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Cities and Union Budget 2023-24: Challenges and Opportunities – IMPRI Impact and Policy Research Institute

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Cities and Union Budget 2023-24: Challenges and Opportunities - IMPRI Impact and Policy Research Institute

Soumyadip Chattopadhyay, Arjun Kumar

Abstract

The “first budget of Amrit Kaal (2022-2047)” recognizes Indian cities’ growth potential and seeks to create “sustainable cities for tomorrow” through infrastructure financing and governance reforms. The budget established a Rs 10,000 crore per year Urban Infrastructure Development Fund (UIDF) and incentives for city governments to improve their creditworthiness to access capital market urban infrastructure financing. It highlights cities’ need for fiscal autonomy. They must improve their commercial debt financing capabilities. Rethinking and prioritizing urban policies and practices during Amrit Kaal is crucial to inclusive growth towards New India in 2047.

Indian Cities as Engines of Economic Growth in Amrit Kaal

Indian cities are expected to drive two-thirds of GDP growth. These cities suffer from governance and infrastructure issues.

The World Bank (2022) estimates $840 billion for our cities over 15 years. Urban services like water, sewerage, waste management, roads, street lights, and stormwater drainage cost $450 billion, while mass transit costs $300 million.

Thus, city governments and urban infrastructure funding are essential. The “first budget of Amrit Kaal (2022-2047)” recognizes Indian cities’ growth potential and aims to build “sustainable cities for tomorrow” with infrastructure financing and governance reforms.

Urban India Flagships Schemes

The Ministry of Housing and Urban Affairs (MoHUA) budget for urban development has decreased by INR 117 crore from FY 2022-23 to FY 2023-24 and now stands at INR 76,431 crore. This decrease is primarily due to a shift in emphasis and budget allocation towards the PM Awas Yojana – Housing for All by 2022, which resulted in a lower actual expenditure of INR 1,06,840 crore for the financial year 2021-22.

The Smart Cities Mission (SCM) and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT)- under MoHUA’s flagship schemes- have received a higher budget allocation of INR 16,000 crores (BE) in FY 2023-24, compared to INR 14,100 crores (BE) and INR 15,300 crores (RE) in FY 2022-23. In the previous fiscal year (the actual for FY 2021-22 was INR 13,868 crores).

In FY 2023-24, AMRUT and SCM received INR 8,000 crore (BE), which is more than the previous year’s BE and RE. The City Investment to Innovate, Integrate, and Sustain (CITIIS) was allocated INR 334 crore, the same as last year. SCM’s RE increased in FY 2022-23 compared to previous COVID years.

The Metros and MRTS scheme, which has almost all capital expenditure (CAPEX), saw a slight decrease in BE for FY 2023-24 at INR 23,175 crores compared to FY 2022-23 at 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 received 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) BE for FY 2023-24 was INR 25,103 crores, down from INR 28,000 crores in FY 2022-23 (RE for FY 2022-23 was INR 28,708 crores and Actuals for FY 2021-22 was INR 59,963 crores). Central Road and Infrastructure Fund financed the scheme with the Extra budgetary resources (EBRs) component.

PMAY-U comprises four components: In-situ Slum Rehabilitation (ISSR), Affordable Housing in Partnership (AHP), Beneficiary-led Individual House Construction/Enhancement (BLC) (under centrally sponsored schemes), and Credit Linked Subsidy Scheme (CLSS) for EWS, LIG, and MIG. The budget for PMAY-U has decreased after achieving Housing for All by 2022. However, removing CLSS will exacerbate credit and affordability problems for the urban poor  (Chattopadhyay & Kumar, 2022; Kumar, 2022).

Swachh Bharat Mission Urban (SBM-U) budget has more than doubled from INR 2,300 crores (BE) and INR 2,000 crores (RE) in 2022-23 to INR 5,000 crores (BE) in 2023-24. Previously funded by Rashtriya Swachhata Kosh- a Central & State component, the increased allocation will help in the scientific management of dry and wet waste, mechanized desludging of septic tanks and sewers, and sanitation. There is a greater emphasis on sanitation and mechanization of activities.

Other Schemes

At the same time, Deendayal Antyodaya Yojana-National Urban Livelihood Mission (DAY-NULM) has been discontinued and reduced to INR 0.01 crores, a staggeringly low compared to last year’s estimates (BE for FY 2023-24 was INR 900 crores and RE was INR 550 crores).

However, PM Street Vendors’ Atmanirbhar Nidhi (PM SVANIDHI) allocation rose 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 its limited focus on street vendors. However, increased budgetary allocations under the DAY-NULM could be more beneficial for the urban poor engaged in urban informal sectors and their livelihoods, as they are still recovering from COVID-19-induced economic losses. Jal Jeevan Mission, another centrally sponsored scheme, sees its budget increase from INR 60,000 crores (BE 2022-23) to INR 70,000 crores (BE 2023-24).

New India’s Infrastructure and CAPEX Push

The budget prioritizes capital expenditure, with the National Industrial Corridor Development Programme (NICDP) developing 32 greenfield industrial smart cities under 11 industrial corridors with Plug-n-Play infrastructure to boost India’s manufacturing GDP. The Plug-n-Play model eliminates road digging for infrastructure installation.

It promotes planned infrastructure that simultaneously lays communication, sewage, water, industrial effluents, electricity, and gas lines to avoid road re-digging and re-laying. The National Industrial Corridors budget increased from INR 1500 crore (BE) in 2022-23 to INR 2000 crore (BE) in 2023-34. 2021-22 expenditure was INR 1104 crores.

The finance minister highlighted the PM Gati Shakti National Master Plan for Multi-modal Connectivity, which includes seven engines to improve connectivity, logistics efficiency, and economic transformation. This scheme aims to connect logistics and supply chains in smaller cities to larger cities, promoting balanced urbanization.

Improving the Financial Health of Cities

The budget established a Rs 10,000 crore-per-year Urban Infrastructure Development Fund (UIDF) under the National Housing Bank to finance urban infrastructure. The UIDF will use priority sector lending shortfall to build urban infrastructure in Tier-2 and Tier-3 cities.

This budget also incentivizes city governments to improve their creditworthiness to access capital markets for urban infrastructure financing. However, city finances are devastating. From 2007-08 to 2017-18, municipal revenue remained stagnant at around 1% of GDP; in 2017-18, it was 0.43 % (Ahluwalia et al., 2019).

Municipal Corporations generate about 80% of India’s municipal own revenue due to their strong economic base. However, revenue autonomy ratios of city governments have decreased from 51% in 2010-11 to 43% in 2017-18, indicating increased dependence on higher levels of government for revenue, especially for Municipal Councils and Nagar Panchayats.

The finance minister suggests that property tax governance reform and ring-fencing of user charges could improve the financial health of city governments. Despite property tax being India’s most significant urban local tax after GST, it only contributes 0.15% to the country’s GDP.

Manual and paper-based property register systems, improper valuation methods, inefficient tax collections, lack of disciplinary measures for delayed or non-payment of property taxes, and lack of grievance redressal mechanisms have undermined property tax revenue generation in India (Chattopadhyay and Kumar, 2019).

Indian city governments have hesitated to utilize user fees to cover basic service operation and maintenance costs due to narrow political compulsions such as fear of losing votes and dissatisfaction with municipal services. As per the World Bank (2022), water and sewerage utilities in Indian cities have only recovered 55% of their operating costs in recent years, highlighting the struggle to implement budgetary measures.

The 15th Finance Commission’s grant conditions set a foundation for municipal financial accountability by establishing floor rates for property tax and linking tax collections to states’ GSDP growth. However, further reform is still necessary, as outlined in this year’s budget, with sustained public and political support required. Empowering city governments to levy taxes and fees and improving transparency and accountability to citizens are also crucial steps.

Additionally, Indian cities are in appalling condition. The National Crime Records Bureau (NCRB) found that Indian cities are unsafe to live in.  In 2021, Swiss organization IQAir’s World Air Quality Report ranked 35 Indian cities as having the worst air quality. India ranks 63rd in ease of doing business among 190 nations. Indian cities are vulnerable to climate change-induced risks like cyclones, flooding, heat waves, and more due to their location and diversity.  Regional planning with the active involvement of empowered city governments is crucial to address these issues. It is essential to mainstream climate change mitigation and adaptation measures into urban planning and policy frameworks.

Promising Yet Concerning

Municipal bond issuances in India have received renewed focus in the budget. However, from 2011-2018, municipal bonds accounted for less than one-tenth of the total commercial debt raised by city governments. Additionally, in 2018, only 59 of the 94 Smart Cities and AMRUT program cities had investment-grade ratings. Weak financial health, non-transparent financial management, and structural bottlenecks, such as the absence of specific laws for addressing city insolvency and over-collateralization, constrain the municipal bond market in India.

The budget emphasizes city governments’ need for greater fiscal autonomy and the ability to manage commercial debt financing meaningfully, effectively, and transparently. Indian cities need an integrated policy and regulatory environment to raise revenue and access public and private funds for urban infrastructure.

Indian cities are the largest drivers of 21st-century economic growth, but not at the expense of inequality and lack of inclusivity. With a growing population and economy, urbanization is needed. Rethinking and prioritizing urban policies and practices during the Amrit Kaal is vital for inclusive growth towards New India in 2047.

References

Ahluwalia, I. J., et. al. 2019. State of Municipal Finances in India: A Study Prepared for the Fifteenth Finance Commission. ICRIER, New Delhi. https://fincomindia.nic.in/writereaddata/html_en_files/fincom15/StudyReports/State%20of%20Municipal%20Finances%20in%20India.pdf

Chattopadhyay, S.  and Kumar, A. 2022. Cities and Budget 2022-23 towards India@100 in 2047. Insights. IMPRI Impact and Policy Research Institute, New Delhi. https://www.impriindia.com/insights/budget-cities-pandemic/ 

Chattopadhyay, S.  and Kumar, A. 2022. Affordable Urban Housing and Budget 2022–23: A Reality Check. Economic & Political WEEKLY. Vol. 57, Issue No. 21, 21 May, 2022. https://www.epw.in/journal/2022/21/commentary/affordable-urban-housing-and-budget-2022%E2%80%9323.html 

Chattopadhyay, S.  and Kumar, A. 2021. AatmaNirbhar Cities & Union Budget 2021- How does the Union Budget fare in addressing Challenges of Cities amidst the Pandemic and towards Transforming Urban India?. The Urban World. Volume 14, Number 3, July-September, 2021. Regional Centre for Urban & Environmental Studies (RCUES), All India Institute of Local Self Government (AIILSG), Mumbai. https://www.aiilsg.org/pdf/RCUES_AIILSG_Mumbai_The%20Urban%20World_Quarterly%20Publcation_%20July-September%202021.pdf 

Chattopadhyay, S.  and Kumar, A. 2020. Smart city making in India: Union budget 2020 and the way forward. Expert Speak. Observer Research Foundation, New Delhi. https://www.orfonline.org/expert-speak/smart-city-making-in-india-union-budget-2020-and-the-way-forward-61933/ 

Chattopadhyay, S.  and Kumar, A. 2019. Tapping the revenue potential of property tax in India. Perspectives. Ideas for India. 23 October 2019. https://www.ideasforindia.in/topics/macroeconomics/tapping-the-revenue-potential-of-property-tax-in-india.html 

Cities and Union Budget 2023-24. Panel Discussion. The State of Cities – #CityConversations. IMPRI #WebPolicyTalk. 7 February 2023. https://www.impriindia.com/event/cities-budget-2023-24/ 

https://www.indiabudget.gov.in/

IMPRI’s 3rd Annual Series of Thematic Deliberations and Analysis of Union Budget 2023-24 | Feb 2- 7, 2023 | #IMPRI #WebPolicyTalk https://www.impriindia.com/union-budget-2023/

Kumar, A. 2022. Urbanization, Housing and Household Amenities in India and China. Shelter. Volume 23, Number 1, April 2022. Human Settlement Management Institute (HSMI), Housing and Urban Development Corporation (HUDCO), New Delhi. https://hudco.org.in//writereaddata/EB/HUDCO-SHELTER-April22/HUDCO-SHELTER-April22.html World Bank. 2022. Financing India’s urban infrastructure needs: Constraints to commercial financing and prospects for policy action. Washington DC. https://documents1.worldbank.org/curated/en/099615110042225105/pdf/P17130200d91fc0da0ac610a1e3e1a664d4.pdf

About the Authors

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Dr. Soumyadip Chattopadhyay
Associate Professor, Visva-Bharati, Santiniketan; Visiting Senior Fellow, IMPRI

arjun sir

Dr. Arjun Kumar
Director, IMPRI

Read more policy updates articles at IMPRI here.

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