With increasing concentration of economic and commercial activities, rapid economic growth and influx of population in Indian cities, the pressure on affordable housing delivery is mounting, resulting in the proliferation of slums. For a sense of the magnitude of the problem, a snapshot view of slums in a few Indian cities has been provided in this article. Focusing on the case of Mumbai, it is estimated that at the present income distribution and institutional rates, only 5–6 per cent of households can afford a house in Mumbai. The article demonstrates that the failure of policies to adhere to basic economic principles results in massive distortions in the land and housing markets, leading to failure in resolving problems of affordable housing and slums. Thus, for cities to ameliorate affordable housing delivery whilst keeping a check on the growth of slums, it is essential that policies ensure the satisfaction of certain core economic principles—in particular, the household stock and flow principle—that are instrumental in efficient functioning of land and housing markets. The article advocates that the success of Rajiv Awas Yojana would depend upon its ability to understand the informal institutions in place, given the extant distortions in the land and housing markets.