India’s cities are miserable places to live in. We may dream of smart cities, but our cities are currently rather un-smart. Even basic necessities like piped drinking water and access to a rudimentary sewage network are out of reach for most Indians living in urban areas. Despite the deep political divides in the country, the one thing on which there is broad consensus is this: India’s cities require a lot of work.
The remarkable popularity of a pie-in-the-sky idea like 100 Smart Cities is rooted in that imagination. That urban India deserves better. P.K. Mohanty’s Financing Cities in India is a timely intervention that seeks to address this growing sense of frustration among citizens living in urban India.
The author’s case is fairly straightforward. Cities are the engines of economic growth. Owing to a variety of factors ranging from availability of skilled manpower to the benefits of agglomeration, much of India’s future growth is expected to come from its cities. By 2030, India’s cities are expected to contribute nearly 70% of the GDP, according to a McKinsey Global Institute analysis. However, very little investment goes back into those very cities.
Cities under-invested
India’s annual per capita spending on cities, which stands at $50, is 14% of China’s $362, 10% of South Africa’s $508 and less than 3% of the U.K.’s $1772. The inevitable outcome of that under investment is bad infrastructure and poor quality of life. Mohanty’s case is that these crippling infrastructure deficits matter not just because they cause hardships to residents, but because India’s economic growth itself could be under threat. If cities are unlivable, the benefits of agglomeration would hardly kick in and India would miss its narrow window of opportunity to develop rapidly.
Early on in the book, he cites the grim picture painted by the High Powered Expert Committee (2011) constituted by the previous UPA government, which projected that an expenditure of at least Rs.39 lakh crore is required by 2031 for upgrading city infrastructure. If operation and maintenance expenses are included, the figure goes up to a whopping Rs.59 lakh crore. For the sake of comparison, the total combined outlay of the Smart Cities Mission and AMRUT is only Rs.1 lakh crore, or about 2% of the funds required by 2031.
Therefore, India’s spending on urban infrastructure has to increase eight-fold. But much of this money may not come from the Central government. Cities themselves have to figure out ways to raise the money. However, the current revenue base of municipalities is narrow, inflexible and non-buoyant (meaning, it does not increase in step with the economy, unlike, say, a service tax). That is why cities need to start thinking of ways to improve their financial muscle and the author recommends a slew of methods which cities can consider to raise adequate revenue.
What’s the way forward?
The proposed strategies in the book can be broadly divided into three categories: tax, user charges, and raising money through bonds and debt. The author spends considerable time digging into history to make a case for a land value tax, akin to the ones that exist in the U.S., Taiwan or Malaysia. Most Indian cities tax built form through a property tax, but the windfall increases in the monetary value of land as a result of provisioning taxpayer-funded public infrastructure in the vicinity is mostly not taxed. The author insists that the costs of providing water and sewer lines, as well as public roads, have to be recovered from developers through a combination of land tax, development charges and betterment fees.
The next step is a rational user charge scheme for the continued provision of public services like water supply, with a fairly priced monthly lifeline charge for the poor and a graded increase in charges (based on usage) to ensure the rich don’t end up getting subsidised.
The third and last step is the use of financial instruments to raise money in order to direct development along certain corridors or geographies, so that the city government can control growth instead of leaving it to developers. But except Ahmedabad, no other Indian city has even tried a bond issue and almost none are credit-rated. Unsurprisingly, most of the examples mentioned in the book are from the U.S., which has heavily relied on such financial instruments.
Overlooking questions of feasibility on all those three points though, the bigger concern with the book is that it ultimately reduces the issue to a money problem. But as the author himself would know, having worked extensively on Hyderabad as an IAS officer during Chandrababu Naidu’s earlier term, what is possible at any given moment is not just a question of funds. A case in point is that only around 40% of the funds originally allocated for JNNURM were released. Many proposed projects were either not started or remain incomplete as they got stuck in the Centre-State-city administrative vortex.
India suffers from a serious local democracy deficit. Without fixing that, throwing money at the problem may not help. In the book, a small section deals with good governance in the concluding pages. But good governance is just a catchphrase that has come to mean so many different things for different people. Without serious introspection about the nature of our urban democratic governance, innovative taxes and user charges may not help much. The real opportunity that Indian cities offer is a chance to build a better democracy, where there is considerable local autonomy and government spending is transparent and accountable. While lack of funds is a concern in that equation, it may not after all be the central concern.
Financing Cities in India: Municipal Reforms,Fiscal Accountability and Urban Infrastructure; Prasanna K. Mohanty, Sage Publications, ₹895.
