August , 2019
Financing urban infrastructure
15:07 pm

Saptarshi Deb

With an estimated population of 377 million and an annual exponential growth rate (AEGR) of 2.76% (2001-2011), urban India is in the midst of a major churn.

India’s urban growth is largely concentrated in large cities. The number of cities with a population exceeding one million has increased from 35 in 2001 to 53 in 2011, accounting for 43% of India’s urban population and is expected to be 87 by 2030. Such growth projections warrant the need for development of extensive urban infrastructure in prominent urban centres in India.

According to the fifth edition of the Annual Survey of India’s City-Systems (ASICS) 2017 conducted by Janaagraha Centre for Citizenship and Democracy, a Bengaluru-based non-profit organisation, lack of a modern contemporary framework of spatial planning of cities and design standards for public utilities such as roads, footpaths, bus stops and other underground utilities such as water and sewerage networks is one of the primary problems in Indian cities. Weak finances, both in terms of financial sustainability and financial accountability of cities, have also been identified as a major drawback. The report also highlights weak human resource management, fragmentation of governance across municipalities, parastatal agencies and state departments and low citizen participation as the other important drawbacks of Indian city systems.

The inventory pile-up in India’s top 30 cities is at an all-time high of 12.76 lakh units due to weak market trends. Additionally, the private sector has been forced to constrict their role in urban infrastructure development following RERA, GST and demonetisation. An important part of urban infrastructure is affordable housing. The public sector must take initiative in building affordable housing projects and price them accordingly. Registration fees for affordable housing may be reduced to encourage buyers.

According to the background note titled, ‘The Financing of Urban Infrastructure Issues and Challenges’ for a seminar on urban development organised jointly by Ministry of Finance, Government of India, ASSOCHAM and Research and Development System for Developing Countries in 2018, “India will need to invest Rs. 39.2 lakh crore to eliminate the current infrastructure deficit and meet the infrastructure needs of the incremental urban population over a period of 20 years.”

Financing urban infrastructure

A large part of urban infrastructure development takes place at the sub-state, municipal level. Budgetary provisions are combined from centre and state level allocations. An important feature of the recent spending levels is a rise in the central government provision for urban development and a fall in the share of the municipalitiesʼ own resources.

The Constitution of India does not lay down the revenue base for municipalities. The power to determine their revenue base rests with the state government. An important feature of financial transfers to municipalities in India is its discretionary nature. Unlike the constitutional provision that lays down the revenue sharing arrangement between the central government and states, there exists no statutory provision in state municipal laws that define the conditions under which transfers should take place from the states to the municipalities. Additionally, absence of autonomy in matters relating to tax rate setting is another problem. Over the 2007-08 to 2012-13 period, the size of the municipal sector registered a decline in the share of ‘own resources’.

Debt financing is yet to take off in urban infrastructure development. Commercial banks have not considered urban infrastructure as one of their priority sectors. The participation of non-banking financial companies (NBFCs) also remains limited.

Municipal bonds have emerged as another source of financing urban infrastructure. These took off in 1997. The mode of financing has also achieved limited success. Public-private partnership (PPP) has emerged as another important mode of financing urban infrastructure development. This model has seen some success. New Town - a planned township on the eastern fringes of Kolkata - had successfully used this model for creation of urban infrastructure.

According to domain experts, authorities need to secure a flow of financing from institutional investors by eliminating regulatory impediments, reviewing risk characteristics and developing adequate responses and also by looking to promote credit enhancement. Fiscal empowerment of municipal governments needs to be focused upon. Additionally, land can be seen as a source of financing urban development. China has used land leasing to finance its urban infrastructure. A number of land-based instruments such as development charges, betterment levis, land monetisation and tax increment can be used for raising resources and using them for infrastructure development.

Government initiatives

The Smart Cities Mission was formally launched in 2015 with an aim of creating 100 smart cities. Over the next two years, 100 cities were selected for central grants. Critics claim that these cities were selected in an arbitrary manner. Progress in implementing the mission has been slow – as on March 31, 2018, the funds released by the government has been only Rs. 10459.2 crore - which is a small fraction of the amountthat had been earmarked. Additionally, according to analysis by the Centre for Policy Research, small slices of land benefiting small fractions of the population in the selected cities are set to claim around 80% of the total funding under the Smart City Mission. 

The Atal Mission for Rejuvenation and Urban Transformation (AMRUT) is a PPP model scheme that aims to benefit 500 towns by providing access to tapped clean drinking water, increase the amenity value of the  towns by  developing greenery and well maintained open spaces and reduce pollution by switching to public transport or constructing facilities for non-motorised transport. The impact of this scheme is yet to be perceived and with the current market situation, private investment might be difficult to come by. The Pradhan Mantri Awas Yojana has met with limited success and has been able to provide rehabilitation to a portion of slum dwellers in Indian cities.

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