Eco Survey flags restrictive land-use norms as key drag on realty supply

Restrictive land-use rules and low FSI caps are choking housing supply, turning land into dead capital and worsening affordability, the Economic Survey 2025-26 warns

The Economic Survey 2025–26 flagged restrictive land-use norms as a key factor behind constrained housing supply and land turning into “dead capital” due to title insecurity, fragmented markets, and speculative incentives that limit land recycling.

 

The survey said restrictive land-use rules such as low floor space index (FSI) or floor area ratio (FAR) caps on built-up area per unit of land limit vertical development and push cities to expand outward, raising land values, limiting supply, and creating artificial scarcity in core urban areas.

 

Dead capital refers to assets that are unable to function as productive capital and contribute to economic activity. FSI or FAR is the maximum permissible built-up area that a developer can construct on a land parcel.

 

Ashim Chowdhury, senior vice-president, research and advisory, Anarock Group, said low FSI has constrained supply and prevented Indian cities from scaling like global peers such as Dubai and Singapore, even as demand rises with population growth, urban migration, and the need for affordable and mid-income housing.

 

Compared with cities such as New York and Hong Kong, with FSI of 15 and 12, respectively, Indian cities have much lower limits — Mumbai at 1.3, Delhi at 3.5, and Bengaluru at 4 — according to Knight Frank Research. Low FSI encourages horizontal sprawl, raises land and infrastructure costs per unit, restricts supply, and pushes prices above income levels.

 

Pradeep Aggarwal, founder and chairperson, Signature Global (India), said rising land prices have sharply increased housing costs, misaligning them with the Housing for All vision. He said more liberal FSI norms could promote vertical growth, reduce per-home costs, and improve affordability.

 

Top Indian markets have faced affordability pressures, with residential sales moderating in 2024 and 2025 after average prices rose 54 per cent during 2019–24 and a further 8 per cent in 2025.

 

The survey noted that states and urban bodies are gradually modifying development control regulations and allowing additional FSI for a premium, but said a holistic rethink is needed for change at scale. It suggested that urban bodies use Ministry of Housing and Urban Affairs resources, including guidance on transit-oriented development, to optimise densities. It also flagged unclear land titles, fragmentation, and opaque records as key constraints, stressing that secure, transferable property rights are essential for land to function as capital.

   

While higher FSI can unlock value, the survey warned that increased density without adequate infrastructure would be counterproductive. Without sufficient mass transit, water, and sanitation, higher density could lead to congestion, shortages, and overburdened systems, even as successful global cities combine density with robust services.

   

The survey also highlighted India’s affordable housing shortage. A Knight Frank–Naredco report estimates cumulative demand at 30 million units by 2030. In the top eight cities, the share of affordable housing supply has fallen from 52.4 per cent in 2018 to 17 per cent in 2025, while its share in overall sales dropped from 38 per cent in 2019 to 18 per cent in the first nine months of 2025, according to Anarock.

   

Affordable housing is increasingly pushed to city peripheries due to lower land costs, but these areas often lack connectivity and civic infrastructure. Unlocking urban land through clearer titles, better density norms, and transit-oriented development could expand affordable housing and curb sprawl, the survey said.