Financing Municipalities and Sub-national Governments in India

Financing Municipalities and Sub-national Governments in India M Rajamani Joint Secretary to Government of India Ministry of Urban Development Regional Round Table on Asia 2nd Conference on Financing Municipalities and Sub-National Governments, Washington, DC 30 September 2004

Urbanisation in India • India’s urban population, as per its 2001 Census, was 285 million (27.8% of its total population of 1.03 billion) • The number of towns and cities was 5,161 • In the world context, the country’s current urban population is almost equal to the combined urban population of United States, UK and France

Urbanisation in India • 423 Cities, in the country, have more than 100,000 population each and 35 cities more than one million each • Of the 10 largest cities in the world, 3 (Mumbai, Kolkata, and Delhi) are located in India • And, about 11 per cent of world urban growth is currently occurring in India

Contribution to National Economy Urban areas are contributing about 60 per cent to India’s Gross Domestic Product (GDP) estimated at US $ 486 billion in the fiscal year 2002-03

Urban Infrastructure in India • The provision of urban infrastructure in Indian cities is lagging far behind the pace of urbanisation • Though about 90 percent of urban population is covered by treated water supply, the water is supplied only for a few hours per day

Urban Infrastructure in India • 52% of urban population does not have access to sanitation facilities • 30 to 50% of solid waste remains uncollected • City roads are inadequate to meet the traffic requirements (vehicle pop in India increased 80-fold in last 40 years but road length increased by only 5 per cent)

Legal and Institutional Impediments • Legal frameworks relating to urban infrastructure development and land and housing market require amendments to facilitate public private partnership and improve functioning and efficiency of the governments • There is multiplicity of urban local agencies and their revenue raising and financial management capacities are inadequate (poor credit-worthiness, weak management systems, limited revenue raising powers)

Availability and Gap in Investment Requirements • There is a huge gap in the availability and requirements of funds for urban infrastructure development • In the next ten years, the requirement of funds for key urban infrastructure of water supply, sewerage, solid waste management and urban roads is about US$ 90 billion and the availability is just about US$ 10 billion • Projected gap for just the O&M of basic services in cities for the next five years alone has been estimated as US $17 billion • If urban mass rapid transit systems are also included, the gap would be much higher

Investment Requirements Driven By • Past under-investment • Rapid urbanisation • Rapid economic growth • Increasing trade and globalisation of the Indian economy • Demand from public and business for better infrastructure • Infrastructure required for international competitiveness

Financial Support to Sub-national Governments and Local Bodies • Central financial devolution to states to supplement the resources of municipalities: As per recommendations of Central Finance Commission • Devolution of financial resources to local bodies as per recommendation of the State Finance Commissions • Grants-in-aid to local bodies by the States • Integrated Development of Small and Medium Towns Scheme • To develop infrastructure in small and medium towns capable of generating economic growth

Financial Support to Sub-national Governments and Local Bodies • Mega City Scheme - To undertake development of infrastructure in five mega cities (Mumbai, Chennai, Kolkata, Hyderabad, and Bangalore in the country • Financial Support for National Urban Information System Scheme - To develop urban management and spatial information systems by using GIS, GPS and GPR • Accelerated Urban Water Supply Scheme -To extend financial support to state govern-ments/municipalities to provide water supply facilities in small/medium towns • Support for desalinisation plants where water source is a problem

Proposed Urban Infrastructure Development Scheme (UIDS) • A new scheme (UIDS) is under consideration to • Improve infrastructural facilities and help create durable public assets in cities & towns • Enhance public-private-partnership in infrastructural development • Decentralize urbanisation and promote planned development of towns, cities and metros • The components for assistance under the scheme will include all urban infrastructure development projects excluding water supply and sewerage

Decentralisation and Empowerment of Urban Local Bodies • In order to decentralise local governance, the Constitution of India has been amended to: • recognise urban local governments as third tier of government after central and state • empower the urban local bodies through functional and financial devolution • facilitate people’s participation in local governance • enable integration of plans prepared by the local bodies.

Support Through Urban Sector Reforms • Thrust on Public-Private Partnership • Hitherto public sector has been responsible for urban infrastructure provision but now there is thrust on partnership with private sector and attracting foreign investment • It is realised that public sector has neither the finances nor the capacities to manage infrastructure development • Public policies are being developed to attract private sector investment

Incentives for Urban Sector Reforms • Urban sector reforms initiated in a major way • Government of India has issued guidelines for 100% FDI in development of integrated townships (of 2000 dwelling units/100acres) • An Urban Reform Incentive Fund (URIF) has been set up to provide reform linked assistance to the states in the country (reforms such as amendment of rent control act, repeal of urban land ceiling act, reduction in duty for land and property transaction, improvement in accounting system, computerisation of land records)

Incentives for Urban Sector Reforms • A City Challenge Fund (CCF) is proposed to facilitate city-level reforms by funding the transition costs of moving towards sustainable systems of municipal management and service delivery • A Pooled Finance Development Scheme (PFDS) has been designed to facilitate access to capital market by smaller urban local bodies • Tax-free status has been granted to Bonds issued by urban local bodies (so far about 15 local bodies have raised resources using this financial instrument)

Incentives for Urban Sector Reforms • Government of India has provided fiscal incentives for urban infrastructure in the form of: • Tax holiday for solid waste management and water treatment systems • Custom duty exemption for import of equipments for water, sanitation and solid waste management projects • Enlargement of the definition of infrastructure for tax benefits to include urban infrastructure such as water supply and sanitation • Definition of infrastructure for tax benefits modified to include urban reforms such as water supply and sanitation

Urban Poverty Alleviation • Targetted subsidies to Urban Poor • SJSRY (Swaran Jayanti Shahari Rozgar Yojana) – Urban self employment and wage employment programme • VAMBAY (Valmiki Ambedkar Awas Yojana) for providing shelter and upgraded shelter to urban poor/slum dwellers below poverty line • NSDP (National Slum Development Programme) now converted to Additional Central Assistance to states for development of slums with community participation

Investment Environment Improvement • Legal provisions are being made to facilitate private sector and foreign direct investment • Municipal Acts being modified to enable urban local bodies’ partnership with private sector and to improve municipal governance and management • Systems being introduced for efficient urban management and good urban governance • Reforms being initiated in developing regulatory systems

Investment EnvironmentImprovement • Major thrust on improving credit-worthiness of urban local bodies • Development of capital market for urban infrastructure financing • Improvements in services delivery and management taking place through public-private partnerships and introduction of e-governance in municipalities

Investment Environment Improvement • Improvements in revenue-raising capabilities through • Rationalisation of user-charges to recover at least the cost of operations and management of services • improvements in tax assessment and administration particularly in property tax • Changes in municipal accounting and financial reporting systems from single-entry cash based to double-entry accrual based systems

Financing Municipalities and Sub-national Governments in India