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Ministry sees debt financing as alternative

Ministry sees debt financing as alternative
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First Published: Fri, Apr 27 2007. 12 23 AM IST
Updated: Fri, Apr 27 2007. 12 23 AM IST
The Union ministry of urban development has identified debt as the ideal way to finance capital expenditures undertaken by urban local bodies in India. Most of these entities currently rely on budgetary support from the state governments as well as project-specific support from the centrally-sponsored Jawaharlal Nehru National Urban Renewal Mission for the bulk of their projects.
However, with budgetary support being gradually reduced and some analysts estimating the cost of providing services in Indian cities to be Rs30,000 crore, bond markets increasingly appear to be a good alternative.
To convince cities of the need to approach the bond markets, the ministry has arranged a series of conferences between ratings agencies and city managers across the country. Also on hand is likely to be a member of former New York mayor Abraham Beame’s team. Beame, who was mayor of the city between 1974 and 1977, led the city out of it’s worst-ever financial crisis in 1975, when banks refused to lend money to cover the city’s $1.5 billion budget deficit.
“There have been only 13 instances of municipal corporations going to the primary and secondary markets,” says Akash Deep Jyoti, who heads the corporate and infrastructure sector ratings for Crisil, the ratings agency. The Ahmedabad Municipal Corporation was one of the few Indian local bodies to offer municipal bonds when in 1998, the local body raised Rs100 crore at an interest rate of 14%.
The ministry is hoping to convince urban local bodies of the need to think big, in order to solve infrastructural problems in the 63 mission cities of the its flagship Mission.
Administrators and urban planners say they feel debt-financing is a sustainable way to develop services on a large scale, after budgetary allocations currently made by the government is phased out. The Mission has a corpus of Rs50,000 crore to be disbursed over a seven-year period, which began in 2005. The grants are supplemented by state and sometimes, private sector funds. Most urban local bodies also rely on allocations from state government budgets as well as the taxes they raise for providing services.
Analysts say that budgetary allocations would be enough for incremental advances to a city’s infrastructure, but would not cover the cost of providing a significant difference in the quality of life in Indian cities.
“There is not enough knowledge and awareness of debt-financing in this country,” said Ramesh Ramanathan, a technical advisor with the mission. “From a capital-expenditure standpoint, these are long-haul developments. If we look at cities today, they have not spent anything on capital expenditure.”
One problem that cities are likely to face is the lack of depth in India’s municipal bond markets. The US has $2.23 trillion in outstanding municipal bonds, constituting almost a 10th of the total bond market, while India has roughly Rs733 crore in municipal bonds, according to numbers provided by Crisil. Individuals and mutual funds account for roughly 75% of the total municipal bond subscriptions in the US.
However, some feel it is a ‘chicken and egg’ thing. “Part of the problem is the lack of credible projects that people can invest in,” said Ramanathan. Investors will come when governance is assured, he added. To resolve this, the urban development ministry had earlier this year announced a ratings process for the mission cities. The process, which is scheduled to start early May, is expected to take between three and five months.
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First Published: Fri, Apr 27 2007. 12 23 AM IST