Financing urban infrastructure in India through tax increment financing instruments: A case for smart cities mission

Abstract

This article is targeted at exploring the Tax Increment Financing (TIF) model for financing planned urban development programs and projects in Indian cities—smart cities, in particular. This is founded on the premise that the TIF approach offers an excellent opportunity to Urban Local Bodies (ULBs) for the creation, capture and recycling of values in cities to support funding of core urban infrastructure in a sustained manner. This article identifies the key components of the TIF model and explains why it is a theoretically elegant and practically desirable strategy for potential acceptance by Indian cities at the present level of urban evolution when municipal finances are unstable and the municipalities are also not in a position to generate current tax income surplus. This article is grounded on the precept of “theory follows practice and vice versa”, case studies on TIF as implemented internationally. In the end, this article suggests directions as to how the TIF principles could be integrated into the theoretical account of financing innovative projects under the Smart Cities Mission, including accessing capital market funds through municipal bonds. The key findings of this article suggest that the efficacy of tax increment financing tools in Indian cities will depend on several factors: the versatility of city development strategy and plan; reforms in municipal finance system; reforms in spatial planning; effective design of TIF projects and financing strategies, including mechanisms for value capture and recycling to catalyze economic growth‐enhancing enterprises that create further values to land‐owners and the city; and human resource capacity to plan, design, finance, implement and monitor projects. If planned well, TIF instruments can act as potent tools to augment external economies of agglomeration and networking and give a momentum to the economic growth, bringing forth a self‐financing or even surplus‐generating process of planned urban expansion, growth and reclamation.