Why Informal Settlements Form: Analyzing Causes and Growth Factors

Walk through any major Indian city and you will see two worlds coexisting on the same street. On one side stand glass-fronted apartment towers and gated colonies. On the other, narrow lanes of tarpaulin roofs, brick walls, and crowded one-room homes. These informal settlements are not accidents of urban growth, they are predictable outcomes of how cities expand, who can afford to live in them, and which laws recognise whose right to land. Understanding why they form is the first step toward addressing one of the country’s most persistent development challenges.

What counts as an informal settlement 🔗

Informal settlements are residential areas that develop outside the formal planning, regulatory, and land tenure systems of a city. They are commonly known as slums, jhuggi-jhopdis, bastis, or unauthorised colonies, and they typically share three features: residents lack secure legal claim to the land, the housing does not meet official building standards, and basic services like piped water, sewerage, and electricity are either missing or irregular. According to research compiled by INFLIBNET, these settlements have emerged as a major response to housing shortages in India and are often built with mud, tin, or plastic on public or private land outside the town planning framework.

The scale is significant. India’s urban housing shortage was estimated at 18.78 million units between 2012 and 2017, with nearly 96 per cent of that demand coming from economically weaker sections and low-income groups. A later study by ICRIER found this figure had risen to 29 million urban units by 2018, including households that were homeless, lived in inadequate or obsolete housing, or stayed in congested conditions. Informal settlements absorb a large share of this unmet demand.

Population growth and urban migration 🔗

The single biggest driver behind informal settlements is the steady flow of people from villages to cities. Rural-to-urban migration in India is shaped by both push factors in villages and pull factors in cities. Push factors include agricultural distress, drought, land fragmentation, low wages, caste discrimination, and lack of access to quality education or healthcare. Pull factors include better job prospects, higher urban wages, the promise of education, and the social anonymity that cities sometimes offer.

The economic gap between rural and urban work is striking. Urban jobs typically pay two to three times more than comparable rural work and offer income throughout the year rather than only during harvest seasons. Construction booms in Bengaluru, Mumbai, and Gurgaon create constant demand for daily-wage labour, while manufacturing hubs in Gujarat and Tamil Nadu attract workers from states like Uttar Pradesh, Bihar, and Odisha.

When migration outpaces planning 🔗

Cities benefit from migrant labour but struggle to house everyone who arrives. The result is what one analysis describes as the city growing faster than its ability to extend water lines, sewage systems, roads, and electrical grids. New arrivals are left with two choices: pay premium prices for housing in well-serviced areas, or settle in underserved locations and create their own informal infrastructure. A report from the Centre for Science and Environment notes that in large metros such as Mumbai, Delhi, or Bengaluru, where buying land from small builders is not realistic for low-income migrants, slums become more endemic.

Dharavi in Mumbai is the most cited example. After Indian independence, large numbers of rural labourers from Uttar Pradesh and Bihar migrated to Mumbai, found the cost of formal housing impossible, and settled in Dharavi where they used traditional skills to engage in informal economic activity. Over time, this evolved into a dense settlement of housing and clustered informal industries that today shelters several hundred thousand people on roughly 230 hectares.

Economic factors and the affordability gap 🔗

Migration alone does not produce informal settlements. The deeper cause is an affordability mismatch between what urban housing costs and what working-class families can actually pay. The house-price-to-income ratio in major Indian cities ranges from 5:1 to 11:1, far above the 3:1 ratio considered affordable internationally. A household would need to save its entire income for five to eleven years to buy a modest formal home, which is impossible for families surviving on daily wages.

Rental options offer little relief. Low-income households often spend 40 to 50 per cent of their earnings on rent, well above the 30 per cent threshold considered affordable, and landlords in major cities frequently demand security deposits equal to six to ten months of rent. For a construction worker earning ₹400 a day, these entry costs are simply out of reach.

Why the formal market does not serve the poor 🔗

Even when builders construct large volumes of housing, very little of it is built for low-income families. A NAREDCO-Knight Frank report found that affordable homes priced below ₹50 lakh fell from 52.4 per cent of new launches in 2018 to just 17 per cent by 2025 across India’s top eight cities. Between 2011 and 2024, affordable housing attracted less than 8 per cent of total private equity investment in the residential sector. The report identified high land costs, weak private participation, inadequate urban infrastructure, and cumbersome approval processes as the biggest barriers to scaling up affordable supply.

The paradox is sharp. India has an acute urban housing shortage, yet the 2011 Census reported about 11 million houses lying vacant in urban India. Much of this vacant stock is held as investment property by middle and upper-income households, well beyond the reach of the families who actually need shelter. The state’s failure to invest meaningfully in social or low-cost housing widens this gap further.

Insecure tenure and the trap it creates 🔗

The third major driver is the absence of legal recognition of land rights. Most informal settlements sit on land the residents do not legally own, whether public land along railway tracks and riverbanks, contested private land, or land categorised as non-residential. Tenure insecurity shapes almost every aspect of life in these settlements, and it has a particular effect on whether families invest in improving their own homes.

The logic is straightforward. If a family fears eviction at any time, it makes no sense to spend scarce savings on a concrete roof, proper drainage, or a tiled floor. A study of 562 households in 56 Pune slums found that residents’ beliefs about their right to build durable housing closely tracked the actual level of tenure security. Where families felt protected, they invested in two-storey homes with permanent materials. Where they felt vulnerable, they built only what they could afford to lose.

The link between tenure and housing quality 🔗

Research consistently shows that secure tenure stimulates housing investment in informal settlements. When the government of Odisha began issuing land titles to slum dwellers, housing conditions began to improve. SEWA Bharat has documented that insecure tenure and limited ownership rights prevent women in particular from investing in their homes, increase the risk of domestic violence, and create a constant threat of displacement and eviction. The absence of recognised land rights also shuts residents out of mainstream housing finance, since banks rarely accept slum dwellings as collateral.

How insecurity perpetuates poverty 🔗

Tenure insecurity creates a self-reinforcing cycle. Families cannot upgrade their homes, so the settlement remains substandard. Because it remains substandard, authorities classify it as a slum and threaten demolition. The threat of demolition prevents further investment. Residents also lose out on services that follow formal address proofs, including subsidised LPG connections, ration cards in the local ward, and admission to nearby government schools. Children grow up without the documents needed to claim entitlements, and the next generation inherits the same instability.

Governance gaps and land market distortions 🔗

Behind these three drivers lies a fourth, quieter cause: weak governance of urban land. Master plans in many Indian cities are outdated, building byelaws are inflexible, and approval processes can take years. Land records are often disputed or incomplete. Analyses of unplanned urban growth point out that the hoarding of land by private entities and corruption in land allocation distort the real estate market, pushing the poor into illegal settlements as the only option left.

The Pradhan Mantri Awas Yojana and earlier schemes like Rajiv Awas Yojana have tried to close the housing gap, but progress has been limited by land shortages, rising construction costs, low private sector interest in low-margin housing, and bureaucratic delays. Until the supply side of affordable housing matches the demand side, informal settlements will continue to absorb the difference.

How the three causes work together 🔗

It helps to see these factors as a chain rather than separate problems. Migration brings people to the city. The formal housing market cannot absorb them at prices they can pay. They settle on whatever land is available, usually with no legal claim. Insecure tenure prevents them from upgrading, which keeps the settlement informal and exposes them to eviction. Each cause feeds the next. Breaking the chain at any single point, whether by improving rural livelihoods to reduce distress migration, expanding genuinely affordable housing supply, or granting secure tenure to existing residents, can change the trajectory.

This is why most successful slum policy interventions combine these elements. In-situ upgrading recognises existing residents and improves services where they live. Rental housing for migrants creates a legal entry point into the city. Land titling unlocks investment by the residents themselves. None of these alone is enough, but together they treat informal settlements as a symptom rather than the disease.

What do you think? If you had to choose between giving informal settlement residents secure land titles where they currently live, or relocating them to new affordable housing on the city’s edge, which approach do you believe would do more for their long-term wellbeing? And in your own city or hometown, which of the three drivers, migration, affordability, or tenure, do you see playing the biggest role?

References

1. https://ebooks.inflibnet.ac.in/socp07/chapter/informal-settlements/
2. https://www.aljazeera.com/gallery/2023/8/30/photos-the-housing-crisis-for-the-poor-in-indias-capital
3. https://www.downtoearth.org.in/urbanisation/informal-and-unplanned-urbanisation-welcome-to-the-new-urban-india-95919
4. https://architexturez.net/pst/az-cf-246156-1756649559
5. https://www.citego.org/bdf_fiche-document-1390_en.html
6. https://www.sciencedirect.com/science/article/abs/pii/S0197397515301442
7. https://sewabharat.org/what-we-do/land-rights/
8. https://www.breakingthethermometer.com/challenges-of-unplanned-urban-growth-and-informal-settlements-in-india/