Several Rajya Sabha seats go to elections this year. The President and the Vice-President are also due to be elected by August. We analyse the impact of the recent State Assembly elections on the composition of the Rajya Sabha and the outcome of the Presidential polls. Rajya Sabha - How will its composition change? Since Rajya Sabha members are elected by the elected members of State Legislative Assemblies, a change in the composition of State Assemblies can affect the composition of Rajya Sabha.  A total of 61 Rajya Sabha seats are up for election in April and July.  This includes 10 seats from Uttar Pradesh and 1 seat from Uttarakhand. In light of the recent Assembly elections, we work out two scenarios to estimate the composition of Rajya Sabha in 2012. Members of Rajya Sabha are elected through the system of proportional representation by means of the Single Transferable Vote (STV). In an STV election, a candidate is required to achieve a certain minimum number of votes (called the 'quota') to be elected.  (For more details on the STV system, click here) For instance, in the case of Uttar Pradesh (UP) 10 Rajya Sabha seats go to election this year.  Candidates will be elected to these 10 seats by the 403 elected MLAs of the Uttar Pradesh State Assembly.  Each MLA will rank the candidates based on his/ her preference. After successive rounds of elimination, candidates who are able to secure at least 37  {or 403/(10+1) } votes will be declared elected. In the new UP Assembly, Samajwadi  Party (SP) has a total strength of 224 members. As a result, SP can elect at least 6 (or 224/37) Rajya Sabha MPs of its choice.  BSP's strength of 80 will allow it to elect 2 (or 80/37) MPs to Rajya Sabha. Similarily, the BJP with a strength of 47 MLAs can have one candidate of its choice elected to the Rajya Sabha.  This leaves 1 seat.  The fate of this seat depends on the alliances that may be formed since no other party in UP has 37 or more seats in the Assembly.  If the Congress (28 seats) and RLD (9 seats) join hands, they may be able to elect a candidate of their choice. We build two scenarios which give the likely range of seats for the major coalitions and parties. The actual result will likely fall between these scenarios, depending on alliances for each election. Of the two scenarios, Scenario II is better for the UPA. It is based on the assumption that the UPA is able to put together the necessary support/ alliances to get its candidates elected to seats with indeterminate status.  Scenario I is based on the assumption that the UPA is not able to put together the required support. As a result, the seats in question get allocated to candidates from other parties/ coalitions. (See Notes for the composition of the coalitions) Composition of Rajya Sabha

Party/ Coalition Current composition Scenario I Scenario II
Total seats

245

245

245

UPA

93

95

98

NDA

66

67

65

Left

19

14

14

BSP

18

15

15

SP

5

9

9

BJD

6

8

7

AIADMK

5

5

5

Nominated

7

12

12

Others

21

20

20

Vacant

5

0

0

It appears that there would not be a major change in the composition of the Rajya Sabha. Which party's candidate is likely to become the next President? The next Presidential election will be held in June or July.  The electoral college for the Presidential election consists of the elected members of Lok Sabha, Rajya Sabha and all Legislative Assemblies. Each MP/ MLA’s vote has a pre-determined value based on the population they represent. For instance, an MP's vote has a value of 708, an MLA from UP has a vote value of 208 and an MLA from Sikkim has a vote value of 7. (Note that all MPs, irrespective of the constituency or State they represent, have equal vote value) As is evident, changes in the composition of Assemblies in larger States such as UP can have a major impact on the outcome of the Presidential election. The elections to the office of the President are held through the system of proportional representation by means of STV (same as in the case of Rajya Sabha).  The winning candidate must secure at least 50% of the total value of votes polled.  (For details, refer to this Election Commission document). By this calculation, a candidate will need at least 5,48,507 votes to be elected as the President. If the UPA were to vote as a consolidated block, its vote tally would reach 4,50,555 votes under Scenario II (the one that is favourable for the UPA).  Therefore, the UPA will have to seek alliances if it wants a candidate of its choice to be elected to the office of the President. Scenarios for Presidential elections (figures represent the value of votes available with each party/ coalition)

Party/ Coalition Scenario I Scenario II
UPA

4,48,431

4,50,555

NDA

3,05,328

3,03,912

Left

51,574

51,574

BSP

43,723

43,723

SP

69,651

69,651

BJD

30,923

30,215

AIADMK

36,216

36,216

Others

1,11,166

1,11,166

Total

10,97,012

10,97,012

Minimum required to be elected

5,48,507

5,48,507

What about the Vice-President? Elections to the office of the Vice-President (VP) will be held in July or August.  The electoral college will consist of all members of Lok Sabha and Rajya Sabha (i.e. both elected and nominated). Unlike the Presidential elections, all votes will have an equal value of one. Like the President, the VP is also elected through the system of proportional representation by means of STV.  The winning candidate must secure at least 50% of the total value of votes polled. Presently, two seats are vacant in the Lok Sabha. If we exclude these from our analysis, we find that a candidate will need at least 395 votes to be elected as the VP.  Under our best case scenario, the UPA holds 363 votes in the forthcoming VP elections. As is the case with Presidential elections, the UPA will have to seek alliances to get a candidate of its choice elected to the office of the Vice-President. Scenarios for VP elections (figures represent the value of votes available with each party/ coalition)

Party/ Coalition

Scenario I

Scenario II

UPA

360

363

NDA

216

214

Left

38

38

BSP

36

36

SP

31

31

BJD

22

21

AIADMK

14

14

Nominated

14

14

Others

57

57

Total

788

788

Minimum required to be elected

395

395

Notes: [1] UPA: Congress, Trinamool, DMK, NCP,Rashtriya Lok Dal, J&K National Conference, Muslim League Kerala State Committee, Kerala Congress (M), All India Majlis-e-Ittehadul Muslimeen, Sikkim Democratic Front, Praja Rajyam Party, Viduthalai Chiruthaigal Katchi [2] NDA: BJP, JD(U), Shiv Sena, Shiromani Akali Dal [3] Left: CPI(M), CPI, Revolutionary Socialist Party,All India Forward Bloc  

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.