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Monetizing the metro PDF Print E-mail
Thursday, 16 February 2012 00:00
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Raising FAR and hiking property tax a good idea

Given that India needs around R40 lakh crore (at 2009-10 prices) over the next two decades to finance its urbanisation needs, it’s important to find innovative ways to get the money. So far, while building airports and metros, local governments have found it convenient to hand out huge dollops of land—250 acres for the Delhi airport and 960 acres for the Delhi metro—which can be used by developers to do commercial activity to cross-subsidise their costs. While that’s a good idea, there’s just so much land available to give out.

In this context, the urban development ministry’s suggestion that states start raising the Floor Area Ratio (FAR) along metro routes and then hike property taxes in these areas is a good idea. Since suburbs can expect to see capital appreciation of around 40-50% on average once metro connectivity reduces commute time to the city centre by half or more, there is no reason why the state government shouldn’t get part of this. It was, after all, the state’s action that caused the property price to appreciate and, more important, it is these very taxes that can help part-finance the costs of expensive metro systems. Indeed, the model needs to be extended to other areas as well. If establishing of a hospital helps increase capital values of land, governments can use property taxes to help part-finance such projects, making it a win-win for all concerned.

While some argue this will cause congestion and choke infrastructure, it’s worth keeping in mind that India has amongst the lowest FARs in the world. Mumbai’s FAR of 1.33 contrasts badly with New York’s 15 in the central business district, Seoul’s 10 and Singapore’s 25—given how the infrastructure in none of these cities is choking, it suggests bad planning and not higher FAR is the cause of the problem. In the longer run, though, with 40% of Indians likely to live in cities in the next two decades, the government has to look in terms of formula-based transfers from the central tax pool as well as greater taxation powers to cities.


 

 

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