It is appreciable that the government is planning an insolvency law specifically for urban local bodies (ULBs) on the lines of the United States’ Chapter 9 Rule, under which reorganisation of the debt of financially stressed municipal corporations is done via various means like extended maturities, haircut to lenders, and refinancing. What distinguishes an insolvency regime for ULBs from that for companies and other businesses is that in the former case, liquidation can’t be an option.
There is an understated need to vastly improve the credit profile of India’s ULBs, a handful of which already resort to market-based debt financing via municipal bonds, in addition to traditional institutional arrangements. Particularly since 2018, the municipal bond market has got a fillip thanks to enabling provisions from the Securities and Exchange Board of India, but a clear guidance on the aftermath of the municipalities turning bankrupt is still not available.
The proposed law could bridge this gap, and encourage ULBs to work on financial discipline, and access large capital from both domestic and foreign investors at the lowest possible costs. Such funds would also be more compatible with capital-intensive urban infrastructure projects, where returns are generated via assorted user fees over long periods.
India is rapidly urbanising, with nearly 600 million people projected to live in cities by 2035. Our cities are fast-growing but most are already choked and riven with very high levels of air and sound pollution. Unless the city infrastructure is upgraded at a brisk pace, and meticulously maintained, our urban agglomerations would be infinitely messier and more unlivable. According to a World Bank estimate, the infrastructure funding requirement of Indian cities for the 15 years to 2036 is a staggering Rs 60 lakh crore.
That implies the capital expenditure demands themselves are more than three times the current revenue receipts of ULBs, even as nearly 40% of the ULB spending is still on routine heads like salary and establishment costs.
In fact, revenue receipts of India’s municipalities are just 0.6% of the GDP, a far cry from 5-8% and higher in mature economies. Their own tax revenue accounts for about half of that; the balance includes grants-in-aid and “assigned” revenues from the Union and state governments, under their own or Finance Commission norms. An irony is that the share of “own resources” in total ULB receipts has declined in recent years, leading to their increased reliance on grants. One reason for this is that key revenue sources for local governments like entry, entertainment, and advertisement taxes collapsed into the goods and services tax (GST).
India’s local self-government system has a chequered history traceable to the end of the 19th century, when colonial rulers resorted to local taxation to lessen the burden on the imperial exchequer. After Independence, the Constitution under Article 40 sought to reinforce these bodies, with necessary powers to function as self-governments. Another major push to their status came in the form of 73rd and 74th Constitutional Amendments in 1993 which, inter alia, mandated regular elections to these bodies.
Despite these, if the historical under-performance of local governments hasn’t been addressed except in a few states where the three-tier Panchayati Raj system is functional, the blame lies on lack of adequate political will. The solution must come in the form of greater devolution of fiscal powers to ULBs and other local bodies. A constitutional amendment to create a consolidated fund for them, with direct apportioning of certain part of GST proceeds, is very much in order.