Land‐based financing of cities in India: A study of Bengaluru and Hyderabad and directions for reforms

Abstract

A conspicuous feature of cities in India is that the basket of revenue sources with municipalities is very narrow. However, the authorities have not exploited the revenue sources already available to them such as property tax, vacant land tax, and other land-based revenue instruments. This is puzzling as land values in Indian cities are increasing exorbitantly, creating windfall benefits to landowners. The economic theory highlights the merits of land as a tax base to finance local public goods on efficiency, ability to pay, equity and benefit principles. Further, internationally, countries have successfully adopted land-based instruments to finance, urban development projects during their urban transition. This article attempts to draw lessons from theory and practice for municipal finance reforms in India. As the context of fiscal federalism differs between countries, obviously not all revenue instruments adopted in other countries can be readily applied in India. Accordingly, we study the initiatives of Hyderabad and Bengaluru cities in using urban land as a resource to identify appropriate instruments for Indian cities. We combine theory with the practices followed by the two pioneering cities to suggest a reform agenda in India for designing land-based tools to finance city infrastructure and services. | INDIA: CHALLENGES OF FINANCING CITIESIndia's urban population, estimated at 410 million in 2014, is projected to rise to 814 million by 2050 (United Nations, 2015). Catering to the housing, infrastructure and civic service needs of such huge numbers in cities and towns is a daunting problem for policy-makers and administrators. McKinsey (2010) projects that India would need to build 38 million affordable homes to plug the current backlog and meet the projected gap in the demand for affordable housing in urban areas. It would require 700-900 million square meters of commercial and residential space each year till 2030. Connecting these spaces will require 2.5 billion square meters of new roads and 7,400 km of new metros and subways, representing 20 times the infrastructural capacity added in India since 1999. While the "growth" needs of urbanisation are huge, the "backlog" and "current" needs are also substantial. According to the 2011 census, only 71% of the urban population had access to individual water connections. Only 44.5% of urban households had access to closed drainage; 37.3% is subjected to open drainage and 18.2% have no drainage at all. Public transportation systems in most cities are grossly deficient. While urban problems are massive, the state of municipal finances required to meet the urban infrastructure and service needs of Urban India is precarious. McKinsey (2010) estimates that India needs to spend Rs.9.74 million crore in its cities by 2030, with Rs.5.31 million crore for capital expenditure. The largest demand for capital funding would come from affordable housingalmost one-third, followed by mass transit. If we exclude affordable housing, the capital expenditure required until 2030 wo...

The Distributional Effects Associated with Land Finance in China: A Perspective Based on the Urban–Rural Income Gap

“…Therefore, this study further examined the effect on the URIG in different regions. The entire sample was classified into East, Middle, and West, according to the region, the regression tests were separately run, and the results are shown in columns (3)(4)(5) of Table 4. Column (3) shows the results for the East region, where the regression coefficient of land finance was 0.0037 and was significantly positive at the 1% level.…”

“…The entire sample was classified into East, Middle, and West, according to the region, the regression tests were separately run, and the results are shown in columns (3)(4)(5) of Table 4. Column (3) shows the results for the East region, where the regression coefficient of land finance was 0.0037 and was significantly positive at the 1% level. Column (4) shows the results for the Middle region, where the coefficient of land finance was 0.0024 and was significantly positive at the 10% level.…”

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