Fortunately, these same governments are extraordinarily asset-rich. They own vast urban land parcels, industrial estates, mineral rights, and equity in many state enterprises that earn negligible returns. The way forward is to convert these dormant assets into a long-term financing capability, which comprises three professionally-managed institutions: (1) an asset management agency; (2) a permanent endowment; and (3) a state investment fund.
The first institution is a statutory asset management agency. It would prepare a complete, geotagged register of state assets, recording title, current use and an independently assessed valuation range. It would raise capital through long leases, redevelopment concessions, joint ventures, land value capture, real estate investment trusts (Reits) and infrastructure investment trusts (Invits), with outright sale reserved for non-strategic parcels through open e-auction.
Where will the value come from? Government land trades at a steep discount because titles are unclear, records are incomplete, zoning is restrictive, and parcels sit locked in low-value captive uses. The agency creates value by curing these defects. Clean, litigation-free title raises realisable prices. Change of use and higher floor space entitlements convert idle acreage into buildable potential. New metro lines, highways and corridors multiply the worth of adjoining state-owned land. In addition, state enterprises can be professionalised, listed or merged, converting dead equity into dividend-paying shares.
The funds generated must go into a second institution, the state’s endowment, governed by specific rules written into state law. All net monetisation proceeds would be credited to the Consolidated Fund of the state and transferred into the endowment. Each year, the endowment may distribute up to 3 per cent of its rolling five-year average value, preserving the corpus in real terms. The corpus is shifted steadily out of land into a diversified portfolio managed by professionals on fixed terms.
Global experience shows how one-time assets become permanent income. Norway transfers petroleum revenues into its sovereign fund and guides withdrawals by an expected real return of about 3 per cent a year; the fund now exceeds $2 trillion. Texas endowed its Permanent University Fund through land grants; its 2.1 million acres still finance the University of Texas and Texas A&M University systems. Singapore transferred its shareholdings in state enterprises to Temasek in 1974 and let professional managers compound that capital into a S$518 billion portfolio.
China supplies the cautionary tale. Local governments financed their cities by selling land use rights, with receipts reaching about 8.5 trillion yuan in 2021. They came to rely on these receipts as a recurring resource and borrowed heavily against expected land values. When the property market turned, they were left with debt and no endowment. Our states should monetise like China and save like Norway.
Kerala provides the essential Indian benchmark. Kerala Infrastructure Investment Fund Board (KIIFB) has approved 1,149 projects worth over ₹88,000 crore and in 2019 issued India's first sub-sovereign masala bond, raising ₹2,150 crore on the London Stock Exchange and repaying it in full in 2024. However, KIIFB’s borrowings were serviced by escrowed motor vehicle taxes and a fuel cess, so the Comptroller and Auditor General treated them as off-budget borrowings. Kerala has now proposed redirecting those revenues to the treasury.
The state’s endowment should invest in a state-level National Investment and Infrastructure Fund (NIIF), run in the same manner as the national NIIF. The Government of India owns 49 per cent of the investment manager; investment committees take every decision on commercial criteria, free of government direction; and professional managers are paid market compensation. This governance has attracted the Abu Dhabi Investment Authority, Canada Pension Plan Investments and Temasek, and the Union Cabinet doubled its commitment to ₹60,000 crore. A state NIIF built to this design would finance capital assets with a target of four rupees of institutional capital for every rupee of state equity. Its portfolio companies, project special purpose vehicles (SPVs) and Invits can raise debt and issue bonds, serviced by ring-fenced project cash flows rather than by the state budget.
All three institutions can be overseen by a single State Development Capital Council, chaired by the chief minister and with the finance minister as vice-chair. The council appoints boards through an independent nominations process, sets policy and reviews performance in public; it takes no role in individual valuations, transactions or investments, and board members serve staggered terms, removable only for defined cause.
States that act now will rapidly develop the ability to finance capital assets and crowd-in more private capital. They will build the modern cities, highways, power plants, hospitals, universities, ports, and other assets necessary for sustainable prosperity.
The writer is president of Everstone group and visiting professor of practice at the London School of Economics. The views are personal
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