india urban strategy statementpdf.usaid.gov/pdf_docs/pnabl920.pdf · india . urban strategy...

INDIA

URBAN STRATEGY STATEMENT

USAID/India

RHUDO/Asia

August 1989

I

Shelter and Urban Strategy Statement

TABLE OF CONTENTS

Page

I. Introduction and Sumnary

A, Background ..................................... . . . . . . I

B. Economic Overview ........................ 1 C. Urban and Shelter Overview ... ............................. 2 D. Background to A.I.D. Involvement........................... 4

l. The Shelter Sector Strategy ............................. 4 2. The Country Development Strategy Statement.............. 6 3. Other Donor Activity .................................... 7

E. Summary of Strategy ........................................ 7

II. The Impact of Shelter and Urban Development on the Economy

A. The Macro-Economic Setting ................................. 9 1. Economic Growth ......................................... 92. Employment .............................................. 10

3. Social Jndicators ....................................... 10 4. Conclusions ............................................. 11

B. The Role of Cities Jn Economic Development................. 11 ,1. Contribution of Cit;es to Economic Growt .............. 11

2. Rural-Urban Linkages ........................... ......... 12

C. The Urban Policy Environment ............................... 12

D. Implications for A.I.D. Programming ........................ 15

III. Analysis of Shelter and Urban Development Problems

A. Urban Sector Analysis ...................................... 16 1. Overview of Urbanization ............ .. ............. ..... 16

a. The Demographic Context b. Spatial Patterns c. Projections

2. The Urban Economy...................... ................ 18

3. Urban Management........................................ 19 a. The Present System b. Constraints to Development

4. Urban Finance ...................... '..................... 6 20

a. The Present System b. Constraints to Development

5.The Urban Poor.......................................... 22 a. The Incidence of Urban Poverty b. Policies for Poverty Alleviation c. Constraints to Improvement

B. Shelter Sector Analysis .................................... 23

1. Supply and Stock of Housing ............................. 23

2. Housing Production ... .................................... 24 a. The Present System b. Constraints to Improvement

3. Housing Finance.................................... ..... 26 a. The Present System b. Constraints to Development

4. Shelter-Related Infrastructure .......................... 28 a. The Present System b. Constraints to Development

5. Residential Land Markets ................................ 30 a. The Present System b. Constraints to Development

IV. Strategy

A. Overview and Rationale for Priorities ...................... 32 1. Rationale ............................................... 32 2. Overview ................................................ 33

B. Selected Development Strategies .......................... Go. 34 1. Support for Development of the

Housing Finance System.................... ......... . 34 a. Objectives b. Strategy c. Program

2. Improvement in Efficiency of Land and and Infrastructure Development...o...................... 36 a. Objectives b. Strategy c. Program

3. Support for Reform of the Urban Policy Environment ............ .. ............ ........ .... 38 a. Objectives b. Strategy c. Proaram

V. Resources

A. Housing Guaranty Loans ...... .......................... 41 B. DA Funds ....... ................................. .... 41 C. RHUDO and PRE/H Assistance ................................. 42

VI. Work Plan

A. Analytic Requirements ........ ............................. 46 B.C. EvaluationsStaffing Re... m..s........................................ .

quirements ..................................... :. 4747

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I. Introduction and Summary

A. Background

The FY 1990 Country Development Strategy Statement (CDSS) noted the growing importance of cities to India's economic development and, simultaneously, the transformation of poverty from a rural to an uroan phenomenon. The COSS concluded that itwould be appropriate to engage in a fresh assessment of the Mission's strategy for urban development. This Urban Strategy Statement is the result of that assessment.

The strategy is the outcome of a series of studies, conducted over a six month period by USAID/India and RHUUO/Asia. The first comprised a review of india's present urban circumstances: the extent of urbanization, the nature of current urban problems and the policy and institutional environments. The second stage analyzed urban trends and their implications, suggested a framework for the strategy, and identified a list of possible urban project opportunities coisistent with this framework. The third stage involved a more detailed examination of project themes selected for further investigation. Reports of these studies, which provide the data quoted ielow, are appended to this Statement.

Sections II and III of this Statement largely comprise a synthesis of these studies. Sections IV through VI describe the India urban strategy for the period FY'90-94, and means for its implementation.

B. Economic Overview

India has made some very considerable achievements in the 40 years of independence: in particular, the achievement of a degree of self-reliance in virtually all basic areas of economic activity, including foodgrain production and industry. Other indications of development include the emergence of a new middle class of perhaps W0 million people whose consumption patterns are shifting to manufactured goods and higher-value processed foods.

Over the long run, the Indian economy has been characterized by low levels of national income and slow growth of GDP. In recent years, however, the trend rate of growth of GDP has shifted upwards, with growth rates averaging nearly 4.9% a year between 1980 and 1987. GNP per capita was $290 in 1986.

Long-term growth of GNP per capita has historically been well below the average for lower-middle income countries, but has increased to 2.7% a year since 1980. Sectoral changes reflect a normal, gradually changing economic structure, away from agriculture and towards industry, transport and communications--mainly urban-based sectors. The primary sector's share of GDP declined from about 60% in 1950 to 36% in 1987, a decline which was split almost evenly between the secondary and tertiary sectors.

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While the share of agriculture in GDP has been falling steadily, the agricultural workforce has remained a constant 70% of the total, not falling below this level until 1981. This contrasts with experience in other countries, where the reduction of the agricultural workforce has been much more marked.

Indian planners have long followed an industrial development policyof import substitution, in their bid to make the country self-sufficient. Despite considerable drawbacks to such a policy, India has been able to carry this "managed" industrialization further than most countries, now havina a diversified, decentralized manufacturing base.

Nevertheless, protection from competition, price controls and unionism, as well as constraints associated with inefficiencies of urban development, have contributed to restrain employment growth in industry. In recognition of the existence of such problems, the Indian governmenthas been enacting policy reforms to increase industrial efficiency over the past few years. There has been a good response to these measures,such that value added in manufacturing has grown at about 8.5% p.a. over the last three years.

In the past, India has been able to rely on the large size of its internal market to provide sufficient demand to fuel economic growth under its path of planned development. However, present trends indicate three potential problems: (1)future growth of an economically active population which outstrips historical rates of job creation; (2)sluggishdemand and productivity growth with con,:omitant slow growth of per capita income; and (3)an emerging foreign exchange constraint. To meet these challenges and generate ristng Der capita income levels, economic development will require further structural chanige--a larger percentageof activity in sectors that can yield higher income per worker (eg, manufacturing, services). Given the nature of their operations, most of the activities in these sectors will have to locate in urban areas to succeed. This implies continuing rapid growth of urban jobs and popul ation.

C. Urban and Shelter Overview

India's urban areas--broadly defined as settlements with a population over 5,000--accommodate some 210 million people, more than in any other country in the world except China. (India's urban population is about one quarter of the urban population of all countries assisted by A.I.D.) The urban population has been growing at 3.9% annually: by international st3ndards, this is about average for a country at India's stage of economic development. One implication is that almost half of the total increase in population is going to live in cities and towns. The settlement pattern conforms to a normal distribution, but--because of India's immensity--contains several cities that have already or will soon pass the 10 million mark.

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Much of India's growth, vitality and economic diversity originatefrom the towns and cities, which are at the leading edge of the development process. On conservative assumptions, some 40% of the country's GDP is now produced in urban areas. This proportion will exceed 50% by the late 1990s, as cities increasingly come to dominate national economic growth.

About a quarter of India's urban population lives below the povertyline. The proportion appears to be decreasing, but nevertheless represents some 50 million people. They live in a variety of circumstances--often not in slums, for instance--but are generally deprived of access to many urban services and, as a partial consequence,suffer atrocious health. The urban poor have household sizes above average, and it is clear that this circumstance contributes to their poverty. Several official programs are designed to alleviate poverty, but often fail to reach the target group effectively. This is particularly true of subsidies for urban services, which especially benefit members of the middle income groups.

A catalog of conditions in India's towns and cities reveals deplorable environmental conditions: for instance, that maybe a quarter of the urban population lives in slums; 750,000 or more people are homeless; over a half of the population of India's big cities does not have access to tap water; three-quarters of the urban population does not have access to water-borne sanitation; and over a quarter has no electric power. At the same time, the official statistics show that living conditions have generally been improving--throughout a period of unprecedented urban growth.

Equally depressing is a description of the situation in which economic opportunities are to be nurtured: an unhealthy workforce, unrellable and expensivw infrastructure services, and difficulties of access to land, overlaid onto 3 plethora of economic controls. Employment statistics are difficult to interpret, but probably indicate that formal employment opportunities have not grown quite so rapidly as the labor force. Yet the informal sector has flourished, to the extent that unemployment (as 1istinct from underemployment) is low. As one study puts it, "the rap,'d growth [of the informal sector] is sufficient evidence of its vitality, dynamism and enterprise, which are growth characteristics in short supply...".

A bare description of the delivery systems for shelter, infrastructure and services suggests a considerable degree of public sector control. State and local governments, for instance, have taken on the responsibility for providing housing for a large section of the population, in addition to their normal responsibilities for providinginfrastructure services. In the interests of equalizing access to land and controlling its price, too, there has been a considerable degree of socialization of land resources. Nevertheless, observers find that the various local authorities lack the resources and trained personnel to undertake their statutory functions; and that mismanagement is bankrupting many agencies or weakening their ability to maintain even the present low level of services.

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Still, the role of the public sector in urban development is not overweening. Most housing is produced and financed privately; most urban land is probably privately owied; and many urban services are supplied bythe private sector. And for as many examples as are given of the dead hand of bureaucracy, instances can be cited of-successful innovation in urban management. Despite numerous obstacles to efficient and equitable urban development, the spirit of Indian enterprise--in both public and private sectors--has ensured tho adoption of alternative methods of delivery of employment, shelter and services whirh go some way to offset the negative effects of formal regulation.

India's urban population is likely to range between 435 million and 485 million in 2010, depending on economic conditions. A total of 460 million (41% of the nation's total 2010 population, up from 21% in 1981)would appear to be a reasonable estimate for planning purposes. This implies that about 70% of India's total 1981-2010 population growth will occur in urban areas (compared with 30% between 1951 and 1981). Urban areas will have to accommodate over 10 million new inhabitants per year over 1981-2010, compared with about half that amount in the 1970s.

Two markedly different urban futures are possible for India over the next two decades:

o More than doubling the urban population without removing constraints implies the massive expansion of largely unserviced residential settlements, as well as retardation of the urban and national economies.

o However, if current constraints are removed and sensible cost recovery systems are implemented, resources should be sufficient to achieve decent urban physical development-development which itself would further economic growth.

D. Background to A.I.D. Involvement

1. The Shelter Sector Strategy

The Sheler Sector Strategy for India vias formalized in 1984. It reflected the concept of the first Housing Guaranty (HG) project in India, and has guided all subsequent work in the sector, up to and including the design of the most recent project, the Housing Finance System Program (HG-003).

The 1984 strategy statement argued that public policy in India had accorded a low priority to investment in housing. ihis resulted in large numbers of people being ill-hoiised. These pcople, in turn, were less productive, have greater difficulty educating themselves and are a greater burden on health, public safety and other services than well-housed citizens. The paper also found that, since many are denied

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the opportunity to buy themselves a house, then capital and labor, which would be drawn to housing in a more neutral market, were not being invested.

At the same time, there was seen to be considerable demand for housingby households whose incones and savings would be adequate to purchase a market rate dwelling if the supply of houses and long-term financing were restricted only by rharket forces, and if regulations were designed to promote equity arid openness in the marketplace. t was argued that demand would be forthcoming if there were adequate institutional development.

The goal was therefore articulated of developirg "a fully functioningprivate housing finance system which raises its capital internally andwhich makes long-term shelter finance available to households with a wide range of income levels, including lower income households".

The strategy statement justified using housing finance as the pointof entrance to the housing sector, rather than addressing issues such as infrastructure or construction management, on four grounds:

(1) The first step in turning suppressed demand into effective demand is to provide capital with which that demand can be expressed.

(2) A.I.D. had (by 1984) already initiated the process of developing a housing finance system, through its support of HDFC. Much,however, remained to be done, in the shape of "developing other institutions which will ultimately expand the reach of the private sector in housing, permit specialization and market segmentation, encourage competition, permit the deconcentration of risks and profits, and increase the number of private sector voices advocating needed policy changes".

(3) A.I.D.'s resources were relatively limited, and it must therefore concentrate on fields "within measurable boundaries".

(4) The problems and opportunities of other sub-sectors (land use was given as an example) are almost boundless, and would"require familiarity with a panoply of legal systems, hundreds of local economic contexts and political sensitivities".

A.I.D. proposed to follow thrc. steps to pursue its goal of developing the housing finance system. The first entailed augmentingthe resources of and providing technical assistance to "a client institutioni". The second step required the advocacy of policy changeswhich would allow the client to expand further, to reach lower income clients and to assist other institutions to reach such clients. The final step of the cycle was to select a new institution with which to work, in order to "achieve the critical mass of primary financial activity necessary to support secondary activity".

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Consistent with this strategy, the Housing Guaranty (HG) program in India initially focused support on, the Housing Development Finance Corporation (HDFC), a joint sector mortgage lender which started operations in 1978.

Project HG-OOl ("Private Housing Finance Program") was authorized in August 1981. Its purpose was to enable HDFC to continue to expand its operations and firmly establish itself in the market as a source of mortgage financing. It consisted of a two-phase, $30 million, HG loan to HDFC to finance market rate loans to individuals and corporate entities, for families with incomes below the urban median. The funds were fully disbursed by April 1984.

HG-002 ("Private Housing Finance for Low-Income Families") was authorized in 1984, originally for $60 million, later expanded to $9 million. As in HG-O0O, the proceeds were loaned to HDFC in several tranches; the objective was to consolidate the company's growth, but with a greater emphasis on sectoral development. By April 1989, all $95 million had been disbursed.

HG-003 ("Housing Finance System Program") is the most recent program, authorized in September 1988. It is designed to develop a system of market-oriented housing finance companies by providing critically-needed lending capital to meet near- and mid-term needs of eligible companies serving a number of geographic areas; and to address a number of sectoral constraints on expanding the system, through technical assistance, training and policy dialogue.

2. The Country Development Strategy Statement (CDSS)

The FY 1990 CDSS was approved in July 1988. Itmarked a change in strategic direction, proposing an essentially new development relationship with India, which more fully emphasizes mutual interests and collaboration. Among other things, the strategy aims to stimulate self-sustaining linkages between "mature" Indian and U.S. institutions.

The CDSS also incorporates a strategy based on the contributions of science and technology to economic growth, productivity and poverty alleviation as the most appropriate focus for Indo-U.S. collaboration in future years. Of particular relevance to the urban strategy is an emphasis on the application of appropriate information and management systems technologies to achieving efficiency of resource utilization and management.

The Statement acknowledges the importance of environmental policy concerns. The Indian urban environment suffers from serious deficiencies, which have adverse impacts on health, the quality of life and productivity. A program which results in amelioration of the urban environment is thus supportive of and consistent with the CDSS.

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3. Other Donor Activity

The Worid Bank is by far the largest of the international donor agencies working in the urban and shelter sector in India. Its program consists of 14 urban projects, and a loan of $250 million toHDFC. The total value of loans and credits for the Bank projects is currently $1,400 million. The 14 projects are all within single metropolitan areas or for urban areas within a single state. Recent projects have emphasized components intended to improve urban management and resource mobilization capabilities. The most recent generation of projects also includes innovations in land management and delivery. Discussions are currently at various stages between the GOI and the Bank concerning new projects, involving the provision of finance to the National Housing Bank, to the Housing and Urban Development Corporation (HUDCO) for infrastructure development and to the Government of Karnataka for a state-wide urban project.

The other principal urban donors are UNICEF and the governments of Great Britain, the Netherlands and West Germany. Others include UNCHS (Habitat), IDRC, CARE and the governments of France, the Soviet Union and Mongolia.

The British Government program includes grant assistance for slum upgrading and community development projects in several cities incentral and easterr India, and some support training programs. Calcutta is the latest addition to the list of cities to receive British assistance. The main program of the Netherlands Government is for training assistance and research funding to the Hliman Settlements Management Institute. The German Government, through KfW, is financing a program of loans to HUDCO, and has offered a line of ':redit to a housing finance company for on-lending to disadvantaged rural households.

E. Summary of Strategy

This Statement has been prepared at a time when urban problems are becoming increasingly more pronounced, and simultaneously the efficiency of urban development is becoming critical to India's overall economic growth; when national awareness is growing of the magnitude of urban problems, and the GOI is actively seeking appropriate solutions; and in an environment where other international donors are principally assisting urban development only at project level. The time is thus ripe for A.I.D. to take an important urban initiative in India.

The urban strategy of USAID/India and RHUDO/Asia comprises three principal elements, which together will lend support to the GOI's own initiatives to achieve more efficient management of resources for urban development. These are:

(1) continuation of support for development of the national housing finance system;

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(2) the initiation of new programs in support of an urban land/infrastructure strategy; and

(3) supporting reform of the urban policy environment.

The shelter sector strategy, formulated in 1984 in support of the development uf India's housing finance system, is still valid; it has, though, not yet been implemented in full. The major current program activity in this area, comprising HG-003 and associated training and technical assistance programs, will therefore be continued.

The urban strategy recognizes the'nigh priority of addressing constraints and environmental problems caused by the shortage of serviced residential land. The long-term solution is simultaneously to improve the efficiency of government interventions and to create a more effectively functioning land market. The strategy will undertake a series of first steps towards these objectives, in order to create a substantial increase in the supply of serviced land both to meet basic needs and to reduce inflationary pressures. The GOI has already started to improve the efficiency of public land development; to promote private-public partnerships in the development of serviced land; and to create a new financing entity to mobilize additional resources and implement otl'er supportive measures to expand output. The A.I.D. strategy will support these initiatives, by a new HG project in urban land and infrastructure development, and by a series of DA-funded activities in related training and technical assistance.

Support for the GOI's new policy directions is a major theme of all elements of the strategy. Amung other means, this will be. achieved through technical assistance missions and the sponsorship of well-focused research that will more clearly identify the costs and benefits of alternative policies. The Ilission/RHJDO will dissemi~iate the results of this research and of other studies throughout India. Training programs and collaborative assistance arrangements will support these initiatives. A.I.D. will aim to further the momentum for change by providing support for indigenous institutions with skills and orientations suited to the research and dissemination tasks ahead. In recognition of the innovative thinking and practices which are flourishing in isolated pockets throughout the country, the strategy wil) also aim both to improve communications within India and to share these experiences with professior.als elsewhere in the world.

Subject to the availability of funds, and assuming continuation oF the present mandatory ceiling on HG projects, the total program will have an annual value of about $26 million. Of this total, $25 million represents HG loans, and $1 million, DA funds, The program will be managed by two urban professionals resident in New Delhi, with extended support from RHUDO/Asia and PRE/H.

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I. The Impact of Shelter and Urban Development on the Economy

A. The Macro-Economic Setting

1. Economic Growth

The Indian economy since independence has been marked by steadyeconomic growth; in the period 1951-80, GDP growth averaged 3.6% annually. However, this level of growth has lagged behind those normallyassociated with advanced developing countries. More recently, the level of growth has shifted upward, with the average annual growth of GDP in 1981-87 reaching 4.8%.

The main forces behind the historically slow rate of economic growthin India have been the very slow growth in average product per worker in agriculture and, relative to other East Asian countries, the slow and capital-intensive growth of the industrial sector. The constraints which have kept these key sectors and the rest of the economy from growing at its full potential affect the rate and pattern of urbanization.

Though agriculture's share of GDP has declined (down from 57% in 1951 to 32% in 1987), it remains a key sector in the economy. Agricultural output has grown steadily, and slightly ahPad of population growth. By2010, however, to maintain the current degree of food self-sufficiency and fulfill the food needs of a much larger urban population, India will be required to increase agricultural output by more than a third over present levels.

Meeting this growth target is not a simple matter. Raising the productivity of agriculture and protecting the natural resources of the sector (ie,agriculture's capital base) will be critical not only to meeting future food needs of growing urban areas, but also to economic growth and poverty reduction.

Manufacturing is the sector accorded the role of leading India's tran'ormation to a modern economy and of the elimination of mass poverty. However, ranufacturing has failed to generate the growth, employment and foreign exchange which was envisaged. In 1951-80, the annual average increase in output was 5.2%. By comparison, the average annual increase in manufacturing production for nine East Asian countries during 1965-80 was 9.0%. Productivity rose sluggishly and India's share of LDC manufactured exports fell substantially from its former leading posi tion.

There are three major structural constraints which inhibit more rapidindustrial growth: (1) the regulatory framework which serves to reduce competition within the sector; (2)a bias towards capital-intensive modes of production; and (3)continuing deficits in the supply of land, urban services and infrastructure, and power.

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In the 1980s, the picture for manufacturing has improved. Recent policy changes have reduced the scope of controls in many industries and attempted to reduce disincentives to efficiency. The result has been higher productivity from capital, and private gross capital formation growing at an average annual rate of 14%. Output from the sector is growing faster than the economy and exports have risen by 28% since 1981.

The services sector has consistently grown faster than the economy,its share of GDP increasIng from 26% in 1951 to 43% in 1987. Since 1981, the sector's pace of expansion has picked up, growing at 7.8% per year.This development parallels the pattern exhibited inmanufacturing.

2. Employment

Employment patterns have changed very slowly in India. The primary se:tor still continues to employ more than two-thirds of the workforce, despite its large decline in the share of GDP. This slow shift reflects both weak push and pull effects as employment in both rural and urban areas have matched the growth of their respective populations. In both rural and urban areas, the pool of potential workers has been risingfaster than employment. However, significant rises in unemployment have not been observed.

Manufacturing employment has grown slowly overall, since much of the growth of factory employment has been due to the substitution to factory from household production in rural areas, the capital-intensive nature of manufacturing, and institu.tional difficulties of the labor market. Much of the growth in recent years has been from the small-scale and unregistered sectors of industry. The growth of the unorganized sector is as much a reflection o-1 the asymnietries in institutional costs faced by large, regulated firms and small, unregulated firms as of labour market pressures.

The tertiary sector has not emerged as a high employment growth sector. Even in urban areas, the expansion of commercial and service employment has only just kept ahead of urban population growth. Growth in rural areas ha: been somewhat better, as commercialization of agriculturehas spread the demand for tertiary activities. There appears to be potential for increasing contributions by commerce and services to future employment creation.

3. Social Indicators

India's birth rate has dropped steadily since Independence. Equally, progress has been made in reducing morbidity: this may be due, inter alia, to a reduction in the incidence of waterborne and communicable diseases, and to improved nutrition. Infant mortality, for instance, has fallen from 146 to 90 per 1,000 between 195U and the present. The crude death rate has fallen from 20 per 1,000 in 1965 to around 12 per 1,000 at the

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present time. Life expectancy, correspondingly, has been increasing, to 56 years by the most recent estimate. This is a level well above the average for other low income countries (excluding China).

The overall rate of population increase has probably fallen slightly since the 1960s, but is still at the relatively high level of 2% p.a. or more (the FAO claims that it is2.3%). India's total population touched 800 million in mid-1988.

Literacy rates have been improving, too, from 17% in 1951 to 36% in 1981. Once a correction has been made for the proportion of children under the age of five, itturns out that over 50% of the educable population is now literate, and the absolute number of illiterates has started to decline. The female literacy rate has been increasing proportionately much more rapidly. Official statistics show that 93% of primary age children are enrolled inprimary schools.

Access to health services has also been improving. For instance, the percentage of the population having access to primary health centers has risen from 19% in 1951 to about 45% in 1961 and 76% in 1981.

4. Conclusions

How do these trends and constraints interact? In the agricultural sector, the stagnation of incomes limits demand from rural areas for urban products. The development of the industrial sector proceeds, through the planning process and directed investment, in an autonomous fashion unlinked to the agricultural sector or international markets and is limited in its ability to absorb labor. The bias tswards capital-intensive modes of manufacturing generates fewer--thiough probably more highly paid--jobs than would emerge under a more labor-intensive development path. This limits both the growth of wage receipts in non-agricultural activities and the demand for food an,! other agricultural products. It also reduces the economy's ability to S-nerate foreign exchange.

To meet these challenges and generate rising per capita income levels, economic development policy needs to focus on increasing employment generation and raising incomes in both rural and urban sectors. Urbanization plays a key role in such a process.

B. The Role of Cities in Economic Development

1. The Contribution of Cities to Economic Growth

The link between levels of economic development and urbanization is well established. International data supports a model whereby rising incomes are accompanied by urbanization which proceeds slowly in initial stages, accelerates when countries reach the middle income stage (currently, when GDP per capita exceeds US$500), and then slows at higher levels of income.

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At a macroeconomic level, increasing labor productivity in agriculture isthe driving force behind urbanization. At a microeconomic level, manufacturing and services tend to locate in urban areas because they are characterized by scale and agglomeration economies. Scale economies come about through the close proximity of support activities such as finance and marketing and the reduction of transport costs. These factors combine to make it advantageous for non-agricultural activities to be concentrated spatially; population also becomes concentrated.

Untangling the contribution of urban areas to economic gro-ith is, however, not an easy task in India: production data are not reported on rural-urban lines. However, some estimates can be made about the magnitude of output from urban areas. In the simplest case, itcan be assumed that all secondary and tertiary activities are based in urban areas--a heroic assumption, which obviously overstates the role of the urban sector. On this basis, in 1987, 65% of all production came from urban areas. Alternatively, if the spatial distribution of output is adjusted for the distribution of employment, urban areas would account for 40% of GDP in 1987. This proportion is likely to rise to 56% by 2010. These figures are consistent with results of studies carried out in other countries which find that urban areas produ-e disproportionately more perinhabitant than rural areas.

2. Rural-Urban Linkages

The success of market towns as centers of economic activity is closely related to the path of effrctive demand and agricultural incomes. The initial impetus for the development of these towns is the need to supply urban demands for food Regional urban centers are the location of the first steps in the collection and prevaration of agricultural commodities. Storage, bulk breaking, and preliminary processing activities take placein these small cities and towns; this is the pattern in Punjab, Haryana and other areas where agricultural production has become commercialized. Research has shown that, in Africa, over half of the activities in secondary cities are related to agricultural pruduction; there is no reason to believe that a similar situation doos not exist in India.

Market towns also serve as connection points for backward and consumption linkages. Inputs such as seed, fertilizer, and credit are distributed through these tuwns. Agricultural producers with disposaole cash income demand consumer goods and services and durables, many of which may be produced locally. Of course, such demand also attracts large-scale supplies of cheap goods with whom traditional local suppliers cannot compete.

C. The Urban Policy Environment

Urban development and housing are state, not central, government subjects. This means that priorities ind funding decisions are determined by the states or by local governments and agencies answerable to the state

I

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governments. One implication of this is that there is neither a uniform institutional structure nor a systematic nationwide policy towards urbanization. Both central and state government have historically accorded relatively low priorities towards urban and shelter development.

Now, however, there is national recognition of the need for change. Two important documents representing this recognition were put before Government in 1988: the Ministry of Urban Development's new National Housing Policy, and the Renort oF the National Comission on Urbanization (NCU). These proposal" -emain consistent with the basic tenets of India's public philosophy but imply dramatic changes in ways of doing things within that framework, for the most part addressing the constraints identified in Section III below. Clearly, the NCU's ideas, in particular, do not yet represent official policy and there is sure to be bureaucratic and political opposition from some quarters. Still, there are indications that they are gaining momentum. Evidence of the failures of present approaches 4s mounting and is regularly disseminated inthe media. Due to that evidence, the new approaches are at least cc -nanding attention at all levels of government.

both the National Housing Policy statement and the NCU report are substantial pieces of work. The major thrusts of these two documents can be summarized under seven basic policy themes and two basic implementation priorities.

In the past "government as provider" approach, the implementation priorities were to secure budget allocations and develop projects. The National Housing Policy aiTd the NCU statement implicitly give higher priority to two other requirements: first, the reform of policies and regulations that now i-hibit development initiatives by the people; and second, more efficient resource management and the building of institutional capacity.

The basic policy themes are as follows:

(a) Government as Enabler/Facilitator. Both documents recognize that many of the urban failures of the past have occurred when government has tried to assume too ambitious a role as the "provider" of urban development. The new proposals call for a shift, recognizing a more dominant role in city building for the people themselves (acting as individuals and as a pa-t of households, the informal sector, cooperatives, small businesses and larger firms). Government would continue to be the major provider of things the people cannot so efficlently provide for themselves (such as infrastructure and, at least in the short term, land-although even in these areas more aggressive cost recovery is emphasized). Government would give more emphasis to enabling and facilitating the positive activity of the people in urban development.

A similar recognition is implied by the NCU for urban economic development. "Enabling" cttails the elimination of barriers, including those created by inefficient government regulations. Whereas in the past, "regulatory reform" has. been thought of as something that helps "big

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business", there is increasing recognition that unreasonable ragulations are among the fomidable barriers preventing the poor from moving up to higher income levels. "Facilitating" may entail a variety of activities, but it is sure to include technical and advisory services and training for appropriate groups.

(b) Priority for Urban Economic Development. In the past, most"urban sector" programs have primarily been concerned with housing and the residential environment. The NCU proposals recognize that the residential environment can never be improved adequately unless more income is generated to pay for those improvements and other benefits of development. The generation of more higher-productivity employment opportunities would become a high priority of urban policy, again with government focusing on its role as enabler and facilitator.

(c) Enhancing the Efficiency of Urban Physical Development and its Contribution to Urban Econonic Development. Housing and related Infrastructure improvements nave been traditionally seen as a part of government's "social program". The NCU report considers that this orientation diminishes the potential contribution of urban physical development. Urban land and construction markets are now tightly and artificially constrained. If the constraints were removed, a substantial increase in the pace of urban physical development would occur, generatingsubstantially more jobs and income. Low cost housing is particularly labor-intensive arid its expansion would generate new demand for building materials production and other economic activities.

d) Realistic Standards and Self Financing Development. Both of the new policy statements emphas4ze affordability in future urban development. They recognize that neither government nor private budgets can supportdevelopment at the high standards now officially required. This means endorsement of more realistic standards and technologies to permit a rangeof site development options affordable to all but the lowest income groups without subsidy, It accepts the principle of "incremental quality improvement" (while lower income households may be i:ble to afford only rudimentary shelter initially, they are likely to substantially improve the quality of their housing over time, given the right inc-ntives). This also means much more aggressive and efficient efforts to recover costs (through user charges and more effective tax systems). Urban development will have to be, and should be able to be, self-financing.

(e) More Efficient Targeting of Support to the Poor. The new proposalsa n-] renounce the use of shelter subsidies but they do call for targeting such resources to the poor more efficiently. Even with appropriate cost recovery for services, the alleviation of the market-wide development constraints noted above should allow the middle income groups to meet their own housing needs without subsidy. If their needs were met, that would remove the largest barrier now preventing the poor from obtaining the benefits intended for them. The process should also permit the generation of higher levels of funding for subsidies through cross-subsidy mechanisms.

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(f) Linking Urban and Rural Development. In the past, urban and rural development planners have been isolated from each other and often viewed as in conflict. Implicit in the NCU's emphasis on jobs and income generation is the recognition that urban and rural development efforts have to be synchronized to have maximum economic effect.

(g) Demand-Oriented Spatial Priorities. Past Indian spatial policieshave often given priority to "spatial equity": eg, providing infrastructure and some industries to backward regions in the hopes of stimulating development. These "supply-oriented" strategies have seldom worked. The NCU report suggests a list of priority cities for further investment based on evidence of economic potential. This more "demand-oriented" approach is likely tohave a much higher payoff in terms of job and income generation and avoid the wastage of scarce capital resources in building capacity that long remains idle. There is mountingevidence that the best way to increase prosperity "Inbackward regions is to improve agricultural output first, and only then to support the development of facilities in towns as demand for them grows.

D. Implications for A.I.D. Programming

Rapid growth of per capita income in India will require structural change--a much larger share of economic activity in sectors that can only operate efficiently in cities and towns. Thus healthy economic growth implies rapid urbanization. Yet sluggish economic performance is also likely to result in massive urbanization as constraints on rural labor absorption leave no other alternative. While rural development remains critically important, what happens to India's GDP over the next two decades will be largely determined by what happens in the cities and towns.

In short, urbanization is to be too important to India's future for A.I.D. not to be involved.

Section III shows that the nation is at present ill-prepared to address the challenges implied by urban growth. The retention of traditional policies would lead to a serious deterioration of urban livingand working conditions even under a fairly optimistic economic scenario, and those conditions would themselves retard the potential of the economy in important ways. Under a pessimistic scenario for the economy, such policies would lead to conditions almost unimaginably deplorable. Yet there are alternatives--more realistic approaches that would promote much enhanced service ?evels and physical quality in the cities even with expected resource limitations,

The 1988 GOI policy statements have created a promising environment for the development of such alternative approaches.

The time is thus right for A.I.D. to program resources to supportefficient urban development in India.

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III. Analysis of Shelter and Urban Development Problems

A. Urban Sector Analysis

1. Overview of Urbanization

a. The Demographic Context

The pace of India's urbanization has been relatively slow compared to other LDCs, although it has been accelerating steadily itirecent decades. Table 1 records the growth of the urban population since 1931: a continuation of the 1971-81 growth rates would suggest a 1989 urban population of 217 million, 26.6% of India's total population.

Table 1

Urbanization, 1931-81

Year Total PopulationMI ions Growth

Urban Population Mions Growth

Percent Urban

% p.a. % p.a.

1931 270.7 1.03 33.5 1.75 12.4 1941 309.0 1.32 44.2 2.81 14.3 1951 349.8 1.24 65.4 4.00 18.7 1961 424.8 1.94 78.9 1.89 18.6 1971 528.9 2.19 109.1 3.29 20.6 1981 685.1 2.20 159.7 3.88 23.7

b. Spatial Patterns

The present level of urban development within each state is closely related to the degree of economic development of that state. However, the economies of large cities are not tightly linked to those of their hinterlands: improving prosperity in one has not much influenced prosperity in the other. In contrast, the growth of smaller cities is strongly linked to agricultural advancement. The growth of small and medium sized towns is thus more likely to be brought about by agricultural growth in the backward regions than by industrial dispersal.

Two groups of towns have been growing particularly rapidly:

o small towns in backward districts, on account of the "push" factor from the rural areas; and

o secondary cities (typically with populations between 100,000 and 500,000) in developed regions, reflecting an increasing concentration of industrial activity in these cities.

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In contrast, three of the four largest metropolises (Calcutta, Bombay and Madras) grew considerably more slowly than average. Calcutta and some other large cities may even have been experiencin9 net out-migration.

Variations in the pace of urbanization between states have been narrowing: urbanization is accelerating most rapidly in the least urbanized states, and less so in the most urbanized. Different groups of states have had quite different experiences but, in all, urban trends seem to be a natural outgrowth of economic circumstances: in particular, (1) the level of manufacturing activity, which has risen rapidly in most states, and (2)agricultuiral activity, which has grown phenomenally in the wheat-producing states (Punjab, Haryana), but has been stagnant in most of the others.

Although some concern has been voiced by Indian observers about the growth of large cities, the distribution of urban population by city size is not abnormal by international comparison. In 1981, 27% of the urban population lived in "metropolitan" centers (cities with a population exceeding 1 million), another 34% in cities in the range of 100,000 to 1 million, and the remaining 39% in smaller cities and towns. This being said, India does, of course, contain a number of particularly large cities. In 1981 there were 12 metropolitan cities; today, there are likely to be close to 20 cities with over 1 million inhabitants in each.

The metropolitan cities include India's two existing megacities-cities with more than 10 million people (Calcutta and Bombay, both with a mid-1989 population of around 10.5 million). They are cities which are experiencing severe problems, but it is not clear whether these problems are proportionately more intense than in other metropolitan cities or, even, that they are worse than in smaller towns.

c. Projections

The future urban population has been estimated using assumptionsabout the growth of the total population and the overall performance of the economy. All projections assume a total national population of 1.11 billion in 2010 and a continuation of the historical growth rate of agricultural employment (1.2% annually). Annual GDP growth was varied at three levels: (1) 5.0%, the future trend of growth forecast by the World Bank and the Planning Commission; (2)3.5%, the average growth rate for the past three decades; and (3)2.0%, the rate which yields approximately stagnant per capita income. The results of the projections are shown in Table 2.

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Table 2

Urbanization Forecasts - 2010

2010 1981-2010 Growth Urban Rate Increase

Projection Population, (Percent/year)(million/year) millions

Demographic United Nations 454 3.66 10.1 Planning Commission 435 3.51 9.5

Economic High (5.0% GDP Growth) 483 3.88 11.1 Medium (3.5% GDP Growth) 467 3.76 10.6 Low (2.0% GDP Growth) 453 3.65 10.1

For present purposes, it is assumed that the 2010 urban populationwill be about 460 million (the approximate average of the projections),41% of the total population. This implies an average annual growth rate of 3.7% between 1981 and 2010. 71% of the country's total population growth in that period will thus have occurred in urban areas.

As noted, urban growth has recently been slowing down in the most urbanized states and speedinn up in the least urbanized. There is no reason to expect that these trends will not continue. Thus the levels of urbanization across states will tend to converge. Similarly, there appears to be no force at work which would notably change proportional relationships in the city size hierarchy.

Even though India's larger cities are growing at a slower rate than its middle-size urban areas, it is worth pointing out that the large cities will present special management problems over the next two decades. In 1981, India had 7 cities with 2 million people or more. The Registrar General estimates that there will be 14 cities of that size by 2001. The three largest will have over 12 million people each.

2. The Urban Economy

Section II described the links between urbanization and national economic development, demonstrating that successful development of the urban econor'ic environment is becoming a necessary condition for attainingeconomic growth.

Other than the economic and regulatory constraints on the expansion of the industrial sector, inefficiencies of urban development also seriouslyinhibit urban business expansion. Inadequate land records, cumbersome

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administrative processing, and onerous regulations all slow down the process of developing shops and factories, and substantially increase their costs. Inflated land and building prices caused by present market constraints also make an important difference in the costs of such development. Inadequate provision of infrastructure by the public sector means that P would-be entrepreneur may have to provide alternative services himself at a much greater cost than would be required with effective public systems. Together these barriers may be enough to prevent, or at least lead to the postponement, of new investment. When new urban businesses are established, these added costs have to be passed on to the consumer, thereby diminishing the competitiveness of the firms and the economy as a whole.

In an optimistic scenario of economic development over the next two decades, with healthy expansion of manufacturing output, the proportion of urban workers employed in marginal activities would be likely to fall. The incidence of urban poverty, already declining, would continue its downward trend. On the other hand, under a more pessimistic forecast, with manufacturing employment growing only at the rate experienced between 1961 and 1971, the nature of the tertiary sector would be fundamentally changed. Its expansion would no longer be driven by demand from industry but by labor supply pressures. Severe competition and underemployment in the sector would drive down average urban incomes, implying substantial degradation in urban living conditions and a large increase in the proportion of urban poor.

3. Urban Management

a. The Present Syst.em

India is fortunate in that its urban functions have traditionally been much more decentralized than in most developing countries, and therefore should be able to respond to real needs more sensitively and be better able to motivate support for the revenues required to address those needs. India's states are explicitly responsible for urban functions under the national constitution, but they have traditionally delegated most of them to localities, most importantly municipal corporations and municipal councils. It.is, however, widely agreed that, since the 1960s when India's urban growth began to accelerate noticeably, local governments have generally been unable to meet their responsibilities in full. The Seventh Five Year Plan for example, states, "Many of the municipal bodies are moribund or have been superseded and are being administered badly".

There have been two responses which have altered the traditional allocation of responsibilities: (1) state governments have sometimes stepped in to provide services directly; and, more frequently, (2)special agencies, established under state auspices, have taken over various functions from the municipalities. The most prominent examples of the latter are the Development Authorities that now operate in almost all large cities.

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The new special agencies, however, have been sharply criticized in that: (1)their existence ha. further diminished the motivation of tile municipalities, while they have not performed that much more efficientlythemselves; (2)they have iiot been responsive to local needs and conditions; (3)they have not involved the municipalities incapitalprogramming so that problems arise when the municipalities have to assumeresponsibility for ongoing systems maintenance; and (4) they havegenerally made the allocation of functional responsibilities less clear.

b. Constraints to Development

While they are the key to providing adequate urban services, India's local governments have been particularly weakened over the past two decades due to the usurpation of some local powers by state and specialagencies, the lack of adequate incentives to recruit and retain qualifiedstaff, inadequate training, and ineffective management practices. Local governments fell far short of being able to keep up with the service needs implied by annual urban growth increments over 1970s and, clearly, they are not prepared to handle the expected doubling of these increments over the subsequent three decades.

The task of modifying the behavior of existing institutions is amongthe most difficult inthe developnent proress, but that does not mean it is intractable. Focusing on staff levels alone would be a dangerous course of action. It will be essential instead to significantly enhance productive output per employee. Experience in other countries suggeststhat the most promising apgrroaches give primary emphasis to applying new systems techniques to substantially improve management efficiency, and secondarily, to promot iuqmore use of non-governmental organizations in partnership with the public sector.

4. Urban Finance

a. The Present System

Urban governments, at all levels, lack the financial resources to undertake even their statutory functions, let alone to initiate innovative management programs.

The property tax is the single most important source of revenue available to Indian municipalities. However, the valuation of property is based upon annual rental value as controlled under the various rent control acts. Studies suggest that revenues could be increased several-fold if rateable values were linked to market prices rather than rent-controlled values.

Even without the crucial reform of the basis of property taxes, morgfrequent, widespread and objective valuations could greatly enhance the revenue available to municipalities from this source. A similar comment

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applies to most of the other sources of revenue available to the local authorities. There is agreement that local governments are tapping only a small fraction of the potential yield from user charges, in particular.

In general, local authorities do not have direct access to capitalmarkets to borrow for public works projects. States do have such access,but their use of it has been seriously limited by Reserve Bank guidelines:the devolution of State resources to local governments has been minimal in relation to local needs. Several of India's most urbanized states are in the process of setting up their own financing intermediaries specializingin support for land and infrastructure development: such entities alreadyexist in Calcutta and Tamil Nadu.

Currently, the resource gap is expanding, and is likely to growdramatically unless bold steps are taken to markedly increase local revenues.


The two principal constraints upon improving urban finances are thus the Inability of local administrations to raise additional revenues from existing sources; and their inability to access major sources of capitalfinance. The two constraints are related. Thus, if the local authorities were more adept at raising local revenues, they would also likely have the expertise to tap sources of capital finance, and financing institutions would develop confidence in the local governments' ability to service loans. Conversely, if there were specialized agencies making loan finance available to local authorities, it is likely that they would insist on staff development and operational procedures which would yield greaterfinancial discipline, and corresponding increases in local revenues.

The constraints on raising additional local revenues are as much political as technical: there is reluctance on the part of administrators to raise charges for services which are poorly delivered and for which the additional charges will not bring any immediate and visible additional benefits. Equally, however, there is a lack of understanding about alternative ways of charging for services, and of mechanisms for mitigating the burden of economic charges on poorer households.

Committees reporting to the GOI are currently considering alternative forms of an entity to finance land and infrastructure development, first mooted in the Seventh Plan. The selection of the institutional arrangement is likely to be clear by the end of 1989. However, whichever institution is selected will have little experience of the types of development that has been proposed by the National Housing Policy and the NCU, and will consequently require assistance with the development of its policies and operational programs. It will also require capital. Themagnitude of its capital requirements is ultimately likely to be in the order of billions of dollars equivalent, which will need to be sourced from domestic and international agencies.

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5. The Urban Poor

a. The Incidence of Urban Poverty

Poverty in India is defined in terms of the expenditure required to obtain the minimum caloric intake necessary for subsistence, plus actual expenditure on non-food items. The present daily standard is of 2,100 calories per person in urban areas, which required per capita expenditures of Rs.122 per month in 1985.

In that year, 27.7% of the urban population (over 50 million people) were estimated to be below the poverty line: a figure which is believed by many observers to be an under-estimate. Nevertheless, official statistics show that the incidence of urban poverty has been decreasing, from 41.2% in 1972-73, and 38.2% in 1977-78.

India's urban poor are unhealthy, ill-educated and live in environmentally unsatisfactory conditions. The poor have more children per household than average: 2.53, against 1.40 for the non-poor. It is reasonable to conclude that large families are likely to be poor because they have many dependents.

Within cities, the urban poor are more concentrated in slum areas than in other parts of the cities. However, published data imply that about half of the urban poor reside outside slums; and that, despite the concentration of slums in the larger metropolitan cities, these cities do not contain a disproportionate number of the urban poor relative to the cities' population.

b. Policies for Poverty Alleviation

The Seventh Five Year Plan initiated two programs specifically to alleviate urban poverty: the Self Employment Program for the Urban Poor (which provides loans of up to Rs.5,000 to assist the development of small enterprises), and the Urban Basic Services Program (which improves water, environmental sanitation, education and economic opportunities for the poor). There is a widespread belief that these programs have been unsuccessful in making any significant impact on the incidence of poverty.

Other than these two programs, the most important of the urban anti-poverty initiatives have been of land reform and subsidies.

The major land reform was the 1976 Urban Land Ceiling legislation. As discussed below, the Act has had negligible success in redistributingland to the poor. Indeed, by virtue of its effective freezing of land transactions, it more likely has had considerable regressive effects.

There are many differential pricing schemes designed to benefit the poor. Most urban services are subsidized in the sense that they are either not charged or are run at a loss. Many of these subsidies,

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however, cannot reach the poor, since the poor often do not have access to piped water, sewerage, electricity and public transport.

Probably all of the public sector institutions responsible for housingpolicy and its implementation make a conscious and publicized effort to bias their programs infavor of disadvantaged groups. There is,however, no shelter institution with a mandate specifically to target its assistance to the poor. There are, correspondingly, large numbers of PVOs active in anti-poverty projects and programs, although there isno central clearinghouse of information about or for urban PVOs.

c. Constraints to Improvement

Economic growth itself will reduce urban poverty. Under optimistic or pessimistic economic scenarios, however, the absolute number of the poor may well increase. The principal constraints to improvement of their lot are both economic, non-economic and distributional.

Economic Constraints. The main constraints to economic growth include onerous regulations which constrain productivity increases, particularly inthe private sector; policies that tend to segregate the formal and informal sectors; and constraints in the processes of land development and the lack of infrastructure.

Non-Economic Constraints. While it iscertain that there are a number of non-economic constraints to the reduction of urban poverty, these have not been clearly identified by analysts. Thiey are likely to include family size (which ispositively related to the incidence of poverty),problems associated with caste and biases ineducation structure.

Distrihutional Constraints. Existing social and poverty alleviation measures and programs are not well targeted, often failing to reach the urban poor and instead benefiting members of higher income groups.

B. Shelter Sector Analysis

1. Supply and Stock of Housing

So far as USAID is aware, there is no published estimate of housingsupply in India, for the simple reason that statistics are sparse and unreliable. It is likely, however, that the conventional public sector (mainly financed through HUDCO) contributes less than 20% of the total urban housing supply. Employers and cooperatives may account for another 10%.

The bulk of the housing (around 60% of the supply) isfinanced byindividual households and by the informal sector. The implication of a variety of studies isthat much -- perhaps a half -- of this residual category takes the form of additions to and subdivisions of existing housing units. Of the remaining, new, housing units, probably only a

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small volume is built by the formal sector, legally. A greater proportionis built by the organized informal sector; and the majority byindividuals, illegally. It cannot be far from the truth to estimate that half the current housing supply in urban India is illegal.

Statistics on the housing stock may be questioned, but they do show that there are a very large number of houses in poor condition. There is also a significant amount of homelessness: perhaps 750,000 urban dwellers who do not have a roof over their heads. Yet conditions have been improving. For instance, there has been a notable improvement in the quality of shelter as reflected by the use of building materials; the proportion of households in one-roomed houses has declined slightly; and there has been an increase in homeownership throughout most of urban India.

2. Housing Production


Housing delivery systems broadly fall into three main categories:public sector; private sector (including cooperative development and employer housing); and informal sector housing (which includes quasi-legal subdivisions and unauthorized colonies).

Public sector urban housing construction amounted to about 150,000 units for the year 1986-87, compared with a total supply of about 785,000 units. It is estimated that it contributed only 4% of the total supply of urban housing in the period 1961-85. Housing, and sites and services schemes are the responsibility of state governments and are generally carried out by State Housing Boards or Development Authorities.

Private, corporate developers are predominantly active on the periphery of the metropolitan cities. They have little involvement in development within the larger cities, mainly because vacant land there is either owned by-public agencies (and held for their own use or for ultimate disposal through public housing schemes), or is frozen under the Urban Land Ceiling Act. They also have little involvement in smaller cities (say, below 500,000 population) because of lack of effective demand (low incomes and apparent competition from subsidized public housing), as well as of the difficulties of accessing developable land and the more general problems of doing business.

In most cities, houses built by private developers are affordable to households at about the 40th percentile in the income distribution, and upwards, but the majority of the units are targetted to the high income groups.

Housing cooperatives--often organized by private developers--mainly cater to middle and higher income households. They contribute less than 5% of the total urban housing supply.

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The Informal Sector. Because of the inability of the public or private (legal) sector to supply enough land and shelter, by far the largest proportion of new housing construction takes place within the informal sector, without official authorization, sometimes on private land in conformity with regulations but more often in informal settlements, on government-owned property.

The clearest evidence is the growth of slums (including squatter settlements built totally illegally on government land or with the connivance of the landlord). India's total urban slum population was estimated at between 32 and 40 million in 1981 (20%-26% of the total population). The National Buildings Oranisation estimated that slums housed 32% of the total population in Delhi in 1988, 38% in Bombay, and 42% in Calcutta. It is generally accepted that slum populations are growing faster than non-slum populations in India's cities.

Illegal (or quasi-legal) development is not limited to the lowest income groups. Higher income families are served, for example, by"unauthorized colonies" established by developers.

These forms of urban expansion exhibit substantial energy and creativity. However, compared to a situation in which all urban land/infrastructure needs were met initially in well planned legal developments, they bear substantial disadvantages. First, there are the social costs associated with large populations living in squalidunserviced living environments for long periods of time (including the health hazards, particularly for children). Second, there are economic costs. One obvious example is that it costs more to install infrastructure after a settlimert has been built up (especially if it is built in a haphazard manner). More broadly, illegal settlements are located where the colonizers believe they can ge' away with it--locations often far from ideal considering the functional efficiency of the urban areas as a whole. Fragmented growth in this manner often leads to wasting scarce land resources, increased aggregate commutation, and higher costs for Infrastructure provision.

Nor are these informal approaches in total producing enough (or the right mix of) building plots to make up for the deficiencies in rormal production methods reviewed earlier.

b. Constraints to Improvement

Those constraints identified in Section III.B.5 as applying to the delivery and servicing of land necessarily also apply as constraints to the production of housing. Additional constraints apply, however, which are separate and distinct for the public, private and informal sectors.

Constraints on Public Sector Production. Public sector housingproduction has emphasized high cost construction of finished housing without adequate cost recovery. Unit subsidies have been extremely high, and programs have been fraught with management problems, particularly with

- 26

land acquisition, land servicing and plot sales. Given limited aggregate subsidy funds, this approachimplies high benefits for a very small number of families, while most households in need receive no assistance.

Constraints on Private Sector Production. The fact that rents are controlled at levels far below market prices reduces private incentives to Invest in rental housing. There are ways of getting around legal restrictions, but these create unnecessary societal costs. Incentives to develop for owner-occupation are reduced by the subsidies given to public sector housing, with a resultant gap between public and private sector prices, and the creation of an environm'nt of reluctance to pay market prices. Further disincentives to private production are created by the high building standards required by most authorities. The supply of legalhousing is also limited by the demand, tself still constrained by the continuing shortage of housing finance.

Constraints on Improvement of Informal Housing Production. The constraints identified above necessarily encourage informal housingproduction, with its concomitant high economic costs. The principal barriers to improved delivery of informal housing, in its various manifestations, are (1)residents' incomes, and their consequent inability to pay the price of formal housing; (2)the inability of residents to borrow for house improvement from formal finance institutions; -d (3) poor or atrocious environmental conditions, which diminish the incentive to invest in one's own housing.

3. Housing Finance


The GOI directly and indirectly affects the flow of funds into the housing finance sector, from both public and private sources, by means of a complex network of policies, taxes and regulations. Direct sectoral controls ao'e exercised by the GOI by means of instructions to publicinstit!.tional investors, much of whose funds must be invested in specified places such as state governments, central government debt instruments and HUDCO debentures. GOT has used these policies to favor certain other priority sectors but, in recent months, has directed an increasing volume of these funds towards housing finance.

Historically, most credit channelled to housing has gone to publichousing finance agencies at below-market rates of interest. While this remains true today, an increasing volume of business is being undertaken at rates close to true market rates: earmarked lending by comercial banks, lending by private and joint sector housing finance companies, and loans to other agencies eligible for refinancing by the National Housing Bank (NHB). In addition, HUDCO is under pressure to revise its lending rates to client organizations to more closely reflect mrket rates of interest. Nevertheless, the GOI, through its interest rate policies and direct controls, does largely deterine credit policies for the whole of the industry.

- 27 -

The institutional structure for housing finance has four main groups of retail lenders: State Housing Boards and other state and local level housing agencies; commercial banks; housing finance cooperative societies; and housing finance companies among which HDFC is presently dominant. Each of these, in turn, accesses their funds through a variety of sources: direct borrowing from households, corporations and the capital market; borrowing from HUDCO; borrowing from public institutional investors; and refinancing of smaller loans from the NHB.

The system is immature but rapidly growing. Probably no more than 20% of all housing activity is financed by the organizations categorized above, most of the remaining 80% taking the form of personal savings. The institutional network for formal housing finance has been expanding very rapidly over recent years, with the formation of the NHB--the apex institution for the sector--the emergence of many small housing finance companies, particularly in the private and joint (public-private) sectors, the enlargement of the scope of responsibilities of commercial banks to encompass retail lending for housing, and the announcement of the formation of housing finance subsidiaries of large public sector financial institutions.

The need for a specialized housing finance system has been acknowledged by the Government, which, through establishment of the NHB, is attempting to create an environment In which the various entities may flourish. The existence of a suppressed demand for housing finance has also been recognized by a number of financial institutions. And the public is responding to the opportunities offered by the new specialized institutions by raising the .olume of its formal borrowing.


The housing finance system isthus currently undergoing rapid expansion, with an institutional broadening that may be expected to result in increased innovation and improved geographical coverage, with new refinancing mechanisms and associated publicity that are intended to increase outreach to lower income households, and with a liberalization of the financial system which, coupled with new domestic savings plans, should make additional financial resources available to the sector.

At the same time, a number of problems remain, which will constrain the growti of the sector, perhaps sufficiently to negate many of the initiatives noted above. These include proble"s of resource mobilization, and of loan management. One additional constraint likely to be experienced in the foreseeable future is of a shortage of demand for housing finance, itself the result of a number of problems of housing supply.

Constraints on Resource Mobilization. One continuing problem of the smallerousing finance companies is that investing individuals and institutions do not always have full confidence in their financial integrity. One way of overcoming this would be for the NHB to publicly

- 28

license or recognize them, or act as a rating agency. (The NHB has inherited some minimal regulatory functions from the Reserve Bank of India--RBI--and is currently considering the possibility of requiring that housing finance companies be appraised by an independent credit rating agency.)

Administrative constraints to resource mobilization include the necessity for companies to obtain RBI permission every time they advertise their savings schemes, a time-consuming procedure. Quality of management also affects resource mobilization, particularly since--due to its infancy--the industry suffers from a relative dearth of skilled and motivated managers.

There is considerable interest in the opportunities for resource mobilization through the growth of a secondary mortgage market. Among the several existing constraints to the development of a market, however, are the lack of standardization of mortgage instruments, lending and servicing procedures, and underwriting and appraisal practices. Also required are negotiability of mortgage notes, a system of registration of mortgages unburdened with exorbitant stamp duties, and finally a legal matrix within which foreclosure and liquidation of the security can be completed cheaply, fairly and quickly. These circumstances u not presently hold.

Management Problems. Other than the default risk associated with the existing laws of foreclosure, another problem faced by the industry is of interest rate risk. Long term maturities are not available at rates that companies can profitably invest. The result is long term assets financed by shorter term liabilities, leaving a maturity gap which is potentially sensitive to changes in interest rates. Concern has also been expressed about underwriting standards employed by some of the newer entrants to the industry, by which the meeting of targets for lending may be considered of equal importance to originating sound loars. If this were later to result in large scale delinquency, a collapse of confidence could affect not just individual institutions but the whole industry.

Lack of Demand. Section III.B.2 describes other constraints on development which create unnecessary costs for consumers and inhibitions to private sector (including individual) developers. Among the more critical of these constraints is the shortage of serviced, affordable land. In turn, they restrain demand for housing which can be financed formally and thus, of course, demand for housing finance. The.NHB is addressing certain of these constraints by, for instance, offering finance for land development, and recommending legal reforms to facilitate lending for housing.

4. Shelter-Related Infrastructure


The primary responsibility for providing and maintaining infrastructure

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falls to the state governments. For urban infrastructure, these responsibilities have often been assigned to the municipal corporations and, in some cases, to specialized agencies.

The level of services provided by the municipal authori'ties is acknowledged to be substandard in both quantity and quality. Thus, one quarter of the population in India's cities does not have either a pipedwater supply or sanitation facilities, and one third have no electricity.There is substantial illegal tapping of power lines. It is officiallyestimated that 40% of the urban water supply is polluted. Nevertheless, access to water and sanitation has improved substantially over the last decade.

There has been a limited response to these deficiencies of publicprovision, by households, communities, the corporate private sector and housing cooperatives. Most widely, this has been on an individual basis, e.g. by households collecting water from streams, burning their domestic refuse or channelling storm water from around their own homes. There are some notable examples, however, of corporate responses to the provision of water supply, sanitation and solid waste disposal at community level.


Public infrastructure production is not keeping up with urban growth at present, and is constraining the supply of serviced urban land for residential development. Without basic refors, the supply is likely to fall farther behind in the face nf accelerating urban growth. This would imply excess costs inhibiting healthy economic growth and job generation, as well as important reductions in the quality of the living environment.

Constraints to improving the situation are both financial and managerial innature.

Financial constraints. Infrastructure that is produced by governmentis heavily subsidized and the subsidies are not well targeted. In addition, infrastructure standards are often unrealistically high, and rely unnecessarily on high cost technologies, with a result that capitaland recurrent costs are higher than they need be. Cost recovery systems are generally inefficient and recovery rates are poor. As a result, the infrastructure development authorities are neither readily able to borrow development finance for expansion and improvement, nor, often, are they in a position properly to maintain the existin!j systems.

Even if the infrastructure authorities were financially sound, the institutional structure for them to make large borrowings is inadequate.

Managerial constraints. Constraints on urban management in general--as noted in Section III.A.3--apply with equal force to managementof infrastructure: the lack of adequate incentives to recrui.t and train qualified staff, inadequate training and ineffective management practices,all combine to produce sub-optimal standards of service delivery.

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5. Residential Land Markets


Many of India's present land policies are based on a presumption of the concentration of ownership of urban land in a few, private, hands, and on fear of the associated specter of speculation. Overall, urban land holdings by central and state government and their agencies are relatively small, although in larger cities many Development Authorities have amassed significant land banks, often to the virtual exclusion of private sector ownership of vacant land.

Policies and practices regarding urban land have therefore concentrated on equalizing access and controlling prices, through different degrees of socialization of land resources. A panoply of measures has been introduced, ranging from the Urban Land Ceiling Act, through the land banking approach typified by the Delhi DevelopmentAuthority, to conventional but unduly restrictive planning and building regulations.

The most important of these is the Urban Land (Ceiling and Regulation)Act, introduced in 1976. Its principal purpose was to provide for a ceiling on individual holdings of vacant land in the larger urban areas; for the acquisition of land in excess of th: ceiling; and to regulate the construction of buildings on such land. Not all states have adopted the provisions of the Act; and land holdings in all towns with a population below 200,000 (covering perhaps a half of India's urban population) are exempt from the Act. The problems of implementing the Act have proved to be numerous, with the result that the government has taken possession of little more than 2%of tha declared "excess" land. At the same time, it has had the effect of freezing the urbar land market in these largercities and, as a consequence, of inflating urban land prices.

Most of the their land management measures, equally, have failed in their intent, often producing consequences opposite to those originally designed, with a diminution of the supply of legally developable land and a parallel increase in prices. Nevertheless, the spirit of Indian enterprise--in both public and private sectors--has ensured the adoption of alternative methods of land supply and development. Both sectors are utilizing extra-legal mechanisms: statutory authorities, using for their own schemes standards which are below those applicable to other developments, and the private sector, with its unauthorized but highly organized set of private "colonizers". More formel alternative methods of land supply which are being practised using the skills and resources of both public and private sectors--albeit not widely, and not always with a marked degree of success--include land readjustment, private sector site and service schemes, and "guided urban development", whereby subdivision and servicing of the land is financed and undertaken by private developers, with low income plots to be purchased by public authorities at a pre-determined price.

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India's efforts to create a more efficient and decentralized housing delivery system can be frustrated because not enough serviced lard is being created to take advantage of the additional financing that can be made available. Serious constraints hold back and disorient supply by the formal sector--both private and public.

Constraints on Private Land Development. Due to the Urban Land Ceiling Act much of the remaining developatle land in India's larger cities is legally entangled and thus not available for privatedevelopment. There is a general recognition by urban professionals of the need to reform the Act, accompanied by a political rluct~nce to take the initiative to do so.

Even at the fringe and in other areas not covered by the Act, however, private development is frustrated by: (1) inflexible and costly site development and building standards; (2) tortuously slow and demanding government reviews of development applications; (3)cumbersome procedures and heavy duties and fees entailed in processing land title changes; (4) governments tying up (through notification) much of the more attractive developable land--much more than they are likely to be able to acquire for a long period of time; and (5) the likelihood that government will be unable to provide the requisite infrastructure for private development, at least not in a timely manner.

There are a few recent examples of balanced large scale land developments by private firms wcrking in cooperation with government, but these models do not appear politic at present in most states.

Inadequacies of Government Land De,3lopment. While government agencies have traditionally assumed the role of primary urban land developer in India, their output has been small in relation to the need. Reasons include: (1)archaic laws that mandate complicated and long delayed agency land acquisition; (2)the lack of adequate cost recoverywhich implies heavy subsidies and thus constrains the yield from available funds; (3)costly site development and infrastructure standards (which have the same effect); (4) inefficient (and non-aggressive) project management; and (5)the fact that most development agencies have focused on house building and have not given enough attention to the provision of serviced sites.

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IV. Strategy

A. Overview and Rationale for Priorities

1. Rationale

There are three principal reasons for the USAID strategy to address urban problems, in addition to continuing to work with housing finance system development. These are: (1) the 1988 GOI policy statements have identified that topics other than housing represent higher priorities in addressing the urban challenge (inparticular, urban economic development, land and infrastructure); and indeed, that the nation's hoysing problems themselves cannot be dealt with effectively until constraints in these other fields are alleviated; the analysis undertaken for this strategy concurs with this finding; (2) a program in housing finance alone is not enough to give A.I.D. a role in assisting with development of the broader urban agenda now being discussed in India; and (3)A.I.D. has developed considerable expertise in addressing these other priority topics in other countries--experience that could appropriately be applied to urban development issues in India.

In reviewing potential areas for urban intervention, the Mission and RHUDO adopted the following criteria for program selection:

o The program should be consonant with the GOI's own goals, and there should be a reasonable likelihood that institutional and bureaucratic consiraints would not prevent the achievement of project goals.

o It should be consistent both with the CDSS approach of applying systems/information technologies to improve efficiencies in urban resource management and institutional development, and with the GOI's own implementation priorities.

o It should have the potential for creating system-wide impact, rather than just offering physical project prototypes that might or might not subsequently be replicated.

o It should be achievable within the funding constraints as presently understood.

o It should embody a field in which A.I.D. already has the technical skill needed for effective project management, or could readily acquire such skill.

This review eliminated from consideration several potential areas of intervention. In particular, the Mission and RHUDO recognize the need for assisting urban economic development, whether through direct support of business development, or by support for efficient market town development. These potential program areas are, however, not to be pursued under the strategy because the resources available to A.I.D. would be unlikely to have any major impact on the problems. Other program areas that were considered but did not meet all of the above criteria included interventions to support the management of mega-cities, trunk infrastructure financing, efficient

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land/housing development by cooperative societies, and support for state government urban management initiatives.

2. Overview

The urban strategy comprises three principal elements: (1)continuation of support for development of the national housing finance system; (2) the initiation of new programs in support of an urban land/infrastructure strategy; and (3) as a major cross-cutting theme, supporting reform of the urban policy environment.

The shelter strategy, formulated in 1984 in support of the development of India's housing finance system, is still valid; it is also incomplete. The current program meets the above criteria for inclusion as an element of the new urban strategy. Ithas the potential of making a major impact on the nation's housing finance system. It is consistent with the themes of the 1988 GOI policy statements. It also provides goodopportunities for the application of the CDSS' S&T themes to an important area of national policy. With the experience of recent years, A.I.D. now has a comparative advantage among donors in the field of housing finance in India. With the development of HG-003, A.I.D. and the NHB have developed a relationship through which the two parties engage in policydialogue; this relationship will be strengthened by continuation of support in this sector. The HG and associated training and technical assistance programs will therefore be pursued with vigor.

The preceding analysis eeconnizes that, to achieve accelerated economic development and greater social welfare, and at the same time to begin to address envirowTental issues, it is of very high priority to address constraints caused by the shortage of serviced residential land. The long-term solution is simultaneously to improve the efficiency of government interventions and to create a more effectively functioning land market. The strategy will take a series of first steps towards reachingthese objectives, aiming to create a substantial increase in the supply of serviced land both to meet basic needs and to reduce inflationary pressures. The GOI has already made moves to improve the efficiency of public land development; to promote private-public partnerships in the development of serviced land; and to create a new financing entity to mobilize additional resources and implement supportive measures to expand output. The A.I.D. strategy will support these themes, by a new HG project in urban land and infrastructure development, and by a series of DA-funded activities in related training and techrical assistance. As in housing finance, these are areas where A.I.D. has has a comparative advantage, and where the GOI has requested assistance.

Support for the GOI's new policy directions is a major theme of the strategy. Itwill involve technical advisory missions dealing with critical subject areas, described below, and will include the sponsorshipof well-focused studies that will more clearly identify the costs and benefits of alternative policies. The Mission/RHUDO will disseminate the

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results of this research and other studies already available, to those with influence within and outside of New Delhi. Training programs and collaborative assistance arrangements will support these initiatives. A.I.D. will further the momentum for change by providing support for indigenous institutions with skills and orientations suited to the research and dissemination tasks ahead. A.I.D. intends to make a positive response to a proposal by the NHB to develop a savings incentive scheme for lower income groups. This proposal, which iscomplementary to the housing finance program and supportive of a land development strategy,would also help to restructure the policies and programs of state govenmenthousing and urban development authorities.

B. Selected Development Strategies

1. Support for Development of the Housing Finance System

a. Objectives

The long-range objective of the ongoing shelter sector strategy for India is to increase the availability of formal housing finance nationwide. This is to be achieved by promoting the development of a financially sound, self-sustaining housing finance system which makes long-term shelter finance available to a wide range of households, particularly those below the ,nedian income. In the medium term, the objective is to support the development of critical components of that system, including a network of financially sound primary lenders, and a regulatory and financial environment within which they may operate efficiently.

b. Strategy

Having undertaken a successful program to assist the development of the country's first private sector housing finance company, HDFC, achievement of the objectives of the strategy can now best be furthered byfostering the development of a number of small market-oriented housing finance companies. For such companies, this will involve an increase in the number of branches, an increased volume of loans, the introduction of innovative means of mobilizing resources and of lending to target households, and increased efficiency inmanagement.

These achievements will increase the number of low income households having access to credit for the purchase, extension and improvement of their homes, encourage competition and its associated efficiencies, permit specialization and innovation, and increase the constituency for policy change benefiting the sector.

c. Program

The program seeks to develop a system of market-oriented housingfinance companies by (1)providing critically-needed lending capital to existing public policy constraints; and (3)addressing a number of

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meet near- and mid-term needs of eligible companies serving a number of geographic areas; (2)fostering a relationship between recent entrants to the sector and the National Housing Bank in order to improve the new firms' ability to mobilize resources, manage their portfolios, increase lending to low income households, and operate more effectively within the sectoral constraints on expanding the system, through technical assistance and training.

The principal vehicle for this program is HG-003, the Housing Finance System Program, for which a $50 million program was approved in September 1988. It is intended that the Program Agreement for the first tranche of $25 million be signed in FY'89, with the loan drawn down shortly thereafter. Authorization of the second tranche, of up tQ $25 million, is planned for September 1989.

Continuation of support for development of the housing finance systembeyond the final drawdown of HG-003 is more tentative. .n principle, the Mission and RHUDO are committed to the objectives stated above and, since it is unlikely that these will be achieved by the conclusion of the present $50 million HG-003, there is a good rationale for the program to be extended. Continuation of capital projects in housing finance, whether through an extension of HG-003 or through a new project, will, however, depend on several factors. These include progress made towards the development of a self-sustaining, markct-oriented housing finance system, the need for additional funds by the NHB (or other housing finance institutions), and competing calls on, and the availability of, HG resources.

The HG program will continue to be supported by related technical assistance and training dctivities.

The training program will include participant training in housingfinance in the U.S., both in periodic courses and, if there is sufficient demand, in courses specially tailored to Indian needs. Participant training will be used as a way to communicate key ideas as well as to stimulate programmatic changes and policy dialogue. DA funds will also be used to support the institutional development of key Indian agencies responsible for training in the sector, and to build collaborative arrangements between them and U.S. institutions. Participating Indian institutions are likely to include HDFC's Center for Housing Finance and Development, and the Human Settlements Management Institute (HSMI). At the same time, assistance will be given to private and joint sector housing finance companies to assess their training needs, and subsequently to develop their own HRD and training plans. Other training activities, focusing on training as a policy tool, will include the support of specialized seminars. Concurrently, the Mission and RHUDO will encourage collaboration among all vendors of housing finance training in India, including HDFC, HSMI and the Bankers' Training College.

- 36 -

Technical assistance activities will be developed as specific requests arise. The first of these is likely to consist of a sequence of consultative missions to the Ministry of Urban Development on the development of a secondary mortgage market.

Since the state of knowledge about housing finance is still weak, the program of studies and research activities started under HG-002 will be continued. Mechanisms to be used will include a multi-year contract with a U.S. consultancy for a series of studies, and individual contracts with Indian consultants. The first activity under the U.S. contract will be the specification of a medium-term work plan for studies and research.

2. Improvement in the Efficiency of Land and Infrastructu're Development

a. Objectives

The objective of this element of the strategy is to promote greater efficiency in the functioning of land markets, in order to make serviced land for shelter more accessible to all income groups, particularly those below the median income.

In the long run, this will entail land development agencies achieving increased reliance on market mechanisms for assembling and developing land. This, in turn, will require a number of changes in existing practices: (1) the rationalization of counterproductive laws, regulations and standards, such as the Urban Land CE|ling Act, procedures for registering and transferring lar.d titles and standards relating to, e.g. road access and open space provision; (2) appropriate cost recovery and other revenue generation measures; and (3) new incentive structures for government activity, supported by efficient information processing and management systems to expedite for instance, reviews of private development applications, processing of title transactions and project implementation.

These goals are unlikely to be attained within the time scale of this urban strategy. In the interim, achievement of the objective can be approached by efforts to improve existing land delivery systems and design innovative mechanisms for involving the private sector in land development. This would help to meet the immediate needs of urban India for an early and substantial increase in the supply of serviced land, meeting basic needs and reducing inflationary pressures, and would simultaneously address critical environmental problems relating to the misuse of urban land.

b. Strategy

The strategy incorporates the provision of assistance to and support for the GOI in developing efficient land markets. Constraints will be addressed by targeting improvements in three specific areas, as follows.

- 37 -

The first is the achievement of a marked improvement in.the efficiencyof public land development. This will entail action on the part of the GOI to remove legal barriers that slow down agency acquisition and development processes, and a concerted effort to improve internal managerial efficiency.

The second is the promotion of public-private partnerships in the development of efficient serviced land projects. Such partnerships will be a vehicle for introducing responsible private involvement, while minimizingthe risk of political repercussions. At the same time, they will substantially expand delivery capacity. Some states already have instances of such partnership arrangements; efforts will be made to replicate and build upon these examples.

The third area of support will be for the mobilization of additional resources for land ond infrastructure development. With its present strongreliance on Plan funds, the public land and infrastructure developmentsystem will soon meet financial constraints, even if it succeeds in increasing its technical delivery capacity. Such constraints can be alleviated by the creation of a new financing entity that will loan for these purposes and be empowered to mobilize additional resources from a variety of sources. This need is recognized by the GOI, which is currentlyexploring options for creating an entity for financing land development.

c. Program

The program will seek to assist the GOI to meet these objectives by (1)providing capital assistance to the national entity/entities empoweredto finance land and infrastructure development, (2)improving the professional and institutional capacity for efficient land management,(3)providing collaborative technical support for the development of associated land information technologies and systems techniques for the management of land development and servicing operations, and (4)facilitating communication and information exchange among practitioners and researchers.

USAID/India and RHUDO/Asia will thus initiate two groups of activities. One will be a HG project to suppurt the activities of the new national land financing entity/entities. The project will be designed to encourage efficient and financially disciplined urban land and on-site infrastructure developments. Special emphasis will be given to promoting more extensive use of public-private partnerships.

With the HG project supporting an institutional mechanism for significantly expanding the delivery of serviced urban land, DA funds will be used to focus on the aims of the longer term strategy. The program will include a broad group of activities of research and dissemination, trainingand application of technologies. These will primarily be implementedthrough national urban policy institutions. The program will be designedto assist national, state and local institutions in capacity developmentand in the adoption of the new policy orientations proposed by the 1988

- 38 -

National Housing Policy and by the NCU. A related program could focus specifically on the practical applications of land information systemstechnologies. A further component could assist with the application of systems and other technologies to establish effective operations of the new national financing entity, ind of the development agencies that would ultimately implement sub-project;s associated with the HG program.

Insofar as the state of knowledge about land markets is incomplete,both on the part of A.I.D. and, to an extent, also of the GOI, theprogramwill be initiated with a series of documentdry and research studies. These will have the objective of synthesizing current information about and understanding of land markets in India and, where knowledge is lacking, of supplementing it through fresh research and studies. The Mission has already started on this program, having commissioned a studyfrom the Ahmedabad School of Planning which is investigafing certain aspects of the functioning of land markets in three metropolitan cities.

The design schedule aims at formulating a request for authorization for the new land and infrastructure financing project in FY 1991.

The program will be supported with broad dissemination of publications on the results of the above R&D activities, and urban policy success stories from India and abroad.

3. Support for Reform of the Urban Policy Environment

a. Objectives

The objective of this element of the strategy is the propagation of an urban policy environment which is supportive of economic growth and development. In particular, this will involve major reforms of the existing system to eliminate constraints--as distinct from merelyincreasing the funding of the existing systems. Consistent with recent GOI policy statements, this implies giving a more leading role to the people in urban development, both households, the informal sector,cooperatives, NGOs, and small and large enterprises; and a simultaneous shift in the role of government in the sector to becoming more of an enabler and facilitator rather than a provider of services, as in the past.

b. Strategy

These objectives have already been accepted by the Ministry of Urban Development insofar as they relate to the shelter sector (by its authorship of the National Housing Policy). Through advocacy of these objectives for urban development by the National Commission on Urbanization, they have also been accepted by many of the leading urbar professionals in India. Acceptance of the principles in New Delhi, however, does not mean that they are universally understood and accepted,and even less that they are being put into practice at state level. This will take much longer.

- 39 -

The A.I.D. strategy is therefore to add support to the momentum forappropriate change which hat been initiated by the GOI, particularlywhere this is coincident with the major areas of emphasis of PRE/H.Those areas that will be the main focus of the strategy are:

o efficient urban management o urban employment generation strategies o channelling financial resources into urban investment o coping with urban environmental conditions.

Because A.I.D. will be responsive to specific problems and opportunities as they emerge, detalls of the strategy can only be indicative at the present time. The nature of the support to be offeredwill depend on the direction and magnitude of policy change beingachieved, and on the responsiveness of GOI and other pirticipants in the urban development process to offers of A.I.D. support.

c. Program

The strategic objective isbest realized by offering Indian professionals exposure to new thinking in selected fields, and simultaneously to publicize Indian initiatives in overseas forums. This will be achieved by a variety of mechanisms, their use depending on specific circumstances: participant training, institutional support,dissemiriation of information, sponsorship of professional participationin seminars within India and. overseas, and assisting with the marketingof Indian urban expertise in other countries.

Elements of the program are already in place. Thus, the Mission and RHUDO currently respond to requests for intormation and documentation. As part of its regional information program, RHUDO is preparing topublish a periodic newsletter; RHUDO also sponsors an annual series ofworkshops on urban and sielter policy, to which key Indian professionals are invited. Representatives of the Mission and RHUDO are also occasionally able to respond to requests for papers and presentations at in-country conferences.

The on-going program will be upgraded in three respects. Firstly, itis likely that participant training in urban/shelter affairs will increase over the extremely low levels of recent years. Secondly, the Mission will respond to an informal request by the National Institute of Urban Affairs for short term TA for assistance wih the design of a moreforceful and coherent work program. Itwill explore the possibilities of providing longer term support through a collaborative arrangement with a U.S. institution. This would focus, in particular, on the developmentand practical applications of new techniques and information technologiesin urban resource managjement.

The third major area of activity is likely tc be in the developmentof a program using monetized resources authorized under Section 416 ofthe Agricultural Act, 1949. This program, the Savings Incentive Scheme

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for Low Income Housing, isan initiativi of the NHB. The targetpopulation is those urban hcuseholds, living below the poverty line, who are at present obliged to live in slum settlements. The program would offer carefully-targetted incentives to them to enable them to participatein the formal sector. The scheme would simultaneously assist in therestructuring and rationalization of state government housing policies and practices.

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V. Resources

A. Housing Guaranty Loans

The HG program will continue to be the sole source of funds for capital assistance. It is assumed that the present ceiling of $25 million per country per year will.continue to apply. If,however, this restriction is lifted, it is likely that either the housing finance program or the land and infrastructure program will be able to absorb a considerably higher volume of funds. The assumption is also made that the relative benefits to India of borrowing under the HG program'will continue to exist and will continue to be recognized by the GOI.

On these assumptions, together with those stated earlier,, the India program will call upon the HG program for continuing authorizations of $25 million a year over the next five years. As the objectives of the housing finance program are increasingly realized, and as the National Housing Bank becomes able to call upon other resources for the implementation of its own programs, so HG funds will be diverted from housing finance to the start-up of the new program in land and infrastructure development--Table 3.

B. DA Funds

The Mission's DA funds will be used primarily to support training and technical assistance initiative: in all three program areas.

For training, it is envisaged that the on-going Development & Management Training (DMT) Project will be Lhe principal source of funds in the early years. $0.5 million has been earmarked under this project for training for housing finance (of which about $0.1 million will have been used before FY'90), but the project is designed sufficiently flexibly that funds can equally be allocated for the other programs under this strategy. Should there be any difficulty in using the project as presently designed in support of the overall urban strategy, the earmarking of funds will be renegotiated with the GOI. Additional sources of funds for training activities will need to be identified.

Correspondingly, the new Technical Assistance and Support Project (TASP) will be used for most non-training activities of the strategy. This project, which is not yet being implemented, is designed to "contribute in a collaborative manner towards strengthening the GOI's ability to implement its development plan". The flexible design of TASP allows for it to fund technical assistance, feasibility studies, small grants and exchange programs. $1.0 million has been earmarked for urban sector programs over the project lifetime. There are two principal constraints on using TASP in support of the urban strategy. The first is that there is to be a normal minimum sub-project cost of $100,000. Since many technical assistance activities will be short-term and therefore low

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cost, itwill be necessary to package them appropriately. Secondly, TASPis not designed to support studies and research which are commissioned by the Mission for its own purposes. Insofar as the priorities for research under this strategy may not coincide with those of the GOI (for instance, when they are primarily designed to strengthen the knowledge base of A.I.D.), itmay be necessary to use other funding sources. As with training activities, the anticipated cost of technical assistance to support this strategy exceeds the funds currently earmarked under TASP. Itwill therefore be necessary to identify additional funding sources.

According to the development of experience of working with the DMT project and TASP, these projects may be utilized throughout the urban strategy period as the nain vehicles for techn'cal assistance and training, extended and/or amended as necessary; or it may be found more appropriate to develop a new technical assistance and training project specifically in support of the urbarn strategy.

The Mission's PD&S budget will be used for most activities which do not fall into the above categories. These will include research studies in support of the housing finance program, the design program and subsequent support studies for the new land and infrastructure project, and a part of the cost of evaluations (the final evaluation of HG-002, the interim and final evaluations of HG-003, and the interim evaluation of the HG for land and infrastructure development). Insofar as training programs which support the development of resource management technologies may include a requirement for the import of computers, etc, whicn could not readily be f.inanced under TASP or DMT, the PD&S budget might also be used for this purpose. Where funding under PD&S may fall short of the requirements--particularly in the early years of the straftegy,, other sources of funding will be sought, for instance from UNDP.

C. RHUDO and PRE/H Assistance

RHUDO/Asia funds will be called upon to fund activities which are primarily regional in nature. Among other things, RHUDO/Asia will fund the annual regional seminars and the regional newsletter. RHUDO will contribute a part of the cost of the evaluations of the HG programs. It will also maintain a small reserve fund for activities which are an integral part of the India strategy but which USAID/India may have difficulties inmeeting.

PRE/H will not be called upon to budget any funds specifically for the India urban strategy, The India program will, however, place increasing demands upon PRE/H both in terms of backstop services and in support of training initiatives.

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Table 3

Resource Requirements

Resources for contracts/commitments to be made in the FY shown

$ '000 (constant)

FY'90 FY'91 FY'92 FY'93 FY'94

DA GRANTS

Urban Policy

Studies: US consult. @ $25,000 25 25 25 25 25 Local short-term @ $12,500 25 25 25 25 25

TA: US consult. @$25,000 - 25 25 25 25 Inst. support: NIUA/RTI 100 I1)0 50 50 50

Training: Partic. training/US @$10,000 20 20 20 20 20 Inst. support: IIPA 20 50 150 150 150 Overseas study tours - 20 20 20 20 Regional activities * * * * *

SUB-TOTAL* 190 265 315 315 315

Housing Finance

Studies: U.S. consult. @25,000 50 50 - - -Local short-term @ $12,500 25 25 25 - -

TA: US consult. @ $25,000 50 25 25 25 -Training: Partic. training/US @ $10,000 50 50 50 50 50

Inst. support: HSMI/Fels 200 200 50 50 50 Inst. support: CHFD (HDFC) 50 50 25 25 25 Incountry training, etc. 25 25 25 25 25 Regional activities * * * * *

Evaluations 60 - - 75 -

SUB-TOTAL* 510 425 200 250 150

Land/Infrastructure

Studies: backgrounds, PP designresearch 100 100 75 75 75 TA: ULIS @ $150,000/city 25 50 200 200 200 Training: Partic. training/US @ $10,000 20 20 40 40 40

Incountry training, etc. - - 25 25 25 Inst. support: HUDCO/Harvard 250 400 100 50 50 Regional activities * * * * *

Evaluations - - 60 - 75

SUB-TOTAL* 395 570 500 390 465

D.A. TOTAL* 1,095 11,260 1,015 955 930

*Totals exclude cost of regional activities.

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Note 1: DA would primarily be from the SD functional account except to the extent that activities related to water/wastewater could be funded under the Health functional account.

Note 2: The above totals exclude OE resources to fund the Urban Affairs Advisor and FSN Specialist.

$1000

HG LOANS FY'90 FY'91 FY'92 FY'93 FY'94

Housing Finance Land/Infrastructure

25,000 -

15,000 10,000

10,000 15,000

-25,000

-

25,000

HG TOTAL 25,000 25,000 25,000 25,000 25,000

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Table 4

Funding Sources

Resources for contracts/commitments to be made in the FY shown

$'000 (constant)

FY 90 FY'91' FY'92 FY'93 FY'94

Regqui rements

DA* 1,095 1,260 1,015 955 930 HG 25,000 259000 25,000 25,000 25,000

TOTAL* 26,095 26,260 26,015 25,955 25,930

Sources

ANE (Mission) DA (existing) (1) 550 225 300 300 -DA (new) 465 1,035 685 620 890

PRE/H (RHUDO) DA (existing) (2) 50 - -

DA (new) (3) *30 * *30 *35 *40 HG (new) 25,000 Z500 25,000 25,000 25,000

TOTAL* 26,095 26,260 26,015 25,955 25,930

*Totals exclude cost of regional activities

Note (1): Existing DA comprises earmarked funds under TASP ($1 million)

and DMT ($375,000).

Note (2): RHUDO-funded training grant to HDFC.

Note (3): 50% of cost of evaluations allocated to RHUDO.

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VI. Work Plan

A. Analytic Requirements

A major emphasis of both of the major programs is the continuation of the current series of analytic studies.

Inhousing finance, the need is for relatively specific research which will broaden knowledge of the subject, primarily in order to givepolicy makers and practitioners a better understanding of the implicationsof alternative courses of action. A secondary objective is to widen the extent of interest in the sector, from its present narrow base of a verysmall handful of professionals. These objectives will be achieved byinvolving Indian professionals in discussion of the research agenda,utilizing local consultants to a greater degree than hitherto, and disseminating the results of studies as widely as possible, both bydistribution of reports and, so far as possible, through a program of seminars.

Housing finance subjects that remain to be explored include the following: patterns of repayment by households of different socioeconomic characteristics; mechanisms for ma'-ing small, short term loans; the impact on savings and investment of alternative taxation structures; resource mobilization techniques; the demand for construction finance; and the current and future demand for mortgage credit.

In the field of land and infrastructure development, the analytic needs are less clearly definable at present, because A.I.D.'s understanding of the sector isless mature. The first step will therefore comprise the specification of analytic needs for the development of a HG program. Subsequent studies will include a survey of the status of land markets in key states and urban areas, and an examination of the opportunities for the deve'lopment of public-private partnerships in the sector. The program of studies will aim at informing A.I.D. about the present situation, constraints and opportunities relating to land markets and infrastructure development; at extending the field of knowledge about these subjects in India; and, not least, at demonstrating the credibility of A.I.D.'s expertise in this area.

The research program in housing finance, and the land and infrastructure program definition studies, will be designed and undertaken in conjunction with U.S. institutions. These are yet to be identified and appointed. So far as possible, the studies will be undertaken collaboratively: to be defined in consultation with the targetaudience and with other researchers in the field, and to be undertaken in part by Indian professionals.

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B. Evaluations

The final evaluation for HG-002 (HDFC) is to be conducted in September 1989. Itwill be funded jointly by USAID/India and RHUDO/Asia.

Interim and final evaluations for HG-003 (NHB) are presently scheduled for mid-1990 and mid-1993, respectively. If,however, the housing finance program iscontinued by increasing authorizations for HG-003 beyond the present $50 million, then the date of the final evaluation will correspondingly be deferred.

Evaluations for a new land and infrastructure program will depend on the timing of its start-up. Given the schedule implied by Table 3 above, the interim evaluation would take place inFY'92-'93.

C. Staffing Requirements

The on-going program iscurrently managed by an expatriate PSC Urban Affairs Advisor, with guidance and assistance as the need arises from RHUDO/Asia, and with backstopping by PRE/H. The Mission is in process of recruiting an FSN technical officer to work with the Urban Affairs Advisor. The Urban Affairs Advisor presently shares a secretary with another professional.

The expanded program can be managed on a day-to-day basis by the two resident professionals: a PSC Urban Affairs Advisor and at, FSN technical officer. As their work load expands with the additional program elements described above, it will be increasingly necessary to utilize their time more efficiently. At a minimum, therefore, a full time secretary will be allocated to the urban professional staff.

Equally, as the program expands, calls upon the time of RHUDO/Asia staff will increase, both for backstop services, for special advisory missions and to provide support professionals on TDY for short periods. Increased activities in India and other South Asian countries may, however, require additional senior staff to manage the regional program.

india urban strategy statementpdf.usaid.gov/pdf_docs/pnabl920.pdf · india . urban strategy...

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