The Mumbai Municipal Corporation has had a busy few weeks, demolishing thousands of slum dwellings. Media reports captured the standard responses: middle-class angst against illegal squatters, versus the outrage of the displaced about the inequity in treating those who form the underbelly of Mumbai's economy.

The slum demolition is being framed in the context of Mumbai - the country's commercial capital - losing its eminence. However, the story needs to be understood against a larger tapestry of two other developments: one, the increasing urbanisation of India, with a projected 600 million residents by 2030; and two, the booming housing finance market, which has gone from a Rs 10,000 crore industry barely five years ago to one that is touching Rs 100,000 crores.

The reality: urban land is all about money.

The situation in Mumbai actually requires some reflection about why the poor are squatting. India has an abysmal story to tell on urban poor housing. NSSO's Survey in 2002 is revealing: 52,000 slums hold 8 million urban households, representing 14% of the total urban population, and only half the poor - the others live on the streets. About 65 per cent of the slums were built on public land owned mostly by local bodies, state governments, etc. Infrastructure facilities are atrocious: only 15% of these households have drinking water, electricity and latrines in their premises. Less than 25% of them have sanitation systems. The housing stock shortage in India is around 20 million, of which 50% is urban; of this, 70% - 80% is in the low-income segment.

This is not just about 'slum demolition drives'; it requires a coherent low-income housing policy. Two questions could help in directing the discussions. The first: Can the housing needs of the urban poor be served by market forces? If so, what needs to be done?

After all, the boom in housing finance has happened due to market forces. So it is logical to ask why banks are not lending to the low-income group, and why real estate developers are not building for this gigantic 8 million-strong market. To provide some perspective, HDFC has financed a total of 2.5 million homes over 25 years. The NSSO survey shows that the urban poor spend close to Rs 1 lakh of their own money on housing: the nesting instinct is universal.

Housing finance companies and large banks don't service the low-income market for a variety of reasons:

  • The inability to assess credit risk: no pay slips, no tax returns, uncertain cash flows
  • Lower profit margins due to smaller transaction sizes and fixed costs
  • Lack of clarity on recoveries: no land title, uncertainty about repossession

What about niche players? The famed microfinance movement in the country is institutionally hobbled; still insignificant in financial terms; substantially restricted to rural areas; and even there, focused on Self-help Group (SHG) lending, which cannot be the delivery channel for housing finance.

The third issue is the critical one, the structural constraint of land title. The absence of a guaranteed land title system in India has far-reaching implications. Current land ownership records only provide 'presumptive title': the sale deed and the tax-paid receipt. All developed countries have a system of guaranteed title, and most developing countries don't. Herando de Soto, a Peruvian economist has written compellingly about this in a book titled, The mystery of capital. While many countries are changing their ways, no state in India has exhibited leadership in cleaning up the land title process.

Two policy tools are available to government to 'release' these market bottlenecks:

  • A thorough revamping of land title systems, to move to a guaranteed system
  • The creation of zoning and land-use planning that specifically encourages low-income housing, and mixed income neighbourhoods

Market-driven solutions need policy support, and will emerge only over a period of time. Also, these policy changes will not ensure coverage for all the urban poor.

This leads to the second question: What is the role of government in ensuring adequate low-income housing? Over the past fifty years, government policy has matured from a fragmented scheme-oriented approach to one that sees housing as part of integrated development. The National Housing Policy and the National Housing Bank are results of this new thinking. HUDCO, which was established in 1970 has lent a cumulative amount of Rs 10,000 crores for urban housing. However, HUDCO's structure of being a quasi-financial institution with minimal regulatory oversight or governance mechanism demands changes before it can fulfil its stated role. The results therefore continue to be inadequate, plagued by issues of transparency, participation and corruption. Solving this requires a different set of conditions:

  • Strong local governments that can manage urban planning, have fiscal strength and enforcement credibility.

  • Bottom-up participation of the affected communities, in determining housing solutions.

  • Integrated delivery of services, not just housing. Examples show that for every rupee invested in infrastructure, the poor generate seven rupees of their own capital.

  • A stock of publicly-created, innovatively-managed rental housing as part of low-income housing policy.

Unlike other relatively more intractable public policy problems, solving the low-income housing conundrum in India is tantalisingly within grasp. A few policy changes to catalyse the private sector, combined with restructuring government's own initiatives could trigger dramatic change. Destroying slum dwellings only exacerbates the problem: the evicted slum dwellers are now pavement dwellers.

Unless of course, it is only about the money.