Economics Of Affordable Housing in Indian Cities

With the 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. This has led to the proliferation of slums, which are a significant social and economic issue. The magnitude of the problem can be seen in the snapshot view of slums in a few Indian cities 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. This highlights the urgent need for effective policies to address the issue of affordable housing.

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. For cities to ameliorate affordable housing delivery whilst keeping a check on the growth of slums, policies must 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 household stock and flow principle refers to the balance between the supply of housing units and the demand for housing from households. When this balance is not maintained, it leads to housing shortages and increased prices, making it difficult for low-income households to access affordable housing.

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. Rajiv Awas Yojana is a government initiative aimed at creating a slum-free India by encouraging states and union territories to tackle the problem of slums in a definitive manner. The program focuses on bringing existing slums within the formal system, redressing the failures of the formal system that lie behind the creation of slums, and tackling the shortages of urban land and housing that keep shelter out of reach of the urban poor. The program also emphasizes the importance of security of tenure through entitlement, which is critical for promoting inclusive cities.

To address the issue of affordable housing, several strategies can be employed. One approach is to increase the supply of housing units by encouraging private sector participation in the creation of affordable housing stock on ownership, rental, or rental-cum-ownership basis. This can be achieved through incentives such as land availability, zoning/FSI incentives, and financial support. Another strategy is to ensure the provision of basic infrastructure in urban areas, especially slums, which would generally require the intermediation of civil society, government, and private entities. This includes the provision of water supply, sanitation, and other civic amenities. Additionally, there is a need for resource mobilization and earmarking of resources by public agencies to meet the cost of affordable housing, civic infrastructure, and services for the urban poor where private sector participation is not possible.

Financing is a critical aspect of affordable housing delivery. Banks and other financial institutions are often reluctant to lend to the economically weaker sections and low-income groups for affordable housing due to perceived credit risks. There is a need for credit enhancement through appropriate fiscal, legal, and institutional mechanisms, including the intermediation of public and private housing agencies, to ensure the flow of capital for this priority program. This can be achieved through measures such as providing interest subsidies on housing loans, sharing in infrastructure and housing capital subsidies, and ensuring equity contributions from beneficiaries.

In conclusion, the issue of affordable housing in Indian cities is a complex and pressing problem that requires a multi-faceted approach. The failure of policies to adhere to basic economic principles has led to distortions in the land and housing markets, resulting in housing shortages and the proliferation of slums. To address this issue, it is essential to implement policies that ensure the satisfaction of core economic principles, such as the household stock and flow principle. The success of initiatives like Rajiv Awas Yojana will depend on their ability to understand and address the informal institutions in place and the distortions in the land and housing markets. By employing strategies such as increasing the supply of housing units, ensuring the provision of basic infrastructure, and enhancing credit availability, it is possible to ameliorate affordable housing delivery and keep a check on the growth of slums.

For more information on affordable housing, you can visit Affordable Housing Online. For details on Rajiv Awas Yojana, you can refer to the official guidelines.