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Effect of fiscal policy on housing finance in India

University of British Columbia

This thesis attempts to identify elements needed in a fiscal policy designed to encourage private investment towards urban housing in India. The need for such a policy arises due to the existing and projected urban housing shortage in India. The Government of India attempts to address housing shortages through subsidies, tax incentives and regulation. However, the urban housing shortage continues to increase. One of the major constraints identified is the shortage of housing finance. An estimated investment of Rs. 572 billion is required to meet the existing urban housing shortage of about 10 million units. Fiscal policy instruments are useful in directing finance towards selected priority sectors. This thesis suggests that the fiscal policies of India be designed to encourage private investment in the urban housing sector. Only a limited number of studies have been made to ascertain how fiscal policies influence housing and housing finance, even though tax incentives that affect housing are commonly used in many countries. These studies show that the effect of most housing tax expenditures is regressive. The incentives given by housing tax expenditures directly affect only the tax payers, and thus would be limited to the top two quintiles of Indian population. People in lower income groups would not benefit and would be discriminated against by these policies. For increasing urban housing in India, there is need to suggest policy measures that favourably impact all sections of the population. A fiscal policy that helps the financial institutions to mobilize household savings towards investment in urban housing is necessary. These policies can be designed to encourage the rich to invest in institutions that provide low-cost housing finance credit to the poorer sections. This will enable the urban dwellers, including the poorer sections amongst them, to have access to finance for housing at reasonable interest rates. The fiscal policy must also give incentives to employers to provide housing or housing finance to their employees. They should also encourage businesses to invest in housing for low-income groups, and developers to provide subsidized housing to them. Such incentives would also help in reducing the role of the underground economy in the housing sector. Policies that actively discourage hoarding and speculation in land and property, such as a tax on vacant land, would increase the supply of housing. In India, such fiscal policies would need to be complemented by changes in the regulatory framework to remove the deleterious effects of other policies, such as rent control laws, on the supply of housing. A tax system incorporating incentives to promote housing, formulated in coordination with housing and urban planners, and with a provision for regular evaluation of its effectiveness is likely to considerably help reduce the shortage of housing finance.

Thesis/Dissertation

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2009-02-25

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http://hdl.handle.net/2429/5057

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University of British Columbia

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