Market Borrowing and Municipal Readiness in India

Syllabus: GS2/ Governance

Context

• As India explores market-based urban financing through the Urban Challenge Fund, concerns have emerged over whether Urban Local Bodies (ULBs) possess the capacity required to manage debt responsibly.

Urbanisation and the Financing Gap

• India’s urban population is expected to cross 600 million by 2030, increasing pressure on civic infrastructure.
• The 74th Constitutional Amendment Act (1992) empowered Urban Local Bodies (ULBs) to perform 18 functions listed in the 12th Schedule, including water supply, waste management, and public health.
  • However, the corresponding financial devolution has been weak and inconsistent across States, resulting in a situation where responsibility is decentralised but revenue is not.
  • Most ULBs depend heavily on State and Central transfers for routine expenditure.
• There is a significant gap between the funds required for urban infrastructure and the funds actually available.

What is the Urban Challenge Fund?

• The Urban Challenge Fund is a reform-linked financing mechanism. It seeks to reward cities that improve governance, financial transparency and service delivery.
• The objective is to make cities more creditworthy so that they can access loans and municipal bonds.
• It complements existing initiatives such as Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart Cities Mission, which focus on improving urban infrastructure and governance.

Significance of Municipal Borrowing

• Borrowing from markets allows cities to finance large infrastructure projects without waiting for grants.
• Municipal bonds provide long-term funds suitable for infrastructure with long gestation periods.
• Greater borrowing capacity strengthens fiscal decentralisation envisaged under the 74th Constitutional Amendment.

Structural Challenges Facing ULBs

• Weak Administrative Capacity: Many ULBs do not have trained staff for financial management and project preparation.
  • Poor-quality project reports reduce the chances of securing loans or investments. Further Delays in auditing and weak accounting practices reduce credibility.
• Weak Own-Revenue Base: Property tax, user fees, and local cesses form the backbone of ULB revenues but together constitute only 20–25% of potential municipal income.
  • Heavy reliance on State governments limits financial autonomy.
• Transparency Issues: Financial statements are usually delayed or incomplete. Also political considerations sometimes influence fiscal decisions.
• Shallow Municipal Bond Market: India’s municipal bond market is still small and underdeveloped, favouring financially strong cities and raising the risk of unsustainable debt for weaker towns.

Way Ahead

• Build Institutional Capacity: Create professional municipal cadres in finance, planning and project management with strengthened digital accounting and timely auditing systems.
• Strengthen Revenue Systems: Modernise property tax using technology such as GIS mapping. Ensure reasonable user charges with safeguards for vulnerable groups. Implement State Finance Commission recommendations effectively.
• Adopt a Phased Borrowing Strategy: Allow borrowing only after meeting clear reform benchmarks. Promote pooled financing models for smaller cities along with providing credit enhancement mechanisms to reduce investor risk.

Concluding remarks

• The Urban Challenge Fund can become a catalyst for stronger and financially independent cities. However, borrowing should follow reforms, not precede them. 
• Unless Urban Local Bodies build administrative capacity and stable revenue systems, expanded market access may create cities of debt rather than sustainable engines of urban growth.

Source: TH