India’s urban population is set to increase dramatically, from 400 million in the last decade to 800 million over the next three decades. This growth presents immense opportunities to transform the urban landscape, but it also brings significant financial challenges. A World Bank report recently highlighted that India will require approximately ₹70 lakh crore by 2036 to meet its urban infrastructure needs. Current government investments in urban infrastructure, however, fall significantly short, at just ₹1.3 lakh crore annually. This is only about one-fourth of the required ₹4.6 lakh crore per year. Of this total, around 50% is required for basic urban services, while the other half is earmarked for urban transport infrastructure.
To bridge this massive funding gap, India must confront multiple systemic issues, including stagnant municipal finances, inefficiencies in resource utilization, and declining public-private partnership (PPP) investments. It is equally important to adopt innovative financing solutions, enhance local governance, and strengthen planning processes for sustainable urban development.
Why Are Municipal Finances Falling Short?
Municipal finances play a critical role in urban infrastructure funding. However, over the past two decades, their contribution has remained stagnant at just 1% of GDP, even as urban areas have expanded rapidly. Municipal bodies account for 45% of urban investments, while the remaining 55% is managed by parastatal agencies. Despite an increase in central and state government transfers from 37% to 44%, municipalities remain financially precarious.
- Tax revenue for municipal bodies grew by only 8% between 2010 and 2018, grants increased by 14%, and non-tax revenue by 10.5%.
- Municipalities’ own revenue sources, however, have declined from 51% to 43%, reflecting a diminished capacity for self-sufficiency.
- Property tax collection, a key source of municipal revenue, is alarmingly low, generating only ₹25,000 crore annually, or 0.15% of GDP. Cities like Bengaluru and Jaipur collect just 5%-20% of their potential tax revenues, highlighting severe inefficiencies in tax collection systems.
Cost recovery for urban services is another significant challenge. Municipalities recover only 20%-50% of service costs, leading to a persistent gap between the cost of service delivery and the revenue generated. Furthermore, local urban bodies (ULBs) face low “absorptive capacity,” which refers to their inability to utilize allocated funds effectively. For instance, 23% of municipal revenues remain unspent, as noted by the Fifteenth Finance Commission report. Major cities like Hyderabad and Chennai spent only 50% of their capital expenditure budgets in 2018-19.
How Has Public-Private Partnership (PPP) Performance Declined?
PPPs, once viewed as a promising avenue for urban infrastructure financing, have seen a drastic decline in India. Investments in PPP projects peaked at ₹8,353 crore in 2012 but dropped sharply to ₹467 crore by 2018. The commercial viability of PPPs often depends on project-specific revenues or government funding for viability gaps. In the absence of these mechanisms, projects lose their attractiveness to private investors.
For instance, municipal bodies in smaller cities struggle to develop Special Purpose Vehicles (SPVs) or prepare comprehensive PPP frameworks, leaving them unable to attract private investment. Consequently, less than 10% of PPP projects in urban local bodies originate from smaller cities, deepening regional disparities in urban infrastructure development.
What Long-Term Reforms Are Necessary?
To address these challenges, India must pursue long-term structural reforms to empower municipal governments and enhance their financial autonomy. Strengthening State Finance Commissions is critical for enabling municipalities to manage resources more effectively. Reforms should also focus on creating revenue-generating mechanisms, such as municipal bonds and debt borrowing, to attract private capital.
- Municipal bonds have shown promise in cities like Pune, where the Pune Municipal Corporation (PMC) raised ₹2 billion in 2017 to partially fund a ₹29 billion water supply project. The PMC’s adoption of double-entry accounting systems and its AA+ credit rating demonstrated that fiscal transparency can improve creditworthiness and attract private investment.
- Cities like Mumbai, where the Brihanmumbai Municipal Corporation (BMC) generates ₹1,800 crore annually as interest from fixed deposits, show how strong fiscal discipline and transparent financial practices can enhance the ability to attract external financing.
What Medium-Term Measures Can Bridge the Gap?
While long-term reforms will take time to materialize, several medium-term measures can accelerate progress in building sustainable urban infrastructure:
- Develop a robust project pipeline: To meet the ₹70 lakh crore investment requirement by 2036, India needs a pipeline of 600-800 urban infrastructure projects annually. Of these, about 15% could be financed through PPPs, translating to 250-300 projects each year.
- Decouple project preparation from financial assistance: Poorly prepared projects often fail to secure the required investments. Decoupling project preparation from financial assistance will allow for better design, ensuring that projects are financially, socially, and environmentally sustainable.
- Leverage Digital Public Infrastructure (DPI): Outdated practices in public service delivery hinder operational efficiency in Indian cities. By embracing DPI, urban bodies can improve service management, particularly in public transport and utility services.
- Capture land value in urban transport projects: With 50% of the ₹70 lakh crore investment allocated to urban transport, cities must integrate metro and rail projects with urban development. This approach can unlock land value near transit hubs, creating jobs and increasing efficiency.
How Can the Private Sector and Community Play a Role?
Innovative collaborations between municipal bodies and private stakeholders can unlock additional resources for urban infrastructure. The New Delhi Municipal Corporation (NDMC) has successfully implemented PPP models for sanitation projects, where private players build and maintain facilities while generating revenue through additional commercial activities like bank ATMs and water vending machines. Similarly, eco-restoration projects like Chennai’s Villivakkam Tank restoration highlight how partnerships can create sustainable urban spaces.
For smaller cities, capacity-building programs are crucial to overcoming resource and knowledge gaps. Vocational training programs can equip ULBs with the skills needed to design and execute complex projects.
What Should the Path Ahead Look Like?
India’s urban future depends on addressing its financial and structural challenges with urgency. A combination of long-term reforms and medium-term interventions can create a more robust framework for urban infrastructure financing. Collaboration across all levels of government, private sector participation, and a relentless focus on innovation and governance efficiency will be key.
By adopting transparent financial practices, improving tax collection efficiency, and leveraging digital tools, India can lay the foundation for sustainable and inclusive urban development. As the urban population grows to 800 million, the window for action is now, and the stakes for transforming India’s cities have never been higher.