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

• Published date: 01 February 2022
• Author: Iti Vyas,Hamendra Nath Vyas,Alok Kumar Mishra
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2378

ACADEMIC PAPER

Land-based financing of cities in India: A study of Bengaluru

and Hyderabad and directions for reforms

Iti Vyas

1

| Hamendra Nath Vyas

2

| Alok Kumar Mishra

3

1

ICFAI Law School, IFHE, Hyderabad, India

2

Department of Sociology, MLV Government

College, Bhilwara, University of Rajasthan,

Jaipur, Rajasthan, India

3

School of Economics, University of

Hyderabad, Hyderabad, India

Correspondence

Iti Vyas, ICFAI Law School, IFHE, Hyderabad,

India.

Email: iti.savernika@gmail.com

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 reve-

nue 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 the-

ory highlights the merits of land as a tax base to finance local public goods on effi-

ciency, 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 the-

ory and practice for municipal finance reforms in India. As the context of fiscal feder-

alism 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 design-

ing land-based tools to finance city infrastructure and services.

1|INDIA: CHALLENGES OF FINANCING

CITIES

India'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 capac-

ity added in India since 1999. While the “growth”needs of urbanisa-

tion 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 house-

holds had access to closed drainage; 37.3% is subjected to open

drainage and 18.2% have no drainage at all. Public transportation sys-

tems 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 mil-

lion 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 housing –almost one-third, followed by mass transit. If we

exclude affordable housing, the capital expenditure required until

2030 would be Rs.3.54 million crore. The High Powered Expert Com-

mittee (HPEC) for estimating the investment requirements for urban

infrastructure services (2011) estimates that India would need Rs.3.92

million crore for urban infrastructure over the period 2012–31. If

operation and maintenance costs are added, the figure would be

Rs.5.92 million crore. However, whereas the financing needs of Urban

India are mind-boggling, paradoxically cities in India suffer from a “rich

city-poor city government”syndrome. The share of municipal revenue

in combined central and state revenues declined from 3.71% in

1990–91 to 2.43% in 2000–01, and less than 2% presently. Municipal

Received: 29 June 2020 Revised: 2 August 2020 Accepted: 10 August 2020

DOI: 10.1002/pa.2378

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https://doi.org/10.1002/pa.2378