Context

• India is on the brink of an urban revolution and over the next three decades, its urban population is expected to double, increasing from 400 million in the last decade to 800 million.
• While this demographic shift offers a unique opportunity to reshape India's urban landscape, it also presents a formidable challenge; financing the massive infrastructure required to support this growth.
• Addressing this challenge is essential to ensure sustainable and inclusive urban development and therefore it is important to examine the financial gap, issues at local level and required reform.

The Financial Gap

• According to a recent World Bank report, India will need approximately ₹70 lakh crore by 2036 to meet its urban infrastructure needs.
• This translates to a requirement of ₹4.6 lakh crore annually; however, current government investment stands at just ₹1.3 lakh crore annually, barely a quarter of the required amount.
• Broadly, about half of this investment is earmarked for basic urban services, while the other half is designated for urban transport projects. 

An Assessment of Challenges at the Local Level

• Stagnation in Municipal Finances
  • For two decades, municipal finances have remained stagnant at just 1% of the GDP, a clear indication of the systemic neglect of urban local bodies (ULBs).
  • Despite their significant role in urban development, municipalities contribute only 45% of urban investments, with the rest being managed by parastatal agencies.
  • This limited fiscal capacity restricts their ability to plan and execute large-scale infrastructure projects effectively.
• Dependency on Central and State Transfers
  • While central and state transfers to municipalities have increased marginally from 37% to 44% of their total revenue, this has not translated into robust financial health.
  • Municipalities' dependence on external funding has reduced their ability to operate
  • Compounding this, the share of municipalities' own revenue sources has declined from 51% to 43%, further weakening their financial independence.
• Low Revenue Generation and Collection Inefficiencies
  • Municipal tax revenues have shown only modest growth, rising by 8% between 2010 and 2018, while grants increased by 14%, and non-tax revenue grew by 10.5%.
  • However, inefficiencies in tax collection severely limit revenue potential; for instance, ULBs in cities like Bengaluru and Jaipur collect only 5%-20% of their potential tax revenue.
  • Nationally, property tax collection stands at a mere ₹25,000 crore annually, amounting to just 0.15% of GDP, a figure significantly lower than global benchmarks.
• Poor Cost Recovery for Services
  • Urban local bodies also struggle with cost recovery for essential services.
  • Across the country, the recovery rates for urban services like water supply and waste management range from 20% to 50%.
  • This mismatch between the costs of providing services and the revenues generated not only worsens the financial strain on ULBs but also leads to substandard service delivery.
• Underutilisation of Funds
  • One of the paradoxical challenges faced by municipalities is their inability to utilise allocated funds effectively.
  • The Fifteenth Finance Commission reported that approximately 23% of total municipal revenue remains unspent.
  • Even in major cities like Hyderabad and Chennai, only 50% of capital expenditure budgets were utilised in 2018-19.
  • This underutilisation points to systemic inefficiencies, such as delays in project approvals, lack of skilled manpower, and bureaucratic hurdles.
• Suboptimal Utilization of Central Schemes
  • Flagship urban development schemes like the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and the Smart Cities Mission have also faced implementation challenges.
  • AMRUT achieved 80% fund utilisation, while the Smart Cities Mission managed 70%.
  • These figures, though reasonable, fall short of the full potential of these initiatives and highlight gaps in project execution and management.
• Decline in Public-Private Partnerships (PPPs)
  • PPPs, which were once seen as a promising avenue for augmenting urban infrastructure investment, have witnessed a sharp decline.
  • Investment in urban PPP projects peaked at ₹8,353 crore in 2012 but plummeted to ₹467 crore by 2018.
  • Several factors contribute to this decline, including inadequate project-specific revenues, weak financial viability of projects, and the lack of institutional mechanisms to attract private players.

Pathways to Reform

• Long-term Reforms
  • Structural reforms are crucial for strengthening municipal financial autonomy and capacity.
  • Empowering municipal governments to manage and allocate resources more effectively is essential.
  • This includes enhancing the role of State Finance Commissions and enabling municipalities to raise funds through mechanisms such as debt borrowing and municipal bonds.
  • These reforms will attract much-needed private capital, fostering sustainable urban development.
• Medium-term Strategies
  • Developing a Robust Project Pipeline
    • To meet the ₹70 lakh crore urban investment requirement, India needs a steady pipeline of 600-800 projects annually, with about 15% of investments potentially coming through PPPs.
    • This involves meticulous planning and preparation to ensure projects are viable and impactful.
  • Decoupling Project Preparation from Financial Assistance
    • Hastily prepared projects often fail to meet financial, social, and environmental sustainability criteria.
    • Separating project preparation from financial assistance will allow for better planning and execution, particularly in the face of climate change vulnerabilities
  • Leveraging Digital Public Infrastructure (DPI)
    • Digital innovations can revolutionise urban service delivery, particularly in sectors like public transport.
    • By adopting DPI, India can enhance efficiency, transparency, and accountability, establishing itself as a global leader in smart urban solutions.
  • Capturing Land Value in Transport Projects
    • With half of the required ₹70 lakh crore investment allocated to urban transport, particularly metro rail projects, integrating transport infrastructure with urban development is crucial.
    • Leveraging land value near transit hubs can drive economic growth while improving urban efficiency.

Conclusion

• India’s urban future hinges on the ability to address these financial and structural challenges head-on as the stakes are high, and this is the window for action.
• By pursuing both immediate and long-term strategies, India can build urban infrastructure that meets the demands of its growing cities, thus ensuring sustainable and inclusive development for the decades to come.
• The path forward will require collaboration across government levels, private sector participation, and a relentless focus on innovation and governance efficiency.