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Union Budget 2023-24 and Urban Infrastructure and Development Financing: Promising Yet Concerning – IMPRI Impact and Policy Research Institute

Union Budget 2023-24 and Urban Infrastructure and Development Financing: Promising Yet Concerning - IMPRI Impact and Policy Research Institute

Dr Soumyadip Chattopadhyay, Dr Arjun Kumar

Indian Cities as Engines of Economic Growth in Amrit Kaal

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.

Urban India Flagships Schemes

The total Budget Estimate (BE) available for urban development (Ministry of Housing and Urban Affairs (MoHUA)) has experienced a drop from INR 76549 crores in Financial Year (FY) 2022-23 to INR 76,431 crores in FY 2023–24 of about INR 117 crores. The Revised Estimate stood at INR 74545 crores. Although the REs and BEs were quite close to each other, the actuals for the financial year 2021-22 surpassed these estimates with stooping INR 106840 crores. 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 Ministry of Housing and Urban Affairs (MoHUA) – the Smart Cities Mission (SCM) and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) – have bagged higher budgetary allocations from INR 14100 crores (BE) in 2022-23 and INR 15300 crores (RE) in 2022-23 to INR 16000 crores (BE) in 2023-24. As compared to previous year, the SCM has an uptick in RE for FY 2022-23, unlike in covid years.

The budgetary allocations for Swachh Bharat Mission Urban (SBM-U) have more than doubled from INR 2300 crores (BE) in 2022-23 and INR 2000 crores (RE) in 2022-23 to INR 5000 crores (BE) in 2023-24. 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.

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 (give last year estimate). 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). Therefore, the DAY-NULM budget can be seen shifting towards PMSVANIDHI, focusing on urban informal sector and livelihoods. 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, we also witness a boost in Capital Expenditure in this year’s budget. . 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.

The MRTS and metro projects have accounted for significant budgetary allocations – an amount of INR 23175 crores in 2023-24 which is marginally lower that the allocation of INR 23875 crores (BE) in 2022-23. However, the Pradhan Mantri Awas Yojna (U) (PMAY-U) (previously Housing for All by 2022) has received a cut in budgetary allocations from INR 28000 crores (BE) in 2022-23 and INR 28708 crores (RE) in 2022-23 to INR 25103 crores (BE) in 2023-24.

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. Poorly administered property tax on account of improper assessment of properties, inefficient collection, and widespread exemptions have undermined its revenue potential.

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.

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. So in terms of several indices and opportunity in general, Indian cities are still in a poor condition.

To get our cities out of this slump, we need regional planning which can be effectively done through local body empowerment. We need to turn our cities into a more sustainable and inclusive habitats with a huge focus on the local economy and decentralisation as a whole.

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.

By observing the allocations and schemes we see that India is still reluctant to urbanise. Urbanisation follows with development and is also an immediate consequence of the same. Thus with an increasing population and an expanding economy, actions must be undertaken to enable the country to urbanise. We need to understand that urbanisation is the largest driver of growth in the 21st century for India, but not at the cost of equity and inclusivity, in the Amrit Kaal. More thrust in this aspect would lead to faster growth in the economy.

About the authors

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

arjun sir

Dr Arjun Kumar
Director, IMPRI

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