Without Resourcing India’s ‘Housing for All’ Closer to No Housing at All

By Sarah Watson –

Apartment construction in Delhi, India. Source: Axel Drainville's flickr photostream, used under a creative commons license.

Apartment construction in Delhi, India. Source: Axel Drainville’s flickr photostream, used under a creative commons license.

India’s yearly budget speech is more than just an allocation of funds. Beyond announcing expenditures for the fiscal year, the budget speech lays out the government’s priorities and unveils a series of policy proposals to meet economic targets or overcome development obstacles. But in the excitement of new budget announcements, previous goals are often forgotten. Each year, new programs pull money and bureaucratic resources away from last year’s stars.

When he rose to present the Modi government’s first budget on July 10, 2014, Finance Minister Arun Jaitley made a bold pledge: the government would “endeavor to have housing for all by 2022.” In aiming for full housing by 2022, he echoed one of Prime Minister Narendra Modi’s signature campaign promises. This is a gigantic task — according to KPMG, India has a current housing shortage of 60 million units and may need to build 110 million more by 2022.

Not surprisingly, the real estate industry applauded the announcement; the initiative also promised to provide a boost to the construction sector. Construction is one of the few non-farming sectors that employs low-skilled workers, and the sector added more than 18 million jobs between 2005 and 2010.

Jaitley laid out a two-pronged approach to stimulating housing construction, engaging both the private and public sector. He announced that investors would now be able to form Real Estate Investment Trusts (REITs), investment vehicles that theoretically receive favorable tax treatment, with the goal of “attract[ing] long term finance from foreign and domestic sources.” He also proposed a “Mission on Low Cost Affordable Housing,” seeded with an initial allocation of $615 million, which would supplement existing government programs in this area. While government-led “Missions” to achieve a particular goal are common policy tools in India, the proposal concerning REITs seemed to be a sign of a new approach, in which the government would incentivize the private sector to tackle India’s challenges.

Unfortunately, as of January 2016 not a single Indian REIT had been listed on any stock exchange. The Security and Exchange Board of India (SEBI) issued regulations for REITs in September 2014; the regulations required that REITs invest no more than 10 percent of assets in properties under construction and prevented them from investing in vacant land — essentially ensuring that they could not add to India’s housing stock. More importantly, REITs are required to distribute 90 percent of income as dividends on a monthly basis; these distributions are taxed under Indian law, making Indian REITs financially uncompetitive for international investors.

As for government efforts, in July 2015 the “Mission on Low Cost Affordable Housing” was replaced with the Pradhan Mantri Awas Yojana (PMAY), or Prime Minister’s Housing Scheme, which aims to ensure that every inhabitant of India’s 4041 statutory towns lives in a permanent structure, with adequate water and sanitation facilities, by 2022. PMAY is designed to be state-led and allows states to select from a menu of four different strategies for driving home ownership. But the program has a long way to go: as of February 2016 it had approved plans for creating 400,000 units of housing in 11 states (the goal is 60 million units by 2022). The central government has pledged $900 million to fund the proposals but has disbursed less than $100 million to the states.

Minutes from the meetings of the scheme’s governing committee indicate that states are anxious to receive government aid to redevelop informal colonies and to build free homes for the very poor. Yet past experiments with building free homes for the poor, such as the Rajiv Awas Yojana (RAY), have been mixed successes at best: implemented in 2013 with an announced budget of $1.65 billion, as of February 1 RAY had produced less than 8,000 dwellings, only 1,060 of which were occupied. Low occupancy rates plague similar programs, like Affordable Housing in Partnership (48 percent) and the Jawharlal Nehru National Urban Renewal Mission (Maharashtra alone has over 53,000 unoccupied units built under this scheme).

Why are so few of the free houses state governments are building lived in? The answer is likely “livelihood issues,” as one state representative put it at the most recent meeting of a committee set up to review progress on the schemes. A 2014 study of former slum dwellers who had been relocated as part of slum development schemes found that most new developments are located at the periphery of cities rather than in the centrally-located (and therefore more valuable) land formerly occupied by the slum. These areas lack jobs or transportation links that could allow their inhabitants to commute to their former places of employment. As a result, the relocated suffered “significant loss in household assets, increased joblessness or unemployment, loss of access to common services, [and] increased health risks.” Similarly, a 2006 study of Mumbai found that relocation programs provided zero net benefits for residents of even some of Mumbai’s worst slum areas, unless the residents could find jobs near their new homes.

The dismal record of past affordable housing schemes suggests that the government should place a greater emphasis on the market-based components of PMAY: a credit-linked subsidy that caps the interest on a home loan at 6.5 percent for 15 years and a $2,300 direct cash grant to individual poor families that want to build or improve their own home. These programs will not be as accessible to the very poor (they require that the beneficiary be able to pull together a mortgage payment or already own a home or land to build on). They are, however, more in line with the empirical research that suggests that improving existing slums with buy-in from their residents is a better way to solve India’s housing problem. Both of these programs have the substantial side-benefit of mostly avoiding state bureaucracies. The first is being run directly by a national housing finance corporation, while the second involves the states only as an intermediary in what should be a simple direct benefit transfer to the beneficiary’s bank account.

The records of PMAY’s coordinating body, however, show that interest in these schemes varies sharply by state. Madhya Pradesh, for instance, is steering nearly 85,000 citizens into the credit-linked subsidy scheme, while West Bengal requested cash grants for more than 47,000 families who want to improve their homes. Gujarat, Rajasthan, and Telangana, on the other hand, have only requested central government support to build new houses from scratch under Affordable Housing in Partnership program.

Both India’s real-estate and construction sectors are in something of a slump, with growth in the latter expected to decline to 3.7 percent in the coming year, down from 4.4 percent in fiscal year 2015. Real estate projects worth $150 billion are currently stalled as a result of difficulty obtaining the appropriate paperwork, a lack of project finance, and high levels of debt across the industry due to previous project delays. Troubles in these sectors cannot be blamed entirely on the disappointing implementation of the Housing for All promise. But hopefully the government will leave some room in the upcoming budget for reviving and refining its past romance with real estate.

Ms. Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

Sarah Watson

Sarah Watson

Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.


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