According to the World Urbanization Prospects, 2018, more than 50% of India’s population will be urban by 2050. By some estimates, India needs to build a Chicago every year and is expected to see an influx of population the size of the entire USA into its cities over the next decade. A new World Bank report (2022) estimates that India will need to invest $840 billion over the next 15 years- or an average of $55 billion per annum-into urban infrastructure if it is to effectively meet the needs of its fast-growing urban population. Further, the National Infrastructure Pipeline (NIP) envisages Rs. 19 trillion of investments in urban India over a five-year period till FY25. However, the current urban financing system is plagued with several challenges. For instance, the devolution of funds to the Urban Local Bodies (ULBs) from the state is not predictable and timely. Further, these devolved funds are largely tied in nature, to either specific sectors or schemes. The ULBs contribute only about 1% of India’s GDP as their revenue share often does not rise with the economic growth of an area due to factors like undervaluation of land and limits on taxation power. In this context, successful listing of municipal bonds by more than 10 cities in India is a silver lining. Most recently, Vadodara has raised Rs 100 crore and has also been selected by the US Embassy and Treasury for a case study on successful listing and a benchmark for other civic bodies.

Significance of municipal bonds:

• Leverage future cash flows to finance capital expenditure: As per CARE rating estimates, large Municipalities in India could manage to raise Rs 1000 crore to Rs 1500 crore every year by issuing municipal bonds.
• Attract new long-term investors and resources into urban projects: Municipal bonds have been subscribed by insurance funds, mutual funds and external funds that make long-term investments. They also provide greater flexibility in terms of revenue and repayment options.
• Force multiplier for improving internal processes in ULBs: Bond route of financing requires ULBs to implement a stringent reporting and disclosure standard, which ushers in greater transparency and accountability towards citizens.
• Boost the quality of life in cities: The money raised from municipal bonds can boost the quality of life in cities and enhance job prospects.

Despite its significance, urban financing through municipal bonds cannot be considered as a one stop solution for urban infrastructure financing due to the following reasons:

• Low credit worthiness: Out of 94 cities, which are part of the Smart City Mission and AMRUT, only 55 cities got investment grade rating BBB- and above.
• No insolvency and bankruptcy law for ULBs: In the event of municipal insolvency or bond default, it is difficult to visualise who will bail out the ULBs.
• Confidence of investors: Except in a few big ULBs, the budgeting and accounting systems lack transparency, which fails to inspire confidence in the investors. Further, there may be increased cases of default when the debts of Municipalities increase, as is happening in China currently.

Thus, municipal bonds can help to pay for vital capital projects-roads, energy, water, sanitation, and other essentials-but there is a requirement of strict implementation of SEBI regulations on municipal bonds, having a specialized agency to protect bond-holders in cases of default (like in Denmark), and adoption of best accounting practices.