At first, this appears to be a straight forward application, especially to somebody who is not an architect, like me. Demand-supply framework suggests, that if the observed prices are low, the most plausible reasons are either a low demand, or an oversupplied market (See image). Therefore , if the starting salaries for fresh architects are low, it would imply too many fresh architects are chasing too few jobs in the market.

However, upon closer examination, these did not sufficiently answer the concern.

Supply of fresh architects has indeed gone up, Data provided by Council of Architecture(COA) indicates an upward trend in number of registrations over last 15 years (find the data here).

But there is no reason to believe that higher supply has pushed the salaries low. Although on demand side, COA dataset is not complete (see for placements numbers here), there are proxies which indicate demand for architectural inputs certainly has gone up. The total contribution of construction activity in Gross Value Added has increased, number of projects registered with various RERA authorities have increased. Biltrax recorded 9,580 building projects in India in FY 2024–25, covering about 2.78 billion sq. ft. and roughly ₹10.38 lakh crore in construction cost (Find more details here).

All these proxies indicate a rising demand for architectural services. Lower salaries therefore, are not due to low demand.

What explains these low salaries is a distinction - the willingness to pay for fresh architects by firms depends upon two variables: (1) The prospective contribution of the person to the firm, and (2) the cost to the firm of training, error checking and supervision.

Fresh graduates are not hired as fully productive architects, firms incur supervision, error-correction and training costs, which affects the firm's willingness to pay.

The architect who enters a firm is not yet the architect the firm needs

A fresh architecture graduate has considerable knowledge. They have spent five years learning design, construction, building systems, software and professional practice. Yet, from the perspective of an architectural firm, a graduate is not immediately equivalent to an architect with five or ten years of experience.

An experienced architect knows how to deal with a client, coordinate consultants, navigate approvals, manage drawings, anticipate construction problems, negotiate with contractors and make decisions under real-world constraints. Much of this knowledge is acquired on the job.

The firm therefore provides training and experience, to the new hire, but training is not costless. A junior architect may require supervision from a senior architect. Their drawings may take longer to produce or require revisions. They may make mistakes that someone else has to correct. They may not yet be able to manage a client or a project independently.

From the firm’s perspective, therefore, the economic value of an entry-level architect is not simply the value of the work that appears on their desk.

Firms decide the salaries on the basis of their assessment of how much net value will the architect generate after accounting for the time and resources required to make them productive. Therefore,

Entry-level salary = value of marginal contribution − cost of training/supervision

Whereas for an experienced architect, as experience increases, the gap between the worker's productive contribution and the firm's cost of making that worker productive tends to narrow.

Imagine:

• Fresh graduate can contribute ₹25,000/month of productive value.

• Firm spends ₹8,000/month equivalent on supervision, training, correcting work, etc.

• The firm might therefore be willing to pay ₹17,000/month.

After two or three years:

• Architect contributes ₹60,000/month.

• Training requirement falls to ₹5,000.

• Wage can rise substantially.

The low salary is a result of need for further training, and that leads us to the next question - When a firm trains a young architect, who should bear the cost?

Two important considerations here:

1. Difference between Firm specific human capital investment and General human capital investment

Think of a spectrum of human capital in the domain:

(a) General human capital: valuable everywhere; learning AutoCAD, structural principles, accounting etc.

(b) Occupation-specific human capital: valuable across firms in the profession, learning how to prepare architectural drawings, manage consultants, conduct a valuation

(c )Firm-specific human capital: particularly valuable to the current employer; learning this firm’s drawing standards, client relationships, project-management system, proprietary software, internal workflow

If a firm invests in genuinely firm-specific human capital, it has an incentive to retain the employee because losing them means losing part of that investment. That creates a potential basis for higher wages and longer employment relationships later in the career.

If the training is highly specific to the firm—for example, learning that firm’s particular systems, workflows and processes—the firm has a strong reason to bear the cost.

But if the architectural experience is general human capital, like learning how to coordinate consultants, manage projects, deal with clients or understand construction, this makes an architect more valuable not only to the current employer, but also to every future employer. The young architect therefore benefits from the training as well, and is required to bear the cost in terms of low starting salary.

2. Difference between Genuine training wage and Low-wage equilibrium

A healthy professional labour market should make sure that low initial wages with substantial learning lead to rising productivity and eventually rising wages.

If instead we see that low initial wage coupled with little learning and more repetitive nature of work leads to modest wage growth, then the problem is not simply low starting salaries, this indicates a low-wage equilibrium at the entry level.

So, who should pay for making an architect?

Yes, the supply of architects has increased. But low entry-level salaries cannot automatically be read as evidence of low demand for architectural skills, particularly when the broader pipeline of construction and development activity has continued to grow.

The more useful distinction may be between the market value of a fresh graduate’s current contribution and the investment required to turn that graduate into an independent professional.

A firm hiring a fresh architect is, in a sense, making two decisions at once. It is hiring someone for the work they can do today, while also investing time and resources in developing what they will be able to do tomorrow.

If firms pay fresh architects less because they require further training, then the lower wage is part of an implicit bargain: the young architect bears some of the cost of acquiring professional human capital today, in exchange for becoming more productive and better paid tomorrow.

But if the promised learning does not materialize, the training-wage argument breaks down. A low wage without substantial human-capital formation indicates a low-wage equilibrium.

To the young aspiring girl, this is the question you should ask when joining a firm

“What am I learning in exchange for what I am not being paid?”

“We have created industrial parks, but there is no uptake. Why?”

A city official asked me this recently.

Another city official posed a very different question:

“Our city has a strong textile cluster. Should we now promote fintech?”

At first glance, these are unrelated questions. One is about empty industrial land; the other is about choosing the next growth sector.

But perhaps they reflect the same problem:

We may be trying to decide what cities should become before understanding what they already are.

India is increasingly looking at its cities as engines of economic growth. Industrial parks, logistics parks, economic corridors, and innovation hubs are being planned to attract investment, create jobs and increase productivity.

But there is a more fundamental question:

What actually drives a city economy?

This brings us to an old idea in regional economics: Economic Base Theory.

The idea is very simple. A city’s economy consists broadly of activities that serve external markets (Basic Sectors) and activities that primarily serve local demand (Non-basic Sectors).

A pharmaceutical manufacturer selling across India, an IT company serving overseas clients, a university attracting students from other regions, or a hospital drawing patients from surrounding districts can all bring purchasing power into the city.

Local restaurants, neighbourhood retail and many personal services largely respond to the purchasing power already present in the city.

A new export-oriented factory does not only create factory jobs. Its workers spend their incomes locally. They rent houses, buy groceries, use transport, eat out, seek healthcare, send their children to school and generate demand for construction and other services.

The external economy therefore creates a ripple through the local economy.

How do we identify the Base

If a city has a much higher concentration of employment in a particular industry than the wider economy, that concentration indicates that the city is producing more of that activity than it needs for its own local consumption.

Identifying the Base is the starting point of strategy.

Suppose a city has a high concentration of employment in textiles. The relevant strategic question then is, “ What can the city do next because it has a textile cluster?”

That could include technical textiles, textile machinery, design, fashion, logistics, supply-chain technology, specialized financial services, or digital commerce.

Should a textile city become a fintech city?

Fintech is a rapidly growing sector. It generates high-value employment and is attractive to policymakers. It is understandable that a city would want a share of that growth.

But should every city try to become a fintech hub?

The relevant question is not simply whether fintech is a promising industry.

It is whether the city has the capabilities to compete in that industry.

Does it have:

• the required talent?

• financial institutions?

• technology capabilities?

• universities and research institutions?

• entrepreneurial networks?

• venture capital?

• digital infrastructure?

• firms with complementary capabilities?

• access to large markets?

And most importantly:

What advantage does this city have over the many other cities competing for exactly the same firms and talent?

This is where the seminal work from Charles Tiebout comes in.

Tiebout: Cities compete too

Charles Tiebout’s famous argument about competition among jurisdictions provides a useful lens (Read more here).

In simplified form, cities compete by offering different combinations of public services, taxes and amenities, allowing households and firms to choose among locations.

Cities compete for mobile firms, workers, investment and talent.

This creates a problem for the “let’s promote fintech” approach.

If ten cities simultaneously announce themselves as the next fintech hub, what distinguishes one from the other?

Likewise, if every city builds an industrial park, why should a firm choose one particular park?

The answer cannot simply be:

“Because we have land.”

Nor can it be:

“Because fintech is a sunrise sector.”

Cities compete for firms, workers, investment and talent. But firms choose locations based on the ecosystems and capabilities they find there, not simply on land or incentives.

City economies face path dependence. They do not start from scratch. Their existing industries create skills, suppliers, institutions, networks and infrastructure that shape what they can achieve.

The objective is not to tell cities to stay with what they already have. A textile city may well decide to pursue fintech. But it should first ask:

What is our competitive advantage in fintech relative to every other city trying to become a fintech hub?

The real tough question therefore is not:

“If we build it, will they come?”

It is:

“Do we understand our economy well enough to know what we should build?

There is, however, a practical problem: we often do not have the data needed to answer these questions at the city level. Employment by industry, productivity, exports, investment, inter-firm linkages and commuting patterns are often available only at the state or district level, incomplete and inaccessible in most cases.

Better city-level economic data is therefore is a prerequisite for designing city economic strategies. We cannot build better city economies if we cannot first measure them.

The conversation emerged from two ideas we had discussed in class:

One, the idea of externalities and public spaces - we discussed how public spaces are those from where no-one can be excluded and the use of the space has to be non-rival, i.e. use of the space by one person should not affect the use by others, such as lake fronts, public parks and footpaths. If we are getting into each-other’s way while walking on the lake front, that would mean there is congestion, the space is used beyond capacity. A common solution suggested by students was to remove vendors and encroachers of all kind.

Two, we had debated between two competing mechanisms for allocating space, between the central authority deciding who should be where, or people choosing for themselves. We argued about the pros and cons of both designs.

Bringing the two ideas together, let us analyze why is it that vendors do not shift even when they are provided spaces. People occupy public spaces for activities providing them ‘profits’, or some sort of utility. This encroachment of public space leads to inconvenience to others. Planners solve the issue by allocating alternate space ‘somewhere’, government funds this new allocation by designing those spaces and constructing.

And when those new spaces are not utilized, we all believe enforcement is the issue. If the state had enough capacity to monitor and punish people, they would have ‘behaved’ and shifted to those kiosks.

What we miss here is the real issue - the incentive design. Rather than asking where can we build kiosks, the question should be

"Where does economic activity already occur, and how can we organize it more efficiently?"

Removing vendors from where economic activity takes place is not the solution. we need to analyze why they behave the way they do. They find opportunity, in high footfalls. A crowd is opportunity to them, to connect and sell, and they would not want to be shifted to a secluded space, where people do not visit. With online platforms providing us with the convenience of doorstep deliveries, street buying and bazaars are anyways seeing a decline, and therefore visibility and accessibility are important for them. Their businesses depend on visibility, pedestrian movement, spontaneous purchases and proximity to other commercial activities. Economists would describe these as agglomeration benefits.

Problem with allocation design, where planners allocate a ‘vacant land’ parcel conveniently for kiosks or any activity requiring people to shift from existing centers of economic activity, is the assumption that all that the person needs is space.

We do not realize that they are occupying more than just the space, when they operate from street. They are occupying an opportunity to interact, be visible and sell.

When we shift them to a secluded kiosk, we have to shift the other elements too, the vibrancy, the connect and accessibility - all that should translate into sales for them!

Moving a vendor 300 meters away may seem insignificant on a map, yet it can eliminate most of their customers. This is why so many relocation projects fail. They relocate the vendor but not the market.

Another debate can be on, why should these vendors even be allowed to operate, if they cant afford a proper space. Shouldn’t their businesses be lucrative enough for them to afford the space, by paying rents? That is a larger question, about inequality, redistribution, and a state that should be able to develop an economy with enough jobs and economic opportunities for everyone.

Till we get answers to that question, let us focus on space, and its allocation, but with a broader lens, one that makes us realize:

Space is not just two dimensions, it is also what happens there and why!!

A quick plotting of Average Wages/salaries received in the previous month by regular wage/salaried employment for male workers against the formal sector employment (Percent of workforce employed in government/public sector enterprises or public/privately listed companies) gave the following result:

There is a clear positive association visible from the graph, i.e. higher is the level of formal sector employment, greater are the salaries of male workers in these cities.

This results corroborates the presence of agglomeration economies in cities. Higher percentage of formal sector employment is a testament to presence of more formal firms/businesses and registered enterprises. When a city’s institutional infrastructure and physical amenities provide conducive conditions for businesses to operate and register, the productivity benefit translates into higher salaries for male workers. Firms are able to pay more, due to these benefits. This result provides an evidence in support of greater degree of formalization. Cities need to strive to simplify and strengthen the institutional mechanisms for registration and functioning of formal enterprises, in order to generate higher productivity benefits, which in turn translate into higher salaries.

One caveat, this is an assertion based on observing one dataset, pertaining to one single year. In order to substantiate this hypothesis, a more detailed examination of data from several time periods is required.

However,

"The benefits of formalization do not appear to be shared equally."

Another graph using data from the same report presents a dismal result.

Higher level of formal sector employment in million plus cities is also positively associated with larger wage gap between average salaries paid to male and female workers in these cities.

While this does not establish causality, it suggests that the gains from urban formalization are not being distributed evenly across male and female workers.

There are more questions that this graph leads us to:

• Is this because these cities have more high-paying technical jobs occupied by men?

• Are women concentrated in lower-paying occupations?

• Is education different?

• Is occupational segregation driving this?

The report does not provide answers, which require a deeper examination and careful analysis.

The female labor force participation rate as per the report is an abysmal 27% in these cities, with 68.7% women mentioning child care/homemaking commitments being the primary reason for not joining the labor force. For men, the highest quoted reason for not joining the labor force is to want to study further.

While the average gap between salaries for regularly employed men and women is around Rs. 3,000, the gap increases to around Rs. 17,000 for self employed men and women.

Though many of the determinants of salaries (education, labor laws, social norms, maternity policies) lie outside local governments’ direct control, from a city economic development perspective, low Female Labor force participation represents an underutilization of the city's human capital and constrains economic growth. If half of the working-age population participates less in the labor market, the city produces less than its potential. Together, the low female labor force participation rate and gender wage gaps suggest that many women face a weak economic return to labor market participation once childcare responsibilities, commuting costs, safety concerns, and household work are taken into account. Understanding the relative importance of these factors requires further research, but they point to barriers that go beyond job creation alone.

If the Urban Challenge Fund aims to make cities engines of economic growth, then one measure of success should be whether cities are able to unlock their largest underutilized economic resource—their women. Rather than funding women’s employment programs, cities could design projects that focus on infrastructure provision with targeted outcomes such as reduced commuting times, creating employment districts, integrated childcare, improved walkability and transit, making industrial areas safer and improved last-mile connectivity.

By focusing on productive Infrastructure - Infrastructure that increases the effective labor supply and productivity of a city by reducing barriers to economic participation, cities can realize their growth potential.

But there is a deeper question that needs to be asked:

“Why did the business choose to operate illegally in the first place?

Let us try to find the answer using three frameworks from economic theory:

Rational Choice Theory - Businesses respond to incentives

Nobel laureate Gary Becker argued that individuals respond to incentives, rather than viewing illegal behavior solely as a moral failing (Read his seminal paper “Crime and Punishment”). If the expected gains from breaking the rules exceed the expected costs, businesses will continue to choose violations.

He argues that businesses choose to behave illegally when

Expected Benefit > Expected Cost

where

Expected Cost = Probability of being caught × Penalty

Penalty is a function of policy design. Probability of being caught is a function of state capacity to enforce, inspect and monitor. Both are needed to ensure businesses behave in the desirable manner.

A business compares the additional profits from cutting corners or operating without the required approvals with the expected cost of doing so. That expected cost is determined not only by the severity of the penalty but also by the probability of being caught. If inspections are infrequent, enforcement is inconsistent, or violations are unlikely to be detected, even a high penalty would not mean a high expected cost.

This is where local governments play a pivotal role. Through licensing systems, inspections, monitoring, and enforcement, they influence both the chances of detection and the consequences of non-compliance.

Institutions are the rules of the game

Douglas North in his 1990 book “Institutions, institutional change and economic performance” has defined institutions as:

"Institutions are the humanly devised constraints that structure political, economic and social interaction."

While Becker explains why businesses respond to incentives, Douglass North helps explain where those incentives come from. North argued that institutions are the formal rules, regulations, enforcement mechanisms, and informal norms that govern society. These shape economic behavior by defining the incentives individuals and firms face.

In this present case, those rules are the Central Explosives Act, the State Licensing Framework and frontline regulation by the local government. They include how frequently inspections occur, whether agencies share information, whether cancelled licences automatically trigger local inspections, and how quickly illegal units are sealed. These institutional arrangements shape the incentives businesses face.

From this perspective, local governments are not merely service providers or regulators; they are institution builders. Through licensing systems, inspection regimes, zoning regulations, and enforcement practices, they create the "rules of the game" that determine whether businesses find it more rewarding to comply with the law or to circumvent it.

Externalities - why government intervention is necessary

From the perspective of externalities, industrial accidents represent a classic case of market failure. An externality arises when the actions of a business impose costs or benefits on others that are not reflected in its own decision-making.

A factory operating without adequate safety measures may reduce its own costs and increase its profits, but the risks are borne by workers, neighbouring communities, and society at large. In the event of an accident, the business does not bear the full social cost of its actions, including loss of life, medical expenses, environmental damage, disruption to livelihoods, and the burden on public services. This is where local governments have an indispensable role. Through regulations, inspections, zoning, licensing, and liability mechanisms, they seek to make the businesses internalize these externalities, i.e. ensuring that businesses bear the full costs of the risks they create.

Hazardous industries in India are regulated through a multi-level governance system involving Petroleum and Explosives Safety Organization, the district administration, police, labor authorities, the fire department, and the municipal corporation. The contribution of local governments is therefore as a coordinator and enforcer within its jurisdiction, ensuring that failures of one agency do not become failures of the entire system.

Designing Better Incentives: What Local Governments Can Do

Based on the economic perspectives, what can the local governments do to address such externalities:

1. Prevent incompatible land use

If hazardous manufacturing is operating in an area not designated for such activities, local government can use its zoning and development control powers to prevent or shut down the use.

2. Use risk-based monitoring

Rather than inspecting businesses randomly, local governments can identify high-risk establishments using data such as land-use permissions, building occupancy, electricity consumption, complaints, GST registrations, or previous violations. This increases the probability of detecting illegal operations.

3. Increase the cost of non-compliance

The externality exists because the business does not bear the full cost of the risks it creates. Local governments can make illegal operation more expensive through: immediate sealing of unauthorized premises, cancellation of municipal trade permissions, penalties for building and zoning violations, recovery of emergency response costs where legally permissible.

4. Improve information sharing

Many industrial accidents occur because different agencies each possess part of the information but no single agency has the complete picture. A shared digital registry of licensed hazardous establishments, accessible to municipal departments and state regulators, would allow cancelled licences or repeated violations to trigger immediate local action.

6. Encourage voluntary compliance

Externalities are not addressed only through punishment. Local governments can lower the cost of compliance by simplifying approvals, conducting safety awareness programs, and helping small enterprises understand regulatory requirements. When compliance becomes easier, businesses are less likely to violate.

Most discussions on urban development equate good local government with building roads, flyovers, water supply, sewage networks, and public transport. These are visible, politically rewarding investments, so they dominate both budgets and public discourse.

But economics suggests that local governments create value in another, less visible way: by shaping the institutional environment in which markets operate.

We routinely finance bridges, water treatment plants, and metro systems through schemes such as the Smart Cities Mission, AMRUT, and the Urban Challenge Fund. Why do we rarely create dedicated financing windows for municipal governance reforms? Why aren't local governments supported to modernize inspection systems, digitize regulatory processes, build integrated compliance databases, or strengthen enforcement capacity with the same seriousness that we finance physical infrastructure?

And for the naysayers, yes corruption is an issue, and we understand that. Answer to poor governance cant be less governance. As business’s respond to incentives, so do public servants. Another time, to write about how and who should design the correct incentives for them!!

To think about it, today a municipality wanting to build a ₹500 crore water supply project has to assemble a temporary ecosystem:

a DPR consultant, a legal advisor, a PPP advisor, a financial advisor, an environmental consultant, a credit rating agency, investment bankers, lenders….

None of these actors are accountable for closing the transaction. Each optimizes its own contract. Institutional memory fades away, with the IAS officer transferred, new agencies, new project, the next project repeats the entire exercise. This is a textbook high transaction-cost market.

A shared institutional capacity, enabling transactions is what is needed the most, especially given India's current emphasis on the National Infrastructure Pipeline, the National Monetization Pipeline, and the Urban Challenge Fund, such a national infrastructure delivery platform for urban infrastructure could reduce transaction costs, standardize PPP practices, and improve investor confidence.

Markets work efficiently because they are supported by institutions that reduce transaction costs. Stock exchanges, payment systems, depositories, and credit bureaus are all examples of market infrastructure. Municipal infrastructure finance lacks an equivalent institutional layer. Cities therefore recreate the same transaction ecosystem every time they prepare a project.

Why another Government Agency?

Let us identify where the gap is:

India already has Ministry of Housing and Urban affairs (MoHUA), Department of Economic Affairs (DEA), India Infrastructure Finance Company Limited (IIFCL), National Investment and Infrastructure Fund Limited (NIIF), Public Private Partnership Appraisal Committee (PPPAC), state finance departments, state urban development departments...but none of them owns the project preparation problem.

India lacks an institution that converts urban infrastructure demand into investment-ready projects.

1. Large infrastructure has institutional capacity

   Colombia centralized PPP capability in a single technical agency (ANI), whereas India has built comparable capabilities through a network of specialized institutions.
   Large infrastructure projects in India are backed by permanent institutions. National highways have NHAI, airports have AAI, ports have dedicated port authorities, and industrial corridors have specialized delivery agencies. These institutions accumulate technical, commercial, and legal expertise over decades, making project preparation and delivery increasingly efficient. Cities, however, lack comparable institutional support. Instead, they rely on project-specific consultants, effectively renting institutional capacity for each transaction, with little opportunity to retain knowledge or build long-term capability.

2. ULBs struggle to identify bankable projects

   The constraint is not primarily a lack of financing instruments. India already has municipal bonds, pooled finance mechanisms, credit enhancement, viability gap funding, and PPP frameworks. The bottleneck is that most ULBs cannot consistently produce bankable projects.

But Urban is a state subject?

Urban development is a State subject, but transaction infrastructure need not be fragmented. Just as municipalities can access shared digital infrastructure such as payment systems and GIS platforms, they can also access shared project-preparation, PPP-structuring, and capital-market capabilities.

What would the new institution do?

If India's highways needed institutions like NHAI to become investable, perhaps India's cities now need institutions that make urban infrastructure investable. India has created a thriving market for urban infrastructure consulting, but not an institution that captures and compounds the knowledge those consultants generate.

Consultants are filling an institutional vacuum. But renting expertise project by project is one of the most expensive ways to build long-term municipal capability.

What is significant about the policy is that it allows for formation of a Market Rate Committee (MRC) to determine the market value of land for calculation of compensation payable. Earlier, the compensation was paid based on the Jantri Rate (or the circle rate), the administered price floor determined by the state for the purpose of property registration and collection of stamp duty.

The reform renders the formation of a Market Rate Committee at the district level, comprising of three valuation experts, one appointed by the Transmission company, one by the Land owners and the third by the District administration. By a random draw, two valuation estimates will be chosen, and the the final price will be arrived at by looking at the difference between the high and low price estimates. In case of a less than 20% difference, an average of two values will be taken. In case of a larger difference, 10% more than the lower value will be considered (Read more).

The two rates, Circle rate and market value are different in their purpose, let us see how:

Circle Rate is the lowest rate used to calculate stamp duty, and it fulfills three purposes

Helps protect Government’s revenue

Property transactions are between two parties, they have an incentive to underreport the true transaction value to save on Stamp Duty. Circle rate prevents that, stamp duty is charged on Circle rate or actual transaction value, whichever is higher. Thus, circle rate acts as the tax floor.

Creates administrative uniformity

For thousands of property transactions, it is difficult to take into account all relevant factors and estimate the market value.

Reduces discretion and corruption

Without Jantri every transaction would require negotiation, officials would exercise discretion, and delays and rent-seeking could increase. Jantri creates a rule-based system.

Circle rate should not be used for compensation design

Compensation requires valuation of the lost value due. It has to represent the economic loss to the land owner, whose land is in part being used for erecting a tower let us say, it has to represent the opportunity cost, not the lowest value as represented by the Circle rate.

Expertise is required to estimate the market value, a job better assigned to trained professionals

World over, land price valuation is undertaken by trained and certified professionals. In India, Circle rates are determined by stage government committees, with no dearth of expertise, but one, these rates are not revised very frequently, and therefore do not really represent market value, and two, these are not designed to mimic market value. Frequent changes in Circle rates will increase stamp duty and the transaction cost.

This reform is a step in the direction of better private capital mobilization by reducing financing costs

The significance of this reform extends beyond land compensation. Infrastructure finance depends on predictable project timelines and manageable risks. Delays arising from land valuation disputes increase project costs, postpone revenue generation, and weaken the confidence of lenders and investors. By institutionalizing a transparent process for determining market value, Gujarat has introduced a mechanism that can reduce one of the most persistent sources of project uncertainty. The reform has the potential to lower transaction costs, improve project bankability, and make infrastructure investment more attractive.

Across advanced economies, governments have recognized the need for trusted institutions for land valuation. Whether through independent appraisers in the United States and Australia, municipal valuation committees in Germany, or official land price systems in Japan and South Korea, the common objective is the same: to create a credible, transparent basis for determining market value. Gujarat's Market Rate Committee represents an Indian adaptation of this broader institutional principle.

India aspires to grow to become a developed nation in another 20 years. That fast pace growth will require institutional arrangements that reduce friction and transaction costs, along with the more visible, larger objective of mobilizing financial capital. This step in the right direction, highlights three ingredients for faster and equitable growth - Credible price discovery. transparent institutions and fair compensation!!

As always, there are naysayers, lamenting nothing would change on the ground, citing issues of state capacity. Municipal governments lack financial resources, regulatory institutions lack enforcement capacity. The ruling does not change the engineering costs of providing footpaths, neither does it change the intentions of those who encroach the space wherever it is provided. Footpaths have been used by hawkers, street vendors, two wheeler owners for parking, and for all sorts of sundry uses we can imagine. All this is not going to change overnight, so what has changed?

Something has fundamentally changed. Rooted in the loss of life of a young boy, this ruling has fundamentally altered the institutional architecture of rights and responsibility. Let us use Prof. Coase’s ideas of property rights and transaction costs to examine, what has changed.

In a typical game set-up, let us assume there are two players, Pedestrians and Local Government. Local government is not a market actor, but for the sake of the argument, let us assume the people who represent the local government, have their own intentions and objectives as they take decisions.

The government has two choices:

• Provide footpaths (P)

• Do not provide footpaths (N)

Pedestrians have two choices:

• Accept (A) – continue walking despite poor conditions.

• Demand (D) – complain, litigate, organize, petition.

Both the parties choose how to behave based on their payoffs, Think of these as illustrative utility units.

Government payoff

Government payoff = -C + P - L

where:

• C = cost of constructing footpaths

• P = political/social benefit from provision (Goodwill)

• L = legal cost of violating pedestrian rights (0 before the judgement)

Pedestrian payoff

Pedestrian Payoff = +B -H -T

where:

• B= benefit from being able to walk safely (Base value of mobility)

• H = harm from missing or obstructed footpaths

• T = transaction cost of demanding, mobilizing, legal enforcement costs

Case 1: Before the Supreme Court ruling

Assume the following components:

Government

• Fiscal cost of building footpaths = −4

• Political goodwill from providing infrastructure = +1

• Cost of citizen complaints = −2 (only if pedestrians demand)

Pedestrian

• Benefit of having a usable footpath = +10

• Cost of walking without footpaths (accidents, delay, inconvenience) = −8

• Cost of mobilizing, complaining, litigation = −3

The government compares:

• Don’t build = 0

• Build = −3

So the rational choice is not to build.

Pedestrians compare:

• Accept = 2

• Demand = −1

So they rationally stop demanding.

The transaction cost of demanding footpaths is high. Most people rationally accept status quo. The government has little incentive to invest.

The poor equilibrium persists.

Case 2: After the Supreme Court ruling

Supreme court ruling has introduced the following additional costs

The government’s cost of not providing footpaths rises because of legal exposure, judicial scrutiny, and constitutional obligations. Government now faces

• Constitutional non-compliance cost = −5

The pedestrians now have a legally recognized entitlement. Pedestrians now incur

• Much lower enforcement cost because the legal right exists = −1 instead of −3.

Everything else remains unchanged.

A new equilibrium is found!

Government realizes cost of providing footpaths is much lower than constitutional non-compliance costs.

We can think of the judgment as changing the government’s objective function.

Before:

Benefit of not building > Cost of citizen complaints

Therefore:

Don’t build.

After:

Benefit of not building < Cost of violating a constitutional right

Therefore:

Build.

By assigning pedestrians a clearly enforceable right over footpath space, the Court strengthens their bargaining position vis-à-vis encroachers. By simultaneously imposing an affirmative obligation on the state to provide and maintain pedestrian infrastructure, it shifts the transaction costs of securing that right from individual citizens to public institutions.

In Coasian terms, the Court has changed the initial allocation of entitlements, making the socially efficient outcome—safe, continuous, and accessible footpaths—more likely by reducing uncertainty, lowering enforcement costs for citizens, and increasing the institutional cost of government inaction.

The judgment demonstrates that when private bargaining is impossible because of the scale and complexity of urban life, the law itself becomes the mechanism through which society achieves a more efficient allocation of scarce public space.

The real contribution of the judgment is not that it will magically create footpaths tomorrow. It is that it changes the economics of not creating them. Before the ruling, the costs of unsafe streets were borne largely by pedestrians, who had to navigate danger, organize collectively, and repeatedly petition the state. After the ruling, a significant part of that burden shifts to public institutions, which now bear the constitutional and legal consequences of failing to provide safe pedestrian infrastructure. In Coasian terms, the Court has changed the institutional architecture that governs the city.

Hoping that when institutions change the incentives, cities eventually change as well!!

During the discussions, Riddhiman Saha from the World Bank, posed a simple but profound questions to the participants:

Who is thinking about economic activity in our Indian cities!

Rhetorically, we did not have answers. With the recent Cities as growth hubs program, there is some activity in the right direction. Select cities are supported by the Central Government to develop Economic Plans and prepare a list of projects aligned with that plan. This is a good beginning, what is required is to let it percolate down, to the level of Tier 2 and 3 cities, to offices with their administrative heads, to mayors and their councils. And that requires a big change.

What International Cities do differently:

Let us look at some of the international cities, how they manage to bring about the economic planning, look at the institutional arrangements supporting them and then discuss, what comes in the way of doing the same here in our country:

Singapore: Story of strong institutions

Economic Development Board in Singapore actively attracts industries, identify future growth sectors, and coordinate investments. Urban planning, infrastructure, housing, education, port development, and industrial policy are all aligned around that objective.

London: Measuring the economy constantly

Greater London Authority collects and publishes data related to productivity, employment, housing affordability and business formation, along with forecasts for growth, much like a national government agency would do.

Seoul: Linking Infrastructure to Economic Clusters

The city actively develops sector-specific clusters such as technology, digital media, biotechnology, and creative industries. Infrastructure investments are evaluated partly on their ability to strengthen these clusters.

New York: Dedicated Economic Development Agency

New York city economic development corporation acts as the home for economic growth in the city. It attracts investment, coordinates PPPs, develops industrial districts and much more.

Chinese Cities: Competition for economic growth

City leaders are evaluated on economic outputs and cities compete amongst themselves for investments, exports, innovation and talent.

Across these examples, three common themes emerge: Strong Institutions with right incentives built in, robust data gathering and diagnosis and effective coordination, to develop a culture of economic growth in cities. Let us discuss how to achieve these:

• Institutional Strength:

  With a plethora of institutions, with overlapping mandates and coordination issues, the mere thought of coming up with a new institution, for all the 4k plus cities in India, sounds as a undesirable task.

  Anshul Mishra I.A.S. in a fantastic post, has recently shared his deep insights about the existing institutional arrangements, gaps and possibilities of operationalizing a functional economic region framework in the planning departments and state governments. Look at the wonderful presentation here. He suggests bigger role for Town and Country Planning Organizations (TCPOs) as per the model regional and town planning and development law of 1985, and suggests three possibilities for the institutional oversight, (i) a dedicated regional planning authority; (ii) State director of town and country planning; (iii) Metropolitan/District Planning Committees.

• Data and Analytics:

  Imagine if Indian cities were annually ranked not only on cleanliness, but also on employment creation, economic productivity, investment attraction, housing affordability, climate resilience, or infrastructure efficiency. Municipal commissioners and urban development authorities would quickly begin asking different questions, allocating resources differently, and building institutional capabilities to improve performance.

  Swachh Survekshan showed that Indian cities can compete to become cleaner. The next frontier is to create incentives for them to compete to become more productive, prosperous, inclusive, and economically dynamic. The lesson is clear: what gets measured gets managed, and what gets benchmarked gets prioritized. Time to think of a City Economic Development Index!

• Coordination

  One of the most instructive examples of coordinated action around economic growth comes from the experience of the Vibrant Gujarat Global Summit. While often viewed primarily as an investment summit, its real significance lies in the institutional coordination it created across government departments. Investment proposals were not treated merely as industrial projects; they triggered discussions on land availability, infrastructure capacity, workforce readiness, logistics connectivity, utility provision, and regulatory clearances. In effect, economic growth became the organizing principle around which multiple departments aligned their actions.

  A similar approach at the city level could be transformative. Imagine a municipal corporation or urban development authority setting a target to become a regional hub for manufacturing, logistics, knowledge industries, or the creative economy. Achieving such a goal would require planning departments, transport agencies, utility providers, housing authorities, skill-development institutions, and investment promotion bodies to coordinate around a common economic vision. Instead of roads being built because a budget exists, or zoning plans being prepared as a statutory exercise, each intervention would be evaluated for its contribution to employment generation, productivity enhancement, investment attraction, and competitiveness.

The Next Frontier

If mission-mode implementation is what works best within our administrative system, then three new missions may be worth considering:

1. Mission Economic Planning – Every city prepares and periodically updates an Economic Development Plan.

2. Mission Urban Data and Competitiveness – Every city measures and reports economic performance indicators.

3. Mission Economic Vision and Coordination – State and city institutions align infrastructure, planning, housing, skills, and investment around a common economic vision.

For an economist, this exercise raises an intriguing question: Can sound be understood through the lens of economic externalities?

The answer is yes—and doing so offers a fresh perspective on how cities create value and impose costs.

Sound as a Negative Externality

Economics has traditionally approached sound primarily as a problem.

Noise pollution is a classic example of a negative externality—a cost imposed on others without compensation.

Traffic congestion, airports, construction activities, and industrial operations all generate noise that affects nearby residents and businesses. The consequences are well documented: sleep disturbance, stress, health impacts, reduced productivity, and lower property values.

Urban economists have long measured these effects through housing market studies. Homes exposed to high levels of traffic or aircraft noise often command lower prices than similar properties in quieter environments. Around Amsterdam's Schiphol Airport, researchers found that higher levels of aircraft noise translated into lower house prices, allowing the economic cost of noise to be estimated in monetary terms.(Link)

From this perspective, sound resembles air pollution: an unwanted by-product of economic activity that requires regulation and mitigation.

Sound as a Positive Externality

Yet focusing only on noise misses half the story.

Not all sounds diminish welfare. Many sounds enhance it.

The sound of flowing water in a public square, birds in a park, cultural festivals, street musicians, or the sounds of a buzzing market can all contribute positively to people’s experience of a city.

These sounds function as urban amenities. They make places more attractive, memorable, and enjoyable. Importantly, the benefits often extend beyond those who directly create them. A musician performing in a public space may enrich the experience of hundreds of passersby. A well-designed park generates acoustic benefits for nearby residents who may never have contributed to its maintenance.

In economic terms, these are positive externalities.

Beyond Decibels

One of the most interesting insights from sonic research is that people do not respond simply to the volume of sound.

A fountain and a traffic intersection may register similar sound levels, yet they evoke very different reactions. One is often perceived as calming, the other as stressful.

Traditional noise measurement focuses on decibels. Human experience focuses on meaning. This distinction matters because urban policy often seeks to reduce sound levels when the real objective should be to improve sound quality.

Sound and Urban Value

This is where the discussion becomes particularly relevant for urban economics and city finance.

Cities routinely invest in pedestrianization, parks, waterfront redevelopment, green infrastructure, and traffic calming. These investments change how places look—but they also change how places sound.

A street closed to vehicles becomes quieter and more sociable. A restored waterfront introduces the sounds of water and recreation. A new urban park replaces traffic noise with natural sounds.

Such interventions often increase nearby property values, stimulate commercial activity, and attract visitors. Economists typically attribute these gains to improved accessibility, aesthetics, or environmental quality. Yet part of the value may also arise from improvements in the acoustic environment.

In other words, sound may be one of the mechanisms through which public investments create economic value.

Sound, Difference, and Exclusion

The discussion on urban soundscapes took an unexpected but important turn during the conference when one participant shared a personal experience that complicated the usual economic framing of sound as either cost or amenity.

She described living in a mixed-income neighborhood where public housing units are embedded within a more affluent residential area. At one point, concerns were raised by other residents about the “noise” emanating from her home. The issue was not loud music or disruptive activity, but the everyday sounds of cooking—utensils being used, food being prepared, and the ambient sounds of domestic life.

What made the complaint notable was not the volume of sound, but how it was interpreted. The participant reflected that her cooking was perceived as “noisy” in a way that reflected cultural difference. The objection was implicitly tied to her identity as a migrant household, where cooking practices, and kitchen tools, differed from those of surrounding residents.

In this instance, sound was not simply an environmental externality. It became a marker of difference, and a basis for drawing boundaries between who belongs and who does not. The same physical phenomenon—sound—was being socially coded in different ways depending on who produced it.

This experience highlights an important but often overlooked dimension of urban soundscapes: they are not neutral. What counts as acceptable sound, or “noise,” is shaped by social norms, expectations, and power relations. Loud religious music comes to mind as an example.

Listening to Cities Differently

The sonic ethnography exercise reminded me that cities are experienced through more than sight. They are heard, felt, and interpreted through everyday sensory encounters.

For economists, this opens an interesting avenue of inquiry. Sound can be understood as both an external cost and a public amenity. It can depress property values or enhance them. It can reduce wellbeing or enrich it. It can be a by-product of urban activity or an asset in its own right.

Perhaps the next frontier in understanding urban value lies not only in what we can see on a map, but also in what we hear when we walk through a city.

After all, every city has a skyline. But every city also has a soundtrack.

On the face of it, it makes sense, to assume that these methods, have been successful, at least in large cities, to generate resources for local governments. The local governments try to capture part of the land value enhancement caused by public investment projects, using tools such as betterment levy, impact fee, development charges, transferable development rights etc. These methods are widely used across the world, and many Indian cities have been utilizing these methods to generate resources for infrastructure projects. Look at Success stories from India and abroad in this compilation from the Ministry of Housing and Urban Affairs (Link).

These success stories are from a few large cities, Land auction from BKC, ring road in Ahmedabad, TDRs in Hyderabad and many more. These land value capture mechanisms can provide an alternative or supplementary source of infrastructure finance outside conventional tax revenues. Depending on the institutional arrangement, these revenues may be on-budget or off-budget.

Is there a city size threshold for these methods to be successful?

The real question may not be whether a city is large or small, but whether it has reached the economic conditions necessary for LVC to work.

Successful LVC typically requires three conditions:

1. Sufficiently high land values – there must be enough surplus value to capture.

2. Active land markets – transactions, development, and redevelopment must occur regularly.

3. Public investments that create measurable value premiums – infrastructure must improve accessibility or economic opportunity enough to increase land values.

The first two conditions (high land values and active land markets) make LVC easier to administer and more lucrative, but the third condition is what creates the value that can be captured in the first place.

The key question is:

Why does a public investment increase land values?

The answer is that the investment must create a scarce economic advantage tied to location.

What creates a measurable land-value premium?

1. Accessibility gains

This is the classic case. A metro station, BRT corridor, ring road interchange, or commuter rail station reduces travel time. If a parcel that was 60 minutes from major employment centers becomes 25 minutes away, people and firms are willing to pay more for that location.

2. Agglomeration benefits

Large cities generate productivity advantages because firms, workers, suppliers, and customers are concentrated. Infrastructure that improves access to these agglomeration economies creates value.

3. Supply constraints

Land values rise when improved accessibility meets limited supply. If thousands of hectares of vacant land are readily available nearby, demand can spread out and the premium may be modest.

4. Strong market demand

Infrastructure alone can not create value. Infrastructure has to be created to support economic activity. Demand for land depends on jobs, incomes, business activity, and population growth. Public investments generate land-value premiums only when they improve access to locations where people and firms want to live, work, or invest.

5. Credibility and permanence

People capitalize future benefits into land values only if they believe the improvement will actually happen and endure. For example a proposed metro line announced before elections may create little value if investors doubt it will be built.

Larger cities often satisfy these conditions

A large city is more likely to have:

• severe congestion,

• high accessibility premiums,

• strong demand,

• agglomeration economies,

• scarce well-located land.

Therefore, the same infrastructure project generates a larger land-value premium.

However, smaller cities with high economic growth can be the potential candidates for LVC.

A useful way to think about it is:

Land value reflects accessibility to opportunities.

Land Value∝ Accessibility × Economic Opportunity

Those opportunities include:

• jobs,

• customers,

• suppliers,

• services,

• educational institutions,

• entertainment and amenities.

Among these, jobs are usually the dominant factor.

Why jobs matter

Consider two cities with the same population of 1 million.

City A

• Major industrial and service hub

• 500,000 formal jobs

• Strong wage growth

• Continuous business investment

City B

• Administrative town

• Limited private sector activity

• Few new jobs

• Slow income growth

A metro station or road project in City A is likely to generate a much larger land-value premium because it improves access to a dense concentration of economic opportunities.

The same investment in City B may improve mobility, but there is less economic value to access.

The key lesson therefore, is that there is no fixed population threshold for land value capture. What matters is whether a city has sufficient economic activity, jobs, development pressure, and demand for land. Larger cities often meet these conditions, which is why LVC is more common there. However, smaller cities with strong economic growth and active land markets can also successfully use these tools. The real threshold is not city size, but the ability of public investments to create measurable land-value gains. At the same time, cities must first address fundamental land market issues—such as unclear land records, weak valuation systems, low transaction transparency, and regulatory bottlenecks—since LVC mechanisms are unlikely to work effectively in dysfunctional land markets.

Strengthening land records, valuation systems, transaction transparency, and development regulations may therefore be a prerequisite for successful LVC, particularly in smaller cities.

Her response is purely from a “Service Mindset” - Vegetables are a necessity, and the university is obliged to provide the residents with all the necessities, therefore the University must be paying the vendor for the service.

However, the distinction here is layered, one within another, like peeling an onion:

1. Difference between essential and non-essential goods and services - Essential infrastructure ‘for the university’, like water supply, security services, roads etc., for which probably the University will be willing to pay, to the providers.

2. Difference between private goods and public spaces - Selling vegetables is a private market activity, the vendor sells to make profit. However, the profit depends on the use of public space, created by the university, agglomeration of people that the university has facilitated, has created conducive space for the vendor to operate, and earn higher profit, and so the vendor should pay. The value of his cart in a village would be Rs. 500, whereas, the same cart will be valued at Rs. 5000 in a city, merely because of concentration of people. This is the basic idea of Urban Location Rent.

   Businesses are ready to pay a premium (Rent) to operate from a more desirable location.

3. The underlying market structure - Does the good or service in question has a highly competitive market, like vegetables. Vegetable vendor exists in a highly competitive and decentralized market structure, where there are many potential sellers, low entry barriers, no exclusive territorial rights, and a strong dependence on footfall. In such markets, access to high-demand locations becomes economically valuable. The university therefore occupies a position analogous to a landlord, platform owner, or market-maker.

   In comparison, a water utility is typically a natural monopoly, heavily infrastructure-intensive and network-dependent, with massive fixed costs. Water utilities therefore are state governed or work as concession operators.

   We cannot practically have twenty competing pipe networks entering the same campus the way we can have twenty vegetable vendors outside the gate.

Summing up the key take away’s -

#1: University has created an agglomeration, and so it has a locational bargaining power.

#2: The denser and more organized a place becomes, the more valuable access to its market becomes. Universities, railway stations, airports, CBDs, hospitals, temples, and metro nodes all become platforms for market access. Once that happens, spatial access itself becomes commodified.

#3: Footfall for some businesses is an asset. for such businesses, the logic now flips, it is not why the university should pay the vendor, but why access to university-generated footfall should be free. This does not mean vendors should be excluded or over-regulated. In fact, good campuses and good cities need informal commerce. Vendors add convenience, affordability, safety through activity, and social life. But economically, their presence is not charity. They are getting a captive market, with ensured footfall, and therefore they should pay for this opportunity. Competition in the market would make them pay, otherwise, another vendor will be willing to seize the opportunity.

What the university has created is not just a campus, but a market — and markets always generate rent!!

Apply this logic to cities and markets, and think about the arrangements under which the good and services are currently being provided. Should the city be charging, paying, subsidizing, or contracting out….Let me know!!

The issue size is unprecedented:

Let us try to imagine the scale of issuance: The total bonds issued so far over the years

1997- 2015 - Rs. 1800 crore( Before the Securities and Exchange Board of India (SEBI) issued guidelines for Bond issuances in 2015)

2015 - March, 2026 - Rs. 4540 Crore (SEBI)

2026 onwards - Each issue to be Rs. 1000 crore or more (to avail the Rs. 100 crore benefit, smaller issues will continue to happen)

For almost two decades, India’s entire municipal bond market was smaller than the size now envisioned for a single large issuance.

Very few cities have the capability:

Currently, only 6-7 cities in India have an annual budget size more than 10,000 crore. Even with such sizes, most of these cities have a weak operating surplus. An issue worth Rs. 1000 crore will create significant liabilities, over longer term. This makes the cities leveraged entities.

The most important signal: Mumbai entering the market

The most revealing fact about India’s municipal bond market may be that its largest city never needed it — until now.

Mumbai, the richest and largest municipal government in the country, has never raised money through bonds, in its 133 years history. They are in the process of issuing bonds worth Rs. 5000-Rs. 10,000 crore now (Read more). Why this is important, is that because BMC is not approaching this as a distressed borrower, rather it is done as a balance-sheet scaling exercise.

That distinction matters enormously, because the city is beginning to operate at infrastructure-balance-sheet scale comparable to large PSUs or state utilities. The signal that the investors receive from this, is that municipal debt market is not on the fringe anymore, it is systemic and that there is going to be an implicit sovereign guarantee behind such issues.

What is the problem, there never has happened a municipal bond default in the country

Problem is two fold:

1. The probabilistic scenario of a default:

   Imagine a large city not being able to repay on time, and creating an instance of default. This is not unheard of, New York city, heavily in debt, had run out of cash in 1975, and the then President Gerald Ford initially resisted assistance, news headlines reported - Ford to City: Drop Dead!

   Eventually, the state bailed the city out, pressured pension funds to buy city bonds. New York was saved, because it was too big to fail, while Detroit was allowed to fail, U.S. Municipality laws allowed restructuring, the debt was restructured and several debtors had to take a cut, absorbing the losses.

   While a ₹100 crore municipal bond can default quietly, A ₹10,000 crore borrowing program linked to banks, mutual funds, insurance capital, and retail investors becomes a national financial question.

2. The contingent liability and sovereign balance sheet problem

   The investors in such large bonds will presume that the state will never allow the city to default. That trust creates a ‘contingent liability’ for the state, i.e. there is no immediate liability, but there can be, in case of a default. Governments, both at the central and state levels have had a history of such liabilities. Public Sector Banks, DISCOMs, even IL&FS, liabilities initially presented as decentralized or commercial eventually become nationally socialized risks.

   Once the market believes sovereign backing implicitly, lenders underprice risk, political discipline weakens and cities may borrow aggressively. This is exactly what happened with banks pre 2008.

This is the classic “too big to fail” problem that global financial systems have repeatedly experienced.

Credit ratings are not enough, they measure risk; they do not create institutions for managing failure. They rely on past data, can not foresee future challenges.

If we are aspirational to create a deep municipal bond market, with large sized issues, we also need institutions for debt discipline, restructuring, and fiscal transparency, so that cities can borrow credibly without automatically transferring tail risk onto sovereign balance sheets.

We need the following:

• Transparent Debt Limits - Clear rules on how much cities can borrow relative to their revenues and repayment capacity.

• Standardized disclosure norms — Municipalities should publicly disclose finances, liabilities, and project performance in a uniform and comparable format.

• Municipal restructuring frameworks — A formal mechanism should exist to reorganize municipal debt if a city faces financial distress, without causing systemic panic.

• Fiscal transparency mechanisms — All guarantees, off-budget liabilities, and contingent risks should be clearly reflected in public accounts.

We need new Municipal Finance Reforms, before rolling such large debt out!

Elevators determine how much density can be economically accommodated in cities, they are not merely mechanical systems.

In the elevator industry, maintenance is a major sub-sector, and there is a lock-in created after installation, through long term contracts. Maintenance market is larger than new installations. That would mean the join corporation will control world’s largest vertical mobility data set for passenger movement and predictive maintenance. But what is even more interesting, is that together these two will account for one quarter of the global Research and Development (R&D) Expenditure, in the industry.

Innovations in vertical mobility industry would have significant consequences for shape of our cities.

Why is this important?

The shape of cities is decided by the trade-off between benefits of agglomeration, and transportation cost. Theoretically, we all would have lived in a skyscraper, on top of each other, to enjoy the benefits of agglomeration (productivity benefits, the reason for existence of dense cities), but that is made impossible by constraints of land and congestion.

The classic monocentric city is an outcome of this trade-off between higher land rent in the city center, and high transport cost as we move away.

Choice is between - staying close to the center and paying high rent, or staying away from the center and spending on commuting.

How much can be built in the center, is a function of how high can we go. If we can build more skyscrapers, supply of built space can go up and more people and businesses can be accommodated in the center. There are limits of building high, for three reasons:

(i) Building Height Economics - Since taller building are costlier to build, the return on investment in taller buildings is an inverted U curve, with optimum building height varying across regions, depending on the land prices, and material costs.

(ii) Legal Restrictions - Building heights have been used a planning tool to control population and build density. FSI and FAR restrictions determine how high the buildings can be, and in India, that decision has been a function of road width. With the logic being roads are a proxy indicator of carrying capacity. More on this unconvincing argument later…

(iii) Building Technology - Building technology has evolved to allow for taller buildings, historically around 40 meters (think of 4-5 storied residential buildings in ancient Rome) to Eiffel tower and World Trade Center with height more than 500 meters, advances in building technology have moved from load bearing masonry to steel skeletons and tube based concept (Read More).

Why does innovation in Urban Vertical mobility matter?

Coming back to KONE and TKE merger, reduction in cost of elevators (merged entity with realize the synergies, resulting in cost savings), will result in lower costs of building tall. Elevator units take a lot of costly space in the buildings and any innovations there would mean lesser elevator space requirement and more commercial/usable space per building.

Need for high speed systems and sky lobbies in skyscrapers means the cost of elevator systems is around 10-20% of total construction costs in high rises/skyscrapers. If that cost can be brought down with R&D and use of AI for maintenance, the following possibilities will emerge:

(i) Increase in supply of build space in the Center: Tall buildings effectively create “more floor space per unit land.”

(ii) Reduction in sprawl: cheaper height reduces the need to “spread outward.”

(iii) Increase in poly-centricity: Tall subcenters may emerge outside CBDs, in the presence of low transit costs, or remote work.

In classical urban economics, bid-rent curves are downward sloping, ie. developers are willing to pay more for accessibility, to be closer to center. As land rents rise sharply near the city center, developers respond by substituting capital for land — investing in taller buildings, deeper foundations, faster elevators, and more complex engineering systems to extract more floor space from the same parcel of land. Vertical urban growth, therefore, is not merely an architectural phenomenon; it is an economic response to expensive central land and the productivity advantages of agglomeration. Innovations that reduce the cost of building tall — especially in vertical transportation systems like elevators — effectively reduce the cost of substituting capital for land.

The trade-off plays out between going vertical (skyscrapers, tall buildings), and going horizontal (sprawl, transit oriented cities). Shape of our cities has been altered by major inventions like metro/rapid systems, road construction, GPS/logistics systems and invention of safe elevators by Elisha Otis.

Specifically, the modern skyscraper city was made possible by the combination of two breakthroughs in the late 19th century — safe elevators and steel-frame construction. Before this, upper floors were undesirable because climbing stairs imposed a heavy physical cost, limiting practical building heights. These innovations transformed cities like New York City and Chicago, giving birth to modern skyscraper urbanism, where vertical transportation became as important to urban growth as roads, railways, and ports.

Future is full of possibilities, India currently is 9% of global elevator market, and growing. We are largely under-elevated, much action is yet to take place, in terms of future urban vertical growth. Elevators are, fundamentally, intra-building transportation systems. The future of urbanization may depend as much on moving people efficiently within buildings as moving them across cities

Look at these main economic channels:

1. Energy Prices and the cost shock - Crude Oil price has increased to $ 110 per barrel, from around 70 in the end of February. Although the state owned companies have absorbed the shock in India for now, and there is no direct effect, there will ultimately be a pass through, if the conflict persists. The indirect effect has already made construction material costly, especially steel, glass and tiles (read more).

2. Supply Chain Disruptions - Disruptions are translating into longer and more uncertain lead times for imported construction components—facade systems, elevators, HVAC equipment, specialized glass—where delivery cycles can extend from 6–8 weeks to 10–16 weeks or more under disruption. Operationally, this does not always show up as shortages but the delivery schedules become increasingly unreliable—partial shipments, last-minute delays, and vendor-side uncertainty.

3. Currency Volatility - Rupee value is depreciating against dollar. Even a modest 3-5% currency escalation leads to increase in cost of imported inputs, for example, an elevator package worth Rs. 5 crore with 40% imported component, would cost Rs. 6 lakh more with a 3% depreciation in rupee -dollar value. This would mean not only cost escalation, but re-negotiation, shorter price quote validity periods and need for re-approvals. All this would mean significant delays and increase in transaction costs.

4. Interest rates/ Financing Costs - Although RBI has maintained a status quo and a wait and watch stance, interest rates in the market have already begun to rise, due to uncertainties associated with the conflict. There is already evidence that banks have tightened the lending rates on financing real estate projects. Even a 1% increase in interest rate would lead to 3-5% increase in project life cycle cost, and reduction in project internal rate of return by 2%, pushing marginal projects into unviability.

Transaction cost theory tells us that locking in assets, having large number of actors to coordinate with and uncertainty lead to higher costs:

Transaction costs = f (Uncertainty, Asset specificity, Number of actors)

In a world where uncertainty is rising on so manty counts due to geopolitical turmoil, architects and urban planners can take some steps to mitigate the effect. Here is a quick checklist for projects:

1. Avoid locking projects into single source systems - Specify systems so that multiple vendors and supply chain options remain viable. For example, for elevators, avoid niche imported brands, rather define speed, capacity, energy class, enabling multiple vendors operating in India. Replace imported stone (e.g., Turkish/Italian) with Indian marble or vitrified tile alternatives already acceptable in the spec.

2. Build flexibility into specifications and documentation - If we assume change is going to happen due to war, we can structure it upfront. For example, define that if steel prices rise beyond a threshold, contractor can switch to an alternate section/system within pre-approved limits.

3. Design for uncertainty, not perfect efficiency - It is desirable to avoid systems that depend on tight tolerances or just-in-time delivery, and to build buffers in time, capacity, and sourcing. We can plan material storage buffers on-site instead of relying on continuous supply flows that may be disrupted.

4. Design and phase the project with working capital constraints in mind - We can break projects into financially manageable phases, avoid specifications that require large upfront cash outlays, and align design decisions with cash flow realities of clients and contractors.

These are project scale strategies to mitigate the impact of war. We need to think at city scale too, since the current geopolitical situation is not one-of. It is indicative of a multi-polar world, where the rule based world order of the post world war era is collapsing, and hence cities need to be ready for longer periods of disruptions, emergencies and conflict. Resilience is to be built, in real sense, through the following:

1. Incorporate risk and uncertainty in planning - Plans assume stability, we need to move to larger use of scenario based planning (best case/worst case/shock scenario). Built-in flexibility in master plans will allow cities to respond to changed growth and demand conditions, for example rather than strict zoning for commercial office space, flexible zoning will allow use of the land in case of reduced demand for office space due to geopolitics. Incremental infrastructure planning, rather than large scale project planning, based on population growth forecasts based on past numbers, will work better.

2. Reduce response and coordination time - Faster approval processes, better communication networks, single window mechanisms should be the handy tools to make sure in case of emergencies, cities can respond.

3. Plan for inflation and cost of living pressure - Amid all the uncertainty, incomes are hit in real sense, and cities have to provide low cost options, affordable housing, rental options, public transport, essential services for lower income groups.

4. Create fiscal buffers - Relying on disaster management funding will not work, because often the impact of geo-politics is not in the form of immediate disaster, but slow cooking negative fissure. Having financial resources and creating stabilization funds will come in handy for deployment to help city governments to conduct operations smoothly.

5. Look out for bottlenecks and vulnerabilities - Current situation has taught us, dependence on a location, source or material can be problematic. Whether it is dependence on ports for logistics, or on fuel for mobility, diversification is essential, to smoothen out bottlenecks.

   The global order is shifting, we all have to embrace the roller coaster ride ahead, professionals, projects and cities, all scales need caution. Resilience is not just a buzz word anymore, it has to become a core design and planning principle.

These rules are present in some or the form in all the cities, across the world.

The justification for these rules is based in the negative externalities of construction, i.e. without these rules the kind of buildings that would be constructed, would be unfit for human habitat, since these requirements of margins etc. do not add direct value for the developers or users, they do not have any incentive for designing and constructing buildings as per these standards on their own. However, these are needed for safety, quality of life and aesthetic concerns, and therefore it is important that the government sets these standards up and ensures compliance by enforcing these.

The DCRs evolve over several regulatory consultations and cycles, and over time the specifications become excessive, exceeding the minimum compliance requirements necessary for addressing the externalities. Studies have shown these costs to be excessive and have proven that without compromising the quality and safety considerations, the cost of construction can be brought down significantly by rationalizing some of the norms. For example, in 2018, Dr. Bimal Patel, Sweta Byahut, and Brijesh Bhatha (Full paper) studied the impact of compliance with DCRs in Gujarat. They use an experimental approach, in Ahmedabad, constructing two alternative layouts, one following DCR and another after modifying regulations but maintaining quality and safety guidelines. They proved that a cost reduction of 34% is possible with modifying DCRs, and this can increase affordable housing supply by 75%.

Impact of Excessive DCRs on private housing market

The imposition of excessive DCRs increases the price of private housing and reduces the housing market size.

Further, regulatory imposition of the additional external costs on developers incentivizes them to evade, fully or partially, in the absence of strict enforcement. This evasion creates a parallel market for unauthorized properties, Since compliance with the DCRs is often a norm for getting approvals and sanctions. In developing countries, real estate markets are characterized by low awareness, and unauthorized property markets function as absorption mechanisms for surplus capital originating in informal, extra-legal, or poorly regulated economic activities.

The presence of this parallel market has two effects:

One, it reduces the demand for authorized property, as some consumers might have a high-risk appetite and consider unauthorized property as a close substitute. Property prices in the authorized market are pushed down by low demand, which forces the developers into a local competitive market either to leave the industry or resort to evading. This leads to fragmentation and informalization of the industry.

Two, presence of unauthorized properties has a high social cost, represented by the negative externalities of construction and land-use, which the DCRs are designed to eliminate. Due to non-compliance, these negative external costs are borne by society at large, in the form of pollution, congestion, risks of building collapse, and lower quality of life.

Design of a secondary regime to address the issue of unauthorized properties

Over the longer term, the unauthorized market expands and corrodes the property market functioning, while increasing the social costs associated with its presence. This is worth remembering that this unauthorized property exists without following the physical norms, which are considered important for safety and structural stability.

Another level of regulatory intervention is then needed to reduce the extent of informality and address the safety and quality hazards imposed by the presence of such properties. There is an added cost to designing this second level regulatory regime and ensuring compliance.

Gujarat DCRs lays down the definition of unauthorized construction as “Any building or development, requiring a Development Permission, undertaken without grant of Development Permission, or undertaken after the Development Permission has lapsed, or, after the Development Permission has been cancelled, revoked or suspended, shall be deemed to be an Unauthorized Building”.

Specifically, in Ahmedabad, the issue resulted in piling up of an inventory of 1.17 lakh illegal constructions in Ahmedabad (Link) where no action was taken for a decade (32% of the buildings surveyed from a sample of 1050 were without building use permission).

The Gujarat Regularization of Unauthorized Development Act, 2022 (GRUDA, 2022), that came in force on 17th October,2022 has used this tool of Impact fee, by allowing owners and developers of unauthorized constructions to apply for regularization of such constructions.

This is not the first instance of such a fee being levied in the state for correction of regulatory failure. In 2011, the Gujarat Government earned a revenue of Rs.349.16 crore as impact fee (Link).

With the provision of impact fee, supply of housing increases, as unauthorized properties get classified as authorized.

The welfare reducing effect of such fee, is compensated by revenue earned by the local government, which in turn can be used for welfare generating activities. The extent to which the developers can pass this payment on to the buyers depends on how old the property is. In most of the cases, the properties already exist for a long time, putting the entire onus on the consumers/owners to get the properties converted. In the next cycle of sale purchase, such cost would be passed on to the buyer, therefore it is the class of buyers which bears the incidence of the tax.

The Ineffectiveness of the instrument in addressing regulatory failure and curtailing piling up of unauthorized property is evident from increase in the number of such property over the years. GRUDA, 2022 was proposed to regularize illegal construction but due to lack of clarity on additional charges and fees, and lack of clarity regarding the provisions failed to serve the purpose.

Ahmedabad is not alone, similar issues are piling up in other parts of the country as well like Delhi (Link)and Mumbai (Link).

Alternative Mechanism to address regulatory failure

Demolition may seem to be a relatively trivial job, but it has very high social costs and it is a huge economic loss. Dismantling a building releases material like asbestos, mercury, lead, or polychlorinated biphenyl which has health hazards along with depletion of economic resources. Observing the same from a different angle also brings us to an important discussion of increased risk of arson and the spillover effect. The presumed virtue of impact fee comes as a penalty on the wrong doers but that may be too simplistic a view, as builders and developers are marginally penalized. On the other hand, building collapse or externality comes as a bigger risk. Specially, if we consider the case of Ahmedabad, AMC has demolished a total of 5.6 lakh sq. feet of illegal buildings (Link). But the enforcement cost of Demolition, which includes additional labor and capital costs, along with the loss of public revenue for forgone property taxes and potential impact fee are also to be considered. Another action seen by the authorities was sealing of properties, AMC has sealed 3,260 commercial properties and 382 residential units. An argumentation cost or haggling cost, in this case may lead to Vacant Property Externality.

These costs are to be juxtaposed with the enforcement cost for DCRs in the first place. In a developing economy like India where most of the municipal corporations are running in deficit an additional cost both of enforcement of any fine or penalty is not feasible economically and socially.

UCF provides a wide and flexible menu of admissible projects—laundry list that appears familiar, with some extension. Identification of projects is the key. Success of the initiative requires a two-pronged criteria to be fulfilled by each project:

Two-pronged test for projects:

1. The first test is in moving from: “Is this project eligible?”
   to : “Is this project bankable?”

A bankable project is one where:

• There is a clear user or beneficiary

• The value created is measurable

• A portion of that value can be captured as revenue

2. The second test is in asking: How does this improve productivity—for businesses and for workers?

A productive enhancement project is one which achieves at least one of the following:

• Reducing costs,

• Increasing output,

• Improving access

Let us discuss two project ideas, admissible as per UCF guidelines, and fit for Cities as growth hubs, as per our two criteria:

Project 1: Old City Market Regeneration & Decongestion

The problem faced by most of our cities is a congested inner city/old market area. Projects transform a contiguous 8–12 sq. km. old city area into a high-density vertical market district; pedestrian-friendly commercial zone and focusing on Integrated goods movement and parking systems would add immense value.

Who will pay: Traders will want to shift to better designed spaces; lease/sale of commercial space can be the revenue driver. User charges/parking fee/ enhanced property tax revenue etc. are additional.

Key here is to make the Traders agree and pay. They need to see value in the transition.

Traders will pay for higher earning per square foot, the Project needs to ensure that it happens!

Chatuchak Market in Bangkok and Mong Kok Markets in Hong Kong are examples of traders shifting to vertical market designs willingly.

Project 2: Circular Water–Waste System with Industrial Linkages

Waste water treatment projects with clear identification of industrial reuse will create a closed-loop urban resource system: Wastewater can be treated and reused by industry; similarly, solid waste has to be processed and monetized. Key to implement is to upgrade the key sewerage treatment plant, build pipeline to identified industrial users and secure offtake agreements.

Who will pay: Sale of treated water can be the anchor revenue; Tipping fees for waste and additional by-products such as compost and recycled materials can augment revenue.

Critical Success Factor here is pre-secured demand from industry, without this, project collapses financially.

This has to be ensured through long term off take agreements.

NEWater system Singapore, and Kalundborg Eco-industrial park in Denmark are examples of this commercially successful circular arrangement.

Let us make a recipe-book, a checklist for potential success:

• Identification of Payer: Clearly, in the design phase, find out who pays

  1. Users pay for services

  2. Businesses pay for access/higher revenues

  3. Land Markets pay through value capture

  4. Public Finance pays for Public Goods

• Designing Projects as economic systems: Create bundles of admissible projects, rather than sticking to one category.

  Club categories of admissible projects to create a complete value preposition, like market redevelopment + Parking + Pedestrianization + Logistics; or waste water treatment+ reuse network+ Industrial demand

3. A Better Way to Evaluate Projects: For cities to function as growth hubs, projects should be assessed on:

• Clarity of who pays and why

• Extent of productivity gains (firms + labor)

• Reduction in transaction and logistics costs

• Improvement in labor accessibility

• Ability to leverage private investment

Cities become true growth hubs when they raise total factor productivity (TFP)—that is, when the same land, labor, and capital produce more output because urban systems work better.

For example, China is the world leader in Bi-cycle manufacturing, while India is second. While labor cost is lower in India, it is the TFP growth = coordination cost + Infrastructure cost + Technology Adoption Cost that makes the difference.

The Urban Challenge Fund India should therefore prioritize projects that reduce coordination costs, improve input reliability, and increase effective density, thereby lifting TFP for firms and workers.

Like in families, if one party shirks, it impacts the others and makes the whole structure imbalanced. Given the vertical power dynamics in the structure, it is the central government that has to do the grandparenting, if the state governments fail to fulfill their duties. But central allocations would mean ‘one size fits all’ transfers, directly to cities. Receiving occasional gifts from your grandparents is joyful, but to rely on such benevolence for the basic duties, can be intimidating and untenable.

Let me explain the metaphor:

1. What is the states not doing right?

States are required to appoint SFCs in every five years to decide the criteria of distribution of funds to urban and rural governments. Since cities differ in size, tax capacity and infrastructure, SFCs are supposed to determine the distribution formula, to reduce disparity and ensure equity in service delivery.

The 16th FC report states:

“Since local bodies fall under the State List of the Constitution, the grants from the Union are expected to supplement, not substitute, the resources transferred by the States on the recommendations of the State Finance Commissions (SFCs).”

However, state governments have been irregular and inconsistent in this. Many states delay SFC constitution or implementation, and recommendations are often partially accepted. The 16th CFC report (Page n. 212) mentions data compiled by Indian Institute of Public Administration.

2. What is the implication for the Center and the federal structure

CFCs are required to base their recommendations for grants to ULBs on the SFC recommendations, however successive CFCs have expressed difficulties in using SFCs recommendations, given their irregularity and lack of uniformity. CFCs have resorted to pushing states to set us SFCs in time, by imposing conditionality for availing local body grants. Some progress is made due to such pressure, but the anomalies are so much that the 16th CFC report has resorted to saying:

“In Articles 280(3)(bb) and 280(3)(c), the Constitution directs the FC to make its recommendations on RLBs and ULBs ‘on the basis of the recommendations made by the Finance Commission of the States.’ We recommend that the above‑quoted expression be dropped from the relevant articles through a Constitutional amendment.” (Page 225)

The Danger in this is replacing a structural logic with a practical workaround. States will have perverse incentives to withhold devolution and be reluctant in sharing fiscal space. Centre grants will become a parallel channel, without state level contextualization, and alignment of granular local needs. SFCs as institutions will be further weakened and redundant and there will be a change in the fiscal relationship, a direct quasi relationship between the center and the ULBs. For a large country like ours, it is an undesirable outcome.

3. What is the implication for cities

For the cities, this might mean a short term relief in accessing the CFC grants, without the conditionality. But in the longer run, non-alignment between central and state grants might mean multiple, even conflicting objectives, more confusion and lack of clarity and greater reliance on market based financing, which though brings discipline, but at a high cost. Imagine a city struggling to fund basic services, suddenly gaining easier access CFC grants. To use these funds, it builds water and drainage infrastructure. But over time, with state funding not aligned, there is little support for operation and maintenance. As assets age and service gaps persist, the city is pushed toward costlier market-based financing

To accept that something is not working, is a virtue. However, to say that therefore it should be bypassed, is dangerous. There are institutional fixes, something not undoable, like fixing automatic and clear deadlines, without political choices built-in; making SFCs recommendations to be rule-based mandatorily; and asking states to clearly publish accepted and rejected recommendations; aligning SFC formation with state budgetary cycles; periodic review by CAG (it sounds daunting to ask for a new performance monitoring agency to be created, for the fear of having another agency leading to more coordination issues and lack of accountability and outcomes).

The issue of ULB finances needs systemic restructuring and institutional tightening. Without working on the nuts and bolts, the system can not function sustainability with crutches and ad-hoc support.

Weak enforcement of SFC-driven fiscal decentralization converts what should be low-cost, rule-based transfers into high-cost, market-dependent urban financing.

The 16th FC is lauded to have increased the share of Urban Local Bodies (ULBs) in total grants. However, the core issue remains, that of autonomy and control of ULBs on resources. 16th FC report quotes a study conducted by Janaagraha, stating that revenue from own sources, i.e. the taxes/fees/fines etc. collected and retained by cities, account for 51% of their total revenues. This percentage declines with the size of ULBs. For cities, with population given below, own source revenues amount to (%)

more than 40 lakhs - 61%

between 5 and 40 lakhs - 55%

less than 5 lakhs - 32%

Dependence of ULBs on grants, therefore is very high, in the range of 40-60%. These grants are from central and state governments, tied(scheme/program specific) and untied. The most important source of own source revenue for ULBs is Property tax, and collection efficiency of the tax has always been an issue. It will remain to be an issue, unless property records are rectified, and most importantly, the undervaluation of property caused by prevalence of Official rate/guideline value/Jantri Rate is not addressed.

The system of devolution of funds and distribution of grants from the Divisible pool, vertically between center and states, and horizontally among states, is based on the central idea of fiscal federalism, and promotes rule based sharing to correct for imbalances. The divisible pool is estimated from the Gross Tax Revenue (GTR) of the central government, after deducting cost of collection and the amount collected through cesses and surcharges, which are to be kept by the Central Government.

Revenue from five taxes is included in the divisible pool: two direct taxes, income tax and corporate tax, and three indirect taxes, union excise duty, customs duty and Goods and services tax (GST, Central and Integrated settlement components).

A large share of these taxes is collected in the cities. There is no single source of data to validate this claim. Urban-rural distribution of tax collection is not reported. However, it can be argued that contribution of cities in collection of these taxes included in the divisible pool would be significantly higher than the rural settlements. Let us take a look:

• Generally speaking, base for taxation is economic activity, or GDP, income generation by individuals and businesses, consumption of goods and services, production of goods and trade, all these activities are performed more in urban areas, spatially, than in rural areas. Economic Survey 2025-26 mentions contribution of cities in GDP is around 70%.

• Agriculture income is exempt from tax. Informal sector evades the tax net. It is the formal organized sector operating in cities, that contributes largely to income and corporation taxes.

• For consumption of goods and services, cities act as hotspots of consumption. In a destination based GST system, with 60% population in rural areas, it is difficult to estimate the exact share of GST being generated in cities. There are no official data sources provided to help such estimation. However, per capita incomes are higher in cities, GST complaint firms and digital payment infrastructure are present in cities. Services are a large part of GST base, and finance, IT, real estate, professional services etc. are overwhelmingly concentrated in cities.

• For union excise on items like petroleum etc. (which are out of GST), production clustering is largely urban industrial ecosystem oriented. Trade taxes are also tied to city based economic systems. Imports fuel the urban consumption and exports are generated from urban industrial clusters.

In spite of contributing significantly to the tax collections, cities have to rely on grants and transfers from the central and state governments.

Figure above is based on data taken from the 16th FC report. ULBs generate less than 1% of GSVA as own sources of revenue, barring Maharashtra. The figure below presents data on per person own revenue collection by ULBs. These numbers are in rupees, and represent how much our city is collecting from us, through local taxes, fee, fines etc, over a period of three years.

Compare this with what we pay for central taxes annually i.e. income tax. Also, for each transaction that we make, we pay GST. For some states, this amount collected by cities per person, comes out to be lower than the GST we sometimes pay on our restaurant bills.

Public Finance principles suggest that local governments should have a immovable tax base, property tax is therefore the best candidate to be a local levy, since property is immobile. Theoretically, taxes on local assets (property, land value) and user charges for service delivery should suffice as sources of revenue for local governments. However, given the problems with property tax and lack of systemic courage to implement user charges for most urban services (partisan politics, myths around affordability and willingness to pay and empirical lack of efficiency and quality in delivery are the reasons), there is a need for reassigning some tax bases or formula based sharing of some central taxes directly with local governments.

In other countries, this imbalance is adjusted, in a formulaic manner, not in an ad-hoc obliging way. Let us look at some examples:

• In Brazil, services are taxed at the local level, and form a major source of revenue for the local governments. City governments also receive a fixed, formula based share of central taxes, like income tax and industrial products tax.

• In Nordic countries, cities levy their own income tax, and this tax is the major source of revenue for the cities. Sweden and Finland charge a flat rate local income tax, along with the national income tax.

• In Germany, proceeds from the income tax are shared between center, state and municipal governments, where local governments receive almost 15% of overall income tax collected. In many other European countries, there is a formula base sharing of income tax revenue with local governments.

• Japan has a local inhabitants tax along with a national income tax.

  These systems allow for a predictable, clear tax base for the local governments, providing them greater autonomy and control over their resources. Cities benefit from higher incomes, formalization and economic growth. In India, cities do not have any direct claim on the income tax or GST. Proceeds are shared with the states and cities have to rely on the transfers from the state, and grants tied to schemes.

  India has become the 4th largest economy in the world. Cities generate 70% of that $ 4 trillion GDP, but control less than 1.5% of that in term of their own revenue, to be able to deliver services to their citizens. What we need is a radical restructuring of the fiscal incentives and powers, not the incrementalism we have been witnessing in the past.

Agree, there is chaos on the roads, enforcement of rules is difficult, waste management is a serious challenge, and air purifiers are becoming a household reality. But does that mean cities should be prevented from growing? What we call “unmanageability” is a limitation of our collective capacity to govern and manage cities. That inability should not be used to thwart the role of cities as growth hubs.

As per figures quoted in ‘Cities as Growth Hub Knowledge Framework Report’, six metropolitan city regions in India, Mumbai, Delhi, Kolkata, Bengaluru, Chennai and Hyderabad generate around 1 trillion dollar GDP, nominally, more than 20% of country’s output!

Three lines of argument emerge, from those who are unimpressed with these numbers:

1. Quality of life argument - These cities are growing, but the quality of life citizens have to face is pathetic.

2. Look beyond the Metros argument - India officially has 7935 cities and towns (as per Census 2011, 4041 Statutory towns, 3894 Census towns). Our collective consciousness does not go beyond 100 at the maximum.

3. Urban bias argument - Rural areas, if provided with urban amenities can generate similar growth.

The first here, is the most difficult to defend argument, since empirically we have not been able to improve the quality of life or our citizens, especially for migrants. But this brings back the rhetorical idiom, does the answer not lie in finding solutions to manage the cities better. This is not evidence against cities—it is evidence of underinvestment and weak governance.

Second and Third arguments are linked. The answer is scale. Urban scale allows productivity benefits. In urban economics literature, the term ‘Agglomeration Economies’ is used to describe these benefits. These benefits arise from sharing, matching and learning (read the National Bureau of Economic Research Working Paper, by Gilles Duranton and Diego Puga here).

Rural areas can not be provided with all the infrastructure that cities make feasible, due to shared costs and utilization. Sharing of resources and infrastructure allows firms to produce at large scale, at low costs, making them competitive. A firm running in a city can have access to packaging industry, advertising, legal counsel, at a low cost. Some of these can be made available online, and therefore possible to be accessed from villages, but physical reality does not vanish, things have to be packed, touched, lifted and delivered. Matching of jobs with their seekers is a function that cities perform. Imagine a super specialty hospital and a heart surgeon. Villages can not provide specialization of jobs. Learning happens through interactions, ideas turn into innovations, probability of that happening is much higher in cities.

Cities as growth hubs, therefore is a much needed initiative, it provides a different lens to be picked up by all our officials and planners. The policy is in a nascent stage, here’s hoping that it brings real change. That the projects/proposals under the scheme, are really analyzed and chosen for their productivity-enhancing impact. It is not difficult, the only question that is to be asked while choosing a project to support is, whether it makes our businesses more competitive and/or brings cost of living down for our citizens. Cost here can be in terms of time, money, or effort.

Growth is not a choice, it is an imperative. Cities have been growing, will continue to grow, policy has arrived late to the party, better than never. Let us hope the change this time is real.