Indian cities require an estimated capital investment of $840 billion in urban infrastructure and municipal services in the next 15 years till 2036, according to a recent report by the World Bank. This means that India will need an average of $55 billion per annum for its urban infrastructure in a bid to effectively meet the needs of its fast-growing urban population. 

Titled “Financing India’s Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action,” the report says that till 2036, the investment in the urban cities must be equivalent to 1.18% of the estimated gross domestic product (GDP) over this period. This is equivalent to $108 per capita per year. Over half of these investments needs almost $450 billion in municipal services such as water supply, sewerage, municipal solid waste management (SWM), stormwater drainage, urban roads and street lighting, whereas the remaining $300 billion investment is required for mass transit. 

The report says that currently, the finances provided by the central and state government account for only 75% of the city infrastructure, whereas urban local bodies (ULB) finances only 15% of the city infrastructure. Of this private sources play a minor role by providing only 5% in financing the urban infrastructure. The government’s annual urban infrastructure investments currently stand at $16 billion. 

Auguste Tano Kouamé, country director of World Bank, India, says, “Cities in India need large amounts of financing to promote green, smart, inclusive, and sustainable urbanization. Creating a conducive environment for ULBs, especially large and creditworthy ones, to borrow more from private sources will therefore be critical to ensuring that cities are able to improve living standards of their growing populations in a sustainable manner.”

The report has studied the urban local bodies of Gujarat and Tamil Nadu and says that the ULBs in both the states reflects the financing trends and situation in most other states. In Tamil Nadu, 70% of urban capital expenditure is provided by the state government, whereas in Gujarat, the state government provides 55% of urban capital expenditure. 

The report also recommends expanding the capacities of city agencies to deliver infrastructure projects at scale. “Currently, the 10 largest ULBs were able to spend only two-thirds of their total capital budget over three recent fiscal years. A weak regulatory environment and weak revenue collection also add to the challenge of cities accessing more private financing," the World Bank says in a statement. 

Between 2011 and 2018, urban property tax stood at 0.15% of GDP compared to an average of 0.3% to 0.6% of GDP for low- and middle-income countries. Low service charges for municipal services also undermine their financial viability and attractiveness to private investment,” the report says. 

Over the medium term, the report suggests a series of structural reforms such as those in the taxation policy and fiscal transfer system - which can allow cities to leverage more private financing. In the short term, the report identifies a set of large high-potential cities that have the ability to raise higher volumes of private financing.

“The Government of India can play an important role in removing market frictions that cities face in accessing private financing. The World Bank report proposes a range of measures that can be taken by the city, state, and federal agencies to bend the arc towards a future in which private commercial finance becomes a much bigger part of the solution to India’s urban investment challenge,” said Roland White, global lead, city management and finance, World Bank, and co-author of the report.  

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