Uttar Pradesh, India’s most populous state, is making headlines for its recent financial strides. Not only has it attracted substantial financing for private projects for the second consecutive year, but four of its cities – Kanpur, Prayagraj, Agra, and Varanasi – are also gearing up to launch municipal bonds, collectively seeking around ₹500 crores from the public to enhance their water supply infrastructure. While these developments may seem unrelated at first glance, there is a significant connection between them that underscores a critical issue in India’s urban governance and development.
In the competitive landscape of attracting businesses, states like Uttar Pradesh must present a compelling case to potential investors. Offering incentives, such as subsidies on land and electricity, favorable labor laws, and financial incentives, is essential to lure companies to set up their operations. However, infrastructure development is equally crucial. Well-maintained roads, consistent water supply, adequate street lighting, public transportation systems, and efficient waste management are indispensable for ensuring the well-being of the workforce and residents.
The responsibility for creating and maintaining such infrastructure falls primarily on municipal corporations, which are responsible for governing cities. However, over the years, these local bodies have increasingly lost their financial autonomy and have become dependent on central and state governments, accounting for 40% of municipal revenue. This financial reliance has weakened India’s municipal system, making it one of the weakest globally, with municipal revenue representing only 1% of the country’s GDP, compared to 7.4% in Brazil and 6% in Africa.
This dependence on higher levels of government poses a significant challenge to municipalities, as they are unable to access the funds needed to improve their infrastructure quickly. Given that cities contribute 70% to India’s GDP, their financial stability is of paramount importance. Moreover, the future of India’s development largely depends on its urban areas, which will require the bulk of the $1.4 trillion in infrastructure investments projected in the coming years.
To address this financial shortfall and foster self-sufficiency among cities, municipal bonds have emerged as a promising solution. These bonds function similarly to those issued by central governments, with a maturity period, regular interest payments, and a final payment of the principal investment, but at a local level, specifically for local development projects.
While municipal bonds have existed since 1997, they have primarily been transacted with major institutional investors rather than the general public, resulting in a stagnant market. To promote these bonds and make them accessible to a broader audience, the Indian government and the Securities and Exchange Board of India (SEBI) are addressing several concerns.
One significant concern among potential investors is transparency. Investors need to trust that municipal balance sheets are clean and provide relevant information. To instill this trust, the government has introduced a uniform reporting system based on international standards, establishing a database of audited annual accounts.
Furthermore, to ensure that financially weak municipal corporations do not engage in bond issuance without the necessary financial safeguards, they must meet certain criteria. These include obtaining a credit rating above BBB-, demonstrating no recent loan defaults, contributing 20% of the project cost from their own resources, and dedicating project revenues to a specified bank account. This “ring-fencing” of revenues ensures that payouts are directly linked to the revenue generated from the project, providing investors with greater visibility.
While the government does not explicitly guarantee municipal bonds, it encourages municipalities by offering incentives. For example, when the Lucknow Municipal Corporation raised funds a couple of years ago, the government pledged ₹26 crores to subsidize its interest burden, reducing interest rates by 2%. This indirect support incentivizes municipal corporations to engage in bond issuance.
These changes have spurred municipalities to tap into the bond markets, with over ₹2,500 crores’ worth of bonds issued since 2018 by cities such as Lucknow, Surat, Vadodara, Ghaziabad, Indore, Pune, and Hyderabad. Uttar Pradesh’s recent commitment to municipal bonds suggests that this financing avenue is gaining momentum and may become a pivotal tool for India’s cities to bolster their infrastructure and promote self-sufficiency.
In conclusion, municipal bonds represent a crucial step toward empowering India’s cities to fund their infrastructure projects independently. As cities play a pivotal role in India’s economic growth, ensuring their financial stability and autonomy is essential for the country’s overall development. Municipal bonds hold the potential to unleash the latent potential of Indian cities and create a more robust and sustainable urban landscape.