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Avoid Tax Breaks In Affordable Housing Scheme in India Under Awas Yojana

Founder and CEO, Transfin.
Jan 25, 2018 8:59 AM 3 min read

If 2017 was the year of new economic paradigms, 2018 would probably stand out for aggressive execution of existing ones – including a house for every poverty trapped (urban) Indian.


Announcement of generous tax breaks for low cost housing projects in India are expected from the upcoming Union Budget.


Buyers and developers anticipate a boost on both the demand and supply end of the spectrum. Moreover, PM Modi’s 'Housing For All By 2022’ target and a populist tone running up to the 2019 General Elections makes low cost housing (or "affordable housing") an easy SOP to grant.


As per government data, there has been a three-fold increase in the stock of affordable houses completed under the Pradhan Mantri Awas Yojana (PMAY) since April 2017.

Low cost housing completed under Pradhan Mantri Awas Yojana (PMAY)
Source: Ministry of Housing and Urban Development


A large part of this growth has been driven by home loans, especially borrowings less than INR10L taken by the poorest of the urban poor.

Growth in number of home loans sanctioned
Source: National Housing Bank


The banks’ ongoing NPA crisis has ensured they stay away from big ticket corporate borrowers, instead placing their attention on retail customers. Thanks to the government and RBI’s affordable housing push, these customers are increasingly from the economically weaker sections (EWS) of society.


However, there are already preliminary reports on rising defaults in affordable home loans, with NPAs for loans amounting less than INR2L crossing 10%. 


It does not take a flight of imagination to understand how this may be transpiring on the ground. Implementation agencies are focused on building 2 crore homes over next 3 years i.e. the PMAY scheme target.


Hence, to maintain momentum to the elections, there is a natural push on financial institutions (both public sector banks and housing finance companies) to ensure the scheme’s key milestones are achieved, perhaps at the expense of necessary prudency.


In fact, Moody’s in a recent note pointed that there has lately been some “easing in lending standards” in the affordable home loans segment. 


There is a need to institutionalise the vision of affordable housing in India and decouple the achievement of its goals from political considerations.


The said institutionalisation will fail to manifest unless it falls out of the purview of a central government scheme and instead moves to perhaps a government-sponsored enterprise (GSE) i.e. a financial services corporation created by an Act of Parliament (a parallel to the US based GSE can be a useful starting point).


Such a GSE would have a long-term mandate to provide affordable housing through incentives to drive both demand, which the PMAY scheme is already doing, and supply, where there still are wide unit economics and capacity related gaps. That way, the requisite checks and balances to prevent reckless lending and regulate competitive dynamics can be organised.


Secondly, such a structure would ensure a sense of continuity is maintained irrespective of the government in power. After all, poverty and the need for affordable housing in India will not end after 2019 or even 2022.


96% of housing shortage in urban India comes from EWS and low-income group. The aspiration to resolve such a mammoth problem showcases the Prime Minister’s grand vision.


But this vision can only condense into an actual, permanent, and sustainable change by making it a permanent goal in the first place. Otherwise, even if the issue of housing shortage disappears, it would surely be replaced by other unique problems such as delinquencies amongst the poorest of citizens or the need for tax payers to bail them out.