Financing Urban Infrastructure in India through Tax Increment Financing Instruments: A Case for Smart Cities Mission

The paper is aimed at exploring the Tax Increment Financing (TIF) model for financing planned urban development programmes and projects in Indian cities – smart cities, in particular. This is based 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 support funding of core urban infrastructure in a sustained manner. The paper describes the key elements of the TIF model and explains why it is a theoretically elegant and practically desirable strategy for possible adoption by Indian cities at the present stage of urban evolution, when municipal finances are precarious and the municipalities are also not in a position to generate current revenue surplus. The paper is based on the principle of ‘theory follows practice and vice versa’, case studies on TIF as implemented internationally. Finally, the paper suggests directions as to how the TIF principles could be incorporated into the framework of financing innovative projects under the Smart Cities Mission, including accessing capital market funds through municipal bonds. The key findings of the paper suggests 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 designed well, TIF instruments can act as powerful tools to augment external economies of agglomeration and networking and create economic growth momentum, generating a self-financed or even surplus-generating process of planned urban expansion, development and renewal.