#17: How building laws lock India's factory land

Factories can lose more than 50% of land to building standards such as ground coverage, setbacks, and parking

This article was originally printed in LiveMint.

Many Indian manufacturers often have to operate under tarpaulins, illegally. Indian industrial estates are littered with these makeshift arrangements around the main factory building. If government inspectors find out, the manufacturer can cheaply, and quickly, dismantle the tarpaulin structures.

Why do they operate under tarpaulins? Our land use laws prevent a factory owner from using their own land efficiently. Researchers have pointed out that India has created an artificial scarcity of land through restrictive regulations. This scarcity is well documented in the case of urban housing. A similar affliction hurts our factories. Our building standards restrict factories from using the plot area efficiently or growing vertically. Industrial buildings are constrained by multiple building standards which lead to a loss of productive land. Of these standards, land loss is largely driven by four standards—setbacks (strips of land factories must leave on all sides of a building), parking, ground coverage (limit on the plot area that can be covered by a building), and floor area ratio, or FAR (the ratio between a building’s constructed floor area and the land area). These standards may provide some benefits. However, the benefits are not free. They come at the cost of economic growth, productivity, and jobs. The question is whether the benefits outweigh the costs.

Research by Prosperiti, a public policy institution, shows that a factory in India can lose more than 50% of land to building standards. Our entrepreneurs are paying full price for half use.

The requirements for these four standards vary from state to state. 10 states were ranked by Prosperiti based on factory land lost to building regulation restrictions. For each state, Prosperiti’s researchers computed the cost of these building restrictions, for micro, small, medium, large, and mega factories. The ranking is part of a report that shows the cost of these regulations in terms of land lost, money lost, and jobs lost.

Overall, Haryana is the least restrictive among the states, but Tamil Nadu is friendlier to large and mega factories. Haryana is the only state where a factory of any size can use more than 50% of the plot. Odisha, Bihar, and Delhi are the most restrictive states for factories of all sizes. Regulations in these states are so extreme that in some cases a factory is left with no ground floor land.

Overall, states set more punishing standards for smaller enterprises than larger ones. On average, small factories lose 85% of their plots to the four standards, while large factories lose 55%. Micro and small factories in Odisha, Bihar, and Delhi lose 100% of land on the ground floor after complying with the four standards.

Setbacks

Factory plots lose the most buildable footprint to setbacks. These setback regulations may have originally been made to prevent fires from spreading, allow ventilation, and sunlight in buildings. However, these requirements can be met by modern technology without the need to keep expensive land unproductive.

In most Indian states, plot owners face aggressive setback requirements from building authorities. In Madhya Pradesh, for example, a person we know by the name of Hemalata constructed a building in accordance with the law and approved plans of Indore. The city regulations required buildings to leave more land, as setbacks, on the front of the building than on the sides. The building included doors on one of the sides in addition to the front. Due to this, the Indore authority argued that even that side of the building should be considered as the front and Hemalata should have left more land unused on that side. It took the Supreme Court of India (Indore Municipal Corporation vs. Dr. Hemalata, 2010) to decide that the side of the building does not become the front just because it has doors.

India renders more land unproductive due to setbacks, compared to Singapore—a country with high legal and safety standards and 32 times GDP per capita. Factories in Singapore do not have to leave setbacks on the side if the adjoining plots also house factories. As a result, a factory on a 10,000 square meter (sq. m) plot will only lose 500 sq. m of the plot to setbacks. In contrast, the same factory in Maharashtra will lose 2,256 sq. m of the plot (about five times more). Among the states studied, Haryana is the only state that is comparable to Singapore.

Parking

After setbacks, factories in India lose the most amount of land to parking requirements. This requirement is usually driven by the need to keep roads congestion-free. However, these requirements are irrespective of whether the factory actually needs the parking space.

A small hosiery unit owner in Punjab we spoke to related his woes. Most of the workers in his plant come to the factory on shared transport. The unit owner was forced to create three times the parking spaces as the number of workers that actually need them. Per our calculations, the factory would have lost about 40% of the plot to parking. For context, one worker can make 400 pairs of socks in a day. This small business owner could have increased his daily output by 50% if parking minimums were rationalized.

Parking requirements should be lower in Indian states than other countries because less than a third of Indian workers use modes of transport like cars, cycles, which require parking (Census, 2011). However, factories in Maharashtra require more parking than in Singapore. A 500-employee factory in Maharashtra needs estimated space for 67 cars, 304 two-wheelers, and six trucks. A similar factory in Singapore would only need estimated space for 16 cars (1/4th), 101 two-wheelers (1/3rd), and seven trucks.

Compared to Maharashtra, Tamil Nadu has a more rational approach to factory parking regulation. In Tamil Nadu, two-wheeler parking spaces are proportionally linked to the workshop floor, and car parking spaces are proportionally linked to the office floor constructed for administrative purposes.

Ground Coverage

Apart from setbacks and parking, Indian factories lose land to ground coverage regulations that limit the usable ground floor space. These restrictions were instituted to encourage groundwater recharge and reduce the density of buildings in an area. However, both these reasons may not be valid today. Rainwater, for example, can be harvested much better through modern methods like pervious pavements.

Some states have recognized that ground coverage regulations may be redundant. Maharashtra, Gujarat, and Telangana impose no limits on ground coverage for factories. In Telangana, factories are allowed to use as much plot area as possible once setback and parking requirements are met.

Factories in Indian states lose more land to ground coverage as compared to Asian countries. In some states, this loss can go up to 60% of the plot size. In comparison, in Hong Kong, a country with nearly 20 times our per capita income, a factory will lose only 5%, and in the Philippines, a country with 1.5 times our per capita income, only 20% of land. This one standard, in fact, makes Haryana less progressive than it could be. A 1,000 sq. m plot in Haryana loses 200 sq. m to ground coverage (after deducting overlaps). This area could have been used to employ 29 additional workers.

Floor Area Ratio

The three regulations (ground coverage, parking, and setbacks) control the horizontal plane of the building. The vertical plane of buildings is regulated by the FAR/ Floor Space Index. Traditionally, the height of factories has not been limited by regulation but by technology. Technology in modern factories has allowed them to advance far from the Dickensian image of factories.

Most Indian states allow only a low FAR for single detached factories. On average, these factories are allowed to create floor space up to 1.3 times the plot area.

In 2018, Chetan Patil, an entrepreneur from Maharashtra, tried to set up a steel fabrication plant in a two-acre industrial shed in Nashik. The state’s building regulations only allowed him to build on 55% of the plot. Worse still, by law, he could only purchase an additional 15% FAR to make up for ground floor land lost. Then, to add insult to injury, this additional FAR would cost him four times the circle rate. Patil waited for two years for his approvals and has now paused the project. Had he set the same plant up in Japan, he could have built a factory floor four times larger and been on his production journey by now.

As they stand, FAR/FSI limits in India are also inimical to the proliferation of flatted factories. Flatted factories are tall stacked manufacturing facilities with high worker density. Even though states have recognized the importance of flatted factories for industrial growth, they continue to set restrictive limits. For instance, since 2020, Uttar Pradesh has actively encouraged growth of flatted factories. However, in two of the state’s manufacturing hubs (Meerut and Noida), such factories are only allowed a maximum FAR of 1.5, and inside industrial areas managed by UP State Industrial Development Authority, such factories are only allowed a maximum FAR of 0.7. These limits are even lower than what some states offer to single-detached manufacturing units. For example, single factories in Punjab’s municipal areas are allowed an FAR of 3.

Flatted factories are a feature of high-density environments such as Hong Kong. In Hong Kong, private flatted factories make up almost 70% of industrial buildings in terms of floor space. These multi-storeyed factories are allowed an FAR ranging between 3.5 and 9.5 in development areas, and can go as high as 12 for factories in industrial areas within metropolitan areas.

Opportunity Cost

An industrial entrepreneur has to shell out large sums of money to keep part of their plot fallow forever. Based on Prosperiti’s estimates, factories in these 10 states stand to lose between ₹2.67 lakh in a micro-factory to ₹3.16 crore in a mega factory.

These regulations may be driving an irrational location of factories. Factories should ideally go where land prices are lower. However, restrictive regulations in cheaper areas may drive factories to more expensive locations. For example, the land price in DLF Industrial Area, Faridabad, Haryana, is about ₹14,352 per sq. m, and in Ganesh Nagar, Ludhiana East, Punjab, is ₹13,200 per sq. m. But, Faridabad is less restrictive than Ludhiana. Therefore, a medium factory will lose ₹57.4 lakh in Faridabad and ₹1.07 crore in Ludhiana. As a result, Faridabad becomes a more attractive investment location than Ludhiana even as land prices are slightly higher in Faridabad.

Money wasted is apparent, but the unseen cost is jobs not created. Even if the land loss on account of regulations was halved, states could generate between 30-74 jobs in a medium-sized factory.

These losses at the factory level can compound to millions of job opportunities lost. For instance, large factories in Maharashtra could have space for 563,000 more industrial jobs had the state reduced the land lost by half. This is 38% of the factory workers currently employed in Maharashtra generating more than ₹500 crore per month in additional wages.

Way Ahead

These land loss estimates are conservative as they are based on only four standards. Other standards like open space reserve, rainwater harvesting systems, means of access, height restrictions, etc., additionally restrict the growth of buildings. In addition, a factory has to dedicate large parts of the floor space to facilities under labour laws. Once all standards are complied with, a factory is able to utilise only a third of the plot for manufacturing goods. This is a non-trivial hindrance to the ease of doing business in the country.

While some of these regulations may be necessary, they must be evaluated in light of India’s other goals. The question is whether the benefits from these regulations outweigh the costs of keeping land unproductive. For India, the trade-off is much more expensive than in many other countries that are already industrialized and rich. This is because in rich countries’ lost income means a marginal decrease from very wealthy to wealthy. In contrast, lost income and productivity in India means the difference between poverty and middle income.

Building regulations for factories are a small subset of land use laws in India. Industrialization is critical to urbanization. The restrictions on factories lead to a cumulative loss of productive land in and around India’s cities. Planners need to figure out how to use land efficiently, and lib- eralizing industrial land could be a start.

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The Freedom to Build team at Prosperiti worked on the report: Bhuvana Anand, Suyog Dandekar, Sargun Kaur, Bhavna Mundhra, Rohan Ross, Shubho Roy, and Anandhkrishnan S.