Source: Municipal bonds can help reinvigorate local bodies, revitalise fiscal federalism, The Indian Express, April 10, 2025
India’s municipal corporations are struggling with severe revenue shortfalls, undermining their ability to deliver on urban development goals. Municipal bonds present a powerful solution to empower these local bodies financially, promote decentralised governance, and support infrastructure needs for a rapidly urbanising population.
The Governance Disconnect
- Lack of Ground-Level Impact: The idea of governance “for the people” remains incomplete unless it reaches the grassroots. Urban local bodies are meant to bridge policy and its execution but currently fall short of this mission.
Financial Struggles of Municipal Corporations
- Chronic Revenue Shortage: Many municipal corporations, including Kochi, are facing acute financial distress, making it difficult to maintain essential functions.
- Kochi’s Initiative: To overcome this, Kochi Corporation is considering issuing municipal bonds as a new funding avenue.
Urban Economy vs. Weak Local Finances
- Mismatch in Contribution and Control: Despite urban areas contributing around 60% to the national GDP, municipal bodies have only 0.6% share in revenue relative to GDP.
- Overdependence on Property Tax: Property tax remains the major revenue source, with limited diversification in income streams.
Dependence on Upper Governments
- Heavy Reliance on Transfers: In FY23, MCs relied heavily on central and state government grants, with central aid making up 2.5% of their revenue.
- Impact on Autonomy: This reliance weakens the financial independence of municipal bodies and restricts local capacity development.
Need for Alternative Financing
- RBI’s Recommendation: The Reserve Bank of India urges MCs to explore other financing mechanisms to meet their growing expenditure demands.
- Municipal Bonds in Focus: Issuing debt instruments like muni bonds is seen as a promising step to reduce fiscal dependency.
Public Infrastructure Demands
- Massive Capital Requirement: India is projected to need ₹70 lakh crore by 2036 for urban infrastructure.
- Role of Muni Bonds: These instruments allow municipalities to borrow funds from investors and repay with interest, facilitating infrastructure development.
Evolution of Municipal Bonds in India
- Legislative Foundation: The 74th Constitutional Amendment in 1992 empowered municipalities to raise funds independently.
- Market Growth So Far: Since 2017, only 17 municipal bonds have been issued, raising around ₹2,800 crore, indicating a largely untapped market.
Government Support and Future Potential
- Budgetary Recognition: The Union Budget 2025 introduced an Urban Challenge Fund worth ₹1 lakh crore to support innovative municipal financing models, including muni bonds and PPPs.
- Growth Outlook: With increased urbanisation, the muni bond market could grow tenfold to ₹30,000 crore by FY34.
Fiscal Federalism and Local Empowerment
- Decentralisation through Self-Reliance: Municipal bonds promote fiscal self-sufficiency and reduce conflicts over intergovernmental fund allocation.
- Autonomy through Direct Access: By accessing capital markets, municipalities gain independence in managing public infrastructure projects.
Role of the Finance Commission
- 15th Commission’s Contribution: Allocated ₹1.2 lakh crore over five years, requiring transparency and accountability from municipalities.
- Expectations from the 16th Commission: It must strengthen support for muni bonds and empower ULBs to rebuild their financial foundation.