Mr Modi's home run: PM's 'Housing for All' plan may just be a pipedream

Struggling, corrupt construction industry will be challenged by the prime minster's $250-billion plan

Narendra Modi's plan to make India a low-cost manufacturing hub requires a steady supply of urban labour at competitive wages. Shifting people from illegal shantytowns to their own dwellings with clear legal titles will go a long way in achieving that objective.

But first India needs to build more houses for the poor. A government panel estimates unmet demand for homes in the $8,000-11,000 (about Rs 5-7 lakh) price range at about 10.55 million. In the price bracket of apartments that are three times more expensive, but still affordable for a great many low-income earners, there is a shortage of 7.41 million.

The overall shortfall of affordable homes will rise to more than 20 million by 2022. At current costs, the investment required to build these cheap homes over seven years would amount to $250 billion (about Rs 16 lakh crore), or 13 per cent of last year's gross domestic product (GDP).

The Indian government's ambitious plan, approved by the Cabinet last week, will see taxpayers shoulder the first 6.5 per cent of the interest burden on 15-year mortgage loans of up to Rs 600,000 ($9,300). In addition, the government will subsidise the price of modestly priced new apartments by up to $1,500 (about Rs 95,000).

Yet meeting the shortfall is a big challenge for property groups currently struggling with a glut at the other end of the price spectrum. Debt-laden developers have a huge inventory of unsold homes that are at least 10 times more expensive than the poor can afford.

Builders aren't cutting prices to clear their stock and middle-class homebuyers are refusing to bite before they do. Transactions have dried up. At the present rate of sales, it would take developers in New Delhi and its suburbs more than 50 months to offload their inventory, according to research firm PropEquity. The balance-sheet stress in the Indian real-estate industry may make it tough for developers to commit fresh capital for affordable housing.

The first step in reversing the lopsided growth of the property market, therefore, is to whip up demand for cheaper accommodation. That is what Mr Modi's "Housing for All" campaign is trying to do. To see how the plan could work, consider homes that cost $15,000 (Rs 950,000) to build, including the developer's profit. After applying the government discount the buyer will pay $13,500 (Rs 850,000), financed with a 15 per cent down payment and a loan worth about $11,500 (about Rs 720,000).

Current interest rates of 10.5 per cent will drop to just four per cent on the first $9,300 (about Rs 6 lakh) of the loan, thanks to the subsidy. All in all, the borrower's monthly mortgage bill - including repayments - would be slightly above $100 (about Rs 6,300). That could tempt the working poor in many Indian cities.

But even if stoking demand for low-cost housing proves to be relatively easy, financing it is still a challenge. For lenders to provide, say, 40 per cent of the required $250 billion in investment will mean $100 billion (about Rs 630,000) in loans, or a 10 per cent increase in the Indian banking system's total outstanding credit.

While some lenders might welcome the opportunity to extend new loans, there's a hitch: India's dominant state-run banks can't afford to start writing too many new cheques in a hurry. They are saddled with bad loans and the government is being stingy in providing them with the $15 billion (about Rs 95,000 crore) in new capital that Morgan Stanley estimates they need. Property developers and banks will have to repair their balance sheets before they can embrace affordable housing.

A lack of land may be an even bigger problem than a shortage of capital. KPMG estimates that clearing the backlog of cheap housing will require at least 200,000 acres, which could be hard to find in densely packed cities. At the same time, acquiring village land in India is both politically contentious and time-consuming. A graft-ridden construction approval process, which takes up to 32 months according to Jones Lang LaSalle, will add to delays.

India ranks 184th out of 189 countries in ease of dealing with construction permits, according to the World Bank. Attempts to streamline regulation have met with little success over the years. It's hardly surprising then that a previous government plan to resettle slum-dwellers has seen work start on fewer than 150,000 homes in the past two years.

Even if Mr Modi's new plan is able to give a significant boost to housing starts, finishing projects quickly will be equally important. That will require developers to boost labour productivity. Compared with other industries, availability of capital per worker in Indian construction has been largely stagnant. Without a technology upgrade, a real-estate boom might just end up pushing up wage costs.

Policymakers also need to avoid building ghost towns. State-built affordable housing in India is perceived to be of poor quality; but without the civic authorities committing transport links and basic municipal services like water and sanitation to new projects, even private builders won't be able to deliver homes that the poor will want to trade their hovels for.

Eventually, India will need to take a hard look at its inefficient land usage. Inner-city land owned by railways and other government departments lies idle, worsening the demand-supply mismatch. Restrictions on building heights add to the scarcity of affordable housing.

Removing these bottlenecks could help create housing wealth at the bottom of the economic pyramid, which can prevent inequality from worsening. However, financing this wealth creation with taxpayer-financed cheap credit can't go on indefinitely.

Eventually, the generous interest-rate subsidy will have to be phased out to minimise speculative price increases. But that's hardly an immediate problem. Given just how bad India's housing shortage is at present, now is not the time to worry about excesses.

The writer is the Asia economics columnist at Reuters Breakingviews in Singapore. These views are his own