Mass transit and land use planning drives economic clusters

Large urban agglomerations are engines of national economic growth. The fuels that power these engines are the transportation infrastructure and mass transit, supported with enabling land use and development control regulations, value capture and revenue sharing, and institutional architecture. This is the topic of the post.

Such urban agglomerations are characterised by clusters of dense, specialised nodes of employment connected to residential nodes by commuter networks. This is the classic model of metropolitan downtowns connected with densified suburban satellite towns that coordinates agglomeration economies at the centre for high productivity job creation.

Accordingly, the central parts of major metropolitan cities of the world are predominantly workplaces, with people commuting to work from suburban areas on commuter railway systems. Mumbai, London, and New York are great examples. This is in keeping with the economic logic of ensuring the most productive use of the highest value lands in the city.

It also unlocks affordable housing supply by locating them predominantly in those areas with lower land prices, thereby relaxing the biggest constraint to affordable housing.

The ingredient that binds the nodes together and creates a dynamic regional cluster is a well-connected mass transit network. In cities globally, commuter and metro railway systems have played this role.

High-volume mass transit systems connect the nodes and bring people closer to jobs. They reshape the geography of what an hour reaches. This trip-shortening effect — making longer distance commutes faster than shorter car trips — is especially powerful in India, where the spatial mismatch between jobs in metropolitan cores and job-seekers in the hinterland has been found to be unusually large. They shrink the distances, thereby increasing the pool of jobs available for people in the hinterland, and expanding the talent accessible for employers in the core.

But evidence also informs us that merely laying the mass transit network is not sufficient. This study by Rana Hasan et albuilt a spatial model of Bengaluru and run the metro against alternative land-use policies and came up with the following quantified impacts. 

Holding the metro investment identical, the difference in net benefits between the best and worst land-use plans is roughly 32 percentage points of city GDP. In other words, the land-use plan determines whether the transit investment creates value or destroys it.

The requirement is to locate sufficient density of homes and workplaces within conveniently accessible distance from the stations, either through walk or feeder services. This is transit oriented development (TOD).

TOD is about commuting using mass transit by walking to/from station (to/from home and workplace) or feeder services. A big collateral benefit from TOD is that it avoids the use of cars, thereby decreasing traffic congestion, reducing productivity losses from long commutes, and lowering air pollution.

As I blogged here, TOD also increases the commercial viability of the massive investments made in mass transit systems (~ Rs 8 lakh Cr and counting, with 20-30% ridership realised, and massive debt repayment fiscal burden looming). It induces traffic by creating new trips (by locating more people within the transit zone influence area), shortening trip distances (thereby expanding the effective commute catchment), and mode shifts (from cars to mass transit).

Effective implementation of TOD requires addressing three constraints. One, relaxing development control regulations to make it attractive to build density in the vicinity of the stations, and creating the complementary pedestrian infrastructure. It also requires appropriate mixed land-use planning that allows the market to respond in the most efficient manner to order commute patterns and shape spatial growth. 

Two, funding of the mass transit capex, especially by enabling with the right kind of value capture instruments, with the right sequencing, and also the appropriate revenue sharing between the rail company and the local government/UDA. Try to capture value too quickly, before value gets created, and the cluster remains still born.

Three, an institutional architecture that aligns the incentives between those constructing the transit system (and repaying the debt mobilised) and those responsible for the land use and other decisions that determine the commercial viability of the system. This could, for example, entail the radical change of making the urban development authorities the owner of metro railway systems in metropolitan areas.

Weekend reading links

1. Foreign capital flows into US equities even as they slow down and even reverse in the debt markets. 

Foreign investors made a record $942bn in net purchases of US equities and investment fund shares in the 12 months to July, accelerating a shift in overseas investment towards American stocks and away from debt. The flows represented the highest rolling 12-month total in Treasury data going back to 1985. Net purchases of US equities and investment fund shares by foreign investors jumped to $426bn in the second quarter, up 62 per cent from the same period in 2025, and surpassing the previous quarterly record of $299bn in 2022, according to the Bureau of Economic Analysis... The foreign inflows coincided with a gain of about 20 per cent for Wall Street’s benchmark S&P 500 in the year to July... Foreign demand for US debt moved in the opposite direction. Overseas investors bought a net $188bn of US debt securities in the second quarter, down from $314bn in the first. That came as China’s reported holdings of US Treasuries fell to $618bn, their lowest level since August 2008, as Beijing diversifies into gold, agency bonds and other assets.

2. Markets step in to correct state capability failures - judicial delays edition.

The country suffers from one of the world’s largest judicial backlogs, approximately 54 million pending cases, and inside many of them is big money that one party owes another, that the claimants can’t afford to pursue through years of litigation. An investor could identify favourable cases, fund the legal proceedings, and keep a percentage of the claim if they won. Pool enough of these claims together and it looks something like a private equity fund, except the underlying asset is the claim to a future payout rather than ownership in a company. 

Cut to January 2026, and Kundan Shahi’s litigation company, Legalpay, has committed Rs 100 crore over the next 18 months to financing commercial and insolvency disputes. The firm has already worked with the likes of Zepto, Pwc, and Deloitte and claims to deliver returns exceeding 30% internal rate of return (IRR) to its investors... From the US and UK to Hong Kong, Singapore, and Australia, third-party litigation funding has matured into a fully-fledged asset class, with the former president of the UK Supreme Court calling it “the lifeblood of the justice system”... Burford Capital, listed on the NYSE and LSE, manages a 7.5 billion dollar portfolio of legal claims and claims to have delivered a 26% IRR on concluded cases over 15 years... In May 2026, Five Rivers Capital, a Mumbai firm backed by a global legal finance company, surfaced as the first Indian litigation finance vehicle registered with Sebi as a Category II AIF. The firm is reportedly in talks to raise about $25–$50 million, though it has yet to close the fund or deploy any capital.

3. Attracting foreign universities to establish campus in India has for long been the target of attention for state governments. Now that 17 universities have set up shop, the demand side weaknesses are becoming apparent. 

In its second year, Deakin University had all of 46 students. Another Australian university, Wollongong, started its India campus with just nine students in 2024 and added 19 more in the second year. Considering the bar for entry is the bare minimum—there is no entrance exam for a start—those are dismal numbers. The reasons aren’t hard to fathom. Indian students looking to study abroad broadly fall into two categories. They either want an education from a prestigious institution or they desire to leave the country and see a student visa as an easier way out. The universities establishing campuses in India don’t cater for either.

“I don’t see these universities bringing any cutting-edge programmes here. It’s more of the same,” says a study-abroad consultant who works with some of them. “There are computer science and business courses that attract a certain student, but they aren’t creating programmes that you don’t usually find in India, like quantum computing or spacetech.” If the country hoped that foreign universities would bring world-class research or future-facing tech to India, it might be disappointed. The “lab-lite” courses they offer are cheap to run and easy to scale, allowing them to operate out of corporate complexes rather than expansive campuses. It’s a low-risk, high-margin play. They promise a degree stamped with a “top 500” brand name but without the research-intensive environment that made it a brand in the first place. And yet, they aren’t cheap. A master’s degree from one of these universities costs Rs 15–25 lakh a year. At that pricing, they have competitors to deal with.

4. Excellent long read from Gill Plimmer on how the privatised UK water utilities have skimped on investments and discharged untreated water into the country's rivers polluting and making them toxic. 

Just eight days after Macquarie sold its final stake in Thames Water in March 2017 — leaving behind a debt pile that had grown to £10.8bn — Thames Water received a then-record £20.3mn fine for allowing 1.4bn litres of raw sewage to flow into the River Thames. The untreated effluent had entered the river at six different sites in Oxfordshire and Buckinghamshire, suffocating bream and trout, killing herons and waterfowl, and putting boating companies out of business... Thames Water had been dumping sewage to save money on maintenance during a period when investors received big dividends and its executives huge salaries. No one was held to account. The company’s chief executive, Martin Baggs, had left six months earlier and before the court case started with a £2mn pay package. Baggs went on to join the board of Thames 21 — a non-profit that protects the river... Between 1991 and March 2025, the 16 privatised water monopolies raised a staggering £82bn in debt while simultaneously paying out £85bn in dividends to their shareholders, according to research by the FT.

5. Robin Wigglesworth has a very good long read on the repo markets, which he describes as being similar to the dark matter in astrophysics.

The repo market is often described as the plumbing of finance. Like the pipes around your house, it ensures that money flows from where it is abundant to where it is needed. And if it breaks down, then things quickly get smelly... It is huge, powerful and omnipresent, and most easily observed through its impact on other bodies... the US Treasury calculates that the US market alone is now roughly $12.6tn, and the International Capital Markets Association, a trade body, recently estimated that the European repo market stands at almost €14tn... when it very occasionally comes under pressure, it is enormously unsettling to the rest of the financial universe.

6.  Private equity has become the lightning rod for housing supply crunch in the US during the mid-term elections, on the back of rising home purchases by firms in recent years.

7. Tej Parikh points to an India shock arising from the large and rising pool of migrants from India. The country is the largest contributor to migrants, 18.5 million globally in 2024, and making 70% of all US H1-B beneficiaries. 

These migrants contributed $150 billion in remittances in 2025, or 3% of GDP. 

Such large migrants invariably invites discontent in these times.

Indeed, anti-Indian sentiment is on the rise. Just this month, the Republican nominee for a seat on Texas’s oil and gas regulator sparked allegations of racism for a social media post aimed at South Asian students. Last year, Indian-origin migrants were explicitly targeted in “March for Australia” rallies. Anti-South Asian slurs in online spaces in the US have also surged. The backlash could hinder the Modi government’s strategy. As it happens, US President Donald Trump has raised scrutiny of and fees for H-1B visas.

8. Very good article about the Gurugram story.  

As of June, Gurugram housed North India’s largest office space, with 100 million square feet built and counting. The who’s who of global MNCs — Apple, Google, Microsoft, Amazon — have a presence here, if not their India headquarters... the data shows that Gurugram’s share in Haryana’s employment in the organised sector has risen from 17.35 per cent in FY06 to 67.62 per cent in FY24, meaning that roughly two in every three organised-sector jobs in Haryana sat inside this one district... Gurugram made up 1.2 per cent of the total number of shops and commercial establishments in Haryana in 2006, which ballooned to 13.51 per cent in 2024. It also made up 67 per cent of the people employed in these sectors in 2024, versus about 26 per cent in 2006.

9. Good graphical feature on PE's problem of exits.

The private equity sector is managing a record $4.7tn in assets. But a growing portion of these assets are unsold companies, an increasing share of which have been held for five years or more. The median holding time is a record seven years. Most unspent capital, or "dry powder", was raised before 2024.

This has caused the distribution of cash to its investors to plunge since 2021.

And the share of exits through continuation funds (dedicated pools of cash from new investors to buy companies from themselves) has climbed sharply.

10. Nvidia announces the biggest share buyback in history worth $150 bn, beating Apple's record $110 bn in 2024.

11. Solar plus battery convergence with thermal power in India.

Solar Energy Corporation of India (SECI) ran an auction to buy electricity capacity where they (SECI) demanded the availability of a thermal generator. A bidder who plans to use solar or wind is then forced to load up with the batteries required, to charge in the day, so as to deliver thermal-style availability. This auction discovered a price of ₹5.25 per kWh, guaranteed for 25 years. It is hard to identify a single comparable price for coal thermal in India because coal-extraction rights are given by the state in non-market ways. But if we look at recent new coal-power contracts in India, they are priced at ₹5.38-6.30 a unit. The SECI-discovered thermal-mimicking price for renewable power is now 10 per cent cheaper than that for new coal.

12. This makes great sense, and is something this blog has been advocating, especially the demand-side creation, for India's semiconductor chip design ambitions. 

What is missing is capital that funds Indian fabless companies all the way to commercial tape-out, not just prototypes. DLI must be expanded. ISM 2.0 should create a Chip Design Commercialisation Fund at Rs 1,000-crore scale — modelled on NIIF — and designate at least two sovereign AI inference chip programmes with guaranteed government offtake. Those two changes, delivered in the next budget, would do more for India’s semiconductor future than more wire-bond packaging projects.

13. Surjit Bhalla says that India's external linkages in terms of FDI and FPI look dismal.

In 2025-26 India recorded a record FDI inflow of $94.5 billion. In the same year, foreign investors repatriated or disinvested $53.6 billion, leaving $40.9 billion. Indian firms invested $33.3 billion abroad. Net foreign direct investment — just $7.65 billion. About 0.18 per cent of GDP — and that is the good news, being a recovery from 0.02 per cent in 2024-25. Still the second-lowest in three decades... Reinvested earnings of foreign firms — profits earned here and not taken home, a figure not part of India’s FDI statistics until the definition changed in 2000-01 — were $25.6 billion in 2025-26, more than three times net FDI. Retained earnings are not a new commitment to India... In 2025, Indian equities underperformed emerging markets by the widest margin since 1993, and trailed Asia-Pacific by the most since 1998. Foreigners withdrew $17.7 billion. This year till August 19, India was down 9.1 per cent in dollar terms while emerging markets were up 20.6 — a gap of 30 percentage points in under eight months. Korea was up 77.6 per cent, Taiwan 58. Another $10.5 billion has left.

14. Graphical explanation of why the US Treasury Bonds are climbing,

15. Starbucks was once hailed as a poster child for ESG practices. In a remarkable reversal, it has now scaled back or scrapped its green goals and fired sustainability staff. 

The coffee shop chain has revised or dropped pledges to halve water use and waste, while a goal to cut carbon emissions by 50 per cent is under review. The pullback comes amid a broader US corporate retreat from environmental commitments as political pressure rose under President Donald Trump and ambitious targets prove hard to meet. But Starbucks stands out because few companies made sustainability so central to their corporate identity. The Seattle-based group announced its targets in 2020, when then chief executive Kevin Johnson declared in a public letter that “sustainability has been at Starbucks’ core since the beginning and consistent with our belief that we can build a great business that scales for good”. The letter, which pledged transparency about its progress, is no longer on the company’s website, while many targets were absent or amended in Starbucks’ annual Global Impact Report published this summer.

16. Good NYT article on how Asia managed to survive the Iran war till date. This is how India managed to maintain oil supplies.

And this is how the natural gas supplies were substituted.

TOD is critical for the commercial viability of Indian metros

I have blogged here making the case for doing Transit-Oriented Development (TOD) around mass transit stations in India, here about the challenges with TOD implementation, and here about the low traffic realisation problems facing metro railway systems in India and the ₹1.07 lakh crore (undiscounted) fiscal burden. 

This post will argue that TOD is the critical requirement for the commercial viability of India’s regional and metro railway systems. TOD is a combination of densified, mixed-use development (supply-side), and walkable streets andintegrated feeder services (demand-side) around mass transit stations. 

In other words, regional and metro railway systems in India can become commercially viable only if they can induce ridership, and this shift would require adoption of TOD at both ends of the commute. 

But India’s regional and metro railway systems are encumbered by structural problems compounded by bad design.

For a start, unlike the successful global mass transit systems which precede real estate development and emerge from an integrated land use and transit plan, Indian railway systems follow it. They try to retrofit into the built-up city and suburbs. Second, as I wrote here, Indian regional and metro rail systems unfairly put the burden of capex on the operating entities without endowing them with the real estate that can be monetised to finance capex. Third, the railway construction entity does not control land use decisions, and those making them do not bear the consequences if their decisions erode the financial viability of the mass transit systems. Finally, making matters worse, they are primarily railway construction corporations, for whom urban planning integration and real estate development are afterthoughts. This is unlike in Japanand other East Asian cities where the metro operators are primarily real estate developers who also build and operate railway networks. 

Given the circumstances of India’s mass transit journey, the best that can now be done is to create conditions to induce ridership and improve commercial viability of metro and regional railway systems. And, as aforesaid, TOD is central to this objective. 

The first order requirement is to induce ridership. This can come from two directions. At the intensive margin, ridership can be induced by shifting existing car users to mass transit. At the extensive margin, it would involve locating commuters within walkable distance of the station and expanding geographical access through feeder services, and shortening the transit trip. 

The intensive margin relies on modal shift among people whose destination and origin are fixed, whereas the extensive margin creates new origin-destination pairs of which mass transit is the obvious mode from the outset. An important, but less discussed, mechanism of the extensive margin is that of trip shortening. The regional or metro rail shortens the commute time to distant places (besides also eliminating the hassle of car-based trips) and brings workplaces closer (in time) to homes and thereby expands its potential users. This trip-shortening effect is typically larger than the modal-shift effect, and second only to ridership induced by locating people inside the TOD zone.

However, while convenience (of avoiding road traffic and walkability at both ends) can induce some mode shifts, getting people who would otherwise not prefer living near a station at all to relocate entails going beyond convenience and also making the place itself liveable and financially attractive. Further, the inducement is significantly likely only if there is a workplace within walkable distance at the other end of the commute.

In the case of metros, it is about densified developments (at both home and work sides) around stations with walkable streets, supplemented with feeder services. In the case of regional railway systems, this is the classic downtown-satellite town mode of development. However, in India, since the satellite towns are already well-developed towns and cities, the station vicinity requirements are similar to the metros.

The walkability part is critical, and one completely overlooked. Densification alone without the ease of walkability at both ends will not induce ridership. Walkability and street connectivity are central to expanding the pool of users. If a commuter who lives 800 metres from a regional railway station still needs to find an auto or shared vehicle because the intervening streets are not well connected, unwalkable, and unsafe, the catchment effective radius collapses to perhaps 200 metres, and the ridership projection drops accordingly.

The demand side (walkability) and the supply side (density) are complements, not substitutes. Building one without the other produces either pleasant low-rise neighbourhoods that don’t fill the trains, or towers in traffic that people can’t walk through. Further, the walkability (and associated liveability), in addition to the mass transit commute convenience, are perhaps critical for also incentivising people to trade-off living in a cheaper and larger housing unit distant from the zone with a pricier and smaller one inside the TOD zone. 

Finally, the mixed-use part is also important. For one, it should provide market participants the flexibility to determine the demand responsive and commercially viable nature of development around the nodes. Further, a node that densifies the area around a station but retains single-use zoning (apartments that connect to the city’s existing car-commute grid) will produce less additional ridership than a node that places offices, retail, and housing within walking distance of each other and of the station. The ridership gain from the second type of node comes not only from the peak commute trip but from the off-peak trips that only a genuinely mixed-use, walkable neighbourhood generates. The former will end up creating a mass transit system that is used only in the 3-4 hours of peak commute times. Mixed-use is therefore critical to generating two-way, all-day ridership.

In other words, ridership of a transit system is determined predominantly by the land use in its catchment — how many people live, work, shop, and study within a walkable distance of its stations, and whether those people can get to and from the station without a car. Building the station but leaving the land use unchanged will not change much. It will produce the infrastructure, but underproduce the demand. This has been India’s metro reality. 

All this means that densified, mixed-use, walkable zones around the station, with convenient feeder services, or TOD, is an essential requirement to achieve significant inducement of ridership. 

The case for TOD is likely more relevant and its impacts greater for Indian cities than counterparts in developed countries. For one, the spatial mismatch between job availability (in the city centres) and affordable housing (in the periphery) is very large. A system that closes this gap generates much greater welfare gain, and therefore much greater demand, than the same system operating in a less mismatched city. 

Further, given India’s low car ownership base, the marginal ridership gain from TOD does not come mainly from convincing existing car users to take the train, but from improving trip quality for those already transit-dependent, and from expanding the pool of riders. Finally, India has a low-hanging fruit to harvest in terms of its low FAR baseline, which allows for significant densification and location of potential transit riders. Relaxing FAR therefore would have an unusually high ridership yield per unit of policy change in Indian cities.

The summary from the Indian context is that the inducement from modal shift is likely marginal, and confined to only those whose commute is already partly walkable and partly by car, or whose car commutes are very long. The larger and more structurally significant opportunity is at the extensive margin from locating new workers and from bringing the workplace closer to homes. TOD is therefore the primary demand generation mechanism for a rail transit system. 

Unfortunately, India’s TOD policies have consistently focused on the supply side (FAR uplift), and that too inadequately, while under-specifying the demand side (street design, parking, block structure). Getting both right is the institutional challenge. It is also something that the argument for TOD-for-viability of metros implicitly assumes but rarely makes explicit.

Some thoughts on the Hyderabad model of urban growth

This is a long read, triggered by a recent article in The Economist lauding Hyderabad’s vertical growth-enabling policy. 

It is an opportunity to think more broadly about the drivers behind Hyderabad’s spectacular urban growth over the last three decades, one with few precedents in India. Also, to avoid drawing the wrong lessons from the city’s success in economic growth and real estate development, this post will provide some qualifications. It will point to the role of the government, the political economy and the role of large developers, and the consequences of deficient urban planning. Finally, it will offer some comparison between the Hyderabad model and those of Gurgaon and Shenzhen.

The Economist article lauds Hyderabad’s vertical growth and the enabling policy of the government. 

Hyderabad, unique among India’s cities, abolished fsi in 2006. And then, miraculously, life went on. NIMBYs foretell all sorts of doom the moment anyone talks about building anything. They warn of Gothamesque ghettos with gridlocked streets, dry taps and overflowing sewers. Nonsense. Today tall residential blocks line the highways in Hyderabad’s western suburbs and traffic still flows faster than in most major Indian cities. Dozens more towers, including the Trump ones, are sprouting in a neighbourhood called Kokapet that was not long ago full of custard-apple orchards and is now a forest of construction cranes. 

There are two reasons Hyderabad has not descended into dystopia. One is its 160 km-long orbital motorway, the first bit of which opened in 2008 and is now an arterial road in the new skyscraper belt. The other is that abolishing the arbitrary cap on FSI did not mean the abandonment of all rules. Regulations covering minimum street widths and required setbacks still apply. Aviation authorities impose restrictions around air-traffic funnels. The effect is that developers can build high only if they have a large enough plot next to a wide enough street somewhere far enough from an airport. Markets decide the rest. The cost of construction rises with height, so a builder’s decision about how much to pay for land and how tall to go rests on whether potential buyers of flats will cough up enough to make the project profitable. That has prevented a housing bubble.

For a start, Hyderabad’s spectacular urbanised growth over the last three decades owes primarily to government actions. Four, in particular, stand out. 

1. The spurt of IT services industries locating to Hyderabad provided the economic anchor to sustain the spectacular property development that followed. Its emergence owes all to government policies. From having nothing apart from a small software cluster at Mythrivanam, the spectacular boom in the IT industry was catalysed by the conscious efforts of the then government of Andhra Pradesh in the mid to late nineties. It established the 158-acre HITEC City at Madhapur through a PPP between APIIC and L&T, with Cyber Towers being the iconic building. The then Chief Minister, Mr Chandrababu Naidu, toured the US and Singapore extensively, wooing software firms, and his efforts culminated in Bill Gates's visit in 2001 and the announcement of Microsoft’s largest R&D centre outside Redmond. It was followed by GE and ICICI and a flood thereafter and continues to this date, expanding to all kinds of sectors and innovations. The Cyberabad brand took off. 

Starting with a few hundred in the early nineties, Telangana state’s IT employment has moved from 0.4 million in FY14 to about a million in FY25, and 85–90% of that sits in the western Hyderabad corridor. 

2. The state’s IT services push was supported by the Andhra Pradesh Infrastructure Investment Corporation (APIIC)’s model of acquiring land, developing trunk infrastructure (transport and utilities), and leasing/selling with clear titles through a single window at concessional rates to incoming firms. This too, like with the ORR, had its set of controversies and scandals.

Apart from the L&T HITEC City, APIIC developed the initial 100-acre Financial District at Nanakramguda, and several others. HMDA has been the price-discovery mechanism for the entire premium belt through its periodic auctions that have unlocked vast extents of government lands. The high premium commanded by these auctions is also because the state layout provides serviced plots with clear title. This is closer to a Chinese SEZ-style state land-lease model than to Gurgaon's private-land-assembly model.

3. The Outer Ring Road (ORR) has been transformational to the urban growth in the western part of the city. Notwithstanding all the controversies on the alignment finalisation, land acquisition, contracts, and tolling, the Hyderabad ORR should count as a totemic example of high growth-catalysing infrastructure investment in India’s history. It unlocked value by enabling the vast hinterland of barren and rocky lands to become productive centres. It was a truly visionary project when conceived in the early 2000s and even when its execution started in 2005. 

The ORR enabled orbital and radial access to the city, thereby resetting the commute dynamics and unlocking vast barren lands, reducing times by multiples. It is no surprise that every land price in the corridor is capitalised against ORR access time. HMDA’s designation of a 1-km high-density buffer on either side of the ORR effectively unlocked about 316 sq km of premium-development-eligible land, the value created from which dwarfs the ₹6,700 cr cost of the road itself.

The ORR did the work of several economic growth crowding-in instruments, and produced the pattern of intense capitalisation of access to it, and (on the flip-side) the neglect of everything it does not touch.

4. The last enabler, the subject of The Economist article, is the deregulated development control regulations, specifically the unlimited FAR adjoining wide roads brought in by the GO Ms No 86 of 2006. In fact, even among the DCR, the GO’s success was only in its deregulation of the FAR. The high FAR manifests in the most salient aspect of Hyderabad’s real estate growth, the skyline of massive high-rises. 

Even with all the above, it also critically required the enterprise, vision, and risk appetite of a handful of local real estate developers (My Home, Rajapushpa, Aparna, etc.) who hoarded large land banks in anticipation of the developments since the late nineties and early 2000s in the run-up to the boom. Only large real estate developers could afford to take the risks that lock up huge upfront capital and endure the vagaries of business cycles. 

However, it has managed to escape the market concentration that characterises markets like Gurgaon. The nature, scale and pace of development have also ensured that while a dozen developers account for the bulk of Grade-A supply, and the top three alone control about 64 million sq ft of upcoming pipeline, there is a long tail of over 30 mid-tier local names.

Such entrepreneurship could also flourish only in a political economy and social milieu which condoned the often questionable overlapping of public and private interest, and deep-rooted corruption. Governments changed, but the underlying model and ongoing work continued unhindered. It is a very good example of Mancur Olson’s stationary bandit at work. 

The combination of the 158-km Outer Ring Road, an unlimited-FSI building regime, a hospitable IT policy, and a handful of developers with 2000s-era land banks has added roughly a mid-sized city's worth of office, housing and vehicles to a 200-square-kilometre arc of west Hyderabad in about a decade-and-a-half. The public sector supplied the foundation. The private sector built on it. What emerged are pockets of car-dependent, single-use, higher-income, gated communities, with limited mass transit or affordable housing. 

This brings us to the issue of urban planning. 

Here, apart from the single instrument of unlimited FAR in the development control regulations, it is notable that the state fell short on the critical aspects of urban planning - master-planned mixed-use, walkable street grids, timely metro and mass transit access, transit-oriented density transfer, affordable housing, and vibrant public spaces and community life (apart from those in the gated communities). Even the unlimited FAR has its set of problems. 

However, it can also be argued that more than state failure, these outcomes were the result of private incentives and the political economy overwhelming urban planning imperatives. The reality of developers with large land banks near the ORR and their close relationships with both politicians and bureaucrats trumped all other factors. 

In any case, they have had several undesirable long-term consequences. Here are a few.

1. Residential real estate development has almost completely taken the form of high-rise gated communities and villas, all serving the upper middle-class and above. Affordability has been the casualty. 

The sub-1000 sqft supply is a mere 2–4% of the west corridor’s pipeline, versus 13% for Hyderabad city and 18% at the all-India top-7-city level. Apart from public housing under various government schemes, it will be a big surprise if there is even one development of housing in the 600 sqft range and below, catering to the lower-income class. The corridor’s default product is a 1,500–2,200 sqft 3 BHK, forming half of everything built, and easily catering to the upper-income class. 

This is a resounding nod to the reality that even in the most deregulated contexts and rapidly growing economic regions, affordable housing and lower-income housing will remain heavily under-supplied. It must be acknowledged as an area of market failure, requiring policy action. 

A ₹10 lakh household income supports roughly a ₹65–80 lakh home, which puts everything from Kokapet, Financial District, Gachibowli, Madhapur, and Raidurg out of reach for a typical mid-career IT professional. Even a ₹25–30 lakh household income (senior IT / GCC AVP) is stretched at ₹2 Cr pricing in Financial District. What this means is that the corridor is now selling primarily to senior tech and finance executives, NRI, and dual-earner-tech/finance households. Junior and mid-level tech workers are being pushed to Tellapur/Kollur/Miyapur. Even in these peripheral areas, sub-1000 sqft housing reaches only about 8%. 

2. The revenue bias of the state government may have compounded the problems. The massive premiums commanded in the land auctions, coupled with the restrictive DCR (on setbacks and open space requirements), have distorted the real estate market and skewed it significantly upwards. For illustration, at ₹150 cr/acre for Neopolis land, the input land cost alone works out to ₹8,000–10,000 per saleable sqft (assuming 2.5–3.5 FSI usable given the large setback and open-space rules). Add construction (₹3,500–5,000/sqft for a premium tower), financing costs (typically 12–18% of project cost), developer margin (20–30%), and GST and other statutory levies/fees, and the total cost comes to ₹13,500–17,000/sqft. This land economics forces ₹4 Cr and above units. In contrast, in Velimela, where land is still ₹5–10 lakh/acre (not for long, one would imagine), 2 BHKs can come at ₹40 lakh. 

In fact, it can be safely said that the entire land-use regime consisting of the ₹150 cr/acre Neopolis land price, the setback rules that make sense only for large plates, the developer economics that require more than ₹80 lakh units to sustain the ORR-belt cost stack, has displaced sub-1000 sqft out of the ORR corridor. The real affordable-format supply in Hyderabad now exists outside the ORR corridor’s western arc, in Miyapur, Bachupally, Nizampet, Kompally (north-west), Kukatpally (central), Uppal, Nagole, LB Nagar, Ghatkesar (east), and Rajendranagar, Shamshabad, Adibatla (south). These are outside the ORR corridor’s western arc. Anarock’s Q3 2025 Hyderabad realty breakdown indicates that 87% of the new supply added was in the premium, luxury, and ultra-luxury segments, priced upward of ₹80 lakh, a figure which rises to more than 95% in the ORR corridor. These are figures that point to a serious housing crisis. 

3. This has been despite the HMDA having a 5% of developable area mandate for each of the Economically Weaker Section (EWS) and Lower Income Group (LIG). Builders have the flexibility to construct it on alternative land within a 5 km radius. However, there is not even a single instance of any developer having built physical units using this option. Instead, they have preferred to use the cash-out loophole of paying a shelter fee, which was carved by amending the Special Development Regulations for the ORR Growth Corridor. It allows developers to pay a capitalisation fee equivalent to 1.5 times the basic land value to HMDA. The low basic land value means this becomes a cheap option, one immediately capitalised into the cost of construction. 

This must count as one of the biggest missed opportunities of Hyderabad’s ORR-based growth, and adds to the list of planning and policy failures. More importantly, the amendments to the EWS/LIG mandate underline the dominance of real estate developer interests. 

4. Also, given the lack of any public transport connectivity linking them, these gated communities are car communities. The very large enclosed boundaries of these communities mean that they are not walkable localities, thereby further isolating the communities and increasing the reliance on cars.

The Phase 1 Blue Line of the metro terminates at Raidurg, on the eastern edge of HITEC City, whereas the next 5–6 km, as in the schematic, contains the highest concentration of new office and residential capex in the corridor, and it has no rail transit at all (though they are included in the Phase 2 corridor of 11.6 km whose work has just started). They are also served sparsely by a fragmented bus network. Even when completed, the configuration and the nature of the development in the area make it sub-optimally useful. 

The metro gap is perhaps the single most consequential planning failure of the western corridor. Hyderabad, like others in India, are seeking to fit the metro into a built-form, instead of shaping the built-form around a built or planned metro. 

5. Furthermore, they are also not mixed-use developments (the institutions/offices, residences, and commercial areas are distinct), thereby forcing households to commute to buy their groceries and vegetables. To some extent, the basic requirements are met by having small shops inside each gated community selling groceries and vegetables/fruits. But outside of this, all commutes are long and car-based. It is unsurprising, therefore, that, like elsewhere in India, there is not one example of Transit Oriented Development (TOD) among the current stations. 

6. The absence of lower-income housing, coupled with the redevelopment and gentrification of even the erstwhile villages, has meant that West Hyderabad must rely on distant areas for various household services. Housemaids, drivers, and other help must travel long distances using autos and bikes to come and work in these communities. Apart from the costs on their lives, this creates their own set of problems (like getting a housemaid early morning or having a driver stay back late, or even their reliability). 

7. The “unlimited” FAR also meant that the government has foregone large revenues in the form of sale of purchasable FAR permitted over a base FAR (which comes with the property right). It can, however, be said that its absence has lowered the cost of construction and boosted supply. For now, the foregone revenues have been recovered many times over in various forms of economic activities, thanks to all the complementary actions that confluenced in the region’s development. 

All this means that West Hyderabad has made its choice of a pattern of living that revolves around secluded gated residential communities and is car-based, instead of the walkable, mixed-use, mass-transit and outdoor public-spaces-based living that characterises many western cities. There are benefits and costs with each model. But once the choice is made, it is almost cast in stone. 

It is also pertinent that while West Hyderabad has developed at this pace, the same planning and development control regulations (DCRs) have had no impact on the rest of the city. Economic growth over the last two decades has largely bypassed the existing twin cities of Hyderabad-Secunderabad and facilitated western suburban expansion. It is hard to think of even one example of meaningful-sized urban regeneration or redevelopment in the remaining parts of the city. It can even be argued that the development of the western ORR corridor has come at the cost of the rest of the city. 

This also reflects the restrictive nature of the existing DCRs, despite the unlimited FSI. Very few, or hardly any, plots in the built-up city can avail this unlimited FSI, thereby pushing development outside to the suburbs and benefiting builders. This is one more illustration of the fact I blogged here that reforms to DCRs across Indian states have largely bypassed the built-up city and benefit only the greenfield suburban developments. 

How does Hyderabad’s development compare with two similar examples of rapid growth to scale - Gurgaon and Shenzhen? 

Unlike Gurgaon, which emerged primarily on the back of private land assembly enabled by the licensing regime of Haryana’s Development & Regulation of Urban Areas Act (1975) and even private infrastructure development (e.g., CyberHub metro), the government had a big role to play in the development of the other two. In Hyderabad, as aforesaid, the government aggregated lands, allocated and auctioned them, while also developing the trunk infrastructure. 

Shenzhen is the extreme case of transformation of farmlands, with population rising from a mere 30,000 to 17.6 million in 40 years, and is instructive for its sequencing. It built the metro alongside, not decades behind, the office and housing pattern. Shanghai Pudong transformed farmland east of the Huangpu into finance-and-office from 1990 onward, but again with subway preceding the office boom. Songdo (Incheon) in South Korea is a smaller-scale but similarly planned-from-blank comparison.

Among the three cities, only Shenzhen retained state agency over the density and transit pattern of what it was building. West Hyderabad and Gurgaon both handed the pattern to developers who, rationally, given their incentives, built gated single-use tracts at the highest FAR they could get. The transit, water and sewer bill is what the state pays afterwards.

The best comparison for west Hyderabad is not Shenzhen (which had state agency), nor Gurgaon (which lacked any state trunk infrastructure). It is a distinct third pattern, created by strong state trunk infrastructure, state land assembly and allocation, weak state land-use and transportation planning, strong private densification, and remarkable entrepreneurship and risk-taking, all riding on a booming IT services industry. This third pattern deserves its own space in the Indian urban development literature.

Derisking the financing of infrastructure sector segments

A striking feature of urban infrastructure financing in India is the negligible role played by debt, especially bank loans. It should be a policy priority to significantly increase the mobilisation of debt prudently and sustainably for urban infrastructure projects. 

In this context, I have blogged here with a proposal to leverage the viability gap funding (VGF) scheme of the Department of Economic Affairs, Government of India, to mobilise bank loans and other debt. The idea is to use VGF to transform the project economics to make it commercially viable for banks to lend to municipalities without a sovereign guarantee and against project revenues. This would be an incentive-compatible form of desirable debt, and also provide a pathway to boost the uptake of the struggling VGF window. 

The newly announced Urban Challenge Fund (UCF) of the Government of India is a step in this direction. The ₹1 lakh crore scheme seeks to transition cities toward market-based financing by providing central assistance up to 25% of the total project cost for projects that are able to mobilise at least 50% of the project cost from market sources like commercial bank loans or municipal bonds. The remaining 25% is to come from state and municipal governments. 

The UCF should avoid the kind of incentive-misaligned recourse debt mobilised against the municipal general funds and/or with state government guarantees. Instead, it should try to ensure that the debt is non-recourse, mobilised against project revenues and without any sovereign guarantee. This kind of debt ensures fiscal discipline and a sustainable pathway to financing urban infrastructure. The UCF guidelines are silent on this important distinction. In fact, there is a case for a substantial incentive within the scheme itself to nudge cities in this direction.

However, initiatives like the UCF and VGF are unlikely to generate adequate uptake if they are implemented as a regular government scheme, and directly between the central and state governments. For one, the rigid and bureaucratic nature of project appraisals, approvals, program administration, and payment tranche releases is unsuited to finance projects involving private capital. Further, the operationalisation of such financing will require getting a few things right on both the demand and supply sides, which requires a market-making role. 

On the demand side, it requires the creation of a shelf of projects that can be structured to access project finance. Developing a good quality pipeline of ready-to-finance projects entails a non-trivial cost and requires a project development fund. The category of projects, like those in water and sewerage, solid waste management, bus transit, electricity distribution, etc., are best placed to benefit. 

On the supply side, it requires derisking and increasing banks' appetite, in particular, to finance such projects. Nothing is more effective than a few successful demonstrations of project finance for municipal projects. Today’s commercially attractive infrastructure sectors like national highways, thermal and renewable power generation, parking, etc., got derisked over time through a handful of successes.

This facilitation of the demand-side and easing of supply-side concerns requires active market-making. The infrastructure development finance institutions (DFIs) like National Infrastructure and Investment Fund (NIIF) and National Bank for Financing Infrastructure and Development (NaBFID) are well placed to act as infrastructure investment banks to make this happen by providing technical assistance to develop the project and structure project financing (without recourse to general municipal funds or state government guarantees), mobilising lenders to help achieve financial closure, and contributing the derisking financing layer. 

Accordingly, at least a part of the grant allocation for schemes like VGF and UCF could be made available for these DFIs to build a pipeline of projects and finance them. A proportionate share of the Project Preparation and Capacity Building Fund (PPCBF) under the UCF should also be transferred to them. This should be part of an explicit mandate for these DFIs to derisk projects clearly specified sectors for bank and bond finance. 

If successful, it would be a powerful example of market catalysis of the kind that is central to the mandate of DFIs.