House in a Slum? You Can't Afford It.
M adhukar Gurav welcomed me to his apartment, airy and bright. Its 225 square feet house a family of four. Yet this modest home is several levels up from where he lived before, and not just because it is on the top floor of the building. Until Gurav scraped together the half-million rupees, or $12,500, to buy this flat two years ago, he lived in a Mumbai slum in a shack made of plywood and tarp.
But Gurav's new quarters are also in a slum -- the most famous in Mumbai, in fact -- which he shares with about 1 million other people. In a typically Indian paradox, his neighborhood of Dharavi, notoriously known as "Asia's largest slum," has turned suddenly desirable. Builders, developers and politicians all eye the square mile of prime real estate that it occupies and hatch plans to put it to use.
And it's no wonder. With 16 million people squeezed into 240 square miles, Mumbai is one of the most densely populated cities in the world. Housing, in perennially short supply, is wildly expensive. I am by no means rich, yet my suburban 1,100-square-foot flat was recently appraised at 32.5 million rupees, or about $800,000. I own it only because I inherited it from an uncle; I could not have afforded to buy it when he died in 1998, and I could not afford it today. Like Gurav's apartment, mine is pleasant but not particularly sumptuous. It's an ordinary Mumbai flat built in the 1970s, but it has made me almost a millionaire.
Because housing is so expensive, about two-thirds of Mumbai's population live in slums or on the streets. This has been true for decades and remains true in ready-for-boom-time India. Indian politicians have concocted countless schemes over the years to "redevelop" slums, which they consider eyesores. For a variety of reasons, they've never managed to deliver on their promises. But one idea that took off decades ago still fuels the construction boom in Dharavi and throughout the dizzying, maddening city of Mumbai.
The concept, called "cross-subsidy," is simple. The government invites developers to build flats to be sold to slum-dwellers at subsidized prices. In return for their participation, the government loosens zoning regulations, usually in the same area, so that the developers can build other larger and plusher apartments to sell to middle- and upper-class people at the market rate. The profit that developers make on these sales will pay for the subsidized units -- a nice marriage between government policy and private profit-making. Or so the theory goes.
Take the cross-subsidy principle to its logical conclusion, and you have free housing for slum-dwellers. In 1995, a new government rolled into power in the state of Maharashtra promising just that: free homes for 4 million slum-dwellers in Mumbai, the state capital, over its five years in office.
Consider the arithmetic. Divide 4 million by five. That's 800,000 units, assuming five people live in each one. Divide by five once more. That's 160,000 subsidized flats to be built in each year of the government's term. Quick calculations showed that, given construction costs in the 1990s, profits from the market-rate sale of 560 apartments would finance 1,000 free flats for slum-dwellers. So, to give away 160,000 apartments, developers would have to sell almost 90,000 full-price ones. In total, they would have to build 250,000 each year. (The numbers have changed since then, but the reasoning hasn't.)
These figures are clearly unattainable. As the government report that established this policy noted in 1995, developers were building only 40,000 housing units per year, not including the units for the cross-subsidy deal. Today, that number is up to about 60,000, but it remains well short of the annual demand.
Like everything, the price of housing follows supply and demand. Say builders manage to build 90,000 additional for-profit units in a single year. What will that do to a market already fat on a supply of 40,000? Easy. Prices will go into free-fall. The foundation of the cross-subsidy plan implodes.
Not surprisingly, the scheme was a spectacular failure. By 1997, slum-dwellers should have moved into 320,000 free flats. That year, I asked the Urban Development Department how many apartments had actually been built. The answer: 1,146.