Why PMAY-U fails to address India’s intrinsic housing problems
By Prerna Prabhakar
At a recent event, Prime Minister Narendra Modi gave away keys to seventy five thousand beneficiaries of the Pradhan Mantri Awas Yojana — Urban (PMAY-U) in Uttar Pradesh. Though it is a welcome and much needed move, the overall pace of delivery under PMAY-U has been rather slow. As of October 11, 2021, just around 50% of the 114 lakh sanctioned houses have been completed. In the process, ₹97,000 crore has already been incurred.
At this point, it is imperative to think about the contribution of this scheme in addressing the intrinsic housing problem in India. It is natural for many to ask — with a huge central assistance commitment of ₹1.8 lakh crore, has this scheme achieved the desired goal so far, in terms of meeting the affordable housing demand? Is the PMAY-U’s subsidy burden a matter of concern?
PMAY-U’s Credit Linked subsidy scheme (CLSS) component offers interest rate subvention on housing loans borrowed by the Economically Weaker Section (EWS), low and middle income groups. However, the subvention amount is insufficient for private housing in major urban centres of tier-I cities. After all, tier-I cities are characterized by high housing prices.
Shifting our focus to government driven EWS projects, we see two particular issues around them. Firstly, these projects are mainly located in the periphery of cities, far away from the city’s key economic centres. Secondly, these places are marked by a general lack of transport connectivity and other infrastructure facilities. This combination results in a lack of takers for these housing units. As a result, these units usually remain unpurchased for years on a stretch.
The CLSS component has a visible fiscal impact in the form of a subsidy burden. However, in typical EWS housing projects, especially the ones built by the state governments and city authorities, CLSS subvention is not the only cost that the government has to incur. For instance, a EWS housing unit in Narela in Delhi is priced at ₹5-6 Lakh. This hides the fact that the construction cost of such a typical unit alone amounts to ₹6 lakh. While scale does reduce cost of works, the price ceiling of ₹6 lakh indicates a broader cost factor being ignored as labour and capital costs are not being accounted for. These are what would essentially count as state level subsidies that eventually add up to national debt.
While PMAY-U is delivering housing for the poor, an emerging economy like India has also to be aware of fiscally viable options for reforming the housing market to address the intrinsic housing problems. The scheme can be avoided from becoming a white elephant, provided suitable steps are undertaken to solve these deep rooted issues associated with the housing market in the country.
A prime reason behind the lack of affordable housing supply is high land prices. Appropriate policy changes to address this problem are likely to form the core of the solution. The logical step thus would be conceiving ways whereby land prices can be checked. This can happen with a three pronged approach – ensuring adequate supply of land for residential purposes; ensuring policies to guarantee the efficient use of this land for developing housing units; and reducing transaction costs associated with land/property purchase.
For maintaining adequate supply of land, it is imperative that necessary changes in land use change policies are introduced at the state level. In most Indian states, multiple levels of No Objection Certificates (NOCs) are necessary for land use conversion. This complex and cost intensive process results in pushing up land prices. Many states like Gujarat and Karnataka have started to make the right moves in this direction through innovations such as the multipurpose NA certification approach or initiating online land use conversion processes. Such efforts can be replicated by other states. Another possible measure towards addressing the issue of land use change is designating specific land parcels for real estate developers in the states’ land banks, which will save them the time, effort and cost associated with land use change processes.
Floor Space index (FSI) regulations are another elephant in the room. For areas characterized with high land prices and less land availability, a high FSI helps fill the void to an extent. However, in most Indian cities, FSI is always maintained on a lower side (1 -2), with strict regulations on increases. Mumbai is the sole exception in this regard where the maximum permissible FSI is 4.5. When compared to FSI in other major Asian cities like Shanghai (FSI is 13) and Singapore (FSI is 25), one sees that there is much more that can be done.
Transaction costs associated with land/property purchasing also adds to the hidden costs of affordable housing. These would include different forms of fees like stamp duty, registration fee, lawyer and real estate agent’s fees. According to Global Property Guide, India has one of the highest transaction costs of housing, going up to 15 %. Compared to its immediate ASEAN neighbours like Thailand (14%) and Malaysia (8%), we see the room to fix this anomaly.
PMAY-U is certainly filling an important gap in India on the affordable housing front. However, given the overall fiscal implications for India, measures are certainly needed to ensure prudence and seek permanent solutions.
Prerna Prabhakar is an Associate Fellow at the National Council of Applied Economic Research (NCAER). The views expressed in this article are personal.