Context
- A new World Bank report estimates that India will need to invest $840 billion in urban infrastructure over the next 15 years (an average of $55 billion per year) to meet the needs of its rapidly growing urban population.
- “Financing India’s Infrastructure Needs: Commercial Financing Constraints and Policy Action Prospects,” according to the report.
- It emphasises the critical importance of leveraging additional private investments to close growing financial gaps.
Relevance
GS Paper 3: Economy, Infrastructure
Mains Question
“Urban infrastructure is essential for the development of cities and their surrounding areas.” In light of this, consider the various reasons for the expansion of slum areas in India. Discuss various issues related to it as well. (250 Words)
Report highlights include:
- Urban population: By 2036, 600 million people, or 40% of the total population, will be living in cities.
- With increased demand for clean drinking water, reliable power supply, efficient and safe road transportation, and so on, this is expected to put additional strain on India’s already overburdened urban infrastructure and services.
- Urban project financing: o Currently, the central and state governments fund more than 75% of city infrastructure, with ULBs covering the remaining 15% with their own surplus revenues.
- Currently, private sources fund only 5% of infrastructure needs in Indian cities.
- Cities face additional challenges in obtaining more private financing due to a weak regulatory environment and poor revenue collection.
- Low revenue: o Between 2011 and 2018, urban property tax was 0.15% of GDP, compared to a low- and middle-income country average of 0.3-0.6% of GDP.
- Policy decisions to keep service charges lower than what is necessary for cost recovery and financial sustainability contribute to low revenue.
- Public-Private Partnership (PPP): Over the last decade, PPP transactions for urban infrastructure in India have declined significantly (both in monetary value and transaction volume).
- For example, since 2000, 124 PPP projects worth $5.5 billion have been awarded in the urban sector.
- Slow implementation performance: o Several flagship missions, such as Smart Cities (SCM) and the Pradhan Mantri Awas Yojana (PMAY), are being implemented slowly by states and urban local bodies (ULBs).
- For example, over the last six fiscal years, ULBs in India have executed only about one-fifth of the approved projects under SCM and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT). o This is primarily due to constraints on implementation capacity at the city level.
Suggestions in the report:
- Cities in India require significant funding to promote green, smart, inclusive, and sustainable urbanisation.
- Creating an environment that encourages ULBs to borrow more from private sources will thus be critical.
- The Indian government can play a significant role in removing market frictions that cities face when seeking private financing.
- In the medium term, a series of structural reforms, such as those in taxation policy and the fiscal transfer system, can enable cities to leverage more private financing.
- Identifying a set of large high-potential cities with the ability to raise larger amounts of private financing in the short term.
- Building the capacity of city governments is critical for implementing the above recommendations for large-scale infrastructure projects.
