Building urban India

Municipal bonds can play an enabling role

It is well accepted that urban India needs massive amounts of investment in infrastructure for providing basic amenities to citizens. The need for investment will only increase in the coming years as more people move to urban areas, leading to greater urbanisation. According to one estimate, 17 of the 20 fastest-growing cities in the world between 2019 and 2035 are expected to be in India. This is also a big opportunity. Increasing urbanisation can become a stable source of long-term economic growth. One of the major reasons for lower investment in urban areas is the extremely limited availability of resources in municipal corporations (MCs). However, this could now change with the right policy interventions. As this newspaper reported on Monday, the Union government is pushing for deepening the municipal bond market.

The government has identified over 30 cities with good ratings. Surat and Visakhapatnam are expected to approach the bond market soon. Among big cities, Chennai is expected to raise funds from the bond market this year. MCs in the identified cities are said to have done most of the work, or are planning to do so, in terms of rationalising property taxes and cleaning up books. They are also identifying revenue-generating projects. Surat and Visakhapatnam, for example, plan to raise funds for expanding capacity in existing projects with assured revenue streams. These bond issues are unlikely to face many difficulties. At a broader level, while the Union government must be commended for its efforts in expanding the scope and depth of the municipal bond market, along with putting the financing of sustainable urban infrastructure as a key item in the G20 agenda, these are still initial steps and a lot more will need to be done.

One of the big reasons why municipal finances don’t get the attention they deserve in the given context is the lack of availability of information in the public domain. The Reserve Bank of India (RBI) has done well to aggregate data for MCs, and publish a report, which is the first of its kind, in 2022. It intends to make this an annual feature. Notably, the RBI’s general government debt calculations account only for the debt stock of the Centre and the states. It leaves out the local bodies because consolidated data is not available. The central bank now wants to fill this gap, which will give a better picture of general government finances. The RBI’s sample, which included 201 MCs, showed that total revenue receipts in 2017-18 were just 0.61 per cent of gross domestic product (GDP). It is expected the receipts increased to 0.72 per cent of GDP in 2019-20. Municipal corporations depend significantly on grants from the other two levels of government. Despite the constitutional backing given to the local bodies, overall revenue collection has not seen any significant change.

Another key aspect of municipal finances is that their combined borrowing is just about 0.05 per cent of GDP, which increases the scope for raising funds from the market. However, there could be potential dangers in raising debt. Municipalities need reforms with clear sources of revenue so that debt repayment is timely. Overall, while a large number of MCs may not fulfil the conditions laid down by the securities market regulator, increasing participation in the bond market, backed by the right reforms, will certainly help build urban India.