World Bank report about India’s cities

(MainsGS1: urbanization, their problems and their remedies.)

Context:

• According to the World Bank, India would need to invest $840 billion over the next 15 years, that is, an average of $55 billion each year, to meet the demands of its fast-growing urban population.

Findings of latest report:

• The World Bank in its latest report, titled ‘Financing India’s Urban Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action’, puts forth the urgent requirement to leverage greater private and commercial investments to meet the emerging financial gaps.
• Much of the urban infrastructure in India is financed by tied intergovernmental fiscal transfers, that is, vertical and horizontal transfer of finance for attaining certain objectives sub-nationally. 
• Of the finances needed to fund capital expenditures for Indian cities, 48% is derived from State governments, 24% from the Central government and 15% from urban local bodies’ own surplus. 
• The rest includes public-private partnership (3%), commercial debt (2%) and loans from Housing and Urban Development Corporation, or HUDCO (8%).

Some of the constraints

• The report argues that the overall funding base to raise commercial revenues “appears to be low” owing to weak fiscal performance of cities and low absorptive capacity for execution of projects.
• Broadly, the global financial institution has argued that low service charges for municipal services undermine financial sustainability and viability. 
• It goes to the extent that urban bodies are unable to recover operations and maintenance costs, thus, constraining their ability to further execute projects. 
• The report states that city agencies have been unable to expand their resource and funding base to support private financing for services such as water supply, sewerage networks and bus services, as they are highly subsidized. 
• These are sourced from either their general revenues, own-source revenues (such as house tax, professional tax, property tax among others) or fiscal transfers.

Way forward:

• The central idea is to increase cities’ fiscal base and creditworthiness and for improving their fiscal base, cities must institute a buoyant revenue base and be able to recover the cost of providing its services. 
• The latter could be attained by revising property taxes, user fees and service charges, among other streams, from the current low base.
• Its report states that the idea should be to double own-services revenues of urban bodies and parastatal agencies every five years, for that level of growth would be adequate to support a funding base sufficient enough to balance its commercial financing ability with its investment needs in future.
• The fiscal transfer system, and thus potential commercial sector investments, must also move towards formula-based and unconditional (meant for general and not project-specific purposes) regime.