What does the World Bank Report say about India’s Cities? (UPSC Current Affairs)

Relevance: GS2 - Urbanization, their problems and their remedies; GS 2 - Devolution of Powers and Finances up to Local Levels and Challenges Therein.

Source: The Hidu, 11/16/2022

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Why in the news?

• According to the World Bank in its latest report, titled ‘Financing India’s Urban Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action’, India would need to invest $840 billion over the next 15 years, that is, an average of $55 billion each year, to meet the demands of its fast-growing urban population.
• World Bank holds that there is urgent requirement to leverage greater private and commercial investments to meet this emerging financial gaps.

Findings of the Report

World Bank in its report, titled ‘Financing India’s Urban Infrastructure Needs: Constraints to Commercial Financing and Prospects for Policy Action’ highlights

Urban Population:

• By 2036, Urban India would be home to 600 million people, or 40% of the world's population.
• As a result, there will likely be an increased demand for services such as clean drinking water, dependable power, efficient and secure road transit, etc., which would put additional strain on India's already overcrowded urban infrastructure and services.

Financing of urban projects:

• Urban projects are currently funded by more than 75% of the federal, state, and local governments, with the remaining 15% coming from local governments' surplus funds.
• Currently, only 5% of the infrastructure requirements for Indian towns are being funded privately.
• Cities' difficulty in gaining access to greater private financing is exacerbated by a lax regulatory environment and poor revenue collection.

Low Level of Muncipale Revenue realisation:

• Between 2011 and 2018, the urban property tax was 0.15 percent of GDP, compared to 0.3-6 percent for low- and middle-income countries.
• Low revenue is a result of policy choices that keep service fees below what is necessary for cost recovery and financial stability.

Public-Private Partnership (PPP):

• Over the past ten years, India has seen a considerable decline (both in terms of dollar value and transaction volume) in PPP agreements for urban infrastructure.
• As an illustration, 124 PPP projects totaling $5.5 billion have been awarded in the urban sector since 2000.

Slow implementation performance:

• States and Urban Local Bodies (ULBs) are carrying out a number of the flagship missions slowly, including the Pradhan Mantri Awas Yojana (PMAY) and Smart Cities (SCM).
  • Example: Over the past six financial years, ULBs in India have only completed around one-fifth of the sanctioned projects under SCM and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT).
• This is mostly caused by limitations on the city level's ability to implement.

On the Service Charges by ULBs:

• As per the report, the relatively low charges for municipal services, as well as a weak regulatory framework, exacerbate the challenges.
• 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.
• Low municipal service charges also undermine their financial viability and attractiveness to private investment.

Who provides finances to build infrastructure in the cities?

• In India, tied intergovernmental fiscal transfers - vertical and horizontal transfers of funds for achieving specific sub-national goals - fund a large portion of the urban infrastructure.
• 48% of the funding required for capital projects in Indian cities comes from state governments, 24% from the Union government, and 15% from surplus funds held by urban local authorities.
• The remaining sum is made up of loans from the Housing and Urban Development Corporation, or HUDCO (8%), commercial debt (2%), and public-private partnerships (3%).
• The World Bank noted that only a small number of major cities have access to institutional banks and/or loans when it comes to private debt.
• Since States may grant loans to their organizations through their self-regulated financial institutions at favorable terms, the amount of commercial debt financing may not be a reliable indicator.
• For instance, loans are offered on favorable conditions by the Tamil Nadu Urban Development Fund and the Tamil Nadu Urban Finance and Infrastructure Development Company.

What are some of the constraints?

• The report makes the claim that because of the poor fiscal health of the cities and the low absorptive capacity for project execution, the entire financial base to increase commercial revenues "appears to be minimal."
• Low service fees for municipal services, according to the World Bank, threaten their financial viability and sustainability. It even reaches the point where urban entities are unable to recover their operations and maintenance expenses, which limits their capacity to carry out additional projects.
• In a related vein, the report claims that due to the heavily subsidized nature of services city municipalities have been unable to increase their budget and resource bases to enable private finance for these types of services.
• Furthermore, it claims that revenue-sharing arrangements between the two parties are not particularly viable for private investors and do not properly take into consideration risk-sharing or risk-transfer methods for project hazards.

What are the recommendations of the Report?

• Fiscal Base: The main goal is to strengthen cities’ fiscal base. It states that cities must establish a robust tax base and be able to recover the cost of providing their services in order to strengthen their fiscal foundation.
• Increasing Creditworthiness: The latter could be achieved by raising revenue streams like property taxes, user fees, and service costs from their existing low foundation.
• In its report, the World Bank suggests that India quickly needs to increase its capacity in order to complete significant infrastructure projects.
  • Only two-thirds of the capital budget allocated to the ten largest ULBs during the previous three fiscal years have been actually spent.
• The bank predicts that India's inadequate regulatory framework and poor revenue collection will make it difficult for cities to secure more private finance.
• Due to the need for a number of structural reforms, including those to the fiscal transfer system and taxation policy, cities should be able to access greater private funding.

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Some Important FAQ

MCQ

Question: Which of the following institutions is not a part of the World Bank Group?

(a) IBRD

(b) WTO

(c) IDA

(d) IFC