India’s urban population has grown by 32% from 2001 to 2011 as compared to 18% growth in total population of the country.[1]  As per Census 2011, 31% of the country’s population (377 million people) live in cities, and contribute to 63% of the country’s GDP.[2]  The urban population is projected to grow up to 600 million by 2031.2  With increasing urban population, the need for providing better infrastructure and services in cities is increasing.[3]  The government has introduced several schemes to address different urban issues.  These include the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Smart Cities Mission, Heritage City Development and Augmentation Yojana (HRIDAY), Pradhan Mantri Awas Yojana – Housing for All (Urban) (PMAY-U), and Swachh Bharat Mission (Urban).

Last week the Ministry of Urban Development released the next batch of winners under the Smart Cities Mission.[4]  This takes the number of smart cities to 90.  The government has also announced a few policies and released data indicators to help with the implementation of the urban schemes.  In light of all this, we discuss how the new schemes are changing the mandate of urban development, the fiscal challenge of implementing such schemes, and the policies that are trying to address some of these challenges.

Urbanisation in India

The Jawaharlal Nehru National Urban Renewal Mission (JnNURM), launched in 2005, was one of the first urban development schemes implemented by the central government.  Under JnNURM, the central government specified certain mandatory and optional reforms for cities, and provided assistance to the state governments and cities that were linked to the implementation of these reforms.  JnNURM focused on improving urban infrastructure and service delivery, community participation, and accountability of city governments towards citizens.

In comparison, the new urban schemes move beyond the mandate that was set by JnNURM.  While AMRUT captures most of the objectives under JnNURM, the other schemes seek to address issues around sanitation (through Swachh Bharat), affordable housing (through PMAY-U), and technology innovation (through Smart Cities).  Further, the new schemes seek to decentralize the planning process to the city and state level, by giving them more decision making powers.2  So, while earlier, majority of the funding came from the central and state governments, now, a significant share of the funding needs to be raised by the cities themselves.

For example, under the Smart Cities Mission, the total cost of projects proposed by the 60 smart cities (winners from the earlier rounds) is Rs 1.3 lakh crore.[5]  About 42% of this amount will come from central and state funding towards the Mission, and the rest will be raised by the cities.[6]

The new schemes suggest that cities may raise these funds through: (i) their own resources such as collection of user fees, land monetization, property taxes, etc., (ii) finance mechanisms such as municipal bonds, (iii) leveraging borrowings from financial institutions, and (iv) the private sector through Public Private Partnerships (PPPs).[7]

In 2011, an Expert Committee on Indian Urban Infrastructure and Services (HPEC) had projected that creation of the required urban infrastructure would translate into an investment of Rs 97,500 crore to Rs 1,95,000 crore annually.[8]  The current urban schemes are investing around Rs 32,500 crore annually.

Financial capacity of cities

Currently, the different sources of revenue that municipal corporations have access to include: (i) tax revenue (property tax, tax on electricity, toll tax, entertainment tax), (ii) non-tax revenue (user charges, building permission fees, sale and hire charges), (iii) grants-in-aid (from state and central governments), and (iv) debt (loans borrowed from financial institutions and banks, and municipal bonds).

While cities are now required to raise more financing for urban projects, they do not have the required fiscal and technical capacity.8,[9]  The HPEC had observed that cities in India are among the weakest in the world, both in terms of capacity to raise resources and financial autonomy.  Even though cities have been getting higher allocations from the centre and states, their own tax bases are narrow.8  Further, several taxes that cities can levy are still mandated by the state government.  Because of their poor governance and financial situation, cities also find it difficult to access external financing.8,7

In order to help cities improve their finances, the government has introduced a few policies, and released a few indicators.  Some of these are discussed below:

Policy proposals and data indicators

Value Capture Financing (VCF):  The VCF policy framework was introduced by the Ministry of Urban Development in February 2017.[10]  VCF is a principle that states that people benefiting from public investments in infrastructure should pay for it.  Currently when governments invest in roads, airports and industries in an area, private property owners in that area benefit from it.  However, governments recover only a limited value from such investments, constraining their ability to make further public investments elsewhere.  VCF helps in capturing a part of the increment in the value of land due to such investments, and use it to fund new infrastructure projects.

The different instruments of VCF include: land value tax, fee for changing land use, betterment levy, development charges, transfer of development rights, and land pooling systems.10  For example, Karnataka uses certain value capture methods to fund its mass transit projects.  The Mumbai Metropolitan Region Development Authority (MMRDA), and City and Industrial Development Corporation Limited (CIDCO) have used betterment levy (tax levied on land that has gained in value because of public infrastructure investments) to finance infrastructure projects.

Municipal bonds:  Municipal bonds are bonds issued by urban local bodies (municipal corporations or entities owned by municipal bodies) to raise money for financing specific projects such as infrastructure projects.  The Securities and Exchange Board of India regulations (2015) regarding municipal bonds provide that, to issue such bonds, municipalities must: (i) not have negative net worth in any of the three preceding financial years, and (ii) not have defaulted in any loan repayments in the last one year.[11]  Therefore, a city’s performance in the bond market depends on its fiscal performance.  One of the ways to determine a city’s financial health is through credit ratings.

Credit rating of cities:  In September 2016, the Ministry of Urban Development started assigning cities with credit ratings.[12]  These credit ratings were assigned based on assets and liabilities of the cities, revenue streams, resources available for capital investments, accounting practices, and other governance practices.

Of the total 20 ratings ranging from AAA to D, BBB is the ‘Investment Grade’ rating and cities rated below BBB need to undertake necessary interventions to improve their ratings for obtaining positive response to the Municipal Bonds to be issued.  By March 2017, 94 cities were assigned credit ratings, 55 of which got ‘investment grade’ ratings.[13]

Credit ratings indicate what projects might be more lucrative for investments.  This, in turn, helps investors decide where to invest and determine the terms of such investments (based on the expected returns).

Earlier this month, the Pune Municipal Corporation raised Rs 200 crore through the sale of municipal bonds, to finance water supply projects under the Smart Cities Mission.[14]  The city had received an AA+ credit rating (second highest rating) in the recent credit rankings assigned by the central government.

Other than credit ratings, the Ministry of Urban Development has also come up with other data indicators around cities such as the Swachh Bharat rankings, and the City Liveability Index (measuring mobility, access to healthcare and education, employment opportunities, etc).  These rankings seek to foster a sense of competition across cities, and also help them map their performances year on year.

Some financing mechanisms, such as municipal bonds, have been around in India for the last two decades, but cities haven’t been able to make much use of them.  It remains to be seen whether the introduction of indicators such as credit ratings helps the municipal bond market take off.  While these mechanisms may improve the finances of cities, the question is would more funding solve the cities’ problems.  Or would it require municipal government to take a different approach to problem solving.

[1] Census of India, 2011.

[2] Mission Statement and Guidelines, Smart Cities, Ministry of Urban Development, June 2015, http://smartcities.gov.in/writereaddata/SmartCityGuidelines.pdf.

[3] Report on Indian Urban Infrastructure and Services, March, 2011, The High Powered Expert Committee for estimating the investment requirements for urban infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.

[4] “30 more smart cities announced; takes the total to 90 so far”, Press Information Bureau, Ministry of Urban Development, June 23, 2017.

[5]  Smart Cities Mission, Ministry of Urban Development, last accessed on June 30, 2017, http://smartcities.gov.in/content/.

[6] Smart City Plans, Last accessed in June 2017.

[7] “Financing of Smart Cities”, Smart Cities Mission, Ministry of Urban Development, http://smartcities.gov.in/upload/uploadfiles/files/Financing%20of%20Smart%20Cities.pdf.

[8] “Report on Indian Urban Infrastructure and Services”, March, 2011, The High Powered Expert Committee for estimating the investment requirements for urban infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.

[9] Fourteenth Finance Commission, Ministry of Finance, February 2015, http://finmin.nic.in/14fincomm/14fcrengVol1.pdf.

[10] Value Capture Finance Policy Framework, Ministry of Urban Development, February 2017, http://smartcities.gov.in/upload/5901982d9e461VCFPolicyFrameworkFINAL.pdf.

[11] Securities and Exchange Board of India (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, Securities and Exchange Board of India, July 15, 2015, http://www.sebi.gov.in/sebi_data/attachdocs/1436964571729.pdf.

[12] “Credit rating of cities under urban reforms begins”, Press Information Bureau, Ministry of Urban Development, September 6, 2016.

[13] “Credit Rating of Urban Local Bodies gain Momentum”, Press Information Bureau, Ministry of Urban Development, March 26, 2017.

[14] “Pune civic body raises Rs200 crore via municipal bonds”, LiveMint, June 19, 2017, http://www.livemint.com/Money/JOOzaSTKnC6k1EZGeFh8LJ/Pune-civic-body-raises-Rs200-crore-via-municipal-bonds.html.

As of May 11, 2020, there are 67,152 confirmed cases of COVID-19 in India.   Since May 4, 24,619 new cases have been registered.  Out of the confirmed cases so far, 20,917 patients have been cured/discharged and 2,206 have died.  As the spread of COVID-19 has increased across the country, the central government has continued to announce several policy decisions to contain the spread, and support citizens and businesses who are being affected by the pandemic.  In this blog post, we summarise some of the key measures taken by the central government in this regard between May 4 and May 11, 2020.

Source: Ministry of Health and Family Welfare; PRS.

Industry

Relaxation of labour laws in some states

The GujaratHimachal PradeshRajasthanHaryana, and Uttarakhand governments have passed notifications to increase maximum weekly work hours from 48 hours to 72 hours and daily work hours from 9 hours to 12 hours for certain factories.  This was done to combat the shortage of labour caused by the lockdown.  Further, some state governments stated that longer shifts would ensure a fewer number of workers in factories so as to allow for social distancing.

Madhya Pradesh has promulgated the Madhya Pradesh Labour Laws (Amendment) Ordinance, 2020.  The Ordinance exempts establishments with less than 100 workers from adhering to the Madhya Pradesh Industrial Employment (Standing Orders) Act, 1961, which regulates the conditions of employment of workers.  Further, it allows the state government to exempt any establishment or class of establishments from the Madhya Pradesh Shram Kalyan Nidhi Adhiniyam, 1982, which provides for the constitution of a welfare fund for labour.  

The Uttar Pradesh government has published a draft Ordinance which exempts all factories and establishments engaged in manufacturing processes from all labour laws for a period of three years.  Certain conditions will continue to apply with regard to payment of wages, safety, compensation and work hours, amongst others.  However, labour laws providing for social security, industrial dispute resolution, trade unions, strikes, amongst others, will not apply under the Ordinance. 

Financial aid 

Central government signs an agreement with Asian Infrastructure Investment Bank for COVID-19 support

The central government and Asian Infrastructure Investment Bank (AIIB) signed a 500 million dollar agreement for the COVID-19 Emergency Response and Health Systems Preparedness Project.   The project aims to help India respond to the COVID-19 pandemic and strengthen India’s public health system to manage future disease outbreaks.  The project is being financed by the World Bank and AIIB in the amount of 1.5 billion dollars, of which one billion dollars is being provided by World Bank and 500 million dollars is being provided by AIIB.  This financial support will be available to all states and union territories and will be used to address the needs of at-risk populations, medical personnel, and creating medical and testing facilities, amongst others.   The project will be implemented by the National Health Mission, the National Center for Disease Control, and the Indian Council of Medical Research, under the Ministry of Health and Family Welfare.

Travel 

Restarting of passenger travel by railways

Indian Railways plans to restart passenger trains from May 12 onwards.  It will begin with 15 pairs of trains which will run from New Delhi station connecting Dibrugarh, Agartala, Howrah, Patna, Bilaspur, Ranchi, Bhubaneswar, Secunderabad, Bengaluru, Chennai, Thiruvananthapuram, Madgaon, Mumbai Central, Ahmedabad and Jammu Tawi.  Booking for reservation in these trains will start at 4 pm on May 11.  Thereafter, Indian Railways plans to start more services on new routes.  

Return of Indians stranded abroad

The central government will facilitate the return of Indian nationals stranded abroad in a phased manner beginning on May 7.  The travel will be arranged by aircraft and naval ships.  The stranded Indians utilising the service will be required to pay for it.  Medical screening of the passengers will be done before the flight.  On reaching India, passengers will be required to download the Aarogya Setu app.  Further, they will be quarantined by the concerned state government in either a hospital or a quarantine institution for 14 days on a payment basis.  After quarantine, passengers will be tested for COVID-19 and further action will be taken based on the results.    

For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.