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Context

• World Bank has released a report, titled “Financing India’s Urban Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action”
• The Report underlines the urgent need to leverage more private and commercial investments to meet emerging financial gaps.

Observations made in the Report

Growing Urban Population and Demand

• By 2036, 600 million people will be living in urban cities in India, representing 40 percent of the population. This is likely to put additional pressure on the already stretched urban infrastructure and services of Indian cities.
• There will be more demand for clean drinking water, reliable power supply, and efficient and safe road transport amongst others.

Need for Private Financing

• Currently, the central and state governments finance over 75 percent of city infrastructure, while urban local bodies (ULB) finance 15 percent through their own surplus revenues.
• Only 5 percent of the infrastructure needs of Indian cities are currently being financed through private sources. With the government’s annual urban infrastructure investments topping at $16 billion (2018), much of the gap will require private financing. 

Need for greater investments

• India will need to invest $840 billion over the next 15 years—or an average of $55 billion per annum—into urban infrastructure if it is to effectively meet the needs of its fast-growing urban population.

Need for expanding the capacities of city agencies

• The new report recommends expanding the capacities of city agencies to deliver infrastructure projects at scale. Currently, the 10 largest Urban Local Bodies were able to spend only two-thirds of their total capital budget over three recent fiscal years. A weak regulatory environment and weak revenue collection also add to the challenge of cities accessing more private financing. Between 2011 and 2018, urban property tax stood at 0.15 percent of GDP compared to an average of 0.3-0.6 percent of GDP for low- and middle-income countries. Low service charges for municipal services also undermine their financial viability and attractiveness to private investment.
• Over the medium term, the report suggests a series of structural reforms including those in the taxation policy and fiscal transfer system - which can allow cities to leverage more private financing. In the short term, it identifies a set of large high-potential cities that have the ability to raise higher volumes of private financing.
• The World Bank report recommended making the transfer of funds to cities formula-based and unconditional and increasing the mandates of city agencies gradually.

Final Thoughts

• The Government of India can play an important role in removing market frictions that cities face in accessing private financing.
• The World Bank report proposes a range of measures that can be taken by city, state, and federal agencies where in the future private commercial finance can play a much bigger part in the solution to India’s urban investment challenge.

https://www.worldbank.org/en/news/press-release/2022/11/14/india-s-urban-infrastructure-needs-to-cross-840-billion-over-next-15-years-new-world-bank-report#:~:text=Currently%2C%20the%20central%20and%20state,being%20financed%20through%20private%20sources

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