"Fairy Tales of Western Development" by Yuen Yuen Ang: A review

by Anirudh Burman.

Introduction

Yuen Yuen Ang's "Fairy Tales of Western Development: The Non-Democratic Origins of Fiscal Capacity in Britain, the US, and China" challenges an influential account of fiscal-state formation. According to her, this prevailing account explains that representative institutions secured citizens' consent to taxation in exchange for public goods. Ang argues that this account gives an incomplete, sanitised history of Western development. This has then shaped policy advice to poorer countries. She instead emphasises financial improvisation, public-private arrangements, and cycles of crisis and institutional repair. In the essay, she seeks to revise that history and broaden the meaning of fiscal capacity beyond tax collection.

Ang's argument is useful for gaining a different perspective on how Indian cities raise and spend money. In my opinion, the prevalent discourse on improving the fiscal condition of Indian cities over-emphasises the importance of property tax. This property-tax-centred reform agenda starts from weak collections and seeks to increase both receipts and their share of municipal revenue. Yet, cities also use land-based instruments, including development charges and premiums for additional floor space and other development rights, to finance infrastructure. Property-tax reform is important, but it must not be the predominant focus of urban public finance. Applying Ang's argument, especially alongside John Wallis's history (discussed later), focuses attention on how land-based finance can expand the resources available to cities and change their reliance on particular taxes. The important question is how these instruments are designed and governed.

Ang uses "taxless finance", a term she credits to Wallis, to describe arrangements that finance infrastructure without raising current taxes. These include land monetisation, credit, shadow finance, and the sale of monopoly rights. They can mobilise resources without formal public consent. However, they leave taxpayers responsible for losses when projects fail. To this, Ang adds the concept of Adaptive Fiscal Capacity (AFC). AFC is a government's ability to raise, manage, and adjust its mix of tax and taxless resources as conditions change. She uses this concept to explain the process of fiscal capacity development in countries like the UK, USA, and China.

Ang's argument concerns how fiscal and economic development occur together. She argues, based on the evidence she presents, that early risk-taking and credit expansion in the developmental path of states may be necessary, with later regulation and taxation consolidating the gains from such early risk-taking. She also distinguishes the capability of enforcing tax compliance from developing an economy capable of generating tax revenue. This promotes a developmental reading of taxless finance, not merely a view of it as a temporary response to weak taxation.

Argument

Ang first questions the historical account behind the prevailing institutional and democracy focused explanations of fiscal strength. She asks how fiscal capacity actually developed, rather than assuming that representative government and consensual taxation deterministically led to this capacity creation. Britain, the United States, and China provide the comparisons through which she develops her alternative account. In this argument, infrastructure finance matters because land, credit, and public-private arrangements helped governments mobilise resources. The narrower question of how states have actually financed infrastructure when tax receipts are insufficient is one important implication of this history.

Ang uses Britain's history to challenge the prevailing account of fiscal development. The familiar story stresses how constitutional changes after 1688 protected property and made public borrowing more credible. Ang argues that this must be considered alongside the equally significant history of heavy taxation, monopoly profits, colonial extraction, slavery, and trade policies that protected domestic producers. Her point is that constitutional reform alone cannot explain how Britain financed its development.

Ang's account of the United States more clearly traces the change in financing arrangements over time. In the early to mid-1800s, US state governments used land, banks, bonds, and corporate charters to support infrastructure when direct taxation faced resistance. Ang connects these arrangements to the Panic of 1837, state defaults in 1841-42, and later reforms. These reforms limited borrowing, changed the rules for forming corporations, and made tax arrangements more uniform. The case shows how arrangements that enabled infrastructure investment were later regulated and redesigned. Those reforms are part of Ang's narrative of fiscal development. In this account, the earlier financing was not just a mistake, but an important strategy in its own right.

Ang cites Wallis extensively to support this argument. Wallis documents how many American states reduced or eliminated state property taxes as other income became available. American state governments initially relied on property taxes, but expanded their investments in banks, canals, and railroads through private, public, and mixed corporations. They earned income from canal tolls, dividends on bank stock, and land sales, alongside indirect taxes on business. Rising asset income allowed many states to reduce or eliminate their state property taxes. These governments did not merely supplement inadequate taxation. They replaced an established tax source, state property taxes, as other receipts became available.

Wallis presents a historical account that Ang uses to argue that taxless finance can contribute to development. It is not just a stop-gap arrangement or a necessary evil. It can expand the resources available to governments and, in some circumstances, replace established taxes. Fiscal development involves changes in the mix of taxes, asset income, and borrowing, together with the institutions needed to govern them.

Ang then moves on to an analysis of China's development. After market reforms began in 1978, fiscal contracts between the centre and provinces allowed the latter to retain revenue above negotiated quotas. Local governments also kept extra-budgetary income, including profits from township and village enterprises, encouraging them to promote industrial growth. The 1994 tax-sharing reform replaced these bargains with a unified allocation of taxes and strengthened central revenue collection. Local governments retained responsibility for education, health care, and infrastructure but lacked authority to introduce new taxes and faced restrictions on direct borrowing.

In this context, land-use-right leases became an important source of local funds. Ang describes local governments converting rural land for urban or commercial use, compensating farmers, and preparing sites with basic infrastructure. Developers then bid for fixed-term rights to use the land and paid a one-time land-transfer fee. The receipt was therefore payment for a lease of use rights, not an annual property tax. Local governments gained access to substantial funds.

Land also provided collateral for borrowing through government financing vehicles, state-owned companies established by local governments to fund infrastructure. Ang traces one model to a 1998 collaboration between the China Development Bank and Wuhu City Government, which bundled construction projects so that financing vehicles could borrow and repay collectively. The model spread, and local governments could borrow through these companies from local banks despite restrictions on direct public borrowing. Ang connects this financing to the expansion of public utilities, roads, and other infrastructure from the 2000s (Ang 2025, p. 13).

The resulting investment created both development opportunities and debt exposure. Repayment depended on projects generating growth and revenue, while falling land prices or wasteful investment could leave local governments unable to meet their obligations. Ang describes attempts by the central government to control these risks, but reports that debt continued to grow. China therefore supports her argument that taxless finance helped build infrastructure while also showing an unresolved problem of institutional adaptation.

How Ang's thesis relates to earlier work

Earlier scholarship already questioned the idea that states grew through voluntary agreements between rulers and citizens. Ang cites many of these works in introducing her argument. Tilly's account placed war and coercion at the centre of European state formation (Tilly 1990). Ang is therefore not the first to challenge a peaceful story of consent and taxation. She, however, draws attention to the range of financial arrangements through which governments acquired resources, especially those outside ordinary taxation.

North and Weingast argue that the constitutional settlement after 1688 made government promises more credible and substantially expanded its ability to borrow. Parliamentary constraints reduced the Crown's ability to alter agreements, giving lenders greater confidence in repayment (North and Weingast 1989). This does not conflict with Ang's emphasis on taxless finance. Borrowing is itself one of the instruments she describes. Their argument helps explain the institutional conditions that made such finance possible, while hers examines its role in development and subsequent reform. Ang explicitly acknowledges the borrowing mechanism, although she challenges the broader claims North and Weingast make with regard to post-1688 institutional change. Her evidence of coercion, monopoly privileges, and colonial extraction broadens the historical account. However, it does not by itself refute the narrower proposition that credible commitments increased access to public credit.

Besley and Persson explain low taxation through factors such as narrow tax bases, weak administration, limited transparency, and poor compliance (Besley and Persson 2014). Ang shifts attention from this explanation to the historical formation of fiscal systems on the one hand, and the relationship between financing development and generating taxable economic activity on the other. One helps explain weaknesses in tax collection; the other widens the inquiry to how investment, revenue sources, and fiscal institutions develop.

Indian cities and local government finance

Indian cities need to finance expansion while also paying for existing services. Their ability to do so depends on how powers and revenues are divided between governments. Article 243W of the Constitution of India provides that a State Legislature "may, by law, endow" municipalities with powers and responsibilities for functions including those in the Twelfth Schedule. Article 243X similarly provides that a State Legislature may "authorise a Municipality to levy, collect and appropriate" taxes, duties, tolls, and fees. Municipal corporations must therefore be understood within a wider system of State governments, development authorities, and other public agencies.

Property-tax reform addresses a real weakness, but it should not be the only test of municipal fiscal strength. The RBI reports that property-tax revenue growth has not kept pace with rising urban property values. It also identifies development charges, betterment charges, and building-approval fees among municipal non-tax revenues (Reserve Bank of India 2024). Increasing property-tax collections and increasing their share of revenue are different objectives. That share can fall even when collections improve if other receipts grow faster. Given the institutional structure of India's urban governance, we must also distinguish money received by municipalities from receipts collected by development authorities and other urban agencies.

Land-based finance is already part of India's policy approach to urban infrastructure. Ang's argument is useful here, since we can study the current fiscal situation within her paradigm of fiscal development, and not understand the low levels of property tax collection merely as an indicator of weak property taxation. The policy implication is to design instruments properly to finance investment now while supporting reliable revenues over time. This requires clear rules for collections, spending, and future obligations.

These instruments perform different functions. A development charge may recover infrastructure costs associated with new development. A premium floor space index (FSI) charge is a payment for permission to build additional floor area. A land sale raises money by disposing of a public asset. These receipts should not be treated as interchangeable merely because they are linked to land. Recurring income need not come only from taxes. But income from operating or holding an asset differs from selling it, just as receipts tied to new development differ from a continuing annual revenue stream.

These differences matter when designing a fiscal system. Taxes, land-based receipts, borrowing, and transfers need rules suited to their functions, so that financing investment today also supports the ability to meet continuing obligations.

A related concern is about the allocation of revenues. Raising money for a city is not the same as giving its municipality control over that money. A development authority may collect a land-based charge while a municipal corporation later pays to maintain the infrastructure. In such a case, it matters who receives the money, who decides how to spend it, whether its use is restricted, and who pays for continuing services. Ang's framework also considers how governments adapt their relations with one another and manage future obligations. Applied to Indian urban finance, the framework directs attention to how receipts and service responsibilities are divided. Institutionalising land-based finance therefore requires more than regularising collections. It also requires arrangements that connect investment decisions to the resources and responsibilities needed to sustain services.

Contributions and limitations

Ang makes three useful contributions. She challenges a selective account of Western fiscal-state formation and its use as a model for developing countries. She places taxless finance and institutional adaptation within the explanation of fiscal development. She also uses China to help construct a comparative argument, rather than treating Western experience alone as the source of general theory.

This review draws on Ang's argument that early risk-taking and credit expansion may be necessary, and that regulation and taxation can consolidate earlier gains. Consequently, the later redesign of financial instruments is part of fiscal development, not simply a correction to an undesirable practice. Taxless finance can help governments build infrastructure and develop their economies rather than merely compensate for weak tax collection. Wallis's account adds that this process can also involve reducing established taxes. Taken together, these arguments support examining how instruments are designed and institutionalised without assuming that taxation must take a larger share.

The distribution of costs and benefits also needs more attention. Ang discusses heavy excise taxes borne by UK consumers whose interests Parliament did not necessarily represent, and the possibility that taxpayers would bear losses from failed local investment in China. These examples make the allocation of risks and costs part of the assessment of fiscal development.

How governments move from raising resources to sustaining services still needs explanation. This is a question about how the developmental process works, not a reason to dismiss its earlier stages. Ang's account creates the ground for a closer examination of the reforms that turn early financing arrangements into lasting fiscal capability.

Conclusion

"Fairy Tales of Western Development" challenges the idea of representative democracy and consensual taxation as the defining history of fiscal-state formation. Ang's alternative account additionally emphasises financial improvisation, non-democratic arrangements, and institutional repair. The American case connects infrastructure finance to later regulation and tax reform. China shows the scale of investment made possible through land and borrowing, alongside unresolved fiscal pressures. Britain challenges a selective account of Western development. This thesis supports a broader interpretation of fiscal development as a changing mix of resources and institutions, often extracted through coercion, resulting in their present forms after a series of trials and experiments.

For Indian cities, land-based finance should be assessed as part of the fiscal system in its own right, not only as compensation for weak property taxation or a temporary step towards greater tax dependence. Property tax can support recurring services. Development charges and premiums may finance infrastructure, and borrowing can spread capital costs over time.

Governing this changing mix requires institutional work. Collection rules, spending powers, debt obligations, and responsibility for maintenance must fit together, especially when different agencies receive revenues and provide services. The question is how to design improvements to existing extractive processes so that the design incrementally creates lasting fiscal strength.

Bibliography

Ang, Yuen Yuen. 2025. "Fairy Tales of Western Development: The Non-Democratic Origins of Fiscal Capacity in Britain, the US, and China." Forthcoming in Political Economy Rebooted, edited by Marion Fourcade, Greta Krippner, and James A. Quinn. Duke University Press. SSRN 5661111.

Tirumala, Raghu Dharmapuri, and Piyush Tiwari. 2021. "Land-Based Financing Elements in Infrastructure Policy Formulation: A Case of India." Land 10 (2): 133.

Ministry of Urban Development, Government of India. 2017. Value Capture Finance Policy Framework.

Reserve Bank of India. 2024. "Own Sources of Revenue Generation in Municipal Corporations: Opportunities and Challenges."

Besley, Timothy, and Torsten Persson. 2014. "Why Do Developing Countries Tax So Little?" Journal of Economic Perspectives 28 (4): 99-120.

North, Douglass C., and Barry R. Weingast. 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England." Journal of Economic History 49 (4): 803-832.

Tilly, Charles. 1990. Coercion, Capital, and European States, AD 990-1990. Oxford: Basil Blackwell.

Wallis, John Joseph. 2000. "American Government Finance in the Long Run: 1790 to 1990." Journal of Economic Perspectives 14 (1): 61-82.

Anirudh Burman is a research at XKDR Forum, working on land, urban governance, public finance, and regulation.

Using Land for Economic Development: India's Land Problem Is Also a Public-Finance Problem

by Anirudh Burman.

Policy makers have traditionally considered the state's use of land for economic development as only a property rights problem. Using land for economic development is one of the main ways in which Indian cities are built and expanded. Roads, metros, housing, industrial areas and public facilities all require land. Government agencies decide where this infrastructure will go and what can be built around it. These decisions change the accessibility and development potential of land. They also create new obligations for roads, drainage, water, waste collection and other public services. Most of this is done by acquiring private land and putting it to public use.

Indian governments have traditionally relied heavily on compulsory acquisition to assemble land for this process. The state acquires land and pays compensation before financing the infrastructure needed to develop it. It gives the state a clear legal instrument, but it also has serious costs. Its use has often left compensation, rehabilitation and resettlement, procedural fairness and the wider distributional costs borne by affected people inadequately addressed.

It is also a poor way to finance development. Acquisition routinely takes time and money. Litigation, administrative delay and financing gaps compound both.

Under the old land-acquisition law and its successor, the state is the upfront buyer of land for roads, stations, housing, public facilities and urban expansion. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (the "2013 land acquisition law") made this route more expensive and more demanding. Over the past decade, states have looked for alternatives. But the case for change is larger than the consequences of the 2013 law.

Compulsory acquisition creates two linked land-finance problems. First, the state often commits large sums to land before it can build the infrastructure that gives a project its public value, sometimes without the resources to do so. This leads to delays. Second, litigation and administrative delay raise the cost of development and defer its benefits. They increase financing and construction costs, postpone land development and reduce the present value of expected benefits.

There is also an institutional problem. A development authority may assemble land, grant additional development rights or collect development-related charges, while a municipality or utility provides the resulting roads, drainage, water and other services. Similar problems arise outside municipal boundaries, where land may already be converting to urban uses while planning and finance powers remain with institutions designed for rural settlements. Land development therefore raises a wider set of public-finance questions. What rights does the state actually need over land? How should the costs of infrastructure be financed? What part of value created by public action can be recovered? Which institution should receive that revenue, and which institution must provide the resulting services?

I make the argument in three steps. First, compulsory acquisition should remain available but cease to be the default, especially for urban development and expansion. Second, I set out principles for choosing among land-development instruments and financing the public costs associated with them. Third, I propose seven changes to land assembly, public-asset management, planning and local finance. Together, they would lower unnecessary public expenditure while creating lawful and durable sources of revenue for public investment.

Limiting the use of compulsory acquisition

The 2013 land acquisition law raised compensation and placed rehabilitation and resettlement at the centre of acquisition. This protects people whose land is taken for public purposes. In many cases, acquisition costs can be a multiple of the market rate of the land being acquired, which makes urban land especially expensive. Government agencies must therefore account for compensation, rehabilitation and resettlement, administrative effort, finance costs, delay and litigation. These are fiscal commitments, not merely administrative processes.

Compulsory acquisition remains necessary for some public works. Metro alignments, transmission corridors, trunk sewers and road junctions may require contiguous land, indefeasible title, fixed geometry and timely possession. Voluntary assembly may fail where a single holdout can block a network. This, however, does not mean that compulsory acquisition should be the default strategy for state agencies.

The fiscal problem predates the 2013 law. When the state acquires land before developing it for urban purposes, it makes a fiscal commitment years before the developed land generates revenue. It also bears the risk of delayed approvals, contested awards, fragmented possession and changing construction costs. A project can acquire land first and confront the service and financing problem later, during redesigns, additional land requirements, delayed construction and obligations that were not part of the original acquisition decision.

The social cost is equally important. Acquisition can break the relationship between a landowning household and the value created by later planning and infrastructure, often by displacing that household. A one-time compensation payment may settle a legal claim, but it does not create a durable stake in the development that follows. The state is then the only party with a continuing stake in the land. In Indian practice, it has often not produced the intended development outcomes. Tenants, farm workers, small businesses, informal occupants and households with uncertain documents can lose access, income or neighbourhood ties. Compulsory acquisition can turn a potentially mutually beneficial transaction into an adversarial process between the state and affected citizens. That process has fiscal consequences as well.

The choice of instrument is therefore a question of public purpose and distribution, but also of long-term fiscal responsibility. States should develop a repertoire of land-assembly instruments that reduces coercion and upfront fiscal claims, while keeping the incentives of affected parties in view.

That is why the Indian state must have a choice of land-assembly instruments. It cannot rely only on expropriation. Before acquiring land, a state agency should compare the full lifecycle cost of negotiated purchase, pooling, readjustment, leasing and other alternatives. A lower upfront outlay is not necessarily fairer or cheaper over the life of a project.

Principles for a different land-development finance policy

Compulsory acquisition for urban development is usually framed as a question of coercion, compensation and procedural fairness. This treats the problem as one of how the state takes private property. But acquisition is a way to assemble undeveloped or underused land, develop it through infrastructure and planning, and unlock higher economic value for private and public actors alike. Most urban interventions change the productive potential of land. The question extends beyond acquisition to how the state measures, attributes and partly recovers the value created by that transformation to finance the public action that made it possible.

The starting point must be private property, because development changes the value of privately held land. Increases in land value belong to holders of property rights. The state does not acquire a claim over those gains merely because land values rise. It acquires a claim when its investment and planning decisions create part of that increase. A metro line, a road, rezoning or additional development rights can increase a parcel's accessibility or its development potential.

Where public action creates such an increase in value, the state should be able to do two things: (a) assemble and develop the land needed for planning and infrastructure, and (b) capture a limited and proportionate part of the value increase to help finance the investment that created the gain ((Peterson, 2008); (Suzuki, Murakami and Hong, 2015)). The objective is to recover public costs from the value those costs help create. Revenue must also reach the public body that bears the related infrastructure and service obligations. These premises lead to four principles for choosing and designing land-development instruments.

First, a better policy should reduce land-assembly and development costs for landowners and the state, as far as possible and without coercion. Indian states and cities already use versions of this approach for urban development, including town-planning schemes in Gujarat under the Gujarat Town Planning and Urban Development Act, 1976, and more recently in Maharashtra; and land-pooling schemes in Amravati, Delhi, Chennai and Guwahati ((Ballaney, Faust, Swarankar and Ghosh Belliappa, 2022)). The choice of the exact land-assembly scheme follows from this principle.

Second, states must ask whether a project requires absolute title, free from pre-existing private interests. Compulsory acquisition gives the acquiring state agency complete and final title. This reduces the risk of title challenges and gives planners broad scope to implement planned development in the acquired area. Agencies should weigh the need for such secure title against the cost of compulsory acquisition. Indefeasible title may be necessary only where a public purpose requires permanent and exclusive control over land. Relevant considerations include network continuity, security, strategic importance and the inability to tolerate later termination of the state's rights.

Third, land-development instruments should preserve the economic stake of affected parties where possible. Existing owners may then retain an interest in the value created by development, which can reduce opposition and lower upfront costs relative to compulsory acquisition. Town planning, land pooling and leasing can do this through returned serviced plots, retained title, deferred payments or other forms of continuing interest ((Hong and Needham, eds., 2007); Byahut and Mittal (2017)). These mechanisms may still displace existing uses or impose costs on tenants, workers and occupiers. Those costs can be lower than under compulsory acquisition, but they must remain part of the comparison.

Fourth, regular and stable flows of spending and income are preferable to large upfront allocations. Several proposals below reduce the state's initial cost and turn development finance into a steady, predictable stream.

These principles point to three relationships that land policy must get right. First, the state should acquire only the property interest that a public purpose requires. Permanent ownership, temporary possession, development rights and access rights impose different costs and allocate different risks. Second, where public investment or planning raises land values, the state should recover only a limited share of the increase attributable to public action, sufficient to help finance the investment and related service costs.

Third, revenue must be aligned with the institution that bears the resulting costs. A planning authority may grant development rights while a municipality provides roads, drainage, waste collection and other services. If revenue and service obligations sit in different institutions, value capture cannot finance public services effectively. The proposals below apply these relationships to land assembly, development, public assets and urban finance.

Proposals for a different land policy

I propose seven linked changes. None is novel in isolation, but their value lies in their combination as a public-finance strategy for urban development. They respond to four weaknesses in the present system: (a) excessive reliance on cash-heavy compulsory acquisition, (b) limited use of arrangements that preserve a private stake in development, (c) planning and development rights that are often disconnected from infrastructure costs, and (d) weak assignment of development-related revenue to the public bodies that finance infrastructure and services.

1. Reserve compulsory acquisition for indispensable public infrastructure. It should be limited to cases in which an alignment, network or public facility requires contiguous land, indefeasible title, fixed geometry and timely possession. Every other proposal should compare acquisition with lower-outlay alternatives on full lifecycle cost, not compensation alone. Urban development projects should be able to combine purchase, compulsory acquisition, leasing and land readjustment.
2. Create a legal framework for land assembly that reduces the state's immediate cash requirement. Land pooling, town-planning and land-readjustment schemes can reorganise plots, reserve land for public purposes and return serviced land to owners. They can reduce the state's immediate cash requirement while retaining land, rights or charges that help finance infrastructure.
3. Use long-term leasing where purchase is unnecessary. Long-term leasing is appropriate where a public purpose requires use or control, but not permanent ownership. It can reduce the state's upfront cash requirement while allowing the owner to retain title and receive an income stream. This does not make leasing cheaper by itself. The state should compare the discounted value of lease payments and contingent liabilities with the cost of purchase.
4. Use concessions to manage publicly owned assets, such as parks and gardens. Public ownership does not require the state to finance every investment or maintenance obligation directly from the budget. This was common across much of the economy until the 1990s and early 2000s, when the state often acted as both regulator and provider. Although the state has moved towards a more regulatory and facilitative role in many sectors, urban development still relies on direct public provision in many cases. Where the public purpose can be protected, the state can grant limited, time-bound use rights over public assets in return for investment and service obligations. It retains ownership and control over the public purpose, while the private party receives only the rights needed to perform the agreed function. States can, for example, use limited concessions to finance the maintenance of public parks and gardens by allowing commercial use over defined parts of an asset. A private party could operate specified commercial or visitor facilities. The municipality should retain ownership, preserve public access, limit the area and uses, and specify enforceable maintenance and service standards. As an example, the City of Austin Policies and Procedures for Concessions in City Parks provide a useful municipal-policy illustration: concessions remain limited commercial uses, must serve a public benefit and a financial return to the city, and operate under defined terms, planning and maintenance standards.
5. Make the local area plan the unit of value capture. A local area plan should link development rights, infrastructure and value capture. Public investment and planning decisions within an area can increase the development value of land. Premium FAR, betterment charges and other instruments should recover a proportionate share of the increase attributable to those actions. The proceeds should help finance the infrastructure and additional service capacity that make the development possible. The local area plan provides the spatial framework for identifying these costs, coordinating development rights and assigning the resulting revenue.
6. Align planning, service responsibility and revenue. Planning powers, development-related revenue and service obligations should be aligned. In many Indian cities, development authorities, such as DDA, MMRDA and AUDA, plan and develop land while municipalities and utilities bear service obligations. Where one public agency grants development rights and another must provide the resulting infrastructure and local services, they must share the resulting revenue. This applies a basic public-finance principle: revenue assignment should follow expenditure responsibility, or, in the usual formulation, finance should follow function ((Boex et. al., 2024)). The arrangement can take different forms. Planning and service functions may sit in the same body, or development-related revenue may be shared through a defined and timely transfer rule. The objective is to ensure that institutions responsible for servicing new development receive a portion of the revenue it generates.
7. Give rural local bodies planning and finance powers in peri-urban areas. The final question is where these powers should apply. Land conversion often begins before a settlement is formally classified as urban. If planning powers, infrastructure finance and development-related charges arrive only after urbanisation, the public sector inherits the cost of retrofitting roads, drainage and other services after development has occurred and much of the associated value has already been allocated. Planning and finance powers should therefore follow the geography of development. Much land conversion occurs where settlements function as urban places but remain under panchayats or other rural local bodies. These bodies must have lawful powers to plan layouts, reserve rights-of-way, collect development-related charges and provide basic services before unplanned growth makes infrastructure far more expensive.

The proposals form an architecture for reducing the upfront cost of urban development. They allow the state to recover a share of the value generated by public action while allowing land markets to function. The first three reduce the state's cash-heavy role as buyer of land. The fourth lowers the fiscal burden of maintaining a public asset without abandoning its public character. The fifth creates an area-based account for planning and infrastructure. The sixth ensures that revenue reaches the institutions that must provide services. The seventh extends the approach to places where urban growth is already changing land values outside municipal boundaries.

Conclusion

India does not need land-acquisition and development policies that claim all gains from land. It needs policies that stop treating compulsory acquisition as the first response and additional development rights as a free or disconnected permission. Land assembly, planning, infrastructure and municipal finance must be treated as one public-finance sequence. The seven proposals offer a starting point.

Selected bibliography

Hong, Yu-Hung, and Barrie Needham, eds. Analyzing Land Readjustment: Economics, Law, and Collective Action. Lincoln Institute of Land Policy, 2007.

Sorensen, Andre. "Land Readjustment, Urban Planning and Urban Sprawl in the Tokyo Metropolitan Area." Urban Studies 36, no. 13 (1999): 2333-2360.

Byahut, Sweta, and Jay Mittal. "Using Land Readjustment in Rebuilding the Earthquake-Damaged City of Bhuj, India." Journal of Urban Planning and Development 143, no. 1 (2017).

Jain, Vibhu. Examining the Town Planning Scheme of India and Lessons from Land Readjustment in Japan. ADBI Working Paper 1037, 2019.

Mahendra, Anjali, Robin King, Erin Gray, Maria Hart, Laura Azeredo, Luana Betti, Surya Prakash, Amartya Deb, Elleni Ashebir and Asmaa Ibrahim. Urban Land Value Capture in Sau Paulo, Addis Ababa, and Hyderabad: Differing Interpretations, Equity Impacts, and Enabling Conditions. World Resources Institute and Lincoln Institute of Land Policy, 2020.

Smolka, Martim O. Implementing Value Capture in Latin America: Policies and Tools for Urban Development. Lincoln Institute of Land Policy, 2013.

Ingram, Gregory K., and Yu-Hung Hong, eds. Value Capture and Land Policies. Lincoln Institute of Land Policy, 2012.

Sheikh, Shahana, and Ben Mandelkern. The Delhi Development Authority: Accumulation without Development. Centre for Policy Research, 2014.

van Duijne, Robbin Jan, and Jan Nijman. "India's Emergent Urban Formations." Annals of the American Association of Geographers 109, no. 6 (2019): 1978-1998.

The Gujarat Town Planning and Urban Development Act, 1976.

Delhi Development Authority. TOD Policy dated 30 July 2021, 2021.

De Souza, Flavia A. M., Tetsuo Ochi and Akio Hosono, eds. Land Readjustment: Solving Urban Problems Through Innovative Approach. JICA Research Institute, 2018.

Glasser, Matthew. Institutional Models for Governance of Urban Services, Volume 1: Synthesis Report. World Bank, 2021.

Anirudh Burman is a research at XKDR Forum.

LRS TCS and Overseas Travel: A Policy Design Critique

by Anirudh Burman.

Transaction taxes introduce frictions in transactions. Sometimes these frictions are in the larger public interest, for example, the interests of protecting government revenue ex ante because of the difficulty of ex post tax collection. In other cases, transaction taxes operate primarily to constrain transactions and their costs outweigh their benefits. A useful test is whether the tax (a) solves a genuine enforcement or information problem relative to ex post assessment, (b) is broadly designed and relatively neutral across comparable transactions, and (c) has stable, predictable parameters so that individuals can plan and comply without disproportionate costs. In addition, withholding taxes can be levied when there is a clear problem with ex post collection. However, the design of such taxes must still be proportionate to the objective and should not create large, avoidable liquidity and compliance frictions.

This post argues that the Union Government's Tax Collection at Source (TCS) on outward remittances under the Liberalised Remittance Scheme (LRS) and on purchase of an overseas tour programme packages fails these tests. It introduces a large, transaction-specific friction on outward remittances under LRS and on the domestic purchase of overseas tour programme packages. It does so without a clear statement of objective or a stable instrument design.

Introduction: TCS on LRS and overseas travel

TCS on LRS and on overseas tour packages was first introduced in the 2020 Union budget and the Finance Act, 2020. The Finance Act, 2020 inserted section 206C(1G) into the Income Tax Act, 1961 ( See Finance Act 2020 amendment here). The legal architecture in section 206C(1G) has two components. One is tied to an authorised dealer who "receives an amount for remittance from a buyer...", who intends to remit money out of India under the LRS. The other is a receipt-trigger tied to a seller of an overseas tour programme package. The second trigger is not a "remittance", which is conceptually confusing, since the move is primarily aimed at taxing cross-border movement of capital: LRS, a scheme under the Foreign Exchange and Management Act, 2000, allows overseas remittances up to USD 250,000 per annum, and the first component introduces a TCS on this, whereas the second component imposes TCS on overseas tour packages, independent of LRS. The second component introduces frictions for domestic purchases routed through Indian sellers.

Since the 2020 Finance Act, the Union government has tweaked this provision multiple times, adjusting tax rates, thresholds and exemptions. This years Union budget proposes to rationalise these further, but leaves the basic architecture intact.

Brief chronology of events

The table below shows that the instrument has been repeatedly redesigned along: (i) rates/thresholds and (ii) scope/coverage/definitions. This makes compliance and planning difficult for affected transactions.

Title of document (1)	Type of instrument (2)	Date (3)	What Changed (4)	Provision in the regulatory instrument (5)	Change type (6)
Finance Act, 2020	Law	March 2020	(a) introduced TCS on LRS remittances above INR 7 lakh per financial year (general rate 5%) (b) set concessional TCS rate of 0.5% for education remittance financed by an education loan (c) introduced TCS at 5% on sale of an overseas tour programme package (no threshold in the section text) (d) created exemptions where buyer is Government/embassy etc., or where buyer deducts TDS on the amount (as specified in the provisos)	Income-tax Act, 1961: s.206C(1G)	Rate/ threshold; Scope/ definitions; Exemptions
Notification No. 20/2022 (S.O. 1432(E))	Notification	March 2022	(a) created exemption from TCS for an individual who is non-resident and visiting India	Income-tax Act, 1961: s.206C(1G) (Notification No. 20/2022)	Exemptions
Notification No. 99/2022 (S.O. 3878(E))	Notification	August 2022	(a) superseded previous notification and replaced the exemption category: TCS not applicable to a non-resident buyer who does not have a permanent establishment in India	Income-tax Act, 1961: s.206C(1G) (Notification No. 99/2022)	Exemptions
Finance Act, 2023	Law	February 2023	(a) continued TCS at 5% on LRS remittances for education and medical treatment in excess of INR 7 lakh (b) continued concessional TCS at 0.5% on education remittances financed by an education loan in excess of INR 7 lakh (c) proposed increasing TCS rates from 5% to 20% for other LRS purposes and purchase of overseas tour programme packages	Income-tax Act, 1961: s.206C(1G)	Rate/ threshold
Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 (G.S.R. 369(E))	Regulation	May 2023	(a) removed exemption in FEMA Current Account Transactions Rules, bringing international credit card usage while outside India within Rule 5 (and therefore within LRS accounting), which can expand the practical ambit for TCS.	FEMA CAT Rules, 2000: Rules 5, 7	Scope/ definitions
Press Release (Ministry of Finance): Clarification regarding applicability of TCS to small Debit/Credit Transactions under LRS	Press Release	May 2023	(a) clarified that international debit/credit card payments by an individual up to INR 7 lakh per financial year are excluded from LRS limits and will not attract TCS	MoF Press Release	Scope/ definitions
Press Release (Ministry of Finance): Important changes w.r.t LRS and TCS (deferral and thresholds)	Press Release	June 2023	(a) superseded the 19 May 2023 clarification and postponed implementation of the 16 May 2023 FEMA amendment, keeping overseas international credit card spends outside LRS (and outside TCS) until further order (b) restored INR 7 lakh annual threshold for TCS across all LRS categories irrespective of purpose (c) specified post-threshold LRS TCS rates: 0.5% for education loan, 5% for education/medical, 20% for other purposes (d) specified overseas tour programme package TCS: 5% up to INR 7 lakh and 20% above, INR 7 lakh (e) deferred the increased TCS rates to October 1, 2023.	MoF Press Release: LRS/TCS	Implementation/ deferral; Rate/ threshold
CBDT Circular No. 10 of 2023 (Guidelines to remove difficulty in implementation of changes relating to TCS on LRS and overseas tour packages)	Circular	June 2023	(a) clarified that overseas international credit card spending is not treated as LRS for now, so no TCS on such spends till further order (b) clarified that the INR 7 lakh LRS threshold for TCS applies per remitter (not separately per purpose or per authorised dealer) (c) clarified category boundary for overseas tour programme package, standalone international air ticket or standalone hotel booking is not a "package" (package must include at least two specified components)	CBDT Circular 10/2023	Scope/ definitions
Circular No. 11 of 2023	Circular	July 2023	(a) no change to TCS rates/thresholds/categories/exemptions.	CBDT Circular 11/2023	Scope/ definitions
Foreign Exchange Management (Current Account Transactions) Amendment Rules, 2023 (re-insertion of Rule 7)	Regulation	June 2023	(a) reinstated exemption in FEMA Current Account Transactions Rules, excluding overseas international credit card use from Rule 5 (and therefore from LRS accounting), reversing the 16 May 2023 omission	FEMA CAT Rules, 2000: Rule 7	Scope/ definitions
Finance Act, 2024	Law	February 2024	(a) Inserted a sixth proviso to s.206C(1G) governing TCS collection based on the pre-amendment position (as on 01-04-2023.	Income-tax Act, 1961: s.206C(1G) (sixth proviso)	Implementation/ deferral
Finance Act, 2025	Law	March 2025	TCS thresholds increased.	Income-tax Act, 1961: s.206C(1G) (threshold amendment)	Rate/ threshold
Finance Bill, 2026	Law	February 2026	(a) proposed reducing TCS rate for LRS remittances for education/medical treatment (above INR 10 lakh) from 5% to 2% (b) proposed reducing TCS on sale of overseas tour programme package to 2% and removing the threshold/slab so 2% applies irrespective of amount (c) retained 20% TCS rate for LRS purposes other than education/medical.	Finance Bill, 2026: s.206C(1G)	Rate/ threshold

Regulatory uncertainty

A predictable, stable regime is important for economic freedom. Economic freedom implies the ability to plan properly, and planning requires foreseeability and predictability. The table above discusses frequent regulatory changes to the LRS and overseas travel framework since 2020. The government has revised thresholds, exemptions, rates frequently, set different TCS rates for different categories of spends and revised them, exempted non-residents, included or excluded foreign credit and debit-card spends, clarified what purchasing an overseas tour package means, and so on.

This matters for economic freedom: individuals cannot reliably forecast the cost of lawful foreign transactions, intermediaries cannot standardise compliance processes, and the effective burden depends on the tax rate, on exclusions and exemptions, as well as whether refunds are timely.

TCS on LRS and overseas travel as a hindrance to economic freedom

LRS was introduced in 2004 as part of a broader liberalisation of Indian finance in 2004. Since then, the LRS limit has been increased gradually from USD 25,000 to USD 250,000. This liberalisation reduced frictions in the ability of Indians to transact abroad, purchase foreign goods and services, and contributed to India's global integration.

In 2020, the Finance Act introduced a friction of a 5 percent TCS, which it increased to 20 percent in 2023 for purposes other than education and medical expenses. The budget speeches of the Finance Minister in Parliament ( 2020-21 and 2023-24 ) do not provide any reasons for introducing this friction. TCS is collected at the time of transaction, regardless of eventual tax liability. TCS imposes a significant friction on such activity. By doing this, the TCS changes the set of choices individuals have by making certain specific uses and transactions costlier from the perspective of both compliance and financial liquidity. In addition, if refunds are delayed, the private cost is not 20%, it is the aggregated cost of the time value of money, the opportunity cost of having made other choices had this liquidity constraint not been imposed, as well as the friction and uncertainty of Indian tax compliance.

Finally, the effect of the TCS is distributional regressive. Individuals facing the highest liquidity constraints are hit the hardest (young professionals, small business owners, families with recurring expenses, etc.). While lower frictions for educational and medical purposes alleviate some of this, the remaining frictions impose invisible opportunity costs on many other types of potential activities.

Paying advance TCS on overseas travel

While the TCS on LRS taxes foreign remittances, the TCS on overseas travel taxes even domestic transactions.

It is important not to equate foreign remittances with domestic transactions. The state regulates cross-border outflows under FEMA and other regulations and has articulated some objectives for this (e.g., managing outflows, monitoring, national security), even if one disagrees with the choice of objective or the proportionality of the instrument. By contrast, domestic transactions already sit within a general indirect tax architecture (GST), whose design objective was precisely to subsume transaction taxes into a broad-based system.

The issue here is not whether cross-border remittances can ever be regulated or taxed, but whether a narrow, high-variance transaction friction outside the GST framework, where the tax is collected upfront regardless of eventual tax liability, represents a coherent and proportionate policy design.

CBDT Circular 10/2023, Question 8, states that "overseas tour program package" includes expenses for "travel" or "hotel stay" etc., and then clarifies that purchase of only an international travel ticket or only hotel accommodation "by in itself is not covered."

Though two of three conditions need to be fulfilled for this to be triggered, it effectively brings domestic payments within its ambit. If one buys an international flight ticket from a domestic airline or a domestic travel aggregator as part of an overseas tour, such domestic expenditure in INR will also be included within the threshold of the TCS. As drafted, this requirement seems to collect an advance tax on individuals spending within India's domestic economy for foreign travel, as well as any spends outside India. This is novel, as earlier prohibitions, even in the license-raj era focused on foreign transactions and remittances, not domestic consumption of goods and services for foreign travel. The use of tax-based frictions serves to reduce the average Indian individual's integration with the globalised economy. In addition, the continual changes discussed above also affect the predictability and forecasting of decisions within the domestic economy because domestic spends on foreign travel are also included within the ambit of TCS.

One possible defence of this TCS is that it is intended to reduce certain outflows, analogous to a Tobin-tax style tax on foreign exchange transactions. The analogy is limited. Tobin's proposal was to cushion exchange-rate fluctuations. It was also designed to disincentivise very short-term speculative round-tripping transactions through a small uniform charge on foreign exchange conversions. The TCS regime is significantly broader in coverage (household remittances and even a domestic purchase trigger for overseas tour packages) and has been set at rates (e.g., 20 percent for many categories) that are far from marginal.

The Finance Minister in her budget speech of 2026 has proposed to rationalise many of the tax rates under the TCS regime. The proposal to reduce TCS to 2 percent for certain categories moves the rate closer to the range conceptually associated with a low-rate transaction tax. The current budget proposal is welcome. However, the deeper concern is the instrument design: a transaction-specific levy that is collected upfront irrespective of final liability, without sectoral neutrality and predictability. A better course of action will be to only pursue those cross-border transactions where the Indian state has clearly articulated objectives in a neutral, low-friction, predictable manner. Absent this, the core concerns remain about the design, and the consequent inability for households to plan and execute their economic activities.

Anirudh Burman is a research at XKDR Forum.

Delays in government contracting: A tale of two metros

by Anirudh Burman and Pavithra Manivannan.

A state entity undertaking a procurement exercise must meet prescribed timelines throughout its procurement pipeline. Delays in one or more milestones adversely affect all parties involved: the procuring entity (increase in expenditure beyond the budget and disputes), the contracted vendors (uncertainty and delays in payment) and the public (delays in utilising public goods and services). At the outset, we recognise that the indicator of a successful procurement exercise are multi-fold: achieving required quality, adhering to timeline and limiting spending gap. Our approach employs the lack of delays as the indicator of a successful procurement exercise.

In a recent article, we examined the extent to which DMRC's (the Delhi Metro Rail Corporation) competence in timely project execution was borne out by data. We found that (a) DMRC is able to meet the Government of India's and its own stipulations in two stages of its procurement process, that is, contract award and vendor payments; and (b) In spite of this exemplary performance, DMRC has faced delays in overall project implementation that have gradually increased over time. This article seeks to understand the underlying factors that potentially contributed to DMRC's prompt performance in its procurement process.

It is not possible to understand DMRC's success in isolation. Instead, we analyse it relative to its predecessor, the Calcutta metro-rail system (Calcutta metro). The Calcutta metro was India's first metro-rail system to be implemented. It was plagued by delays and cost overruns. Such a comparative analysis of a successful public project to one that fared worse in execution is revealing. First, it shows the learning curve of the state in building capacity to execute public projects. Second, it helps to understand what works and what does not, when a state entity conducts a procurement exercise. The analysis can serve to provide valuable feedback in procurement reform policies.

Delays in execution of metro-rail systems

Formerly, the Ministry of Railways was responsible for the construction of mass rail services, including metro-rail systems in metropolitan cities. The Ministry undertook the construction of the Calcutta metro in 1971. In 1986, the Government of India (Allocation of Business) Rules, 1961 was amended to shift the responsibility of the urban transport system to the Ministry of Urban Development (now the Ministry of Housing and Urban Affairs). In contrast to the Calcutta metro, the construction of the Delhi metro-rail system (Delhi metro) was undertaken by the Ministry of Urban Development as the nodal union ministry. The role of Railways was limited to providing technical assistance.

We study the annual reports of the Delhi metro and the Parliamentary Public Accounts Committee Reports (1981; 1989; 1992) on the Calcutta metro, to estimate overall delays in both these projects. We source this data from the website of DMRC and the Parliament of India, respectively. Our data consists of six time periods during which there was significant procurement of works. The data includes the date of completion and submission of the detailed project report (DPR), the date on which the project received Union Cabinet approval, the date of commencement of works, the scheduled date of completion of the project, and the actual date of completion of the project, in part and full. These are presented in Table 1 below, as a timeline of events for the first line of the Calcutta metro and the first phase of the Delhi metro.

Table 1: Timeline of events

Event	Calcutta Metro Line-1	Delhi Metro Phase-1
Completion of Detailed Project Report (DPR)	1971	1995
Project sanction	1972	1996
Project commencement	1978	1997
Scheduled completion	1978	2005
Partial commission (one section)	1984	2002
Project completion (fully operational)	1995	2006

We find that the gap between estimated and actual date of completion is a little more than a year for the Delhi metro. This gap was close to two decades for the Calcutta metro. Further, the lag between the date of sanction of the project to the date of commencement of works for the project is wider for the Calcutta metro (4 years) than for the Delhi metro (about a year).

This suggests that, from 1971 to 1995, there appears to be much improvement in the way procurement was undertaken for Indian metro-rail systems. We posit that the Delhi metro's success was shaped by the challenges faced and the experiences gained in implementing the Calcutta metro. Our analysis attributes learnings from the Calcutta metro to the following structure and list of processes adopted by DMRC: its institutional design, its financing and revenue models, global transfer of technical know-how, and expertise of its early leadership. In the subsequent sections we analyse how each of these features enabled the Delhi metro to avoid inordinate delays.

The institutional design of the procuring entity

What motivated the institutional design of DMRC? To answer this we look at various Parliamentary Committee reports, CAG reports and literature on the subject. Our review suggests that there were three main institutional constraints faced by the Ministry of Railways in implementing the Calcutta metro.

1. The lack of coordination with the West Bengal State Government and the local agencies in Kolkata. There were delays in land acquisition, problems in utility diversions such as transport, water and sewage, and detection of uncharted utilities after commencement of works. These instances had a direct impact on the contracting process, such as frequent interruptions of works, revisions to scope of work, and change in construction methodology (Public Accounts Committee, 1981).
2. Frequent changes and vacancies within the Ministry of several important personnel such as the General Manager and Chief Engineer. This was due to the administrative process of the Ministry. The Railways had to follow the conditions laid down by the Appointment Committee of the Cabinet with respect to retirement, superannuation and promotion (Public Accounts Committee, 1981). This resulted in loss of experience and expertise within the procuring entity.
3. Inadequacy of financial powers delegated to the General Manager. From the year 1974 to 1982 the General Manager had the power to sanction tenders up to Rs. 1 crore only. This was increased to Rs. 2 crores in 1983 and Rs. 5 crores in 1985. This limited power of the General Manager meant, approvals for sanctions of higher value tenders had to be received from the Railway Board. This procedure was time consuming and caused delays in finalisation of contracts by up to 3 years (Public Accounts Committee, 1989).

We speculate that the above constraints prompted the authorities undertaking the Delhi metro project to adopt a different approach. The Calcutta experience provided two guides for the organisational structure of DMRC. One, to build institutional capabilities for executing a metro-rail system outside the Ministry of Railways. Second, to have a separate corporate entity with independent decision making authority. Thus, DMRC was set up with two distinguishing features which worked in its favour: It was formed as a limited liability company under the Companies Act, 1956 and the ownership of the entity vested equally in the Union and the State Government. The board of directors of DMRC constituted representatives from the Union Ministry of Urban Development, Department of Transport of GNCTD and the Delhi Development Authority. Such an institutional arrangement, by aligning incentives for all the stakeholders, enabled better coordination with the local government and ensured that the management had the backing of both the State and the Union Government. Further, functional directors appointed for distinct functions such as, project and planning, works, electrical, finance, business development and the like, had sufficient powers delegated to them under the Schedule of Powers (CAG, 2008). This facilitated quick decisions in expenditure approvals, qualification of bidders, finalisation and acceptance of contracts. Finally, the long tenure of key personnel such as the Managing Director, enabled the organisation to retain domain experience and expertise.

Financing and revenue models

For prompt execution and sustenance of any infrastructure project, timely flow of funds is essential. Metro-rail systems are capital-intensive projects. The Calcutta metro was fully funded by the Ministry of Railways. One of the main reported reasons for delay in the project was lack of funds and improper utilisation of allocated funds. Up until 1980, the Railways had not fully utilised the funds allocated for the project. Further, for subsequent years, sufficient funds were not made available for the construction. This resulted in shortage of raw materials, such as steel and signaling equipment, and delayed payments to vendors (Standing Committee on Railways, 1993; Public Accounts Committee, 1981). For the DMRC project, the Calcutta experience prompted the authorities to explore other avenues for funding such as, equity, external agency loans, subordinate loans from centre and state, property development revenue and central government grants. Most significant was the official development assistance (ODA) loan from the Japan International Cooperation Agency (JICA). Nearly 54-55 per cent of the first three phases of the DMRC projects was funded by JICA as a low-interest and long-term concessional loan. The funding pattern for each phase of the project sourced from the DMRC website is as set out in Table 2. Smooth flow of funds into DMRC enabled timely payment to vendors and ensured that the project was not delayed due to uncertainty in financing.

Table 2: Funding pattern for DMRC projects

	Phase I	Phase II	Phase III
JICA loan	60%	54.47%	48.57%
Equity from GoI	14%	16.39%	10.04%
Equity from GNCTD	14%	16.39%	10.04%
Loans from Union/States	5%	6.56%	13.39%
Grants from States	-	0.59%	10.62%
Property Development	7%	5.59%	7.34%

Another lesson came from the fact that the Calcutta Metro was not financially viable (Singh, 2002). The traffic earnings were inadequate to cover the operating expenses of the metro-rail system. This not only burdened the exchequer in the form of subsidies but also affected the public as the fare per trip that was charged had to be increased to sustain operations (Public Accounts Committee, 1989). Decrease in cash flow meant stalling of procurement of raw materials, and delays in payments to vendors.

The financial crunch faced by Calcutta Metro encouraged DMRC to generate revenue through non-conventional sources. DMRC adopted the examples of well-performing international metro-rail systems and sought to increase its non-farebox revenue. Table 3 below shows the revenue model of DMRC for 10 years (FY2011-FY2020) obtained from its annual reports. Revenue from traffic operations is categorised as fare-box revenue and revenue from real estate, consultancy and external projects are categorised as non fare-box revenue.

Table 3: DMRC Revenue Model (as percentage of total revenue)

Description	Fare revenue	Non fare revenue
FY20	65.49	34.51
FY19	62.92	37.08
FY18	55.22	44.78
FY17	45.69	54.31
FY16	53.35	46.65
FY15	60.34	39.66
FY14	55.74	44.26
FY13	62.93	37.07
FY12	65.74	34.26
FY11	65.05	34.95

On an average 58.49% of DMRC's revenue is from traffic operations (fare-box revenue) and 41.51% of the revenue is through other sources (non-fare box revenue). This is in line with international practice. For instance, the non-farebox revenue of some of the better performing metros in the world (in terms of ridership and network length), such as London, Singapore and Hong Kong, ranges from 25-60% of its total revenue. DMRC's capacity to source funds and remain financially viable has helped it to make timely payments to its contractors, repay its debts, and expand its network line.

Human capacity and technical know-how

Building human competence within the government is paramount to do procurement well. This includes both functional as well as technical competence. In India, the technical know-how to build metro-rail systems was lacking. The Calcutta metro was the first ever underground railway project undertaken in India. Despite this, global tenders were not invited for construction of the work. Neither the construction firms in the country nor the Railway Administration possessed the experience to construct underground structures for a rapid transit system. The lack of expertise led to frequent abandonment of works and changes in scope of work, resulting in huge financial implications in addition to time overruns (Public Accounts Committee 1989 and 1992). Thus, when the idea of a metro-rail system in Delhi was born, the need to rope in personnel with prior expertise and experience, such as, B.I. Singal and E. Sreedharan, was recognised.

Mr. B.I. Singal was the former Director General of the Institute of Urban Transport and the then Managing Director of RITES (Rail India Technical and Economic Service). Mr. Singal came in with 11 years of experience in the planning and building of some of the finest metro-rail systems in the world, such as the Hong Kong MTR (known for completing the project within time and budget) and Taipei metro-rail network. RITES prepared the feasibility study on building a metro-rail system for Delhi. Mr. Singal made sure that his RITES team had a few professionals who had previous experience of working with the Calcutta metro. Mr. E. Sreedharan, the first Managing Director of DMRC, had served as the Chairman and Managing Director of Konkan Railways. He brought in his domain experience of working with the Railways as well as the management experience of heading an autonomous entity. Studies document some effective practices adopted by Singal and Sreedharan which we speculate had an impact on the organisation's procurement practices. They insisted on independence in decision making, speed, and global exchange of knowledge and expertise (Ashokan, 2015; CPI, 2017). This resulted in creation of DMRC as a separate legal entity and in transfer of Japanese technology and know-how in building metro-rail systems.

After the failed attempt at indigenisation by the Calcutta metro, the authorities felt the need to tap in to global expertise for the Delhi metro project. In addition to funding from JICA, Japanese Consultants were also brought on board. This ensured transfer of foreign technological knowledge, skills and expertise to DMRC. DMRC engineers developed technical skills such as tunneling technologies, and functional skills such as management ethos, and value for time from their Japanese counterparts (Onishi, 2016). This enabled DMRC to build in-house capacity, which now helps other metro-rail networks in the country.

Discussion

Our work shows how the Indian state attempts to achieve better outcomes by identifying lessons from its past shortcomings. The challenges faced by the Calcutta metro shaped the Delhi metro's institutional design, financial structure, and human resource competence. Our article highlights the importance of these three factors in enabling desirable procurement outcomes.

A key insight from our analysis is that these factors do not work in isolation. Autonomy in decision making, efficient and experienced personnel, adequate financing, and right institutional choice are all inter-operable and go hand in hand. If a procuring entity seeks to realise better outcomes, procurement reforms must not merely pick the lowest hanging fruit of these factors. Instead, a sector-specific approach of studying the past experiences must be employed to act as feedback into future projects. Our research provides a framework to assess such past successes and failures, and demonstrates the potential of deploying such research.

References

Public Accounts Committee, Fifty-fifth Report, 1981, Hundred and Forty-second Report, 1989 and Ninth Report, 1991.

Standing Committee on Railways, Second Report, 1993 and Thirty-fourth Report, 2007.

Comptroller and Auditor General of India, Report No. Performance Audit 17, 2008.

Pavithra Manivannan, Lessons from the Delhi Metro, Business Standard, July 2021.

Anirudh Burman and Pavithra Manivannan, Timeliness in government contracting: Evidence from the country's largest metro-rail network, The Leap Blog, August 2022.

Yumiko Onishi, Breaking Ground: A Narrative on the making of Delhi Metro, JICA, 2016.

Centre for Public Impact, The Construction of the Delhi Metro, November 2017.

Saurabh Singhal, Non Farebox Revenue for Metro - A Global Perspective, Business World, May 2022.

The International Association of Public Transport (UITP), World Metro Figures, 2018.

M.S. Ashokan, Karmayogi - A biography of E. Sreedharan, Penguin, 2015.

Anirudh Burman is an Associate Research Director and Fellow at Carnegie India. Pavithra Manivannan is a Senior Research Associate at XKDR Forum and Chennai Mathematical Institute.

Timeliness in government contracting: Evidence from the country's largest metro-rail network

by Anirudh Burman and Pavithra Manivannan.

Introduction

Infrastructure projects in India are plagued by delays (MOSPI, 2022). Proposed explanations include failures of government contracting for public procurement (Singh, 2010, Sinha and Vatsa, 2021, etc.). In this article, we measure delays in the procurement process of the largest metro-rail network in the country -- the Delhi Metro Rail Corporation (DMRC) -- which is considered a successful project. It fares well on global ranks on some parameters such as network length and ridership. The early phases of this metro rail project have been lauded for timeliness in execution and contract payments (Expenditure Management Commission, 2016).

We look at two distinct datasets to obtain a birds eye view and a procurement-oriented view of the delays in DMRC. We find that DMRC is prompt in stages of the contracting processes for which we are able to find evidence, but that the overall project implementation suffers from time overruns. We put this knowledge together to obtain insights into government contracting.

Our approach

As with contracts drawn between any two counterparties, government contracting is a pipeline that runs through four phases (Mehta and Thomas, 2022): (I) Contract specification and design, (II) Contract tendering and award, (III) Contract management and (IV) Contract closure. Flaws in government contracting shows up as inefficiencies in public procurement such as delays in infrastructure projects, which in turn, results in cost overruns, loss in revenues, vendor dissatisfaction and lack of competition when government wants to procure, and ultimately, deprives the public of the intended benefits.

We use three data-sets to understand the timeliness of government contracting in DMRC projects.

1. A data-set of the time taken by the various DMRC projects, sourced from the CapEx database published by the Centre for Monitoring Indian Economy (CMIE).
2. A data-set of tenders awarded by DMRC, hand-constructed from the 'Contracts Awarded' section of the DMRC website;
3. A data-set of payments made by DMRC, hand-constructed from the 'Vendor Payment Details' section of the DMRC website and from an RTI application.

The first data is sourced from the CMIE CapEx database. The CapEx database records the date of significant events for each project. We collect data for the three operational metro networks constructed by DMRC, that is, Phase 1, 2 and 3. This data-set consists of project level information such as, the date of announcement of the project, initial completion date, actual completion date and time overruns.

The second dataset is a hand-constructed data-set consists of tender level information for awarded contracts of DMRC, such as the department calling for tenders, nature of work, date of publication of Notice Inviting Tender (NIT), date of issue of letter of acceptance and value of the contract. This data-set covers this information for 892 tenders for a period of 5 years (2016-2020). DMRC categorises these tenders into 7 heads: Civil and Architecture Works, Electrical Works, Operations and Maintenance, Rolling Stock, Track Works, Signalling and Telecom and Property Development.

In addition, we categorise the contracts for IT services and housekeeping works as 'Miscellaneous' and the procurement done by DMRC for other metros in the country as 'For Other Metros'. The highest number of contracts were awarded for Operation and Maintenance works (623) and the least for Rolling Stock (2). Table 1 shows the typology of procurement undertaken by DMRC during our study period.

Table 1: Typology of DMRC Procurement

Category	2016	2017	2018	2019	2020	Total
Civil and Architecture Works	17	28	9	15	9	78
Electrical Works	5	1	3	5	13	27
Operations and Maintenance	0	65	167	200	191	623
Rolling Stock	0	0	0	2	0	2
Track Works	12	2	0	1	3	18
Signalling and Telecom	8	1	0	0	3	12
Property Development	0	5	3	10	5	23
Miscellaneous	4	14	23	8	13	62
For other metros	5	7	17	8	10	47

Our second hand-constructed data-set consists of monthly bill payment status of DMRC. Pursuant to government communication (vide D.O.18(18)/IFD/2019 dated 05.11.2019), DMRC uploads its monthly vendor payment details on its website since December 2019. This data gives us periodic information about the bill submission date and the bill payment date of DMRC vendors. Since the website does not archive its data we obtained our data partly from the DMRC website and partly vide an RTI application made for this purpose. Our data-set consists of 20,654 bills for the period between November 2019 to August 2021. The payment period is unknown for about 1,550 bills in our data-set, which we discard in our analysis.

We restrict our study to benchmark DMRC's performance against the timelines prescribed by its internal guidelines (DMRC Procurement Manual, 2016 and General Conditions of Contract, 2019) and the Central Government procurement guidelines (General Financial Rules, 2017 and the Manual for Procurement of Works, 2019). We do not employ a comparative analysis with other procuring entities for two reasons: One, availability of data in government portals such as the CPPP (Central Public Procurement Portal) and websites of the procuring entities are often sparse and sporadic. Second, a deeper understanding of the fundamental functioning, internal rules, processes and organisational structure of each entity is required for a meaningful comparison and it warrants a separate study.

Findings: Time overrun in DMRC project implementation

In the CapEx data, we are able to see that, between 1995 to 2021, there were three projects announced, implemented and completed by DMRC. These are the Phase 1, Phase 2, and Phase 3 lines. These have been operational from 2006, 2011 and 2021 respectively. From this data, we are able to locate various timelines for all three phases, including the date on which the Phase was announced, to the date on which they were completed and commissioned for public use for fully operational metro lines. We calculate the time overruns as the difference between the date projected initially as the completion date for a Phase and the date on which it was actually completed and operationalised. These are presented as project delays in Table 2.

Table 2: Project delays (in months)

Phase 1	15
Phase 2	32
Phase 3	102
Source: CMIE Capex Database

Findings: Timeliness in contract award by DMRC

High-income countries, countries with greater political accountability, and countries with greater economic freedom process public works procurement in a more timely manner (Djankov and Bosio, 2020). Each of these countries does infrastructure procurement following its own regulations to award contracts. In India, works procurement is guided by the Manual for Procurement of Works, 2019. According to Clause 5.6 in this manual, the time taken by Ministries and Departments from the date of opening the tender to the date of awarding of contract is 90 days.

We estimate the actual time taken by DMRC to award tenders (Table 3). This is calculated as the time taken from the date of opening of the tender to the date of issuing of the acceptance letter. We find that, on an average, DMRC takes 91-92 days to complete the tendering process.

Table 3: Time taken to award tenders (in days)

Year	No. of tenders	Average time taken
2016	51	101
2017	123	98
2018	222	103
2019	249	81
2020	247	89
Average	178	92

Findings: Timeliness in making vendor payments by DMRC

Payment delays are endemic in public contracts in India. DMRC has sought to avoid payment delays by including provisions for both interim and final payments within its Procurement Manual and General Conditions of Contract, 2019 (GCC). Depending on the type of contract, payments may be made at different stages of the procurement cycle. At Clause 11, the GCC provides for set timelines for the scrutiny of invoices and payments to be made by the procuring entity:

• Interim payments: A contracting firm may apply to the respective project engineer of DMRC requesting for an 'interim payment certificate'. This certificate will be issued based on achieved milestones or prescribed payment schedule in the contract, if any.
1. Within 21 days of the request, the project engineer must issue the interim payment certificate specifying the amount due to the contractor.
2. DMRC is mandated to make 80% of the certified payment amount within 7 days of issue of the certificate.
3. The balance 20% is to be made within 28 days of issue of the certificate.
• Final payments: Once the project engineer certifies that the contractor has completed all his obligations related to a particular work, the contractor is entitled to apply for a 'final payment certificate' with the required supporting documents.
1. Within 28 days of receiving this request, the project engineer must issue the final payment certificate stating the final amount due.
2. DMRC is mandated to pay the amount certified in the final payment certificate within 56 days of issue of this certificate.

We look at the vendor payments data-set of DMRC to analyse the adherence to these timelines. We find that, on an average, DMRC takes about 4 days to clear its dues from the date of submission of the bill by the vendors (Table 4). For the data-set in our study, the maximum days taken by DMRC to make its payment is about a year.

Table 4: Time period for clearance of dues (in days)

Year	No. of bills	Average time	Median time	Minimum time
2019	1326	5	2	0
2020	9887	4	3	0
2021	7891	4	4	0
Total	19104	4	3	0

Payment delays by public sector enterprises in India to their vendors far exceeds their procurement values (Manivannan and Zaveri, 2021). We find that DMRC is an outlier in terms of maintaining payment discipline to its vendors, and in adhering to the timelines provided in its GCC.

Discussion

The public discourse on government infrastructure procurement focuses on delays and time overruns being an indicator of poor government contracting. In this article, we have analysed the capability of a procurement-intensive public sector enterprise to keep up with its timelines in two stages, that is, in contract award and payments. We find that DMRC takes about 3 months to award a contract, and about 4 days to clear its payment dues to vendors. Regardless of this exemplary performance on awarding contracts and paying vendor dues, we also find that the overall project implementation by DMRC failed to meet scheduled timelines to complete. All three phases took a longer time than originally expected. In fact, we observe that the overall project time delays increased from the Phase 1 project to the Phase 3 project.

Executing infrastructure projects on time has been a continuous concern and challenge in India. Our analysis about DMRC timeliness in awarding contracts and in making payments provides evidence against the popular perception that public projects are delayed due to delays in decision-making by the public authorities and their inability to make timely payments. Instead, we speculate that these are because of other factors for overall project delays, some of which could be misaligned allocation of scope and risk in procurement contracts and poor contract management. A deeper analysis into each project, procurement practises, financial and institutional structure of DMRC may help in understanding the reasons for its timely performance in certain procurement processes and the potential causes of time overruns. These learnings can then be adopted by other procuring entities to achieve better procurement and project outcomes.

References

Ministry of Statistics and Programme Implementation Infrastructure and Project Monitoring Division, 434th Flash Report on Central Sector Projects, January 2022.

Ram Singh, Delays and Cost Overruns in Infrastructure Projects: Extent, Causes and Remedies, Economic and Political Weekly, Vol 45, No. 21, May 2010.

PC Sinha and Ananys Vatsa, Delays in Project Completion in India, Indian Journal of Projects, Infrastructure and Energy Law, January 2021.

Erica Bosio and Simeon Djankov, Timely procurement of public works, World Bank Blogs, February 2020.

Department of Expenditure, Ministry of Finance, General Instructions on Procurement and Project Management, October 2021.

Expenditure Management Commission, Recommendations of the Expenditure Management Commission, December 2015.

Department of Expenditure, Ministry of Finance, Manual for Procurement of Works, 2019.

Delhi Metro Rail Corporation Ltd., General Conditions of Contract, November 2019.

Pavithra Manivannan and Bhargavi Zaveri, How large is the payment delays problem in Indian public procurement?, The Leap Blog, March 2021.

Charmi Mehta and Susan Thomas, Identifying roadblocks in highway contracting: lessons from NHAI litigation , The Leap Blog, July 2022.

Charmi Mehta and Diya Uday, How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states , The Leap Blog, March 2022.

Anirudh Burman is an Associate Research Director and Fellow at Carnegie India. Pavithra Manivannan is a Senior Research Associate at XKDR Forum and Chennai Mathematical Institute. We thank Susan Thomas for valuable comments and discussions.