Independent Research and Policy Advocacy

Sustainable Financing for Indian Cities

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By Anand Sahasranaman & Vishnu Prasad, IFMR Finance Foundation

A version of this article was first published in the September 2014 edition of the monthly journal Yojana.

Municipal finances in India are characterised by the constant tension between the funds and functions of local governments. Cities in India have insufficient revenue tools to meet their expenditure requirements. While the 74th Constitutional Amendment Act (CAA) devolved a great deal of functional autonomy to local governments, a commensurate devolution of financial autonomy was absent. Out of the 18 functions to be performed by municipal bodies under the 74th CAA, less than half have a corresponding financing source. Furthermore, most local governments cannot set tax rates or change the bases of collection without the explicit concurrence of state governments. However, not all problems of municipal financing in India are attributable to the upper tiers of governments. Local governments have failed to utilize adequately even those tax and fee powers that they have been vested with, in particular by failing to put forth an adequate collection effort. The very low levels of own revenue generation in Indian cities have, thus, precluded them from providing even the most basic public services to their citizens.

While the thrust of urban policy in India has been on the metropolitan centres, the current state of public infrastructure and service delivery in India’s small and medium cities is, if anything, even more alarming than that in the larger ones. The central question that therefore confronts us, in the context of cities both big and small, is this: How can cities sustainably finance the development of public infrastructure to ensure service delivery that conforms to the laid-out benchmarks for all citizens in the next fifteen years? This article argues that in order to meet this challenge, Indian cities will need to increasingly generate higher levels of own source revenue and efficiently use market based financing mechanisms to ensure minimum levels of service delivery.

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2 Responses

  1. Very well written paper, and summarising key issues in attracting finance to municipal projects like 24×7 water supply, sewerage and solid waste management. There are rising no. of PPP projects in this space, but most of them have struggled attracting debt, and let go of private equity. This has become a vicious circle of poor internal revenue generation of municipal corporation, poor service levels, mistrust from end-customers to cooperate for paying user charges as they dont see at par services, lacking abilities of PPP operators to attract debt financing, delayed reform or PPP operationalisation, rising political tensions, non-revisions of user charges/ tariffs, and slowed gestation.

    Question is where to focus to bring the scalable impact. I support author’s view point that right Financing can act as the right catalyst to bring this change. What could be intermediate interventions before agency like HUDCO can start acting as good aggregator, also in Municipal Financing?

    1. Dear Rahul, thank you for your comments and thoughts on the paper. As the paper highlights, any sustainable solution to urban infrastructure financing will need to begin by getting the internal revenue generation of cities in order, specifically on property tax and user charges. Evidence from India and other countries show that small but necessary steps like GIS mapping of properties are good places to begin- Bangalore city is a case in point. Indonesia, for instance, was among the first countries to successfully effect property tax reform by focusing on collections reform rather than valuation reform. These examples point to directions that Indian cities can take in the interim. Accessing markets for finance will necessarily be predicated on the creation of a sustainable and predictable flow of funds from the city’s own revenues.

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