Home / Opinion / Online-views /  How not to fund urban renewal

Continuing growth in India and China is now seen as essential for the world’s economic health. Urbanization is a necessary correlate, if not the engine of that growth. Our flagship urbanization programme is the Jawaharlal National Urban Renewal Mission (JNNURM), directed at strengthening urban governance, providing basic services to the poor in 63 selected cities and enabling these to access capital markets to build infrastructure. Urban infrastructure and construction is a key candidate for replacing the diminished investment demand from industry and financing growth in this sector is necessary to maintain our pace of growth.

Also See: Rating and Funding (Graphic)

How successful has JNNURM been in enabling these urban local bodies (ULBs) to access the capital market? Recently, the credit rating of 46 ULBs, which comprise 41 (five ULBs comprise Greater Mumbai and two ULBs are part of Kolkata) of the 63 cities under JNNURM, have become available. Each of these was rated by one of the four major domestic rating agencies on the basis of their legal and legislative framework, economic base, municipal finances, operations and service delivery and municipal management. These 41 cities account for 73% of the total Central support provided under JNNURM.

Discounting the caveats from the US about the credibility of credit ratings, they indicate the probability of receiving the interest and principal payments in accordance with the terms of the initial contract. A rating of BBB- or above is considered investment grade, i.e. the ULB has a high probability of meeting its debt obligations. In a well-functioning capital market, such ULBs should be able to raise money from retail and institutional investors. Higher ratings, e.g. AA and A, imply greater assurance for investors, while lower ratings, e.g. BB+, give less comfort.

How has Central support for JNNURM been distributed so far? The accompanying table shows the distribution of Central support to various cities, grouped by their credit rating. The different ratings of the five ULBs comprising Mumbai (Navi Mumbai and Greater Mumbai: AA, Thane: AA-, Kalyan-Dombivili: A and Mira-Bhayandar: A-) have been aggregated into a single rating of AA- and that of Kolkata (A+) and Howrah (BB-) have been grouped as A+.

The picture that emerges is quite clear. Higher-rated cities are getting far more funds from the Centre. Seven cities with the two highest ratings so far, i.e., AA- and A+, account for 47% of the Central support. When other cities likely to be rated highly, such as Hyderabad, which was earlier rated AAA, Bangalore, Delhi and Vijayawada are included, it is likely to further increase the share of highly-rated cities. The situation for poorly-rated cities is exactly the opposite. The 15 cities with a below investment grade rating have received only 14% of the Central support under JNNURM.

Similarly, even among investment grade cities, those in the richer states of Maharashtra, Gujarat, Goa, Haryana and Punjab and the Union territory of Chandigarh account for 48% of Central support. Another six cities (Mysore, Madurai, Coimbatore, Chennai, Kochi and Thiruvananthapuram) in three fast-growing southern states with above average per capita income add another 19%. Of the cities in the poorer states, Kolkata alone gets 10% and the remaining five together (Jaipur, Ajmer, Dehradun, Bhopal and Indore) receive only 9%.

The worrisome conclusion is that instead of enabling financially healthier cities to access the capital market, JNNURM support is supplanting the market by giving resources to them directly and disproportionately, leaving out financially weaker cities.

Not just the market, JNNURM is replacing inter-state and intra-state fiscal devolutions too. Unlike richer states that could provide more resources through their state finance commission devolutions, cities in poorer states are disadvantaged. All the 14 non-investment grade cities except two (Amritsar and Shimla) are in states with below-average per capita income.

Arguably, these cities should receive more Central support, but in practice they account for less than 13% of the total support for the rated cities.

Is it really JNNURM’s strategy to support financially stronger cities in richer states or is the outcome driven by the strong first-come first-served structure of JNNURM? Beyond a point, providing support to such ULBs is counterproductive. Not only does it displace investment from the financially poorer ULBs, which could have financed their infrastructure with more support from the Centre, it also passes up on the opportunity to improve the financial accountability and market discipline of financially stronger cities by keeping them out of the market.

It can be argued that in redirecting support to financially stronger cities in richer states, JNNURM is imitating a market outcome, and is thus substituting for a non-existent municipal finance market. But the municipal finance market is non-existent precisely because the financially better cities are being kept away from it by government policy. After the financial crisis, this will become more difficult to achieve, delaying the development of municipal finance in India. Besides, if there is one lesson from the financial crisis, it is that the state should not imitate or substitute for the market, but regulate it and intervene in cases of systemic failure. For this, it needs to stand apart from the market. In the final analysis, persisting with JNNURM’s current approach is self-defeating for its goal of making cities financially self-sustaining and may kill the growth of the municipal finance market in India.

Kanhu Charan Pradhan is with the Centre for Policy Research. This is drawn from a larger study on the impact of JNNURM on Indian cities. Comment at theirview@livemint.com

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