Why civic bodies in India need municipal bonds

₹200-crore worth Lucknow Municipal Corporation (LMC) bonds were listed on the BSE on Wednesday in presence of Uttar Pradesh CM Yogi Adityanath who said more such bonds from India’s biggest State will be listed on the stock exchange. But it’s not only UP civic bodies, but many municipal corporations are also likely to float municipal bonds to raise funds.

With property tax as the only major source of municipal revenue for urban local governments, municipal corporations continue to struggle to garner revenue to complete budgetary projects. Municipal revenue accounts for a small share of GDP in India, and has remained stagnant at around 1 per cent of GDP from the period 2007-08 to 2017-18.

Property tax, profession tax, entertainment tax, grants from the State and the Centre, including GST grant, advertisement tax are some of the major revenue sources of civic bodies. Non-tax revenues largely comprise user charges (including for water), fees, rentals from municipal property.

The Ministry of Urban Development's High Powered Expert Committee estimated that about ₹39.2 lakh crore at 2009-10 prices will need to be spent on urban infrastructure over a 20-year period. Of this, ₹17.3 lakh crore (or 44 per cent) will be on urban roads. “The backlog for this sector ranges from 50 to 80 per cent across cities,” the committee report said.

McKinsey estimated India’s annual per capita spending on cities in 2010 at $50. This is much less compared to $362 in China, $508 in South Africa and $1772 in the UK.

Rising migration

Urban planner Aneeta Gokhale–Benninger says that with migration from rural to urban areas, the city population is rising rapidly and civic bodies are under pressure to provide basic infrastructure like water, roads and transport. She said majority of civic bodies have no major revenue generation sources other than traditional resources.

“Municipal corporations have an annual budget and development plans. However, the majority of civic bodies are unable to execute budget projects and development plans remain on paper. With no strong revenue resources, annual budgets and development plans are nothing but a ritual. In this case, municipal bonds are one of the strongest options,” says one of the former senior municipal officials who now works with the Union Urban Development department.

Civic activist Vijay Kumbhar says that municipal bodies will have to change their functioning to raise money through bonds. He said that timely preparation of accounts, audits by independent agencies and fulfilling terms set by SEBI are a must for civic bodies. He added that civic bodies must follow disclosure standards like the private sector to boost investor confidence and bond subscriptions.

Earlier, nine cities including Ahmedabad, Bengaluru, Nashik, Madurai and Pune have raised funds floating municipal bonds.