Financing Indian Cities, Gorkhaland movement is a question of identity, not development Current Affairs 26th July, 2017

Financing Indian Cities, Gorkhaland movement is a question of identity, not development Current Affairs 26th July, 2017

Financing Indian Cities

Introduction:

Cities are the engines of economic growth. Owing to a variety of factors ranging from availability of skilled manpower to the benefits of agglomeration, much of India’s future growth is expected to come from its cities. By 2030, India’s cities are expected to contribute nearly 70% of the GDP, according to a McKinsey Global Institute analysis. However, very little investment goes back into those very cities.

Financial health of Indian cities:

Cities are under-invested:

India’s annual per capita spending on cities, which stands at $50, is 14% of China’s $362, 10% of South Africa’s $508 and less than 3% of the U.K.’s $1772. The inevitable outcome of that under investment is bad infrastructure and poor quality of life.
These crippling infrastructure deficits matter not just because they cause hardships to residents, but because India’s economic growth itself could be under threat. If cities are unlivable, the benefits of agglomeration would hardly kick in and India would miss its narrow window of opportunity to develop rapidly.

  • A 2010 McKinsey report estimates that India will need to spend $1.2 trillion by 2030, a far cry from current spending estimates.
  • The financial health of Indian cities is in such a pathetic state that revenue generated by urban local bodies accounts for less than 0.9% of the total GDP (gross domestic product) despite cities contributing almost 60% towards GDP.
  • Several urban local governments have to also rely on state governments to fund even basic operational expenditure like employee salaries.
  • In tier 2 and tier 3 cities, urban local bodies and municipal corporations have had little or no autonomy or capacity to raise revenue.
  • The government’s flagship urban development schemes fund only a fraction of the required investment and cities are tasked with finding other ways to bridge the funding gap. For example, under the Smart Cities Mission, the government has allocated $15 billion for 100 cities to be disbursed over four years, with equal contributions from the Central and state governments. This amount is by no means sufficient. The grant is to be seen as a starting point to attract funding from external sources.

India’s spending on urban infrastructure has to increase eight-fold. But much of this money may not come from the Central government. Cities themselves have to figure out ways to raise the money. However, the current revenue base of municipalities is narrow, inflexible and non-buoyant (meaning, it does not increase in step with the economy, unlike, say, a service tax).

Issues:

  • Over the last decade, public-private partnerships (PPPs) have been the preferred route for infrastructure creation in India. But PPPs have not worked as well as they were expected to owing to the poor rate of return for the private sector and other inefficiencies. The PPP model needs a radical redesign to be able to account for regulatory uncertainty and financial risk, a fact acknowledged by even the Kelkar committee appointed to study how the PPP model can be revived.
  • With the banking system heavily stressed with bad debts, urban rejuvenation might not receive the necessary impetus from the private sector in the short term.

The underlying lesson is that the government cannot afford to wholly rely on the private sector and will have to boost public spending as well as generate revenue on its own.

What needs to be done?

The government must commit to developing a city’s creditworthiness.

Municipal bonds:

Credit rating of cities is the first step towards raising money through the bond market, subnational governments, and international lenders. Ratings are assigned based on the assets and liabilities of urban local bodies, revenue streams, resources available for capital investments and implementation of credible double-entry accounting mechanisms.
More recently, the government announced that 94 of the 500 cities have already obtained such ratings, necessary for issuing municipal bonds. However, only 59% of the cities assessed were found to be worthy of investment.

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