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.