Political party turnover in a local election increased completion times of real estate projects in Mumbai
A pervasive politician-developer nexus exists in Indian cities, where politicians receive illicit financial support from real estate developers in exchange for favourable building policies and accelerated approvals. This "quid pro quo" facilitates the flow of "black money" — income hidden from tax authorities — into campaign coffers. The nexus is difficult to discern in detail due to the opacity of the system, but we uncover what is plausibly a natural consequence: when politicians turnover, building construction slows down.
Building more housing in Indian cities is critical to meet the needs of a growing urban population, but restrictive regulations and drawn-out approval processes have severely constrained housing supply despite tremendous demand (Bertaud 2010, Brueckner and Sridhar 2012, Harari 2020). Restrictive regulation and the potential for discretionary delay in granting approvals give rise to opportunities for rent seeking. This rent seeking is a crucial avenue for political parties to raise money for funding elections.
Election laws in India impose stringent and low ceilings on campaign spending. Yet, elections are becoming more expensive, with actual spending being several magnitudes above the official spending limit. This spending is financed with black money raised from various sources. A Government of India report notes, ‘‘Real estate is one [of] the biggest source and mode of consumption of black money’’ (Government of India 2012, p.2).
In our research (Tandel et al. 2023), we seek to establish the existence of quid pro quo arrangements between politicians and developers by examining how local election outcomes affect real estate project delays. We hypothesise that elections that change the ruling political party disrupt existing arrangements between politicians and developers, creating uncertainty until new relationships are established. This adjustment period likely causes delays across the real estate development process. Therefore, we hypothesise that constituencies where elections result in a turnover of the incumbent party will experience an increase in completion times for ongoing real estate projects. We focus on the city of Mumbai, which is India’s most populous city having the country’s most expensive housing and real estate, and which is governed by India’s richest municipal corporation.
Real estate and politics in Mumbai
The elected body of the municipal corporation of Mumbai constitutes 227 local councillors. The municipal government determines building regulations, most notably the limits on floor area ratio, land use policies, and approval processes. Officials in the government’s building permissions department provide key permissions (starting with an “Intimation of Disapproval” and ending with an “Occupancy Certificate”) to developers for real estate projects in the city.
A typical real estate project takes on average 8.5 years to complete in Mumbai (Gandhi et al. 2021) in part due to the complex regulatory process. Developers bribe officials for getting additional building rights and for speeding up approvals. A large number of real estate projects in the city are embroiled in legal disputes, and thus experience further delays due to high judicial pendency rates (Gandhi et al. 2021). Developers may seek help from local politicians in order to resolve disputes outside the courts or to intimidate complainants and thwart possible legal action in exchange for support during election campaigns.
Elections to the municipal corporation are held every five years by the autonomous state election commission. Owing to the stringent limits on campaign spending, all major parties contesting elections rely on illicit sources of funding. The real estate sector is a major contributor; besides direct contributions, a share of the bribes paid by developers to various officials during the course of real estate development is also utilised to fund election campaigns.
The effects of political party turnover
We use a geocoded dataset of ongoing real estate projects in Mumbai and match buildings to municipal electoral constituencies. We identify constituencies in which the party in power changed after the 2017 municipal election and compare average completion times of projects in these constituencies with completion times of projects in constituencies where the party in power did not change.
We find that projects in constituencies which saw a change in the political party following the election had on average 4.5% longer completion times.
We also use a matching procedure and compare completion times of projects in a constituency which saw a change in political party to their nearest similar neighbour in a constituency where the incumbent party was re-elected. Using this method, we estimate that a change in political party is associated with 7.6% longer project completion times.
Channels for delays
One mechanism for the delay is a slowdown in granting approvals right after the election. We estimate the permit delay mechanism using application and approval dates for a “commencement certificate” for a sample of projects where developers applied for an approval just before the election and received approval after the election. We find that a change in the party in power is associated with an increase of 20-25 days in approval times and with a 21% decrease in the likelihood of receiving approval within three months of the election.
Delays could also be on account of an increase in litigation post-election as developers lose political protection. However, we do not find evidence of an increase in likelihood of litigation for projects in constituencies which saw a change in political party after the election.
While the precise mechanisms require further study, the findings shed light on how politician-developer collusion distorts Mumbai's real estate market.
Implications for policy
Recent studies, including Nagpal and Gandhi (2023), indicate that easing stringent policies, such as floor area ratios, can substantially enhance housing affordability. However, the challenge in advocating and enacting these reforms is compounded by a deeply entrenched nexus between politicians and developers, who often benefit from the status quo.
To effectively initiate reform, a dual approach is essential. The first step involves intellectually advocating for these changes, highlighting their potential benefits to the broader public. The second, and perhaps more challenging step, involves addressing the politician-developer axis. Implementing greater transparency and accountability in political financing and the real estate approval process is critical to undermining the perverse incentives at the heart of this nexus. Since much of the demand for illegal funding comes from a cap on legal funding it may be wise to recognise the reality on the ground and increase the campaign cap.
In essence, project delay correlated with political turnover serves as a barometer of crony relationships. The existence of such crony relationships reminds us that economic reform and political reform are linked and both types of reform are crucial for resolving Mumbai's housing crisis.
References
Bertaud, A (2010), “Land Markets, Government Interventions, and Housing Affordability.” Working Paper 18, Wolfensohn Center For Development at the Brookings Institution.
Brueckner, J K, and K S Sridhar (2012), “Measuring welfare gains from relaxation of landuse restrictions: The case of India’s building-height limits.” Regional Science and Urban Economics, 42(6): 1061–1067.
Gandhi, S, V Tandel, A Tabarrok, and S Ravi (2021), “Too slow for the urban march: Litigations and the real estate market in Mumbai, India.” Journal of Urban Economics, 123: 103330.
Government of India, Ministry of Finance (2012) “Measures to tackle black money in India and abroad (Part II).” Available here: https://dor.gov.in/sites/default/files/Measures_Tackle_BlackMoney.pdf.
Harari, M (2020), “Cities in bad shape: Urban geometry in India.” American Economic Review, 110(8): 2377–2421.
Nagpal, G, and S Gandhi (2023), “Scaling Heights: Affordability Implications of Zoning Deregulation in India.”
Tandel, V, S Gandhi, and A Tabarrok (2023), “Building networks: Investigating the quid pro quo between local politicians & developers.” Journal of Development Economics, 103138.