On 14th May 2020, Finance Minister Nirmala Sitharaman announced a “Rs 70,000 crore boost for the housing sector” in India by further extending the Credit Linked Subsidy Scheme (CLSS) for the Middle Income Group (MIG) by one year, up to March 2021. This extension was announced as part of the second tranche of relief measures to boost the Indian economy under the Aatmanirbhar Bharat Abhiyan. However, the announcement is only aimed at satisfying a temporary need of reviving the economy without being mindful of fulfilling the real objective of the Pradhan Mantri Awas Yojana – Urban (PMAY-U) – to provide ‘housing for all’.
Launched in 2015 by the Central government, PMAY-U is designed with four different verticals to increase the housing supply by addressing issues around credit, land rights, repair and affordability. The four different verticals are In-situ Slum Redevelopment (ISSR); Credit Linked Subsidy Scheme (CLSS); Affordable Housing in Partnership (AHP); and Beneficiary Led Construction/Enhancement (BLC). The CLSS is the only Central Sector Scheme under PMAY-U that makes credit available at subsidized interest rates to households which require home loans. It is the first government housing scheme in India to have accommodated the MIG category.
When PMAY-U was launched in 2015, the focus of CLSS was originally on the Economically Weaker Section (EWS) and Lower Income Group (LIG) categories, having an annual household income of up to Rs 3 lakhs and Rs 3-6 lakhs respectively. However, in 2017, a mid-way amendment was made to extend the eligibility under CLSS to MIG households. With this amendment, the MIG-I and MIG-II categories, with an annual household income of Rs 6-12 lakhs and Rs 12-18 lakhs respectively, became eligible for centrally subsidized home loans. The CLSS provides interest subsidy on home loans with a maximum loan tenure of 20 years, at a rate of 4% per annum for MIG-I households and 3% per annum for MIG-II households for a maximum loan amount of Rs 9 lakhs and Rs 12 lakhs respectively. Using a discount rate of 9%, this interest subsidy is credited as an upfront credit subsidy of Rs 2,35,068 per MIG-I household and Rs 2,30,156 per MIG-II household (Ministry of Housing and Urban Affairs, PMAY-U).
This provision to include MIG households under the CLSS has subsequently been extended twice. This includes the aforementioned extension announced as part of the Central government’s economic relief measures, which was made to deal with the possible delays in completion of targets on account of the Covid-19 pandemic. The announcement has stated that extending the scheme to the MIG category for another year will mobilize additional investment in housing worth Rs 70,000 crore in FY 2020-21. This speculation, however, merits further investigation.
To begin with, one needs to analyze the figures from the previous years of implementing CLSS for MIG households. As per an announcement on the PMAY-U website in June 2020, the Central government claims that in the three years since the CLSS scheme was first extended to the MIG categories in January 2017, it has benefitted nearly 3.26 lakh MIG households up to April 2020 and mobilized a total investment of approximately Rs 75,000 crore in housing (inclusive of the subsidy amount provided under CLSS). This translates to an average investment of about Rs 22.7 lakhs per house constructed by MIG beneficiary households under CLSS.
Extending the same logic, the Central government speculates that by extending the CLSS scheme to the MIG category for another year, it will benefit an additional 2.5 lakh MIG households, in turn mobilizing housing investment to the tune of Rs 70,000 crore in FY 2020-21, while also stimulating demand for steel, cement and other construction materials and their transportation, resulting in increased jobs. This projection, however, implies an average expenditure of Rs 28 lakhs per house constructed.
As of 1st February 2021, the total number of beneficiaries had risen to 4.93 lakh, which means that since April 2020, the scheme has already covered 1.63 lakh beneficiaries in less than a year. However, if the implementation of this scheme continues to imitate the past trends with an average investment of Rs 23 lakhs per house, then the total housing investment mobilized would amount to Rs 37,490 crores – still just over 50% of the Central government’s estimate.
In the past three years, the central government has transferred a subsidy of Rs 7,680 crores to nearly 3.3 lakh MIG households under CLSS, providing an average subsidized credit of Rs 2,32,612/- per beneficiary household in the MIG category (both I and II). One should not confuse the projected total housing investment of Rs 70,000 crore with the total contribution by the government in the form of subsidy. By providing an average credit subsidy of Rs 2,32,612/- to 2.5 lakh beneficiaries in 2020-21, the government will only be spending Rs 5,815 crores.
The extension of CLSS comes in the wake of an economy in the doldrums due to the total lockdown implemented to manage the spread of the COVID-19 pandemic in India. This measure is intended to build faith among real estate developers by opening up the market segment of MIG, which is most likely to generate demand for organized real estate. The current announcement is in line with the Central government’s intent to reverse the lockdown-associated economic slowdown by encouraging the private sector to invest in large-scale infrastructure projects. This package, with its minimal investment from the Central government’s exchequer, was intended to push the demand in India’s construction industry for the year 2020-21.
‘Housing For All’ missing its mark
Due to its purchasing power, the MIG category supported with CLSS credit subsidy has been successful in enabling real estate development and partnerships in the government’s housing schemes. The decision to accommodate MIG category under CLSS in early 2017 was announced in the aftermath of the demonetization exercise in the country. It was rolled out for economic damage control and to pacify the dissatisfaction among Indian middle class and the private developers. It was announced for only 12 months starting from January for all those who fit into eligible criteria. However, it was extended for multiple times over the past three years.
In a similar fashion, the latest announcement to extend the CLSS is intended to satisfy the temporary need of economic revival but won’t do much in meeting the more pervasive policy objective of ensuring ‘housing for all’. Given the severe impact of the pandemic and the resulting lockdown measures, it is unlikely that this duration of extension would reflect a significant recovery or be enough to deal with the disturbances caused in the economy. Moreover, the scheme is likely to come to an abrupt end in March 2021 since it was not reflected in the announcements for the housing sector in Union Budget 2021, which catered largely to the builder and real estate sector than ensuring anything for low-income housing.
A good policy decision considers consequences beyond short-term effects on one group to factor in the long-term consequences for all groups of people. The Central government should tread thoughtfully by considering the merits of diverting these investments into other social housing strategies in a pragmatic way that would yield better housing for the most vulnerable sections of people in our cities. The ad-hoc extensions of CLSS benefits under PMAY-U to the MIG groups have not served this purpose.
(The author thankfully acknowledges the support and feedback from Ms. Ishani Mehta)