Seven Reform Pathways to Close Urban Investment Gaps in India

The country needs a coordinated push to plan and finance city-specific infrastructure and service projects of high quality

- KAILASH KARTHIK N. & SRIKANTH VISWANATHAN

2010 McKinsey Global Institute report estimated that India needed capital investment of $1.2 trillion over 15-20 years to meet its urban requirements. At ₹2,701 per capita, our current urban investment falls short of the required ₹17,884. This, despite larger outlays by states as well as a staggering 932% increase in the budget allocation for the ministry of housing and urban affairs since 2009-10. This gap in the financing of urban infrastructure adversely impacts the ease of living and doing business in our cities. A roadmap ensuring adequate medium-and long-term financing for city infrastructure and services is critical for India to meet its Viksit Bharat goal by 2047.

Given the shrinking fiscal space of the Union and state governments and competing claims on resources, budgetary support for urban financing can only go so far. Municipalities must explore bank loans, public-private partnerships, bonds, finance leases, climate finance and other mechanisms. China exemplifies this strategy, having powered its urban growth through a transformative municipal bond market, one that evolved from opaque local government financing vehicles to the world's largest formal municipal debt system, with local government bonds forming 28% of its domestic bond market.

In China, municipal bonds are now the primary vehicle for funding urban infrastructure, with local governments leading build-ups. In India, on the other hand, most urban infrastructure is funded by Union and state government grants. Municipal bonds contribute little; they account for only about 0.012% of the country's total bonds. Just ₹13,840 crore was raised over the period from 2017 to 2021.