To fulfil the demands of the rising urban population, India’s yearly investment in city infrastructure must climb from an average of $10.6 billion per year over the last decade to an average of $55 billion per year over the next 15 years, according to a World Bank analysis issued Monday.
The paper, titled ‘Financing India’s Infrastructure Needs: Commercial Financing Constraints and Prospects for Policy Action,’ indicated that India will require $840 billion in infrastructure funding over the next 15 years.
“By 2036, 600 million people in India would live in urban areas, accounting for 40% of the population.” This is anticipated to place extra strain on India’s already overburdened urban infrastructure and services, with increased demand for clean drinking water, dependable electricity supply, and efficient and safe road transportation, among other things. “At the moment, the federal and state governments finance more than 75% of city infrastructure, while urban local bodies (ULB) pay 15% with their own surplus income,” according to a World Bank statement.
According to the report, roughly half of the investment required in the next 15 years – $450 billion – was in the basic municipal services sector, which includes water supply, sewerage, solid waste management, roads, and streetlights, while the majority of the remaining amount was to address urban transportation needs.
Currently, the private sector accounts for barely 5% of urban infrastructure investments.
“With the government’s current (2018) annual urban infrastructure spending reaching $16 billion, a large portion of the deficit will require private finance,” according to the statement.
The paper examined ULBs in Tamil Nadu and Gujarat and discovered that all-India financing patterns were mirrored. The Union and state governments accounted for more than three-quarters of overall urban capital spending in the two states. The state governments funded around 70% of urban capital spending in Tamil Nadu and 55% in Gujarat.
“Commercial finance was insignificant in Gujarat, accounting for barely 1% of total ULB expenditure across the state.” ULBs in Tamil Nadu, on the other hand, raised up to 12% of their total capital expenditure through commercial financing, mostly through loans from state-controlled FIs [financial institutions], according to the research.
According to the paper, the comparatively cheap rates for municipal services, as well as a poor regulatory environment, exacerbate the issues.
“Between 2011 and 2018, urban property tax was around 0.15% of GDP, compared to a low and middle-income country average of 0.3-0.6% of GDP.” “Low municipal service prices also impair their financial viability and attraction to private investment,” according to the research.
Among its recommendations, the World Bank research suggested formula-based and unconditional transfers of funding to cities, as well as gradually extending the responsibilities of local agencies.
“The Indian government can play an essential role in reducing market frictions that cities experience while seeking private investment.” “The World Bank report proposes a range of measures that city, state, and federal agencies can take to bend the arc toward a future in which private commercial finance becomes a much larger part of the solution to India’s urban investment challenge,” said Roland White, a co-author of the report and the World Bank’s global lead of city management and finance.
