Urbanization - An Inevitable Consequence but a Paradigm Change in Strategy Required towards Development of Urban Infrastructure 

India's current per capita income of about USD 1,200 puts us at an inflection point where nations at similar points in their economic growth cycle like Japan, South Korea, China, etc. were propelled into higher growth rates through a combination of factors. Some of these were:

  • A massive expansion of employment intensive and export oriented manufacturing across sectors and value chains ranging from toys, garments, value added metals, microprocessor  chips, cars, smart phones, heavy machinery, ships and many more
  • The above expansion in these employment intensive manufacturing industries was dovetailed with a massive exercise to re-skill and relocate the rural population to these manufacturing hubs. These hubs over time became large cities/urban agglomerations. This ensured that the resultant wealth creation was also getting distributed in a relatively equitable manner to ensure overall societal prosperity and stability
  • In contrast, India expanded its economy by relying largely on growth in the Services sector from the mid 1990's which spurred investments, employment, globally successful enterprises and urbanisation. However, the limitations of this sector to incrementally contribute to GDP will shift the focus manufacturing. This is expected to increase the pace of urbanization in the coming decades. The current level of urbanization at 31% of population size is expected to increase to 40% by year 2020 and 50% by 2050. The current urban population of about 377 millionis likely to increase to 600 million by 2031

Government of India and many state governments are aware of the acute need to invest and build urban infrastructure and are working on enabling the same. However, the strategy and execution of the same requires a paradigm shift from the current one.Some 2,500 "new towns" have emerged in the decade up to 2011, largely in an unplanned manner, which have no urban statutory status with any right to collect taxes and do not even have common urban infrastructure systems like water, sewage system, public transport, etc. With such speed and scale of urbanization, it is of paramount importance that such new towns / emerging urban centers are governed by an organized framework of town planning and execution

Capital Outlay for Urban Infrastructure-A Perspective on Global Benchmarks andAdequacyin the Indian Context 

Investments in urban infrastructure will be required not only to bridge the existing requirement but also to meet growing demand for quality urban infrastructure for urbanization. Government of India has recognized this as the core challenge to be addressed while aspiring to facilitate initiatives like establishing 100 smart cities with robust infrastructure in waste management, urban transportation, water supply, sewerage treatment etc.

Globally, developed countries with high levels of urbanization have been characterized by significant investments in urban infrastructure in relation to the size of their economies:

  • The current outstanding of the US municipal bond in about USD 3.6 trillion, representing approximately  21.5% of the GDP, with an annual increment of new issuance of about USD 170 billion (about 1.0 per cent of the GDP)
  • In China, the total debt and guarantees issued by the local governments at the end of 2013 was about USD 2.8 trillion, representing more than 28% of the GDP. On an average, China annually invested, close to 2.7 per cent of its GDP, over a 7 year period from year 2000 towards urban infrastructure

While, one may debate about a few "excesses" associated with some of the aforesaid investment, one cannot deny that they have lead to an exponential improvement in the quality of life for citizens of these countries. Hence, these figures do give a lead indicator of the quantum required for India to invest in handling the projected growth in urbanization

In contrast to the above countries, India’s spending in urban infrastructure wasonly 0.7 per cent of its GDP in 2011-12. The "Report on Indian UrbanInfrastructure and Services" (2011) of the High Powered Expert Committee of theGovernment of India (HPEC) estimated an investmentof Rs. 39.2 lakh cr over a 20-year period from 2012-13 to 2031-32, i.ean average of Rs. 2 lakh cr per annum or about 1.5% of the current GDP of USD 1.9 trillion. Hence, one is looking at a requirement which is double of the current levels of capital investment in urban infrastructure in relation to the GDP to keep pace with the projected trends in urbanization

When one compares the above requirement with the earmarking of financial resources of Rs 98,000 crfrom GOI over a five year period for its flagship programs, namely theSmart Cities Mission (Rs. 48,000 cr) and Atal Mission for Rejuvenation and Urban Transformation (AMRUT) (Rs. 50,000 cr), the annual outlay comes to only Rs 19,000 cr. This implies that outlays from other various central / state governments schemes, private developers, banks, FIs and multi-lateral agencies have to be to the tune of  Rs. 1.8 lakh cr (USD 30bn). This is indeed a tall order due to the following factors:

  • The largely weak position of the state government finances as well as most of the Urban Local Bodies (ULBs)
  • Constraints imposed by controls on fiscal deficit at both the Central and State Government levels
  • Inadequate breadth and depth in the commercial debt market for funding urban infrastructure projects
  • Risk aversion of banks and private developers to invest in urban infrastructure projects
  • High corporate leverage deterring further investments by private infrastructure developers

Suggested Solutions

Short to Medium Term--Increase Public Spending and Invest in Capacity Building and Creating Viable Business Models across Sub Sectors

In the short to medium term, the focus should be on increased public spending by central and state governments by way of contribution / share to ULBs towards urban infrastructure capital expenditure. This view is consistent with the larger one echoed by the Chief  Economic Advisor who emphasized that in a 1-2 year time frame, public spending will have to be the key driver of incremental investments in the infrastructure sector. While this means that fiscal deficit targets may have to be increased to accommodate the additional spending , it would also force governments to have a hard re-look at further rationalisation of subsidies, an aspect on which GOI has done some commendable work in the last year to manage fiscal deficit (diesel de-regulation, cash transfers for LPGs etc)

In this two year interim period, all out efforts should be made by different stakeholders to address the following aspects  

  • Channelise the public expenditure in the two year period to upgrade and create a meaningful asset base in critical sub sectors like urban transportation, solid waste management, water supply, roads , urban power distribution, sewage treatment etc
  • In order to prioritise the above investments, there could be multiple criteria for selecting the ULBs based on population, demand-supply gaps, propensity of the ULB to implement  reforms in policy, governance, capacity building  and  levying of user charges
  • Identify and de-bottleneck the key issues to improve the viability in various sub sectors to make them attractive for PPP models    
  • Invest in capacity building in ULBs and reforms (revenue surplus, accounting practices, governance etc) to make ULBs investment friendly from all possible sources of equity and debt
  • Strengthen the regulatory and judicial reforms to enable investors (especially banks) to recover value in stressed assets

Medium to Long Term-- Increase Private Sector Participation

All of the aforesaid steps proposed in the two year period should set the platform for restoration of the confidence and sentiment amongst key stakeholders , especially private sector investors, banks and financial institutions to seriously look at investments in the Urban Infrastructure sector. This should lead to more resources flowing into the sector to keep pace with the demand of increasing urbanisation

 

Shashi Johnson

The Chief Executive Office with IL&FS Urban Infrastructure Managers Limited, based in Mumbai.

 

 


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