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Challenges and Opportunities

Challenges and Opportunities


by Dr Pratap Kumar, Economic Adviser, Urban Development Ministry.

India is the fastest growing large economy in the world with a growth rate of 7.6% in 2016. Orderly urbanization is necessary for sustaining this growth rate and indeed adding a few percentage points to it.

Urban India has made a substantive contribution to the national growth rate. Let us look at some numbers. 31% of Indians or 377 million Indians live in urban areas.

They contribute 63% to the national Gross Domestic Product (GDP). Or one-third of the Indian population contributes two-thirds to the GDP and therefore urban dwellers are the most productive segments of the population as they benefit from the high concentration of people, infrastructure, and industry, providing access to opportunities, services, and amenities, captured in the term agglomeration economies.

For this reason, like elsewhere, cities have been recognized as engines of economic growth in India.

These numbers are going to increase at an unprecedented rate. It is expected that by the year 2030, 40% of India’s population or 600 million people will be living in urban areas and will contribute 75% to the national GDP.

Even now, India’s urban population is larger than the total population of United States and is second only to China.

However, despite the huge numbers in absolute terms, India’s urbanization is low compared to BRICS countries. Brazil with 85% of its population living in urban areas, Russia 74%, China 54%, and South Africa 64% have much higher proportion of their populations living in urban areas.

Given that urban areas are engines of economic growth, a higher proportion of urban population in India would have meant a higher growth rate.


However, the unprecedented increase in the Indian urban population in absolute terms has brought with it significant challenges. Chief among them are large urban infrastructure deficit, inadequate finances, and poor governance.

These challenges are inextricably linked. While finances would be required for improving infrastructure, so very crucial for urban areas to play their dominant role in growth, unless a robust institutional structure and governance foundation is there, much of this extra investment will go waste.

There is a large urban infrastructure deficit in India manifested in poor quality urban services to the population. Add to this the need for providing infrastructure services for a growing population.

Projections by the UN suggest that India will add the highest urban population in the world over the next four decades or another 497 million urban population between 2010 and 2050.

The challenge is to provide minimum urban services to the rapidly growing urban population of India even when the existing population is under-served.

Every Indian city faces challenges related to water and power supply, waste management, mobility, education, healthcare, safety, and climate. These challenges will exacerbate if timely and adequate action is not taken; if neglected, they could even derail India’s growth.

In the water sector, no Indian city has 24×7 water supply. Though the per capita per day availability of water in India may be nearly sufficient for attaining the domestic norm of 135 litres per capita per day, much of the water supplied in urban areas is lost because of leaking pipes, lack of water meters and tampered meters.

The result is that non-revenue water in urban India is 50%, compared to just 5% in Singapore. In addition, water is so under-priced that cost recovery in the water sector is estimated at about 20% of the operation and maintenance expenses.

The population that gets rationed out from piped water supply due to low cost recovery is the urban poor who pay exorbitant water costs by the bucket, which is much more than what the population with access to piped water supply pays.

With regard to mobility, the share of public transportation is only 30% of total trips in India as compared to 50% average across countries; only 20 cities (out of 85 with a population of more than half a million) have a city bus service.

The limited public transport infrastructure leads to overcrowding and congestion on roads and poor commuting experience.

In urban housing, India has a large slum population. In 2011, more than 65 million people lived in slums accounting for 17% (or one-sixth) of the total urban population. The quality of life in slums is poor, with little infrastructure and services.

Augmenting urban infrastructure will cost a lot of money. However, India’s municipal corporations, municipalities and nagar panchayats, commonly known as urban local bodies or ULBs are among the weakest in the world both in terms of capacity to raise resources and financial autonomy.

Municipal income in India comes from a variety of sources: own revenue from a number of taxes of which the most important is property tax, user fees, transfers in the form of central and state government grants, domestic and multilateral borrowing, etc.

However, ULBs own revenues as a percent of GDP has gone down from 0.6% in 2002-03 to 0.5% in 2012-13.

While property taxes are the most important constituent of own revenues, there are problems of low coverage, low rates, low collection efficiency, and lack of indexation of property values making it a non-buoyant source of revenue.

As per the Indian Thirteenth Finance Commission, municipal bodies were found to realize only about 21% of the potential property taxes.

As a result, while property taxes in OECD countries are around 2% of GDP, and those in developing countries are at 0.7%, in India property taxes are only 0.2% of GDP.

Urban Local Bodies have not been able to levy adequate user charges for the services they deliver to cover even Operation and Maintenance costs. User charges are also sticky and have not been revised for decades.

As a result, a vicious cycle of low quality services leading to low willingness to pay adequate user charges leading to bad municipal services has developed.

Overall, India’s ULBs need to be strengthened with adequate ‘own’ sources of revenue, that will also enhance accountability.

With most revenues of urban local bodies going for meeting salary expenditures, there is little surplus left for investment.

Accessing external finance for investment through municipal bonds, etc has been challenging owing to the precarious state of ULB’s own finances and poor governance.

On the other hand, the needs are immense. According to the High Powered Expert Committee set up by the Government of India which gave its report in 2011, investment requirement for urban infrastructure over the 20-year period from 2012 to 2031 is estimated at US$800 billion.

Maintenance of these assets would require another US$400 billion over the same period or US$60 billion per annum both in terms of capital costs and operation and maintenance expenses.

As compared to this, the federal government budget for urban development is only US$4.5 billion for 2016-17.

As per the McKinsey Global Institute, in per-capita terms, India’s annual capital spending of US$17 is only 14% of China’s US$116 and 4% of United Kingdom’s US$391. India needs to invest US$134 per capita per annum (or 8 times more) on urban infrastructure to 2030.

The immense financial requirements call for a paradigm change in how cities are financed – from largely grant funded cities to a combination
of assured grants and more commercial sources of finance.

It is not only the provision of physical infrastructure but the delivery of quality services that is important. Empowered and efficiently governed cities are necessary to discharge the large responsibilities assigned to them. For this to happen, governance of cities has to improve.

The multiplicity of agencies with overlapping jurisdictions and fragmented roles and responsibilities has been a major factor in the poor delivery of urban services.

In some states, statutory agencies of state governments (or parastatals) are assigned the responsibility for delivering urban services, e.g. water and sewerage.

However, the accountability of the parastatals is to state governments and not to ULBs and thus the latter have little control over the parastatals.

India’s ULBs need to be strengthened as local self-government with clear functions, independent financial resources, and autonomy to take decisions on investment and service delivery.

They should have a unified command and should be led by an empowered and accountable directly elected mayor. The 74th Constitutional Amendment of 1992 enabled the devolution of funds, functions and functionaries to the ULBs.

Interest in the development of cities was emphasized with the launch of an urban rejuvenation programme (JnNURM) in 2005 across 65 cities. While these attempts created some flexibility for cities to manage their affairs independently, not much change happened on the ground.

Among the challenges, poor data availability, in terms of service levels and finances for example, is a major urban challenge. Unless there is data, you cannot have proper evidence based policy making.

As we start collecting city level data, there is bias as only the better managed urban local bodies would put out their data in the public domain. But a beginning has been made.


The challenges of urbanization may be daunting, but so are the opportunities that come with it. However, it needs to be kept in mind that under the Indian constitution, urban development is the responsibility of state governments and not the federal government.

In accordance with this division of powers, the federal government has launched a number of catalytic Missions such as the Smart City Mission (SCM), Atal Mission for Rejuvenation and Urban Transformation (AMRUT), and the Swachh Bharat Mission (SBM) or the Clean India Mission as part of its strategy of holistic urban development.

The actual decisions about the implementation of these Missions are taken at the state and city level.

Smart Cities Mission is a holistic city rejuvenation programme for 100 cities in India, which aims at improving the physical, social, economic and governance infrastructure of urban India.

Smart City Mission aims at providing basic infrastructure, decent quality of life to the people, clean and sustainable environment and IT driven smart solutions.

The idea is to begin with a compact area in the city, develop that area as Smart City by providing a package of core infrastructure and smart solutions.

It is expected that this will then have a catalysing effect, extending similar smart area development to rest of the City as well as creation of similar Smart Cities in other parts of the country.

The architecture of the Smart City Mission emphasizes flexibility, whereby there are three area-based development models – Retrofitting, Redevelopment, and Greenfield development.

Cities have to choose among these models or a mix of them depending on their vision, local context and resources.

The architecture of the Smart City Mission also stresses Inclusiveness by adding a PanCity feature as an essential requirement for every Smart City.

This pan city feature could be intelligent traffic management whereby all residents of the city benefit from the Smart City initiative.

Two transformational changes introduced through the Smart Cities Mission are Competition and Citizen Participation. Competition in the selection of cities clearly emphasizes that this is not an entitlement based scheme, which is the usual feature of government backed schemes in India.

Cities have to compete on the basis of their capability and vision.

Thus, only the most capable cities are being developed into smart cities.

Secondly, citizen participation is being underlined and 11.8 million people participated in the first round of the competition for developing their smart city proposal.

Citizen participation is also an important factor in promoting accountability by reducing the disconnect between people and city governance. Citizen participation needs to be strengthened to create citizen-owned and citizen-managed’ cities.

The smart city mission also aims at a paradigm change in how cities are financed – from primarily grant based funding to more commercial sources of funding.

The average size of a smart city proposal is US$400 million, out of which the federal government will provide a seed capital of US$80 million to be matched equally by the state governments and ULBs.

This governmental funding would have to be leveraged through rationalized user charges for better quality urban services, maximizing property tax collections, public-private partnerships, value capture financing, loans from bilateral and multilateral institutions, municipal bonds, etc.

Another flagship program is the Atal Mission for Rejuvenation and Urban Transformation or AMRUT.

The Government launched the AMRUT Mission with the objective of providing basic services in 500 cities as a national priority.

These include access to a water and a sewerage connection for every household, developing well maintained open spaces and reducing pollution by promoting public transport or constructing facilities for non-motorized transport.

Total central funding for the programme is US$8 billion over a period of five years to 2020, which would be leveraged to augment basic city infrastructure.

The third flagship program launched by the Government is the Swachh Bharat Mission or the Clean India Mission.

The programme was launched to address issues pertaining to solid waste management, sanitation and sewerage management in the country.

It intends to eliminate open defecation by 2019, the 150th birth anniversary of the father of the nation, Mahatma Gandhi, and aims at 100% collection and scientific processing of Municipal Solid Waste.

Besides infrastructure, attainment of the objectives of the Mission would require behavioural change, through generating awareness among the citizens about sanitation and its linkages with public health.

We perceive private participation in urban infrastructure through Public-Private Partnerships as another big opportunity for making delivery of urban services more efficient at minimal fiscal cost.

India is second in the developing world both by the number of PPP projects as well as associated investments as per the Private Participation in Infrastructure database of the World Bank.

However, of the 852 PPP projects and US$338 billion of investment in Indian PPPs, only 14 projects are in water and sewerage accounting for an investment of less than US$1 billion.

This signals huge untapped potential. PPPs can be used effectively in water supply, water and waste water treatment, integrated solid waste management, multi-level parking, etc.

A major deterrent to the entry of private firms in the urban sector in India is the commercial nonviability of many of these projects.

In addition, there is poor capacity at the city level to enter into such contracts.

The Government of India has tried to address both these issues.

One of the new PPP models that has been developed is the Hybrid Annuity Model.

It is a mix of Engineering Procurement and Construction contract and Build-Operate-Transfer model, with the Government and the private companies sharing Total Project Cost in the 40:60 ratio.

The aim is to reduce financial burden on the concessionaire during project implementation.

Projects would have major clearances like land acquisition and environmental/forest clearances.

It is expected that the extensive use of the model for water and sewerage projects would boost PPPs in the urban sector.

Also, model transaction documents like Request for Qualification (RFQ), Request for Proposal (RFP) and Model Concession Agreements (MCAs) are being developed for water and sewerage projects, with project level flexibility for adoption at the city level.

Another opportunity is to make extensive use of Value Capture Finance (VCF).

This refers to Government internalizing some of the externalities that urban infrastructure projects create. Appropriate VCF tools can be deployed to capture a part of the increment in value of private land and buildings that urban infrastructure projects create.

This, in turn, can be used to fund increased public investment, creating a virtuous cycle in which value is created, realized and captured, and used again for public investment.

Some VCF tools are already being used in India like conversion charges, betterment charges, impact fees, development charges, pricing of floor space index above a certain limit, etc.

The need is to standardize the use of VCF tools so that they are used more extensively with all public infrastructure investments.

States and cities should make the most out of these opportunities. Progressive chief ministers, municipal commissioners and mayors should recognize that starting early on the urban transformation will give them competitive advantage, attract investments, and create jobs – getting them ahead of the curve.

A good place to start would be the announced smart cities, which are the best in terms of capabilities to succeed, thereby demonstrating success, and replicating it throughout urban India in the spirit of the Smart City

Mission – What can India learn from Singapore.

In August 2016 at the inaugural NITI lecture chief guest, Tharman Shanmugaratnam, Deputy Prime Minister of Singapore emphasized that it is not only about spending more on infrastructure.

Cities have to play an important role in innovation and inclusiveness.

While India is trying to harness the innovation aspects of urban development, it is inclusiveness that India also needs to promote.

Here we can learn from Singapore in how public housing promotes social cohesion by promoting interactions that leads citizenry to trust each other and believe in a shared future over the long-term.

Another specific learning could be doing things for the long-term.

India has launched three transformative programs in urban development: the Smart City Mission, AMRUT, and the Swaachh Bharat Mission or the Clean India Mission.

The urban transformation that India wants will take time.

Here we can learn from the Keep Singapore Clean campaign. We know that the Keep Singapore Clean campaign was one of the country’s first national campaigns as an independent nation and was launched on 1 October 1968 by the then Prime Minister Lee Kuan Yew.

Not fully satisfied with the results, 44 years later, the Department of Public Cleanliness (DPC) was created.

So, India has to be patient for results that will definitely come over the long-term.

(Dr Kumar delivered a keynote address at the Fourth Singapore-India Business Dialogue held by the Singapore Management University and the Indian School of Business on November 15 in Singapore.)

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