Step 1: Root your Nexus 7.
Step 2: Download and install a root-enabled file explorer like File Expert or any other you like.
Step 3: Navigate to /system. There you will find a file named build.prop. Copy it and paste it someplace safe to keep as backup.
Step 4: Open up build.prop and look for a property named ro.sf.lcd_density. Its original value is 213, change it to 170. You can go lower if you like.
Step 5: Restart your Nexus 7.
