges to finance new infrastructure
development. The central government should lead the effort in introducing modern
and well-enforced standards for construction materials. In what follows, we will
discuss specific policy steps that the government s hould take in order to tackle
each of these issues. We will also point out key concerns that could be raised by
potential stakeholders (Exhibit 1.30).
Clarify ownership rights of land titles: In order to solve the unclear
ownership rights on land titles, the government must expedite all the
existing land dispute cases, which are languishing in courts all over the
country. This will not only clear up the disputes but, as a result, also ease
the huge burden being shouldered by the courts at present. The
government should, therefore:
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