How Land Can Be Strategically Used to Finance Urban Infrastructure

Indian cities are the engines of the country’s economy, yet the local governments that run them rarely have enough money to build the roads, metros, drains, and water lines that growing populations demand. The World Bank has estimated that urban India needs roughly $840 billion of investment in infrastructure over 15 years, while existing national missions cover only a fraction of that. Grants from higher levels of government cannot close this gap on their own. This is where one of a city’s most valuable but underused assets comes in: land. Used strategically, land can generate money upfront, attract external finance, and pay for infrastructure that citizens use every day. Here is how that works.

Why cities struggle to pay for infrastructure 🔗

Urban Local Bodies (ULBs) such as municipal corporations and municipalities are responsible for delivering most basic urban services. The problem is that their finances are weak. Most depend heavily on transfers and grants from state and central governments rather than generating income of their own, which limits their ability to plan long-term, capital-intensive projects. The introduction of the Goods and Services Tax also removed several local taxes like octroi and entry tax, narrowing the revenue channels that cities could once rely on. The result is a familiar cycle: cities cannot afford big projects, so they wait for grants, which keeps them dependent and prevents them from building independent financial strength.

The foundation: internal revenues come first 🔗

Before a city can borrow large sums or raise capital from markets, it has to prove it can manage and repay money. That credibility starts with internal revenue, also called own-source revenue. These are funds a municipality generates through its own taxing powers and service charges, rather than money handed down from above.

What counts as internal revenue 🔗

Internal revenue in Indian ULBs broadly falls into three categories: taxes imposed by the municipality such as property tax, user charges for civic services like water and sanitation, and fees and fines for regulatory functions. Property tax is usually the single largest own-source item. When a city collects these efficiently, it shows that it has a predictable, recurring income stream it controls directly. This matters more than the absolute amount, because lenders and investors look for stability and discipline.

Why own revenue unlocks loans and bonds 🔗

Strong internal revenue is the foundation that makes external finance possible. Before a municipality can issue a municipal bond, it generally must maintain audited accounts, have no record of default, and obtain an investment-grade credit rating. None of this is achievable without healthy own revenue. Credit rating agencies assess a city’s financial profile precisely to judge whether it can service debt. The Union Budget for 2023-24 even announced incentives for cities to improve creditworthiness through property tax reforms and ring-fencing user charges, recognising that revenue reform is the gateway to market borrowing.

This explains why the municipal bond market in India has stayed thin. Since the first bond was issued by Bengaluru in 1997, only around two dozen ULBs have used the instrument, and most issued just a single bond as a one-off exercise. A majority of ULBs remain unrated or below investment grade because their own revenues are too weak. In short, internal revenue is not just one source of money among many; it is the precondition for accessing every other source.

Land-based financing: turning land into upfront capital 🔗

Even with healthy revenues, cities still need large sums quickly to build something as expensive as a metro line. This is where land-based financing becomes powerful. Instead of waiting years for tax collections to accumulate, a city can use land to raise significant money upfront, reducing the fiscal risk of taking on huge projects.

What is land value capture 🔗

Land-based financing rests on the principle of land value capture (LVC). The idea is straightforward: when a government invests in public infrastructure, nearby private land and buildings rise in value, often dramatically. Land value capture recognises that this increase was created by public investment and allows the government to capture a share of that uplift to help pay for the project. The urban planner Donald Shoup framed the underlying puzzle well: how do you finance a project whose returns far exceed its cost when nobody wants to pay the upfront cost? LVC answers this by making those who benefit from the value increase contribute to it, rather than letting private owners pocket the entire windfall.

Common land-based instruments in India 🔗

The Ministry of Housing and Urban Affairs published a Value Capture Finance Policy Framework to guide states and cities in using these tools. The main instruments include:

• Betterment levy: a one-time charge on landowners whose property values rise because of public investment.
• Development charges and impact fees: fees paid by those undertaking new development to fund the infrastructure that supports it.
• Land pooling: a system where landowners pool their parcels, the area is serviced with infrastructure, and a smaller but far more valuable serviced plot is returned to each owner. Gujarat, Haryana, and Andhra Pradesh’s new capital Amaravati have used this approach.
• Transfer of Development Rights, premiums on extra Floor Space Index, and land monetisation through the sale or lease of public land.

The government has also stressed that simply selling land outright is an inefficient way to raise resources, and that capturing value continuously through these instruments is far more sustainable. Public bodies in India hold some of the most valuable land in the country, and a World Bank report by George Peterson noted that parts of this land lie vacant or underused even as cities lack basic infrastructure.

Land financing in urban transport 🔗

Urban transport is where land-based financing has been used most visibly in India. Metro rail systems are extremely capital-intensive, and given budget limits and borrowing constraints, state governments have turned to land to fund them. A popular method is real-estate cross-subsidisation, where revenue raised from developing land near a transit corridor helps pay for the transit itself. A study of India’s urban rail corridors examined exactly this approach in the Bengaluru and Kochi metro projects, where land was developed commercially to generate finances for the rail systems.

Other transport examples include the impact fees levied along a one-kilometre corridor beside the Hyderabad Outer Ring Road, and the metro cess added to property purchases in Mumbai to fund the city’s metro. The logic is consistent: a transit line raises the value of land around its stations, and capturing part of that increase funds the line. Transit-oriented development, where dense, mixed-use neighbourhoods are planned around stations, makes this even more effective by concentrating the value uplift in places the city can reach.

Extending the model to basic services 🔗

While transport gets the spotlight, the same logic can be applied to essential services that touch every household. The government’s framework explicitly notes that impact fees can be used for water supply, sewerage, solid waste management, roads, and open spaces, not just glamorous mega-projects.

Water supply and sewerage 🔗

New residential and commercial developments increase demand for piped water and sewerage networks. Charging development charges or impact fees on these projects can fund the trunk infrastructure they rely on, ensuring that growth pays for the services it requires rather than overloading existing systems. Combined with sensible user charges, this creates a stable base that can even support borrowing dedicated to water projects.

Solid waste management 🔗

Waste management is chronically underfunded because it generates little visible revenue. Land-based tools offer a route forward: betterment levies and development charges in growing areas can subsidise collection, treatment, and disposal facilities. Cities can also monetise or lease land for waste-processing plants in ways that combine service delivery with revenue. Because these services improve liveability, they indirectly raise nearby land values, which strengthens the case for capturing some of that value to sustain them.

Challenges to keep in mind 🔗

Land-based financing is not a magic solution. Land is a state subject in India, so cities cannot act alone; supportive state laws and frameworks are essential, which is one reason places like Delhi have struggled to apply LVC. There can be public resistance to new levies, weak technical capacity within ULBs to design these instruments, and genuine equity concerns when land acquired for a “public purpose” is later used for commercial development. The deeper lesson is that land financing works best as part of a broader shift away from grant dependency and towards cities that earn, manage, and reinvest their own resources transparently.

What do you think? If your city built a new metro line or water network next to your neighbourhood and your property value rose because of it, would it be fair for the municipality to capture a share of that increase to fund the project? And which land-based tool do you think Indian cities should prioritise to make their basic services financially self-sustaining?

References

1. https://planningtank.com/urbanisation/methods-of-land-value-capture-for-financing-indian-cities
2. https://accountabilityindia.in/blog/urbanisation-in-india-municipal-bonds/
3. https://www.gktoday.in/municipal-bonds-india/
4. https://www.mdpi.com/2073-445X/10/2/133
5. https://mohua.gov.in/upload/whatsnew/59c0bb2d8f11bVCF_Policy_Book_FINAL.pdf
6. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=153331&reg=3&lang=2
7. https://katalog.bibliothek.kit.edu/bib/434545
8. https://www.sciencedirect.com/science/article/abs/pii/S0264837721002490
9. https://www.examrace.com/Current-Affairs/NEWS-What-is-Land-Value-Capture-Policy.htm
10. https://www.nism.ac.in/blog/reimagining-urban-finance-why-municipal-bonds-matter-more-than-ever/