Financial challenges in urban infrastructure development

Source: The post financial challenges in urban infrastructure development has been created, based on the article “India’s urban infrastructure financing, needs and reality” published in “The Hindu” on 25th November 2024

UPSC Syllabus Topic: GS Paper3- infrastructure

Context: The article discusses India’s urban growth challenges, highlighting the need for ₹70 lakh crore by 2036 for infrastructure. It emphasizes weak municipal finances, low tax collection, underutilized funds, declining PPPs, and suggests reforms, better planning, and private sector collaboration.

For detailed information on Urban Local Bodies In India read this article here

What are the financial challenges in urban infrastructure development?

1. India’s urban population will rise from 400 million to 800 million in three decades. To meet infrastructure needs, ₹70 lakh crore is required by 2036. However, government investment in 2018 was only ₹1.3 lakh crore annually, much lower than the needed ₹4.6 lakh crore.
2. Stagnant Contribution to GDP: Share of Municipal finances has remained at 1% of GDP since 2002, reflecting limited growth despite rising urban needs.
3. Low Revenue Self-Sufficiency: Municipalities’ share of their own revenue sources declined from 51% to 43%, reducing self-sufficiency. They rely more on grants and transfers from central and state governments, which increased from 37% to 44%.
4. Poor Tax Collection: Many cities collect a small fraction of potential tax revenues. For example, Bengaluru and Jaipur collect only 5-20% of potential property taxes.
5. Low Property Tax Revenue: Property tax collection is ₹25,000 crore, a mere 0.15% of GDP, far below its potential.
6. Cost Recovery Gaps: Revenue from services like water supply and waste management covers only 20-50% of their costs, leading to funding gaps.
7. Unutilized Funds: About 23% of total municipal revenue remains unspent, with major cities like Hyderabad and Chennai spending only 50% of their budgets in 2018-19.
8. Decline in PPP Investments: Public-private partnership (PPP) investments dropped from ₹8,353 crore in 2012 to ₹467 crore in 2018, reducing private sector involvement in infrastructure development.

What reforms are needed for sustainable urban development?

1. Strengthen Municipal Autonomy: Increase financial and administrative powers for municipalities to better manage and allocate resources. Current revenue generation is low, with municipalities only collecting 43% of their own revenue.
2. Develop a Robust Pipeline of Projects: Plan for 600-800 projects annually with about 15% investment potential from PPPs to meet the ₹70 lakh crore requirement over 20 years.
3. Decouple Project Preparation from Financial Assistance: This ensures projects are sustainable and well-planned, addressing past issues where only 50% of capital budgets were utilized in major cities like Hyderabad and Chennai.
4. Leverage Digital Public Infrastructure (DPI): Improve public services, especially transportation, by adopting modern digital solutions.
5. Capture Land Value in Transport Projects: Integrate metro and rail projects with urban development to increase land value and improve city design and efficiency.

Question for practice:

Examine the factors contributing to the financial challenges faced by municipalities in India and the proposed measures to address these challenges.