Housing Subsidies and Affordable Housing in India
In 2015, the Indian government initiated one of the largest urban housing programs in the world to provide affordable housing for all, the Pradhan Mantri Awas Yojana (Urban), or PMAY (U). The program is set to end at the end of this year. However, as per a news report published last month, the outgoing government reportedly instructed officials to work toward a continuation of one part of the program if it returns to power in June.
Specifically, according to this news report, the government is discussing plans to implement a new interest subsidy scheme on loans for affordable homes in an attempt to “drive growth in the real estate sector.” An interest subsidy on housing loans is one of the components of the PMAY (U) as well: the Credit-Linked Subsidy Scheme, or CLSS. This essay reviews the implementation of the PMAY (U) and its success in achieving its objectives.
The Design and Performance of the PMAY (U)
The PMAY (U) has four components: (a) In Situ Slum Redevelopment (ISSR), (b) the abovementioned CLSS, (c) Affordable Housing in Partnership (AHP), and (d) Beneficiary-Led Individual House Construction/Enhancement (BLC).
Each of these theoretically targets a different beneficiary group. The ISSR provides central government assistance of up to Rs. 1 lakh per house to eligible slum dwellers. This is directed through state governments, who are encouraged to denotify the slums after redevelopment. Under the BLC, the central government provides up to Rs. 1.5 lakh per house for individual house construction or enhancement. Here, the beneficiary group is required to prove ownership of the land. Under the AHP, the central government provides up to Rs. 1.5 lakh for affordable housing projects, where at least 35 percent of the houses are built for the Economically Weaker Section (EWS). And under CLSS, the government provides a housing loan subsidy, with varying levels of subsidies depending on the income category of the household and the loan amount sought.
As per government information on the performance of the scheme from May 2024, the construction of 118.6 lakh houses has been sanctioned thus far, and 83 lakh houses have been built. The largest component of this has been the BLC, with 75 lakh houses sanctioned for construction and close to 45 lakh houses built. Approximately 25 lakh houses have been sanctioned under CLSS, of which reportedly almost 100 percent have been constructed. The ISSR, or slum-related housing component, has seen the lowest take-up, with only 2.96 lakh houses sanctioned. Under the AHP, close to 16 lakh houses have been sanctioned, while 8.4 lakh houses have been built.
The central government’s financial expenditure for the scheme has increased significantly since 2017. In 2015–16 and 2016–17, the central assistance of the scheme was Rs. 3,223 and Rs. 4,598 crore, respectively. In 2017–18, the assistance increased to Rs. 16,531 crore, and the expenditure since then until 2021–22 has exceeded Rs. 20,000 crore in each year. The total central assistance between 2015-16 and 2021-22 has been Rs. 1,18,020 crore.
How should one make sense of the numbers on housing completions? For this, it is necessary to understand the estimates of the shortfall in housing and the government’s appraisal of affordability requirements.
Urban Housing Shortage in India
The basis for estimating the urban housing shortage in India is the Report of the Technical Group on Urban Housing Shortage for the Twelfth Five-Year Plan, or TG-12. The TG-12 report estimated that in 2012, there were 14.99 million households in congested houses that required new accommodation, 2.27 million households living in obsolescent housing (unsafe, dilapidated housing), 0.99 in non-serviceable kutcha housing, and 0.53 million homeless. This adds up to a housing shortage of 18.78 million, of which the largest category by far is that of households living in congested conditions (approximately 80 percent).
The report then goes on to estimate that 11.7 million of these 18.78 million households live in self-occupied houses, while 7 million are rented. The report also adds that since its figures are estimates, city, and state-level agencies should undertake surveys to study how many of the households can have their housing upgraded in the same location rather than be provided new housing elsewhere.
Therefore, based on these estimates, it seems clear that the main affordable housing problems in urban India are congestion and obsolescence. It is also clear that targeting the upgradation of housing is a viable option for some households, since a significant proportion of houses seem to be self-occupied. It is, however, imperative to keep in mind that self-occupation is not the same as ownership, since self-occupation in a slum does not necessarily confer any ownership rights, which is then a barrier to receiving government benefits for housing upgradation.
How Well Has the PMAY (U) Targeted the Problem of Housing Shortages and Affordability?
Parliament’s Standing Committee on Housing and Urban Affairs published a report evaluating the performance of PMAY (U) in March 2023.
The Ministry of Housing and Urban Affairs stated to the standing committee that though the TG-12 had an estimate of 18.78 million, the ministry conducted a demand-based appraisal, which resulted in an estimate of about 12.3 million houses. The report then goes on to provide a breakdown of the number of houses sanctioned and completed in each of the PMAY (U) components.
As per the report, in the CLSS vertical, 22.5 lakh houses out of 23.97 lakh sanctioned houses had been completed. The corresponding numbers for the BLC vertical were 32.8 lakh out of 73.45 lakh (44.6 percent), and for the AHP vertical, they were 1.78 lakh out of 20.9 lakh sanctioned houses. The ISSR, or the slum upgradation scheme, saw a paltry 0.99 lakh houses completed out of the 4.3 lakh houses that were sanctioned. An additional 1.08 lakh houses were categorized as “nonstarter houses” under the ISSR vertical. However, the report notes data furnished by the ministry to the effect that 7.9 lakh slum households have taken benefits under the BLC scheme.
The most successful components of the PMAY (U) have been the BLC and the housing loan subsidy. Other components have run into implementation problems. That is, the two components that, according to the ministry, explicitly target congested and dilapidated housing—ISSR and AHP. While some BLC and CLSS beneficiaries are also slum households, according to the ministry, ISSR and AHP were designed to specifically target slum households. The standing committee report points out that 5.6 lakh houses under the ISSR and AHP verticals are lying vacant. In addition to the data of a significant proportion of houses under the ISSR and the AHP components remaining vacant, one paper based on a review of official data finds that the occupancy rate under the AHP component in nine states (Chhattisgarh, Gujarat, Uttar Pradesh, Rajasthan, Andhra Pradesh, Telangana, Karnataka, Uttarakhand, and Tamil Nadu) is just 7.82 percent.
The report states that the committee asked the ministry why the BLC component had such a large proportion of the total houses sanctioned. In reply, the ministry specified that “states also find it more convenient to give houses in smaller cities and to people who have their own land. That is why, we have seen BLC vertical growing up.” Even then, the BLC component has a low proportion of completed houses compared to those sanctioned as per the information given in the report (approximately 44 percent).
The PMAY (U) Does Not Seem to Be Targeting Congested Households Well
The information above shows that the components of the scheme that explicitly target congested and dilapidated housing have shown much lower rates of success than the BLC and the housing subsidy component. While the ministry does (See Table 20 of the Standing Committee report) claim that close to 8 lakh slum households have used the BLC, this is a small proportion of the total number of BLC houses delivered (32.8 lakh). Moreover, a small proportion of the total number of houses sanctioned are under the ISSR and the AHP components, targeted specifically at slum residents.
This is significant, given that the estimates of the TG-12 report highlighted the affordability problem primarily as a problem of congestion and poor-quality housing. In fact, since the TG-12 report was submitted in 2012, a 2020 paper by scholars from the Indian Council for Research on International Economic Relations estimated that the housing shortage has increased by 54 percent in 2018 relative to 2012, mostly among the EWS and low-income group (LIG) categories. Not just this, the paper finds that the per capita “floor area of congested households declined from 111 square feet in 2012 to 83 square feet in 2018.”
As per the standing committee report, the ministry has stated that slum households have also used the CLSS, or the housing loan subsidy component, but has not provided numbers for the same. Given that loan eligibility is a prerequisite for this component of the PMAY (U), this number may not be significant, considering that many slum residents lack sufficiently good land titles. On the contrary, the CLSS component of the PMAY (U) explicitly allows middle-income group (MIG) households to also avail of the subsidy. As per the latest data furnished by the ministry, 6 lakh out of a total of 25 lakh households under this component belong to the MIG category.
In fact, there has been a slow but gradual shift away from the initial focus on the EWS and LIG categories. The MIG categories were added to the CLSS component in 2017 and were not part of the initial design of the scheme in 2015. Later, the limits on the size of the houses that were approved for building were relaxed for both the BLC and the CLSS components.
To summarize, the TG-12 estimated a housing shortage of 18.8 million, or 1.8 crore, in 2012, which has likely increased significantly since then. The PMAY (U), based on TG-12’s estimates, then adopted a demand-based strategy that led to a demand for 1.2 crore houses. Of these, 83 lakh houses have been completed, but the greatest percentage of completions have been under the housing loan subsidy component, and it is unclear how well it targets EWS and LIG groups in slums since they often lack the ownership documents required to avail of loans. Much more than half the total number of houses sanctioned have been under the BLC component, where beneficiaries can show land ownership. And the government notes that states find it easier to sanction this money in smaller cities. Even within the BLC component, the completion rate has been less than half. The two components targeted specifically at slums, ISSR and AHP, have seen minimal uptake and have huge vacancies. The one component showing sterling performance is the CLSS, or the housing loan interest subsidy.
Implications for Housing Policy
The performance of the PMAY (U) points to the difficulty of beneficiary targeting and implementation. First, neither the central government nor the states conducted a comprehensive survey or assessment of the housing needs of the EWS and LIG segments of the urban population prior to the launch of the program. There also does not seem to have been adequate consideration of how beneficiaries would avail of the scheme benefits in the absence of ownership documents.
In addition, different components of the scheme each suffer from their own weaknesses. The low completion rate under the BLC component highlights the difficulties in working with beneficiaries to deliver housing. The standing committee report enumerates a number of issues outlined by the ministry. Two of these include land and family disputes as well as delays in releasing installments.
The low rates of occupancy under the AHP component point to the locational importance that households attach to housing. In short, households may prefer congested housing in areas where they currently stay rather than better houses elsewhere. Spatially irrelevant housing may benefit developers and existing homeowners looking for real estate investments, but not households targeted by the scheme. The ISSR, or in situ slum upgradation component, was essentially created to incentivize states to upgrade facilities in slums and then progressively denotify them. The low numbers under this component seem to be a result of the state governments’ inability or unwillingness to deal with the problem of slums.
Finally, the one component that has worked successfully has a targeting bias, since it obviously continues to require creditworthiness from the beneficiaries. Since a significant number of people in slums may not have land ownership documents, this inhibits them from availing of housing loans, let alone housing loan interest subsidies.
The TG-12 report defines the affordability problem as primarily one of congestion. People want to stay in congested houses because of the locational advantages those houses provide. However, because of the economic value of the location, households find it difficult to upgrade those houses at a cost that they can afford.
Therefore, one solution to the problem of congested housing is to ease the regulatory constraints that lead to congestion. The problem can be viewed as a result of (a) demand for housing at a specific location far outstripping supply due to rapid economic growth and associated pull factors; (b) artificial scarcity in those locations created by land use regulations that lead to affordability issues; and (c) in the context of slums specifically, the absence of any documents to prove ownership of land.
There are two possible, complementary approaches the central government can take to address these issues. The first is to focus symptomatically on the problem of affordability and direct financial assistance in a targeted manner. The PMAY (U) is emblematic of this approach. The second is to ease regulatory constraints and enable market-driven supply to increase affordability. Costs have to be reduced by lowering housing costs city-wide for the median-income household, so that the general benefit of such a move also percolates to those living in congested areas. For example, low floor space index (FSI) and floor area ratio requirements in Indian cities have increased congestion instead of reducing it. While these are topics that fall under the domain of state governments as per the Constitution of India, the union has periodically used its financial powers to incentivize states to undertake reforms. For example, the central government had made the repeal of the urban land ceiling laws by states a condition for accessing funds under the Jawaharlal Nehru National Urban Renewal Mission.
In addition, solving the specific problems associated with Indian slums effectively requires a commitment from state governments to address the issue. For example, Odisha has taken significant measures to provide land titles to slum residents and is in the middle of a large program to redevelop slums in cities throughout the state. A top-down central program can at best complement this initiative but not dictate it.
Lastly, since this essay started with the reported news of a proposal to provide a housing loan interest subsidy if the National Democratic Alliance is reelected, it is worth discussing whether housing loan subsidies promote affordable housing in general. Issues with the targeting of the CLSS scheme discussed above notwithstanding, academic literature reveals that achieving this objective is contingent on various factors. There is no direct causal link between housing subsidies and housing affordability, since a housing loan interest subsidy raises demand for housing by lowering the price of a loan and increasing the purchasing value of the income a household reserves for housing.
One of the most important contingencies in the Indian context are the rates of tenurial land ownership among the targeted group. If most people living in congested or dilapidated housing own the land on which they currently live, a subsidy will exert marginal upward pressure on housing prices. It is likely that most of the subsidy will be used for upgradation rather than buying more land. On the other hand, if housing upgradation is largely contingent on paying for land as well as construction, the upward pressure on land prices will be more significant. In such a situation, increasing land use supply to match the increase in demand caused by the loan subsidy will become critical. Increasing land use supply would involve increased freedom to develop the available land to its fullest potential, which would entail higher buildings on the same plot as well as more land for housing. Since the overall constraints on land use—building bylaws, setback and margin requirements, FSI limits—drive housing prices, easing them for the entire market will contribute to increasing affordability rather than more targeted liberalization measures such as those used in Mumbai for its slum redevelopment programs in the 1990s.
As the experience of the PMAY (U) shows, subsidies may help symptomatically, but they are hard to direct efficiently in the housing market. Increasing the supply of housing through market mechanisms seems to be the less tried approach and must be given much more importance.
—By Anirudh Burman
A New Approach to Studying the Political Economy of Development
Any strategy for economic development is grounded in a theory of change, which in turn is underpinned by an understanding of how political economies operate. Building an accurate image of the political economy, at least getting the basics right, is essential for choosing the right strategy. But this is easier said than done. Political economies are quite complex—they encompass numerous interacting agents, each pursuing a variety of goals in ways that may be opaque to outsiders but logical to those involved. The interconnectedness of these elements can be overwhelming and may trigger responses that either oversimplify or ignore their complexity entirely.
In the social sciences, one response to navigating this complexity is to focus on narrow questions that can be isolated and answered in their specific context. A related response is to commit to methodological purity by only pursuing questions that can be answered with “scientific” methods, like randomized controlled trials. Another approach is to oversimplify reality by using simple and linear models. In the world of advocacy for development, avoidance of this complexity can lead to an exclusive focus on policy reforms, overlooking the complex interactions between the institutional landscape and political economy settlement that shape policies, which in turn might have feedback loops. Typically, these reforms draw from the “best practices” of developed countries without considering the constraints of the specific context.
It is no surprise that policymakers have not found research and advocacy on economic development useful when addressing big questions of growth and development. They have to address such questions while working with what they have, keeping in mind the various pulls and pressures they face. We need to keep trying to find ways to understand political economy on its own terms—a complex and adaptive system with various agents interacting in the pursuit of their respective goals.
In her research, Yuen Yuen Ang, a professor of political economy at Johns Hopkins University, has tried to describe the inherent complexity of political economy in a manner that also helps explain how development occurs. Her work shows that in the study of political economy, the complexity need not lead to theoretical dead-ends. It can be analyzed, and useful theories on how a political economy works can be built. Ideas about meta-institutions can also be derived, which can help harness this complexity for economic development. But this first requires a shift in the paradigm in which political economy is studied.
In a recent paper on the political economy of development, Ang summarizes this paradigm shift. Her approach runs counter to those underpinned by an image of the economy as complicated but mechanical, which can be simplified using reductionist methods and controlled from the top. Instead, she suggests a new paradigm called “adaptive political economy.”
Ang draws a parallel with how the work on fractals, discovered by Benoit Mandelbrot, revolutionized the understanding of natural patterns. Traditionally, mathematics focused on regular, simple shapes, and failed to capture the “rough” complexity present in nature. Similarly, she suggests that social scientists move beyond the linear, mechanical models of political economy to embrace the inherent complexity and adaptiveness of social systems.
She shows how the traditional schools of political economy—modernization theory, institutional economics, and historical institutionalism, rely on linear causality and static models. The modernization theory posits that economic growth precedes institutional development, while institutional economics argues that good institutions are necessary for growth. Historical institutionalism, meanwhile, emphasizes the role of historical legacies. These approaches impose mechanical properties on complex systems, leading to inadequate solutions and persistent problems.
Traditional approaches to studying political economy, Ang argues, often conflate the complex with the complicated. Complicated systems, like machines, consist of discrete parts with linear relationships, allowing for control and predictability. In contrast, complex systems are adaptive and interdependent. Social systems are inherently complex and more closely resemble living organisms than mechanical devices.
Ang’s approach views institutions and economies as adaptive and interdependent parts of a political economy. They interact dynamically and adapt while finding ways to fit the environment. They may coevolve, leading to significant improvements in both institutions and the economy, which in turn feed into each other, resulting in development over time. Instead of choosing between institutional development and economic development as cause or effect, one could see how both are causes and effects for each other.
Ang suggests that this approach has many implications, as it requires a fundamental shift in understanding causality, indeterminacy, human agency, and institutional design. In complex systems, causality is bidirectional and interdependent rather than linear. Unlike risks in complicated systems, uncertainties in complex systems generate unpredictable outcomes, both positive and negative. To be effective, institutions must facilitate adaptation and foster learning, not just exert control.
This approach sees development as a coevolutionary process where economic and institutional changes mutually reinforce each other. Ang explored this perspective in her pathbreaking book, How China Escaped the Poverty Trap (2016) on China’s economic transformation. It revealed that early development may rely on repurposing “normatively weak” institutions that already exist. These institutions may be considered “weak” because they do not adhere to the “best practices” of developed countries, but they have the potential to be repurposed to enable growth. Once growth accelerates, the emerging markets may then stimulate the creation of stronger, more formal institutions. Eventually, these institutions sustain mature markets.
Ang’s approach emphasizes innovation from the grassroots and challenges the conventional focus on foreign aid and top-down interventions. Adaptive political economy is a paradigm that recognizes the complexity and adaptiveness of social systems. Ang writes that this paradigm incorporates a moral dimension, addressing power asymmetries and normative biases that shape traditional economic thinking. This approach, she claims, can provide more relevant solutions to contemporary challenges by acknowledging the limitations of existing paradigms rooted in the industrial-colonial era.
Ang demonstrates the usefulness of this approach in the two books she has written on China, both of which reflect an effort to understand its political economy on its own terms. As discussed above, the first book offers an interpretation of China’s growth experience by adapting and applying a framework from the complexity theory. Ang lays out how China’s political economy became more adaptive by allowing local governments to generate varied strategies, albeit within certain boundaries, rewarding those that were successful, and encouraging exchanges between regions with significant disparities. This allowed each region to benefit from its unique position within the larger political economy. This interpretation of the China story was novel and also made an important methodological contribution to the study of political economy. The recent paper draws from that work and builds on it.
Her second book, China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption (2020), presents a nuanced understanding of corruption as a complex, context-specific phenomenon that cannot be comprehended by simply borrowing categories from developed countries. She puts forth a typology of corruption, distinguishing between “access money” (elite public servants giving special deals and lucrative rights to businesses in exchange for bribes), “speed money” (frontline functionaries taking bribes in exchange for quicker approvals), “grand theft” (large theft by elite public servants, with nothing in exchange), and “petty theft” (small time theft by frontline bureaucracy, with nothing in exchange). Ang argues that corruption involving theft alone, which does not solve a problem in return, is uniformly growth-damaging. However, the consequences of access money and speed money are more ambiguous. Access money can stimulate growth but also cause distortions, systemic risks, and inequality. Speed money, meanwhile, can solve immediate problems, but at a cost to businesses. She further posits that the perception of developing countries as more corrupt than developed countries is on account of the fact that most cases of corruption in the latter take the form of access money. This may not illegal but still involve large-scale deals and lucrative opportunities for businesses that indulge in such forms of corruption.
Ang’s is a useful approach to studying political economy. Other scholars have also tried to grapple with the complexity of political economy on its own terms. Douglass North’s idea of “adaptive efficiency” and his theorization, along with other co-authors, of how developing countries may go from closed-access orders to limited-access orders, and eventually to open-access orders, involves a coevolutionary logic. One could argue that limited-access orders help create markets, which may later lead to demands for open-access orders. Brian Levy and Francis Fukuyama’s work on development strategies also implies a dynamic model, wherein a particular development strategy may lead to changes in other systems, which will, in turn, enable other development strategies. Similarly, Albert Hirschman’s critique of the balanced-growth approach recommended by some economists, in which he argued that development is about changing what exists rather than superimposing something completely different, can be seen as an adaptive idea of political economy. More recently, Lant Pritchett, Kunal Sen, and Eric Werker have theorized about the adaptive interactions between political settlement, the “rents space,” the “deals space,” economic growth and structural transformation, and transnational factors. In their work as well, causality runs in both directions. Among other things, they see deals, which are deviations from rules, as adaptive responses to problems of low state capacity and unrealistic regulatory laws.
Such studies of the political economy of development share this spirit of trying to understand its complexity rather than deny or avoid it. They address broad questions of growth and development, rather than limiting their scope to simpler but narrower questions. In this tradition, Ang’s work introduces a new paradigm that can push the field of political economy in a more insightful and useful direction. Her focus on meta-institutions that help us see the big picture of how a political economy can become adaptive is a major contribution. While this paradigm has been applied fruitfully in other domains, following works of scholars like Robert Axelrod, Ang has shown how it can be adapted to the study of political economy.
A crucial missing element in these approaches, including Ang’s, remains the liminal space—when an order moves qualitatively from market-creating to market-preserving, or from limited-access to open-access. Currently, we lack robust theories explaining how and why these transitions happen. Perhaps we will never develop a comprehensive theory for this phenomenon, as such moments of transition may depend on context-specific contingencies. Nevertheless, it is remarkable how far we have come in the scholarship on political economy. It is incumbent upon the practitioners of development to imbibe these perspectives in their thinking on development strategies.
—By Suyash Rai