India likely to Register High Multi Decadal Growth Rates in Urbanisation

As per the last census conducted in 2011, 31% of the country's population was residing in urban areas contributing close to 63% of the country's GDP. Generally, emerging economies like China (45% urbanisation), Brazil (78% urbanisation) have a more direct co-relationship between level of urbanisation and its contribution to GDP. India is unique in respect of this characteristic of an inverse co-relationship between level of urbanisation and contribution to GDP from urban centres. For India, to break the inevitable "middle income trap" of per capita income of USD 1200 per annum and to achieve relatively more equitable distribution of wealth, we have to reduce the dependence of large population on agriculture and allied activities, which contribute to only 25% of the GDP and increasing their reliance on incomes from economic activities in urban centres.

India is on the threshold of high multi decaded growth rates in its history of urbanisation,as it is expected that the country's GDP growth over the next few decades is expected to be driven by a major expansion in manufacturing and urban based services. Additionally, creation of new industrial settlements and consequent re-classification of rural settlements will "push" India into increasing urbanisation.This likely scenario is echoed in the report of a committee set up under the erstwhile Planning Commission which projected that the proportion of urban population will rise to at least 40% by 2020

Need for Development of Urban Infrastructure to keep pace with Urbanisation

For Indian cities to become growth oriented and productive, it is essential to achieve world class urban infrastructure systems. The present levels of urban infrastructure is grossly inadequate to meet the demand of the existing urban population. According to the census of 2011, it is estimated that some 2,500 "new towns" have emerged in the decade up to 2011, which have no urban statutory status with any right to collect taxes and are governed by non progressive State Panchayat Acts. These towns do not even have common urban infrastructure systems like tap water, sewage system, public transport, etc. Equally challenging is the story of our better known metros like Mumbai and Bengaluru where the inability of the infrastructure in these metros to keep pace with the rapid expansion of economic activity and urbanisation has left citizens,in general,a harassed lot.

With such speed and scale of urbanization, it is of paramount importance that such new towns/ emerging urban centres are governed by an organised framework of town planning and execution to prevent unplanned development i.e. "slum type growth". In this regard, investments in urban infrastructure will be required not only to bridge the existing requirement but also to meet growing urbanization.

Government of India has recognised this as the core challenge to be addressed while aspiring to facilitate initiatives like establishing 100 smart cities including satellite towns of larger cities and modernization of existing mid-sized cities with robust infrastructure in waste management, urban transportation, water supply, sewerage treatment etc.

Diversify Urbanisation and Reduce Dependence on Tier 1 and Tier 2 Cities

As per the census of 2011, 53 Metropolitan cities with population of > 10 lakh accounted for about 43% of India’s urban population. Further Class-I cities (excluding Metropolitan cities), with population between 3-10 lakh accounted for about 13% of the urban population and cities with a population ranging from 1 lakh to 3 lakh accounted for 14%. Hence, there is a need to develop a diversified portfolio of urban centres across the country by drawing regional development plans and promoting growth centres that are employment intensive and consistent with the economic potential including the natural endowment of cities and regions. There is a need to look beyond the Tier 1 (Metros) and Tier -2 cities as increasing dependence on such cities for accommodating urbanisation can potentially constrain quality of life for its citizens

The Investment Challenge and Possible Solutions

According to estimates by the High Powered Expert Committee (HPEC) appointed by the Ministry of Urban Development, an investment of Rs. 39.2 lakh crore (at 2009-2010 prices) is required over the next 20 years to meet the capital funding requirements in urban infrastructure. It is quite apparent that traditional forms of financing will not be able to meet this investment requirement. A majority of Urban Local Bodies (ULBs), barring some in Tier 1 and Tier 2 cities, are not able to generate any substantial revenue surpluses to fund capital expenditure. Hence, ULBs have relied heavily on grants and subsidized funds provided by the Central, State Government and some bi-lateral and multi lateral funding for capital assets to provide urban services. The limitations of such financing arising out of fiscal pressures on Central and State budgets are now well known.

In order to broad base the sources of funding, it is imperative that investments from the private sector needs to be attracted to participate in urban development programmes using Public-Private Partnership (PPP) model. Further, ULBs should be encouraged to access financial resources from the market by way of issuance of long-term bonds, commercial bank borrowings, etc. Other resource mobilisation measures like monetisation of land resource, increase in the non-property taxes (user charges), should be made an integral part of the overall financing framework of individual ULBs. Urban Infrastructure Development focussed financing facilities like the Pooled Municipal Debt Obligation Facility (PMDO), an initiative by 16 leading financial institutions in the country,are well positioned to address this. Similarly, some states like Tamil Nadu, Karnataka, West Bengal, etc. have taken initiatives to float Special Purpose Vehicles (SPVs) to raise financial resources for ULBs. However, some basic requirements of attracting commercial financing need to be put in place. These are enumerated in the subsequent sections

Increase User Fees to Attract Sustainable Capital Investments

A change in mind sets is required both at the user/citizen level to pay more for the services availed and at the level of politicians and bureaucrats to take hard decisions to tax citizens and not get influenced by narrow political considerations. At the core of this change in mind sets to appreciate the fact that by paying appropriately for various civic services availed, the viability and bankability of entities developing and providing urban infrastructure services will improve. This improved viability will attract investments from both debt and equity providers which in turn will set off a virtuous cycle of continuous capacity creation which is more efficient and sustainable.Our estimates are that an annual user charge paid by even middle and upper income households for various civic services is an inadequate 1% to 5% of gross annual incomes.To ignore the rising levels of prosperity in India, especially amongst the upper and middle income  classes, and  to not tax these segments,should be avoided if we are serious about upgrading and overhauling urban infrastructure

Cross subsidisation is a reality in an unequal society and hence users who can afford more have to pay more. Hence,cross subsidisation of basic services which have a wider user base like water supply and sewage treatment,through higher levies on services like property, trade, rentals, public transportation, entertainment, professional taxes,etc.will remain as an important tool to be used by civic bodies/PPP projects to improve their underlying viability to attract sustained investments

Capacity Building at ULB level

This is one area where significant investment of resources is warranted. The capacity building of ULBs has to be at multiple levels of infrastructure, institutional, human resources, technical, financial, management and governance practices. This will also require a change in the thought process of the general polity including local politicians to facilitate management of civic bodies and/or private proponents under the PPP mode without any vested interests.

Better Co-ordination between various Agencies to Facilitate Faster Decisions

Given the Federal structure of the country, multiplicity of agencies is to some extent inevitable. However, from an investor’s perspective, any step that can be taken to reduce red tapism and delays due to the role of such multiple agencies has to be addressed on a priority basis including reduction of multiple agencies and/or reduction in layers within each agency. Return expectations of both debt and equity providers in India are generally higher due to higher risk factors. Compounding the same due to delays on account of numerous agencies and co-ordination issues between them are clearly avoidable

Conclusion

In the last decade, India's experience with Urban Infrastructure development is symptomatic of its experience with development of infrastructure in general. While, everyone acknowledges the existence of significant demand-supply gaps in service delivery and the   challenges posed to general quality of life in cities and towns, improvements are required to be carried out on a significantly larger scale, given the prognosis of high multi decadal growth rates of  urbanisation in India. As a sector too, Urban Infrastructure has also lagged behind reform measures as witnessed in other sectors like power, roads, oil and fertiliser etc.  

There have been some notable initiatives for development of urban infrastructure in the last decade like the increased public spending through schemes like the erstwhile JNNURM and tapping into private spending through Public Private Partnership (PPP) models. However, learning’s from these need to be implemented on a much larger scale in a more predictable and time bound manner. This will need the collective energy, intellect and implementation skills of policy makers, town planners, investors, administrators and developers to come together to contribute to building quality urban infrastructure

 

Shashi Johnson

Shashi Johnson is the Chief Executive Office with IL&FS Urban Infrastructure Managers Limited, based in Mumbai.

 




Disclaimer
The views and opinions expressed in the document are based on the research and analysis of the respective authors and writers. Accordingly, no representation or warranty, express or implied, is made as to accuracy, completeness or fairness of the information and opinion contained in this document. The information given in this document is as of the date of this document and there can be no assurance that future results or events will be consistent with this information. IFIN and its affiliates shall not be liable for any damages whether direct, indirect, special or consequential, including lost revenue or lost profits, which may arise from or in connection with the use of this document. This document is strictly confidential and is being furnished to you solely for your information.

© Copyright 2015-16. All rights reserved.