Financing Indian Cities : Opportunities and Constraints in an Nth Best World

Abstract

This paper examines international
 experience with mobilizing funding for both capital and
 recurrent costs for municipal infrastructure with a view to
 identifying areas where India could improve its system of
 financing infrastructure in cities. Based on international
 data, the analysis shows that there is indeed a wide range
 of models for funding municipal infrastructure across a
 group even as relatively homogeneous as the European Union.
 Although a number of different models operate in countries
 with very good services, important features of India s
 municipal finance system stand out. The spending per capita
 is exceptionally low, even when compared with local
 governments with few functions. The real estate sector
 generates meager tax revenues, but transfers from higher
 levels of government are also meager. Turning to cost
 recovery models for services, the paper examines
 international evidence on cost recovery. In practice, a
 surprisingly large number of countries, including
 high-income countries, subsidize basic municipal services,
 particularly in water supply and sanitation. Analysis shows
 that these subsidies often have perverse distributional
 effects. Likewise, pricing schemes designed to skew
 subsidies to low-income households often have unintended
 distributional effects. Again, evidence from urban India
 suggests that cost recovery is exceptionally low, not only
 in absolute terms but relative to the experience of other
 low and middle-income countries. The paper concludes with a
 discussion of some of the measures that should be considered
 for improving finances in Indian cities, including land
 monetization and capital grants systems designed
 specifically for reaching secondary cities and towns.