Detroit’s bankruptcy and municipal bonds in India

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SummaryUsing the Detroit example to deter Indian municipalities from the debt market is poor advice

Detroit’s bankruptcy has, in the recent weeks, been extensively reported in the domestic media with a few reports attributing the bankruptcy to the oil crises of the 1970s, the rise of the Asian giants in automobile manufacturing, and the inability of the city of Detroit to adjust to the changing realities. What is surprising though is that the media has tried to establish a link between the bankruptcy and the use of debts by municipalities in India for financing infrastructural services—the undertone being that municipalities in India could go the Detroit way if they do not improve their finances and exercise prudence and autonomy in fiscal management. While no one will question the compulsions of sound management of municipal finances or of granting autonomy to municipalities—a reality check would show that municipalities continue to be “mere tenants at will of the state legislatures”, if we invoke Benjamin Baker’s words—any attempt to suggest that debt is not a viable instrument for financing municipal infrastructure or that there are superior substitutes will set back the nascent municipal debt market in the country. There is hardly any comparison between how municipalities in the US finance city infrastructure and how it is done in India. Let me elaborate.

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 pittance—R1,353 crore or less than $250 million—over 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 country’s 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

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