Debt as an instrument of financing municipal infrastructure in India is as yet of no or little consequence. Only 22 muni-bonds have thus far been issued, raising a pittanceR1,353 crore or less than $250 millionover a 16-year period. In the US, the total outstanding debt and liabilities of local governments in 2010 was a whopping $1.72 trillion, close to 12% of the countrys GDP! Debt has been and is the principal source of financing local government activities in the US. In contrast, most Indian municipalities are not in a position to raise debts in the market; those which can, appear to have an aversion to using this instrument, notwithstanding the existence of Local Authorities Loans Act of 1914; they prefer easier options, grant-financing being the most obvious one, which apart from creating disincentives for municipalities to improve their revenue raising effort, can hardly ever be adequate for meeting the requirements. The bankruptcy of Detroit or of other US cities or the legendary 1992 Chicago disaster that became a metaphor for national-level crisis of failing public infrastructure and failing public bureaucracy, or the fiscal crises faced by New York in 1975 which led to one of the largest Federal government bailouts in the USrecall the New York City Loan Guarantee Actdo not take away the value and strength of debt financing compared with the other instruments of financing. Apart from spreading the financial load over a longer time-span, it brings in fiscal discipline that most, if not all, municipalities in India are badly in need of. Indeed, Ahmedabad, the first Indian city to issue bonds on the strength of its own balance sheet, is today in a far stronger financial position than it was in 1997 or any time in the past.
Indias municipalities are not credit worthy. On the strength of their own balance sheets, they would not be able to borrow from the market. Their balance sheets are depressing, and can hardly be portrayed as being those of a tier of government. In FY08, the latest year for which national aggregates on the finances of municipalities are available, the average per capita revenue raised by municipalities was R747 or R2.1 per day! What is worse is that several state governments, instead of reinforcing their fiscal foundations, have weakened them, either by doing away the property tax or exempting a very large proportion of properties from the purview of taxation. Although restored with the backing of the JNNURM reform agenda, such retrograde steps show how poorly we understand what property taxation is, what it is meant for and what benefits it can bring to our doorsteps. Contrast this with the developments in several countries which have either legislated, or are in process of doing so, that municipal fiscal powers cannot be abridged by the higher governmental tiersthey can, of course, enlarge them.
There is no clarity as to how a default on municipal debt can possibly be addressed in India. The Reserve Bank of India does not formally recognise municipal debt; all internal debts and liabilities in India belong either to the central government or the state governments. Where to go to in case municipalities default on redemption of debts Municipal properties can not be attached. In the absence of any separate budget row or column for municipal debts in the RBI accounts, even when municipalities have raised debts on the strength of their own balance sheets without any form of sovereign or sub-sovereign guarantee, state governments hesitate in granting permission to municipalities for issuing debts, lest they may become liable to rescue them in case of defaults. Absence of safeguards on how defaults will be addressed is one of the major weaknesses in the use and expansion of the municipal debt market in the country. As the media has reported, Chapter 9 of the US Bankruptcy Code enables insolvent municipalities to seek bankruptcy protection from their creditors, and provides space to them to restructure and negotiate a debt readjustment plan. Other countries have framed bankruptcy laws which lay down the parameters for borrowing and procedures for filing bankruptcies. Nothing of this kind exists in India, leaving the municipalities to somehow totter along. With the exception of a few municipalities, most are floundering not because of debts or financial obligations but because of their inability to access the capital market, compete for the limited resources that the market has, and provide to their citizens, business, and industry what they are entitled to.
Are there any lessons from the bankruptcy of Detroit for the 4,041 municipalities in India Several, but three of them appear compelling: first, resolve the question: whose debt is the municipal debtthe new duo on the Mint Street, Raghuram Rajan and Urjit Patel will hopefully pick it up; two, create a bankruptcy code that would provide comfort to the potential investors in muni-bonds, and three, begin work on a fiscal responsibility framework for municipalities to break away from the stasis they are a victim of.
Om Prakash Mathur
The author is distinguished professor, National Institute of Urban Affairs