© /Bloomberg News Construction of Wish Town, a development meant to house 200,000 people in the New Delhi suburb of Noida, stopped in 2016.

NOIDA, India—Half a million unfinished apartments are stuck in financial limbo in India, dashing the dreams and the spending of a middle class that was supposed to be spearheading India’s economic rise.

Wish Town, a development in the New Delhi suburb of Noida, encapsulates the plight of middle-class Indians who sank their life savings into the promise of life in a green and neatly ordered suburb. Hundreds of empty townhouses and apartment towers, half-built and stained by mold from monsoon rains, stare down at what used to be farm lands.

The construction workers are long gone, the site’s cement factory and cranes have stopped working. Signs mark aborted projects: a “Sports Field” is still a cauliflower patch, the “Social Club” a shell of a building.

Construction stopped in 2016 when the developer couldn’t pay its debt. Only about half of the 40,000 apartments that were to house close to 200,000 people have been finished and handed over to their buyers. Those who have moved in complain that the golf club, gyms, pools, retail spaces and restaurants advertised by its developer, Jaypee Group have largely yet to be built.

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Jonaki Ray took a loan to buy an apartment in 2009 that has tied up her life savings for more than a decade. To pay for her mortgage, and an apartment she has rented in the meantime, she stopped splurging on things like vacations abroad and a new car.



Ms. Ray has finally been given the keys to the unit, but still has no plans to move in. She has to finish the interiors on her own, and she is worried about safety as no one else on her floor has moved in.

“There is this thing looming over me and I don’t know what is going to happen,” she said. “It’s always there at the back of my head.”

Stuck home buyers in the hundreds of “ghost towns” now dotting the outlying areas of New Delhi, Mumbai and other urban centers face a situation that some here liken to America’s much larger subprime crisis. Builders have run out of money and can’t get new loans. People who put down payments have waited through years of delays and court cases and still may not ever get their homes or refunds.

Many have cut back spending on everything from cars and clothes to flights and eating out. This has contributed to the recent drop in consumption behind India’s economic slowdown, with the government predicting growth will fall to less than 5% in the fiscal year ending March 31, its lowest in more than 10 years. Deborah Tan, an assistant vice president at Moody’s Investors Service, said Indian consumers have given up hoping for the economy to turn around and are tightening their belts—one reason the rating firm downgraded its outlook for India to negative from stable in November.

Delivering on the hopes of the middle class has emerged as one of the biggest challenges for Prime Minister Narendra Modi. The middle class, which most analysts say could be more than 100 million people, has backed him strongly in two elections, and he regularly mentions the plight of stuck home buyers in his speeches. New Delhi last month announced a $3.5 billion fund to jump start the viable projects, although many economists say the amount isn’t enough.

The housing crisis reflects the sea change that has taken place in India’s financial industry amid liberalization efforts to meet the needs of a fast-growing economy. Two decades ago it was close to impossible for most people to get a mortgage, and red-tape made it difficult and unprofitable for developers to attempt large projects. Even the best-paid usually had to save until near retirement before they could afford a home.

When market liberalizations in the early 2000s made it easier to raise money on the stock market and with loans, as well as to obtain home mortgages, buyers and builders went overboard. Across the country there was an explosion in new apartment construction. Complexes with a total of five million apartments and villas were launched between 2009 and 2019 according to PropEquity, a real-estate research company. Real-estate loans at India’s banks, as well as at nonbanking finance companies known as shadow banks, quadrupled to more than $70 billion.

The developers, though, quickly ran into problems getting government clearances and finding enough workers to build their projects. Apartments that were supposed to be built in three years ended up taking five years or more. Then, funding for projects dried up, as banks and shadow banks cut back amid growing piles of soured real-estate and infrastructure loans. This forced more delays and even the mothballing of many projects.

More than 450,000 apartments have been delayed for more than three years, according to a recent government survey. The value of all the delayed projects is more than $50 billion, 10 times the number five years ago and still half of what it will be in the next few years, according to PropEquity.

Analysts say the government may need to create its own bad bank specifically for real estate to take the bankrupt projects off the lenders’ books. New Delhi has already merged struggling state banks into bigger banks, while the central bank has cut interest rates five times this year and eased restrictions on healthy lenders.

Samir Jasuja, founder of PropEquity, said the industry needs government money and guarantees as well as guidelines about which projects get saved and how. Without government-backed funds to rescue the most viable projects, the problem will only spread, he said. “This hole is going to get bigger and bigger and more money is going to go after bad projects,” he said.

Wish Town had some good news last month. Through negotiations in bankruptcy court, the project found a new owner, a government-backed company, that has said the complex will be finished in three years.

For Ms. Ray, though, the gray skeletons of unfinished towers she can see from her window are a far cry, she says, from the lush photos in the promotional pamphlet she was enticed by a decade ago.

“It seemed so green and peaceful,” she said. “Now it’s not green or peaceful.”

Write to Eric Bellman at eric.bellman@wsj.com