Monday, February 21, 2011

Why Tendulkar's aborted gym makes a case for higher FSI?

I have written earlier about the need to raise the hugely restrictive and distortionary Floor Space Index (FSI) ratios applicable in Indian cities. FSI is the ratio of the total plinth area of the building to the total land area, and is typically in the 1.5-3 range for Indian cities. In contrast, FSI in most Asian cities varies from 5 to 15 and in many Western cities goes up to even 25. The low FSI is arguably the biggest factor that keeps urban housing prices unaffordable for the large majority of residents of any Indian city.

A high-profile recent example of the colossal wastage and inefficiency of this comes from the Maharashtra Government's rejection of a request by Sachin Tendulkar to construct a gym on the top floor of his new house at Perry Cross Road, Bandra, Mumbai. The reason - the gym would mean that the FSI would exceed the maximum allowable FSI ratio of one.

Now, Tendulkar had purchased the 8998 sqft plot for Rs 39 Cr in 2008. In other words, every square feet of his house sits on some of the most expensive piece of real estate anywhere in the world. In per-capita land area terms, it will certainly be amongst the most under-utilized prime real estate in any of the major global cities. Further, the per-capita land area value occupied by Tendulkar and his family would be amongst the most expensive for any family across the world. Every strand of logical reasoning would support the argument that the draconian FSI ratio regulation of Mumbai is astonishingly inefficient.

It is a classic example of a loss-loss deal. Tendulkar and his family would obviously be dis-satisfied. The government gains nothing, and if anything has foregone a considerable future property tax revenue stream. Any possible economic activity or other benefits generated by way of the gym has been nipped off. (And, maybe Tendulkar would have been able to possibly exercise more with a gym at his house, and be able to extend his cricket career a few more months!!)

Consider this counter-factual. If FSI ratio was say, four, Tendulkar would probably have purchased say, 3000 sq ft of land. He would have spent say, Rs 20 Cr, and invested the Rs 20 Cr so saved in setting up a restaurant, which in turn would create jobs and other economic benefits. The remaining land may have been purchased by a real estate promoter to set up a mall, resulting in more economic activity. Or purchased by someone else - who would now be forced into buying a land that would otherwise have been used for multi-storied weaker section housing - to build his house.

All this would have been economically efficient outcomes. Tendulkar and family would have been happy to get a much larger house built at a lesser cost (in terms of land value). The valuable piece of real estate would have been more optimally utilized, instead of being locked up in a sub-optimal home investment (I am sure that not many economists would claim that building a house on a land worth Rs 39 Cr is efficient allocation of scarce resources!). The overall impact on the economy, in terms of jobs created, taxes generated, and resources more efficiently deployed, would have been substantial in comparison to the present outcome.

In fact, everybody would have been better off even if the government had declared that area a green zone or restricted area (or barred re-development). A park would have benefited large numbers of people and generated much higher utility and overall benefits. Sachin Tendulkar would have invested his Rs 39 Cr elsewhere with higher FSI ratios and built a house which atleast fully met his requirements. Scarce resources, money and land, would have been more optimally utilized!


KP said...

Dear Gulzar,
I do not believe that the house purchase was even remotely connected to an efficient outcome – being a positional good in this case.
However, I like your use of Tendulkar’s house to illustrate sub-optimal outcomes in using a low FSI – that may be the only creative use of this poor decision.
More amusing though – was the sudden realization that the Maharashtra government was such a stickler for rules! (or for that matter any other government!!).


gulzar said...

yes, i agree KP that tendulkar's purchase has to be seen as a positional good.

but it would remain a positional good even with 4000 sq ft instead of the 9000 sqft. the regressive FSI provision contributed to tendulkar's inefficient spending and purchase of the positional good.

SC said...

Question purely out of curiosity-- how did Ambani get his permit? From what I know the Bombay has a flat rate on FSI so his "house" would definitely have availed some form of an exception..