India’s urban infrastructure financing, needs and reality
Context
India’s urban population is expected to double from 400 million to 800 million in the next three decades. This growth offers opportunities to transform urban landscapes but also presents significant financial challenges.
- A recent World Bank report highlights that India needs ₹70 lakh crore by 2036 to meet its urban infrastructure needs, while current investment levels fall far short.
Relevance:
GS-2 (Growth and development)
Dimensions of the Article
- India’s Urban Infrastructure
- About the Issue
- Challenges
India’s Urban Infrastructure:
- Urbanisation is rapidly increasing, necessitating a massive expansion in infrastructure to support a population of 800 million.
- A World Bank report estimates that India will need to invest $840 billion over the next 15 years—or an average of $55 billion per annum—into urban infrastructure if it is to effectively meet the needs of its fast-growing urban population.
- Investment Gap: India requires ₹4.6 lakh crore annually, but current spending is just ₹1.3 lakh crore. Nearly half of the need is for urban services, and the other half is for transport.
- Issue:
- Municipal bodies contribute 45% of urban investments but remain underfunded. Municipal revenue has stagnated at 1% of GDP since 2002, with their share of self-generated funds declining.
- Underutilisation of Resources: Cities struggle to spend available funds effectively, with 23% of municipal revenue unspent and major schemes like Smart Cities Mission achieving only partial utilisation.
Challenges:
- Poor Revenue Collection:
- Property tax collection is just ₹25,000 crore annually, or 0.15% of GDP.
- Cities like Bengaluru and Jaipur collect only 5%-20% of potential tax revenues.
- Service cost recovery ranges from 20%–50%.
- Low Absorptive Capacity:
- Municipal bodies leave a significant portion of their budgets unspent.
- Capital expenditure utilisation is as low as 50% in cities like Chennai and Hyderabad.
- Decline of PPPs:
- Investments through public-private partnerships (PPPs) have dropped from ₹8,353 crore in 2012 to ₹467 crore in 2018, limiting alternative financing avenues.
- Inefficient project preparation:
- Hastily prepared projects often fail to meet financial, social, and environmental sustainability standards, hindering long-term outcomes.
Suggested Measures:
- Strengthen Municipal Governance: The State Finance Commission should empower municipalities with financial and administrative autonomy to manage urban funds.
- Develop a Project Pipeline: It should prepare a pipeline of 600-800 PPP projects annually and ensure that they meet sustainability and efficiency standards.
- Modernise Urban Management: The government should leverage digital public infrastructure (DPI) for providing better urban services.
- Promote Collaboration and Innovation: Foster partnerships between governments and private players to encourage innovative financing mechanisms like municipal bonds and debt borrowing.
