By Nirupama Soundararajan & Aakanksha Shrawan
The Pradhan Mantri Awas Yojana (Urban), or PMAY (U), has been the talk of the town since its launch in June 2015, owing to its major welfare implications on urban population. Social welfare aside, the target of constructing 2 crore affordable houses by 2022, though not easy, will result in significant economic gains. First, it will create employment. Data shows that real estate is the second-largest employer after agriculture—PMAY (U) is expected to provide employment to 7.4 crore people by 2022, the largest amongst all the sectors. Second, it will trigger growth in private investment. For its implementation, an investment of Rs 3 lakh crore will be required. Affordable housing will also provide a fillip to core construction sectors such as steel and cement. However, data also suggests that the progress of the scheme is not encouraging, even though it has done better than its earlier avatar, the Rajiv Awas Yojana (RAY), under which 1,60,931 houses were approved but only 19,920 were completed, as of 2014. Under PMAY (U), 22,31,130 housing units have been approved and 1,37,186 have been completed, and the Centre has released funds worth Rs 11,452 crore. A completion rate of merely 16% seems to imply that these funds may have large opportunity cost in the future if the current situation continues. Based on numbers provided by the ministry of housing, of the 9,93,278 housing units that have been grounded so far, only 1,57,106 have been completed. Digging deeper we find that the problem stems from huge disparities between states in their implementation.
For example, while only 2% of the grounded houses were completed in Himachal Pradesh as on July 31, 2017, the comparable figures for Madhya Pradesh, Maharashtra and Karnataka are 5%, 24.71% and 25.35%, respectively. What is more pertinent is that some of these states have the most severe housing shortage problem. On the other hand, occupancy rates of completed houses are more encouraging, at 55-100%. Almost all completed houses under the scheme have been occupied in the states of Himachal Pradesh, Jammu and Kashmir, Maharashtra, Punjab, and Uttar Pradesh. This indicates that the problem is one of supply rather than demand. The biggest impediment to the success of PMAY (U) is the slow pace of construction of houses and this can be attributed to the major slowdown in credit flow to the housing sector. According to RBI data, outstanding credit to the housing sector grew by a meagre 1.5% between March 18, 2016, and June 24, 2016. However, during March 31, 2017, and June 23, 2017, it fell sharply to (-)3.06%. This may be attributed to an increase in gross NPAs from this sector from 4.7% in March 2009 to 16.7% in March 2016.
Even allowing 100% FDI in construction development has only resulted in large portions of investment being made in brownfield projects (around 48% in 2016) that doesn’t lead to any significant expansion in production capacity or, for that matter, generate employment. While RBI has allowed real estate developers to raise up to $1billion through external commercial borrowings (ECB), the move may find few takers due to the monitoring and currency risks involved. Slackening of credit flow has thwarted construction activities of many builders, resulting in poor conversion rate of grounded houses to completed. The government must turn its attention to completion of grounded houses. First, there is a need to overhaul the prevailing funding mechanisms available to builders and developers so that they can complete pending projects and handover the houses to the beneficiaries without further delays.
As a first step, the government should take advantage of the negative interest rates regime prevailing in much of Europe, as a result of which there is persistent decline in investment rates in these economies. A similar issue exists for global pension funds, whose returns are headed south because of their inability to meet payment obligations. For example, the UK’s 350 largest pension fund companies have payment obligations of $1.15 trillion, whereas their assets are only $950 billion. Further, the ushering in of the new bankruptcy code has catalysed India’s domestic bond market. Retail demand, too, has shown its new-found preference for bonds. The opportunity is therefore ripe for issuance of long-term bonds by infrastructure and housing finance companies for domestic investors and for foreign pension and sovereign funds. Second, a suitable process must be put in place through which the government can take over stalled projects and ensure their completion. Alternatively, the government can ensure access to time-bound and outcome-bound credit to developers to help them finish projects.
The government can also consider issuing sovereign infra bonds that can invest in affordable housing projects that have been taken over by them. This will ease the pressure on banks to lend to a sector that has contributed significantly to NPAs. Third, the government has to take a proactive approach to encouraging foreign participation and investment into the affordable housing sector. Foreign investment will not only bring in capital, but also superior technology that may well reduce cost of construction and expedite completion timelines. The situation, however, is not so grim. The Union Budget 2017-18 has awarded infrastructure status to affordable housing and implemented the real estate Bill (RERA), which should ensure easier access to institutional credit to the builders along with clearer guidelines and transparency in the affordable housing segment.
The stickiest point is to minimise land acquisition costs, without which no amount of capital flow will contribute to making houses truly affordable. High population density of urban India puts a huge premium on land, and one that is only likely to increase in the years to come with increasing migration. Vertical construction is clearly one way to go. For this, India must re-examine the floor space index (FSI), which defines the multiple of the ground area that can be constructed. This must be increased from the current 1-3 to at least 10. A higher number means more floors or vertical growth. The government must also consider better utilisation of its existing land banks and that of other public sector enterprises for building affordable housing. As election year approaches, it is in the best interest of the government to prioritise the implementation of PMAY (U). Its success alone may result in addition of about 2% to the GDP growth rate and create employment across the value chain.