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Indian cities can't be drivers of economic growth at the cost of inequity, inclusivity

By Dr Soumyadip Chattopadhyay, Dr Arjun Kumar* 
Indian cities with their contribution of around two-thirds of the GDP are expected to play an instrumental role as the country’s engines of economic growth. A majority of these cities are hamstrung by serious infrastructural issues and governance deficits.
As per the recent World Bank study, our cities need an investment of $840 billion over the next fifteen years. Investment requirement for basic urban services (e.g. water supply, sewerage, waste management, roads, street lights, stormwater drainage) is estimated at about $450 billion and another $300 million is for building mass transits.
So, strengthening the city governments and having a budgetary provision for financing urban infrastructure assumes special significance. The “first budget of Amrit Kaal” has recognized the growth potentials of Indian cities and is aimed to build ‘sustainable cities for tomorrow’, with a roadmap for infrastructure financing and governance reforms.
Click here for Urban India Flagships Schemes.
The total Budget Estimate (BE) available for urban development (Ministry of Housing and Urban Affairs (MoHUA)) has experienced a slight drop from INR 76,549 crores in Financial Year (FY) 2022-23 to INR 76,431 crores in FY 2023–24 of about INR 117 crores. The Revised Estimate (RE) for FY 2022-23 stood at INR 74,545 crores. Although the REs and BEs were quite close to each other, the actuals for the financial year 2021-22 were stooping INR 1,06,840 crores, owing to the PM Awas Yojana – Housing for All by 2022. This decline is attributed mostly to the thrust and budget outlay given in previous years towards Housing for All by 2022.
Two flagship schemes of the MoHUA – the Smart Cities Mission (SCM) (Mission for Development of 100 Smart Cities) and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) (Urban Rejuvenation Mission – 500 Cities) – have bagged higher budgetary allocations from INR 14,100 crores (BE) in 2022-23 and INR 15300 crores (RE) in 2022-23 to INR 16000 crores (BE) for both in FY 2023-24 (actual for FY 2021-22 was INR 13,868 crores). The AMRUT has received BE for FY 2023-24 of INR 8,000 crores (FY 2022-23: with BE of INR 7,300 crores & RE of INR 6,500 crores; FY 2021-22 with actual INR 7,280 crores). The SCM also has received BE for FY 2023-24 of INR 8,000 crores (FY 2022-23: with BE of INR 6,800 crores & RE INR 8,800 crores; FY 2021-22 with actual INR 6,587 crores). The component of City Investment to Innovate, Integrate and Sustain (CITIIS) has again received BE of INR 334 crores like the last year. As compared to the previous year, the SCM has an uptick in RE for FY 2022-23, unlike in covid years.
The scheme for Metros and MRTS, which has almost the entire amount as capital expenditure (CAPEX), has witnessed a slight decline in the BE for FY 2023-24 at INR 23,175 crores as compared to BE for FY 2022-23 which was INR 23,875 crores (RE for FY 2022-23 was INR 20,401 crores and actuals for FY 2021-22 was INR 23,473 crores). The National Capital Region Transport Corporation has been allotted BE of INR 3596 crores for FY 2023-24 (BE & RE for FY 2022-23 was INR 4,710 crores).
The Pradhan Mantri Awas Yojana Urban (PMAY-U) has seen a decline in the BE for FY 2023-24 at INR 25,103 crores as compared to BE for FY 2022-23 which was INR 28,000 crores (RE for FY 2022-23 was INR 28,708 crores and Actuals for FY 2021-22 was INR 59,963 crores). The scheme is financed from Central Road and Infrastructure Fund, having the Extra budgetary resources (EBRs) component. PMAY-U has four components- In-situ Slum Rehabilitation (ISSR), Affordable Housing in Partnership (AHP), Beneficiary-led individual house construction/enhancement (BLC) (these three are under centrally sponsored scheme) and Credit Linked Subsidy Scheme (CLSS), a central sector scheme, for Economically Weaker Section (EWS), Lower Income Group (LIG) and Middle Income Group (MIG). The CLSS scheme has been discontinued altogether in this budget. There has been a decline in the budget for PMAY-U as the Housing for All by 2022 target has been met.
However, following the discontinuation of the CLSS scheme, problems ofl ack of access to credit and affordability for the urban poor bracketed in the EWS and LIG categories would only intensify.
The budgetary allocations for Swachh Bharat Mission Urban (SBM-U) have more than doubled from INR 2,300 crores (BE) in 2022-23 and INR 2,000 crores (RE) in 2022-23 to INR 5,000 crores (BE) in 2023-24 (actuals for FY 2021-22 was INR 1,951 crores). Earlier, the SBM-U was financed by Rashtriya Swachhata Kosh – Central & State component. Higher financial allocation is complemented with the provision for scientific management of dry and wet waste through the complete transition from manhole to machine-hole mode, a switch to mechanical desludging of septic tanks and sewers in all cities and towns. A greater emphasis has been given to sanitation and mechanization of such activities.
Other Schemes
At the same time, the allocation towards Deendayal Antyodaya Yojana-National Urban Livelihood Mission (DAY-NULM) has been discontinued and has been reduced to INR 0.01 crores, a number staggeringly low compared to the previous year’s estimates (BE for FY 2023-24 was INR 900 crores and RE was INR 550 crores).
Nonetheless, the Prime Minister’s Street Vendors’ Atmanirbhar Nidhi (PM SVANIDHI) sees a substantial increase in its allocation from INR 150 crores (BE 2022-23) to INR 468 crores (BE 2023-24) (RE for FY 2022-23 was 433 INR crores and actual for FY 2021-22 was 297 INR crores). Therefore, the DAY-NULM budget can be seen shifting towards PMSVANIDHI, albeit, with it’s limited focus on street vendors. However, increase in budgetary allocations under the DAY-NULM could be more impactful for the urban poor engaged in the urban informal sectors and their livelihoods and more so, as they are yet to fully withstand the COVID induced economic losses. Speaking of other centrally sponsored schemes, Jal Jeevan Mission is also one such scheme that sees an increase in its budgetary allocation from INR 60000 crores (BE 2022-23) to INR 70000 (BE 2023-24).

New India’s Infrastructure and CAPEX Push

The main focus of this year’s budget has been increased Capital Expenditure. With the objective to increase the share of manufacturing in the GDP of India, the National Industrial Corridor Development Programme (NICDP) is being implemented whereby 32 greenfield industrial smart cities under 11 industrial corridors are being developed with world-class Plug-n-Play infrastructure. The Plug-n-Play model has been put in place to avoid digging of roads every time a pipeline or cables have to be laid down.
It promotes planned infrastructure where separate lines for communication, sewage, water, industrial effluents, electricity and gas are laid all at once, preventing re-digging and re-laying of roads. The National Industrial Corridors have seen an increase in its budgetary allocation from INR 1500 crore (BE) in 2022-23 to INR 2000 crores (BE) in 2023-34. At the same time, the actual expenditure was INR 1104 crores in 2021-22.
In addition to this, the Finance Minister in her speech spoke of the scope of the PM Gati Shakti National Master Plan which will encompass seven engines for economic transformation, seamless multi-modal connectivity and logistics efficiency. Proper implementation of this scheme could address the poor state of logistics and supply chains in the smaller cities and better connect them with their larger counterparts.

Improving the Financial Health of Cities

One of the key takeaways of the budget is the setting up of a Rs 10,000 crore per year Urban Infrastructure Development Fund (UIDF) under the aegis of the National Housing Bank for the purpose of financing urban infrastructure. Funds under the UIDF are expected to be amassed through the use of priority sector lending shortfall with the specific aim of creating urban infrastructure in Tier-2 and Tier-3 cities.
This budget has also announced incentives for improving the creditworthiness of the city governments to enable them to access the capital market for financing urban infrastructure. However, the finances of city governments are in a grossly unsatisfactory state. As per the ICRIER (2019) report, municipal revenue remained stagnant at around 1 per cent of GDP during the period from 2007-08 to 2017-18 and the municipal own revenue as per cent of GDP was only 0.43 per cent in 2017-18.
Among the different categories of city governments, Municipal Corporations contribute nearly 80 per cent to India’s municipal own revenue owing to their strong economic base and the capacity to mobilise sufficient tax and non-tax revenues. Importantly, the revenue autonomy ratios (proportion of the tax and non-tax revenue in total municipal revenue) for all the city governments registered declined from 51 per cent in 2010-11 to 43 per cent in 2017-18. This indicates the growing fiscal dependency of the city governments, especially the Municipal Councils and Nagar Panchayats, on higher levels of government for meeting their revenue shortfalls.
Reforms in property tax governance and ring-fencing of user charges, as announced by the Finance Minister, are therefore timely interventions for improving the financial health of the city governments. Property Tax is the most important urban local tax in India and its importance has increased in the post-GST period. However, with a contribution of only 0.15 per cent to India’s GDP, the revenue collections from property tax are significantly low.
Wide spread use of manual and paper-based systems of property register; improper valuation methods without any link to actual (market) value of properties; inefficient tax collections and absence of penal measures for delayed or non-payment of property taxes coupled with lack of grievance redressal mechanisms have seriously undermined the revenue generation potentials of property tax in India.
Moreover, the city governments in India hardly utilize user fees to cover even operation and maintenance costs of basic services mainly due to narrow political compulsions, e.g., fear of losing votes and peoples’ dissatisfaction with the municipal services. The recent World Bank report highlighted that water and sewerage utilities in Indian cities recovered, on average, only 55% of their operating costs in recent years. So, successful operationalization of the budgetary announcements remains a huge challenge for Indian cities.
The Fifteenth Finance Commission’s grant conditionalities in the form of notification of floor rates for property tax and subsequent linking of property tax collections with the growth of states’ own GSDP lay strong foundations for the financial accountability of municipalities. In addition, it requires overhauling the current practices, at a much higher scale as envisioned in this year’s budget. In fact, the success of these reforms is dependent on garnering sufficient and sustained public and political support at the city levels. Equally important is to empower the city governments to impose taxes and fees and to strengthen the linkages between local taxes and local expenditures on municipal services by encouraging accountability and transparency of the city governments to their citizens.
Further, Indian cities today are in an appalling state. An analysis of crime rates given by the National Crime Records Bureau (NCRB) suggests that cities in India fare poorly in terms of safety of living. The World Air Quality Report, prepared by Swiss organisation IQAir, is an index that listed 35 Indian cities with the worst air quality tag for 2021, and little has changed since then. With respect to the ease of doing business, India ranks 63rd across the world among 190 countries. Of late , the climate change induced risks including cyclones, flooding, heat waves and so on have made the Indian cities vulnerable due to their location and diversity of geography. Mainstreaming climate change mitigation and adaptation measures in urban planning and policy frameworks is critical. So we need regional planning with active involvement of empowered city governments.

Promising Yet Concerning

This budget has a renewed thrust for municipal bond issuances. However, municipal bonds accounted for less than one-tenth of the total commercial debt raised by the city governments during 2011-18. Out of the 94 cities under the Smart Cities and AMRUT programs, only 59 per cent received an investment grade rating or above in 2018. In the last four years, out of 28 Municipal Corporations securing investment-grade credit ratings, only five cities issued municipal bonds. Apart from the weak financial health of the city governments, several structural bottlenecks including non-transparent financial management, absence of specific laws for addressing the insolvency of the cities, over-collateralisation and absence of secondary markets constrain the municipal bond market in India.
While it reemphasizes the need for greater fiscal autonomy of the city governments, it is equally necessary to build their capacities to manage commercial debt financing in a meaningful, effective and transparent manner. Indian Cities urgently need an integrated policy and regulatory environment to improve revenue mobilization and to access and leverage public as well as private funds for financing urban infrastructure on a sustainable basis.
In essence, Indian cities are undoubtedly the largest drivers of economic growth in the 21st century, but not at the cost of inequity and lack of inclusivity. With an increasing population and an expanding economy, actions must be undertaken to enable the country to urbanise. During the timeline of the Amrit Kaal, rethinking urban policies and practices is urgently required to facilitate growth with inclusiveness.

References:

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Dr Soumyadip Chattopadhyay, Associate Professor, Visva-Bharati, Santiniketan, Visiting Senior Fellow, IMPRI; Dr Arjun Kumar, Director, IMPRI

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