Risks without returns

External commercial borrowing for low-cost housing is a bad idea

It has been reported that a high-level committee of officials from the finance ministry and the Reserve Bank of India is due to meet soon in order to consider whether affordable or low-cost housing projects can access more external commercial borrowing, after being treated like "infrastructure" sectors. It makes economic sense for traditional infrastructure companies, such as those building highways or pipelines, to obtain financing at lower rates and for longer time periods, as infrastructure development is not like most other investments - a large number of people share the benefits, making it hard to keep out free riders and thus equally hard to fund; there are high externalities for local entrepreneurs and business; and the initial investment can sometimes be recovered only in decades. Housing in general, while it does have considerable social and economic externalities, does not feature the exclusion or the free rider problem. Nor do companies see pay-offs in the same decades-long time frames as do real infrastructure firms. The economic logic to treating them identically is shaky.

On the other hand, current real estate companies have been signally unable to take advantage of the demand for affordable housing. According to the Report of the Working Group on Financing Urban Infrastructure for the 12th Five-Year Plan, 99 per cent of the housing shortage of 24.7 million units at the end of the 10th Plan was related to low-income groups. The financing required for affordable housing during the 12th Plan, the report concludes, is Rs 8.5 lakh crore, of which Rs 2 lakh crore is needed for building and upgrading the surrounding infrastructure. The government is expected to provide Rs 1 lakh crore of the total funding through various subsidies and interest subventions; the remainder, presumably, must come from the same private sector companies that have so far failed to develop workable affordable housing models. It is difficult to see, however, how accessing external commercial borrowing will somehow allow companies to alter their DNA and provide housing. After all, external commercial borrowing will not be available more cheaply than regular finance was in the liquidity-flush past - a period when real estate companies still did not see any reason to build low-cost units. On the other hand, for troubled and cash-hungry real estate majors, access to additional borrowing, for whatever reason, is attractive. The regulation required to ensure that there is no leakage from external commercial borrowing for low-cost housing to other, more profitable or urgent uses of the money will be considerable, and perhaps beyond the Indian state's capacity.

It is also worth remembering that this comes at a time when India's external account is weak. While it is true that the trade deficit has shown signs of narrowing somewhat of late, it is still very far from any comfort zone. Any increase in external dependence at this point merely makes India more susceptible to a sudden crisis; and it does not appear that external borrowing of this nature will generate enough benefits to cover the greatly increased risks. In particular, given the high probability that it will wind up being a boondoggle for troubled and irresponsible real estate companies, it is an idea that should be rejected.