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Business News/ Home-page / Only 2 cities make the cut
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Only 2 cities make the cut

Only 2 cities make the cut

Investment grade: The landmark Gateway of India in Mumbai.Premium

Investment grade: The landmark Gateway of India in Mumbai.

New Delhi: Mumbai and Nashik are the only two cities to have received positive ratings in an ongoing credit rating exercise commissioned last year by the Union ministry of urban development. The ministry set out to rate 63 cities and has covered 40 so far.

Investment grade: The landmark Gateway of India in Mumbai.

An AA rating means a borrower is considered “high safety"; the rating is fourth on an 18-point scale, with AAA being the best. Cities with high ratings will find it easier and cheaper to raise credit, said Akashdeep Jyoti, head of the infrastructure ratings practice for credit rating firm Crisil Ltd.

The urban development ministry’s credit rating exercise is part of a Union government-sponsored scheme with a corpus of Rs50,000 crore, the Jawaharlal Nehru National Urban Renewal Mission, or JNNURM, which aims to make cities self-sufficient in terms of their ability to raise money rather than depend onassistance from the Centre or the states where they are located. The scheme, which was launched in 2005 and runs up to 2012, gives grants of as much as 90% of the cost of urban development projects to cities, provided they set in motion reforms such as upgrading their accounting systems.

The urban development ministry sees the credit rating exercise as a way to independently assess where cities stand in terms of financial performance, and methods to make them investment grade. A recent Reserve Bank of India (RBI) study on municipal finances estimated that Rs6.28 trillion needs to be invested in urban areas by 2014. And all that money cannot come from the government.

Four ratings firms—Crisil Ltd, Icra Ltd, Fitch Ratings and Credit Analysis and Research Ltd—rated the cities based on financial performance, quality of bookkeeping and service delivery standards, among other parameters. The ministry, however, refused to share the findings and said it was still engaged in dialogue with cities about improving their performance.

The high ratings for Mumbai and Nashik can be attributed to the revenues they earn from octroi—a local tax levied on articles brought into a district or state for consumption.

Mint could not independently ascertain the parameters used to rate the cities. However, the government official familiar with the process said some cities suffered because their municipal corporations do not provide civic amenities and others, especially in Madhya Pradesh and Bihar, fared poorly on account of their dependance on budgetary support from the state.

Armed with a good credit rating, a city’s municipal corporation can raise money from the market. Analysts say this isn’t immediately required because grants from JNNURM currently cover what cities need.

“There have only been 13 bond issues by municipal corporations across the country and none in my memory after the JNNURM scheme started," said O.P. Mathur, a municipal finance expert and principal consultant with the National Institute for Public Finance and Policy (NIPFP).

“The ratings process is being done with three objectives in mind," Mathur added. “One is a straightforward understanding of where they (municipalities) are now. Two, to see what distance they have to cover, and three is to figure out if the problems are intrinsic to the municipality or are from outside factors."

The credit rating process highlighted specific problems. Jaipur, for instance, reports no tax revenues because it abolished property taxes (in January 2007), Mathur added.

RBI’s study on the state of municipal finances found that of 35 municipal corporations, 28 spent far more than they netted in tax revenues. “This is significant in that for maintaining the present level of expenditure, revenues are inadequate and borrowed funds are used," the report said.

Of the seven cities that showed a fiscal surplus, Mumbai and Surat recorded surpluses of Rs750 and Rs500 per capita, respectively.

The problem is exacerbated by the lack of a clear municipal accounting manual, with most municipalities using outdated cash-based accounting systems that take into account only receipts, as opposed to the double-entry-based accounting system that factors in how much the municipalities are making as well. “We expect that in three-four years, all municipalities will shift to this system. It takes time because accounts officers need to be trained," Mathur said.

Mint could not immediately ascertain how many municipalities follow the double-entry or accrual-based accounting system. Some states, such as Tamil Nadu, have completely shifted to this system.

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Published: 13 Feb 2008, 12:32 AM IST
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