According to a new World Bank report, India would need to invest $840 billion in urban infrastructure over the next 15 years (an average of $55 billion per year) to adequately address the needs of its rapidly rising urban population.

 

Details

  • The report was titled as “Financing India’s Infrastructure Needs: Commercial Financing Constraints and Policy Action Prospects”.
  • It emphasises the urgent need to leverage additional private investments to cover rising financial gaps.

 

Highlights of the report

  • Urban population —
    • By 2036, 600 million people or 40% of the population, would be living in urban areas.
    • This is projected to place extra strain on India’s already overburdened urban infrastructure and services, with increased demand for clean drinking water, reliable power supply, efficient and safe road transportation, etc.
  • Financing of urban projects —
    • Currently, the central and state governments fund more than 75% of city infrastructure, with ULBs funding the 15% with their own surplus revenues.
    • Only 5% of Indian cities’ infrastructure needs are currently being funded through private sources.
    • A weak regulatory environment and weak revenue collection add to the challenge of cities accessing more private financing.
  • Low revenue —
    • Between 2011 and 2018, urban property tax stood at 0.15% of GDP compared to an average of 0.3-0.6% of GDP for low- and middle-income countries.
    • The policy decisions to keep the service charges below those required for cost recovery and financial sustainability contribute to low revenue.
  • Public Private Partnership (PPP) —
    • PPP transactions for urban infrastructure in India have seen a significant fall (both in monetary value and transaction volume) over the last decade.
    • For example, 124 PPP projects awarded in the urban sector since 2000 worth $5.5 billion.
  • Slow implementation performance —
    • States and Urban Local Bodies (ULBs) are implementing several of the flagship missions, such as Smart Cities (SCM) and the Pradhan Mantri Awas Yojana (PMAY), slowly.
    • Example — ULBs across India have so far executed only about one-fifth of the outlay of approved projects under SCM and Atal Mission for Rejuvenation and Urban Transformation (AMRUT) over the last six financial years.
    • This is mainly due to constraints on implementation capacity at the city level.

 

Suggestions given in the report

  • Cities in India need large amounts of financing to promote green, smart, inclusive and sustainable urbanisation.
  • Creating a conducive environment for ULBs to borrow more from private sources will thus be crucial.
  • The Government of India can play an important role in removing market frictions that cities face in accessing private financing.
    • Over the medium term, a series of structural reforms including those in the taxation policy and fiscal transfer system can allow cities to leverage more private financing.
    • In the short term, identifying a set of large high-potential cities that have the ability to raise higher volumes of private financing.
  • Expanding the capacity of city authorities will be crucial to implement the above suggestions for large-scale infrastructure projects.