India’s urban infrastructure sector is grappling with a persistent revenue shortfall, making it challenging to meet the growing demands of rapidly expanding cities. Despite an estimated capital expenditure of ₹20 trillion by the central and state governments from FY 2020-25, the sector requires ₹37 trillion ($450 billion) between 2021-36 to sustain basic urban services. However, investment in urban infrastructure has remained low, averaging just 0.6% of GDP since 2012.
Municipal Financing Challenges
The financial structure of municipal bodies varies across states, complicating funding mechanisms. Essential services such as water supply and sanitation are managed by separate agencies in cities like Delhi, Hyderabad, and Bengaluru, while in states like Rajasthan, these responsibilities rest with public health departments and local bodies. Municipal corporations also struggle with revenue generation, collecting only ₹4,624 per capita against the required ₹9,700 per capita. The abolition of octroi duties post-GST has further weakened municipal finances, making them reliant on government transfers.
The Path to Sustainable Urban Funding
Property tax revenue, a crucial funding source, stands at just 0.15% of GDP, far below the 0.6% benchmark needed for sustainable urban growth. While municipal bonds could supplement infrastructure funding, weak creditworthiness and revenue deficits hinder their widespread use. Structural reforms, such as GST revenue sharing and enhanced tax collection, could help boost municipal revenues from ₹1.5 trillion in 2018 to an estimated ₹5.17 trillion in the future. With urban infrastructure needs projected at $840 billion by 2036, urgent fiscal reforms are imperative for sustainable city development.
