To bridge the wide funding gap for the creation of urban infrastructure, the Centre will allocate Rs 10,000 crore annually from the corpus of the priority sector lending shortfall of banks to accelerate urban capital expenditure. The idea is to create a long-term dedicated fund flow mechanism for the sector.
“Annual contribution to the Urban Infrastructure Development Fund (UIDF) from priority sector lending shortfall can also be enhanced going forward, depending on funds availability,” a senior official said. The funds would be used by public agencies to build urban infrastructure in Tier 2 and Tier 3 cities (state capitals and smaller towns)
In the Budget for 2023-24, finance minister Nirmala Sitharaman said UIDF under the National Housing Bank will be established through the use of priority sector lending shortfall, like the Rural Infrastructure Development Fund (RIDF) under the National Bank for Agriculture and Rural Development (Nabard).
The Centre set up the RIDF in 1995-96 under Nabard to extend financing support to states for rural infrastructure projects in the irrigation sector at that time. Subsequently, RIDF was made available for new rural infrastructure projects and its ambit was broad-based to cover almost all-important aspects of rural infrastructure. With the allocation of Rs 40,001 crore for 2022-23 under RIDF, the cumulative allocation has reached Rs 4.6 trillion.
The Reserve Bank of India mandates banks to lend 40% of their funds to specified sectors, like agriculture, Micro, Small and Medium Enterprises, export credit, education, housing, social infrastructure, and renewable energy under priority sector lending (PSL) requirement. The shortfall in PSL achievement is to be deposited with RIDF or other funds under Nabard or NHB. The funds are a cheaper source of resources for public infra development with the interest rate being 150 bps lower than the Reserve Bank of India’s Bank Rate (6.75% now).
Urban capital expenditure requirements far exceed recent spending trends and the government’s steps to promote urban upgrade investment could potentially double spending levels in a couple of years, Ajit Pai, Strategy Lead Partner, Government and Public Sector, EY India, said.
As per a recent World Bank report, to efficiently meet the demand of the growing population, India will need approximately $840 billion in investment in urban infrastructure over the next 15 years. Of this, $450 billion investment needs are in basic municipal services such as water supply, sewerage, municipal solid waste management, stormwater drainage, urban roads and streetlighting). The balance $300 billion is needed for mass transit systems.
Urban areas constitute only about 3% of the total land area, but they contribute to over 70% of the GDP.
Yet, India’s urban population proportion is a little more than half that of the world and it has been trailing many peers. According to United Nations projections, the urban population in India is projected to increase from 461 million in 2018 to 877 million in 2050.
“Massive upgrades to urban infrastructure and integrated design at a juncture where next-generation technologies are available and better insight into the evolution of future jobs will allow for better cities in India,” Pai said.
The Centre is sharpening its focus on accelerating the nation’s efficiencies of agglomeration by enhancing integrated urbanization.
With cities seen as engines of jobs and growth, the Budget for FY24 has also earmarked Rs 20,000 crore out of the Rs 1.3 triillion interest-free capex loans to states for efficient use of land resources, adequate resources for urban infrastructure, transit-oriented development, enhanced availability and affordability of urban land and to make them creditworthy for issuing Municipal Bonds.
The funds would enable states to undertake urban reforms to catalyse public and private investment in infrastructure, transport, power and industrial infrastructure.
Since 2014, the governemnt has launched several centrally sponsored schemes (CSS) such as Smart Cities Mission, Atal Mission for Urban Rejuvenation and Urban Transformation (AMRUT), Pradhan Mantri Awas Yojana-Urban (PMAY-U), Swachh Bharat Mission-Urban (SBM-U). During these nine years, these schemes have yielded a total investment of Rs 16.4 trillion ($23.5 billion) including the government (in 6:4 ratio between the Centre and states) and private sector investments, according to government data.
Given that these funding requirements are significantly higher than current levels of investment, the Centre wants to intensify collaboration and partnership with states and local bodies to rope in the private sector through public-private partnership (PPP).
With a rising urban population, there is a proportionate rise in the demand for urban services such as urban transport, sanitation, drinking water, housing, urban amenities etc.