Affordable and Inclusive Housing in India: Bridging the Gap

Owning a home is more than just having four walls and a roof. It represents stability, dignity, and a launchpad for economic mobility. Yet for millions of urban households, that dream remains out of reach. Rapid urbanization, soaring real estate prices, and stagnant incomes have widened the affordability gap, leaving entire segments of society priced out of decent housing. Understanding what affordable and inclusive housing truly means, and why it matters, is the first step toward building cities that work for everyone.

What does affordable housing really mean? 🔗

At its simplest, affordable housing is housing that a household can pay for without compromising on other basic needs like food, education, healthcare, or transportation. The widely accepted thumb rule is that housing costs, whether rent or EMI, should not exceed 30 to 40 percent of a household’s monthly income. But affordability is not a fixed number. It is best understood as the ability and willingness to pay, and both vary sharply across income groups, cities, and even neighborhoods within the same city.

The government formally categorizes urban households into three economic segments for housing purposes. Under the Pradhan Mantri Awas Yojana-Urban 2.0, Economically Weaker Sections (EWS) are households with an annual income up to ₹3 lakh, Lower Income Groups (LIG) fall between ₹3 lakh and ₹6 lakh, and Middle Income Groups (MIG) earn between ₹6 lakh and ₹9 lakh per year. What is affordable for an MIG family in Pune is dramatically different from what is affordable for an EWS family in the same city, and that difference shapes every aspect of housing policy.

The mismatch between definitions and market reality 🔗

One of the biggest problems with the official definition of affordable housing is that it has not kept pace with rising property prices. The Reserve Bank of India considers homes priced under ₹45 lakh in metros and ₹35 lakh in non-metros as affordable, a threshold last revised in 2019. But as research on housing inclusivity shows, real estate prices in major cities have climbed so quickly that even the smallest units often fall outside this range. In Mumbai, for instance, the average launch price of a unit under 30 square meters jumped roughly 60 percent between 2019 and 2024, putting EWS households almost entirely out of the formal market.

The scale of the urban housing shortage 🔗

The numbers tell a striking story. The Technical Group on Urban Housing Shortage under the Ministry of Housing and Urban Affairs estimated an urban housing shortage of around 18.78 million units during 2012-2017. The Indian Council for Research on International Economic Relations later projected this had grown by 54 percent to about 29 million units by 2018, with projections suggesting the gap could widen to 31.2 million units by 2030.

What makes this deficit particularly troubling is how unevenly it is distributed. Nearly 96 percent of the urban housing shortage is concentrated among EWS households, with another 2.5 percent among LIG families. In other words, the people who need housing the most are the ones least able to afford what the market offers. Middle-income groups face a smaller but still significant deficit, while higher-income households account for less than one percent of the shortage. This is not a general housing crisis. It is fundamentally a crisis of affordability.

Factors that influence housing affordability 🔗

Affordability is shaped by a tangle of interconnected factors. Three of them dominate the conversation: income, house prices, and mortgage availability.

Income and employment patterns 🔗

For EWS and LIG households, income is rarely steady. A large share of these families work in the informal sector, which means daily wages, seasonal work, or self-employment without payslips, contracts, or social security. This volatility makes long-term financial planning difficult and disqualifies many households from formal credit. An Observer Research Foundation analysis notes that low-income households face significant difficulties in procuring housing loans precisely because lenders rely on documented income, which informal workers seldom possess.

House prices and supply-side bottlenecks 🔗

House prices in Indian cities are pushed up by several supply-side constraints. Scarcity of developed and unencumbered urban land, high construction costs, restrictive zoning, and lengthy regulatory approvals all add to the final price tag. Worse, developers increasingly prefer to build mid and high-end projects because margins are thinner in the affordable segment. According to industry reports, the supply of affordable housing units in major cities declined by roughly 30 percent in just one year between 2023 and 2024, with cities like Hyderabad seeing a 69 percent drop in affordable unit availability.

Mortgage availability and credit access 🔗

Even when affordable units exist, accessing finance to buy them is another hurdle. Banks and housing finance companies have historically focused on salaried, middle-income borrowers because they are easier to underwrite. EWS and LIG families, by contrast, often have to rely on smaller Affordable Housing Finance Companies that charge higher interest rates and demand stricter collateral. The government has tried to bridge this gap through the Interest Subsidy Scheme (ISS) under PMAY-U 2.0, which offers a 4 percent interest subsidy on the first ₹8 lakh of a home loan, up to a maximum benefit of ₹1.80 lakh spread over five yearly installments. While useful, such schemes still require borrowers to qualify for a formal home loan in the first place.

Inclusive housing strategies 🔗

Affordable housing alone is not enough. A house far from jobs, schools, healthcare, or public transport does little to improve a family’s life. This is where inclusive housing comes in. The idea is to ensure that disadvantaged groups not only get a house but also become full participants in the social, economic, and civic life of the city. Inclusion operates along three reinforcing dimensions.

Social inclusion 🔗

Social inclusion in housing means breaking down the spatial segregation that often divides cities into pockets of wealth and poverty. Research on inclusive urban planning highlights strategies such as removing exclusionary zoning that bans low-income housing in well-located neighborhoods, setting fair-share housing goals across city zones, and reserving a portion of large public-private partnership projects for affordable units. PMAY-U 2.0 takes a step in this direction by giving special focus to Safai Karmis, street vendors, anganwadi workers, construction workers, persons with disabilities, widows, and other underprivileged sections, alongside SC, ST, and minority communities.

Another important social inclusion feature is the mandatory provision that the female head of the family must be the owner or co-owner of a PMAY-U house. This single rule has quietly redistributed property ownership in millions of households, strengthening women’s standing within families and communities.

Economic inclusion 🔗

Economic inclusion aims to connect housing with livelihood. Locating affordable housing far from employment centers, a frequent criticism of resettlement colonies in cities like Delhi and Mumbai, undermines the very purpose of the scheme. Several mechanisms can help. Cross-subsidy models require developers in large projects to build a share of affordable units, funded partly by profits from premium units in the same complex. Affordable Rental Housing Complexes (ARHCs), a sub-scheme under PMAY-U, target urban migrants and informal sector workers by converting vacant government housing into affordable rentals near workplaces. In-situ slum redevelopment tries to upgrade existing slums rather than relocating residents, preserving social networks and access to jobs.

Some scholars also recommend incremental housing, where families build and improve their homes over time as their economic situation allows, with secure tenure granted upfront. The Beneficiary-led Construction (BLC) vertical of PMAY-U partially reflects this philosophy by providing central assistance to eligible EWS families to construct or enhance their own homes.

Financial inclusion 🔗

Financial inclusion focuses on bringing households traditionally excluded from formal credit into the banking and housing finance system. Tools include housing microfinance, which offers small, incremental loans that align with the irregular income patterns of informal workers, and credit risk guarantee funds that protect lenders against defaults so they are more willing to lend to first-time, low-income borrowers. The corpus of the Credit Risk Guarantee Fund Trust was recently expanded from ₹1,000 crore to ₹3,000 crore precisely to encourage banks and housing finance companies to extend affordable housing loans to EWS and LIG segments. Pairing Aadhaar-linked direct benefit transfers with simplified self-certification of income has also reduced friction for first-time borrowers.

What still needs to change 🔗

Government schemes have made real progress. Under PMAY-U, more than 85 lakh houses have already been built and handed over to beneficiaries, with PMAY-U 2.0 targeting another 1 crore urban families over five years. But persistent challenges remain. The interest subsidy is often too small to bridge the affordability gap in expensive cities. Slum redevelopment moves slowly because of land-title complications and limited private sector interest. Many completed units sit unoccupied because they are located too far from where people actually work. And affordability definitions need urgent updating to reflect city-specific price realities, perhaps by shifting to a carpet-area benchmark rather than a single national price cap.

The path forward likely requires a mix of approaches: prioritizing the upgrade of informal settlements where most low-income households already live, expanding rental housing options for migrants, encouraging income-mixed neighborhoods through inclusive zoning, and deepening housing microfinance for households outside the formal credit system. Affordable housing is ultimately a question of how cities choose to share space, opportunity, and dignity.

What do you think? Should affordable housing in Indian cities focus more on building new units on the urban periphery, or on upgrading existing informal settlements where people already live and work? And how can policy ensure that low-income families are not only housed, but genuinely included in the social and economic life of the city?

References

1. https://pmay-urban.gov.in/about
2. https://www.frontiersin.org/journals/sustainable-cities/articles/10.3389/frsc.2025.1602317/full
3. https://www.impriindia.com/insights/pradhan-mantri-awas-yojana-urban/
4. https://www.orfonline.org/research/indias-enduring-urban-housing-shortage
5. https://www.researchgate.net/publication/354937017_Low-income_housing_development_in_India_Strategies_for_income_mixing_and_inclusive_urban_planning
6. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2043927