Provide income, not houses

The union government plans to provide interest subsidy of 6.5 per cent to the Economically Weaker Sections (EWS) to enable them to buy homes. The concern is welcome. But usefulness of such a subsidy is doubtful because EWS households simply do not have the incomes to buy a house.

The problem is brought out by just one statistics. A report by real estate consultancy firm Jones Lang Lasalle says housing shortage in India in 2007 for MIG and HIG was only 0.2 per cent, for LIG 10.5 per cent and for EWS a whopping 99.9 per cent. This means that all the problems supposedly besetting the housing sector have not prevented the real estate firms from supplying nearly 17 million houses to the MIG and HIG households.

These households have money to spend. The builders have found ways to overcome the problems. EWS households do not have purchasing power. Hence, the builders are not interested in building houses for them. Main problem in providing housing for the poor is that they do not have the income to buy the houses.

The strategy of the Modi government is to reduce the price of the houses. Interest subsidy is one step in that direction. The other measures that are suggested are increase in Floor Area Ratio, exemption from Rent Control Act, reducing the time taken in obtaining clearances for construction, easier funding from banks, and dilution of construction norms.  Indeed these will help if implemented. My assessment, however, is that the cumulative impact of all these measures would bring the price of housing down by, say, 25 per cent.

That would still be much inadequate. The guard who does 12 hours duty in the Society where I live in Ghaziabad is paid Rs 8,000 per month. He pays rent of Rs 1,500, spends Rs 3,000 towards food and living expenses, Rs 1,000 for contingencies, and Rs 2,500 sent to the village for maintenance of his family. That leaves him with no surplus. He could, at best save Rs 2,500 if he did not have to support his family in the village.

A back of the envelope calculation indicates he could possibly take a loan of Rs 2 lakh and be able to service the same at an interest rate of six per cent which he will have to pay after availing of a subsidy of 6.5 per cent as proposed by Modi. But what will he get in Rs 2 lakh? Not even a one room tenement. Inquiries reveal that minimum Rs 7 lakh is required to buy 25 square metres’ land with one built up room.

Then there is the problem of availing the loan. The pradhan of a village in Uttarakhand told me of the sad plight of the loanees. A gang of touts works hand in hand with the bank officials. The tout will get papers of loan of, say, Rs 50,000 signed by the beneficiary but actually pay him only Rs 20,000. Later, when the  bank issues a recovery certificate, they will take Rs 2,000 from the loanee and tell the village accountant and the bank manager not to pursue the recovery for, say, six months.

Ever-increasing interest

So, the interest keeps on building till the poor fellow has to sell his land. The pradhan gave strict instructions to the bank not to extend any loan in his village so that the poor people of his village were spared of such a fiasco. Similarly, a rickshaw puller in Varanasi told me he was paying a rent of Rs 1,500 per month or Rs 18,000 per year to the rickshaw owner. The rickshaw cost only Rs 12,000 to buy.

When asked why did he not take a loan and buy a rickshaw himself, he said, “I would be running from one office to the other, provide this document and that, pay commissions, and at the end of the day, the bank would give a loan of Rs 8,000 that would be insufficient to buy a rickshaw.”

Modi should beware that the Congress has created a system in the last 60 years that perpetuates poverty and provide opportunities to the welfare mafia of government servants to make money. The EWS households only get dreams. Modi should not perpetuate that disgusting system. Cosmetic policies like increase in interest subsidies will only provide more attraction for the welfare mafia to trap the simple minded households.

He will be well advised not to aim for the sky. He should realise that solving the problem of incomes or housing of the EWS households is beyond his capacity. He should instead focus on improving the civic services in the slum areas. Let the per capita expenditure on water, sewage, roads and lighting in the slums be made, if not equal, then, say, 10 per cent of the per capita expenditure in Lutyens Delhi.

That is doable and will actually provide relief to the 44 million EWS households that will be inevitably be living in cramped quarters ten years down the lane.

(The writer is former Professor of Economics, IIM-Bangalore)