Seven reform pathways to bridge India's urban investment gaps

Mint

22-05-2025

A 2010 McKinsey Global Institute report estimated that India needed capital investment of $1.2 trillion over 15–20 years to meet its urban requirements. At ₹2,701 per capita, our current urban investment falls short of the required ₹7,884. This, despite larger outlays by states as well as a staggering 932% increase in the budget allocation for the ministry of housing and urban affairs since 2009-10. This gap in the financing of urban infrastructure adversely impacts the ease of living and doing business in our cities. A roadmap ensuring adequate medium- and long-term financing for city infrastructure and services is critical for India to meet its Viksit Bharat goal by 2047.
Given the shrinking fiscal space of the Union and state governments and competing claims on resources, budgetary support for urban financing can only go so far. Municipalities must explore bank loans, public-private partnerships, bonds, finance leases, climate finance and other mechanisms. China exemplifies this strategy, having powered its urban growth through a transformative municipal bond market, one that evolved from opaque local government financing vehicles to the world's largest formal municipal debt system, with local government bonds forming 28% of its domestic bond market.
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In China, municipal bonds are now the primary vehicle for funding urban infrastructure, with local governments leading build-ups. In India, on the other hand, most urban infrastructure is funded by Union and state government grants. Municipal bonds contribute little; they account for only about 0.012% of the country's total bonds. Just ₹3,840 crore was raised over the period from 2017 to 2021.
Indian cities, particularly our medium and small ones, have not sufficiently addressed the challenge of raising market funds. This conversation needs to be broader than just municipal bonds, given that these require cities to acquire credit maturity (and worthiness ratings) while other forms of raising funds exist. We outline a seven-point reform agenda for financing urban infrastructure in India's smaller cities and towns.
First, we must estimate the infrastructure gap in our cities for both current and future needs. We then need to estimate the financing requirements city by city, based on credible unit costs and current data. This complex exercise will require leadership from both Union and state governments, with statistical systems offering city-level data.
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Second, we need a differentiated approach by city type and size. India has 40-plus cities with a population of over a million, over 400 cities with a population of over 100,000, and more than 4,000 cities with fewer people. Our one-size-fits-all approach to the planning, infrastructure and governance of cities will not work. We must move to a context-specific, place-based approach.
Third, state-level urban infrastructure development financing companies (UIDFCs) must be established where absent or rehabilitated where they have deviated from their original mandate. Rather than functioning merely as procurement and contract management arms of state governments, UIDFCs should focus on project preparation and developing financing models that match the typologies of sectors and projects (water supply, sanitation, roads, etc) with sources of finance (grant funding, scheme funding, term loans, municipal bonds, climate finance, public-private projects, etc).
They should also facilitate reforms of financial reporting that cover budgeting and accounting in urban local bodies. For the success of UIDFCs, they need specialized professional management teams with functional autonomy, as with the National Bank for Infrastructure Development or National Infrastructure Investment Fund.
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Fourth, smaller cities need City Action Plans (CAPs) accompanied by City Investment Plans (CIPs) to surmount our flawed master planning process. We need actionable five-year plans prepared through citizen participation and coordinated across all city and state agencies—the urban equivalent of Gram Panchayat Development Plans. These plans should reflect citizen priorities while yielding a pipeline of projects that can inform the budgeting process. Early experiments in Assam as part of its Doh Shaher Ek Rupayan convergence programme appear promising.
Fifth, CIPs should optimize spatial agglomeration effects. Not every city and ward needs every type of urban infrastructure. Waste management plants and other such facilities, or even personnel, can be shared among cities based on a 'municipal shared services' or 'municipal capability centre' model
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Sixth, an inventory of public land and market valuations of the same can catalyse municipal financing. Currently, no city has a comprehensive database of all public land, with ownership fragmented across multiple government entities. Valuations of such holdings, with differential development control regulations taken into account for different areas in a city, will unlock value and optimize land use.
Lastly, the timeliness, cost and quality of urban infrastructure are directly and adversely impacted by the least-cost procurement model. Even as the Centre has shown willingness to embrace the superior quality and cost-based system, states and cities have not adopted it, except where funding is from bilateral or multilateral agencies. Unless we undertake procurement reforms, urban infrastructure will continue to be beset by time, cost and quality problems. More importantly, we will not create an ecosystem of builders and contractors that can operate at the scale and quality we need.
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With some states already taking leadership on these reforms, India needs a coordinated push to establish CAPs and CIPs, develop robust project pipelines and publish market valuation data for public land. Such a concerted approach can potentially build a municipal infrastructure pipeline that complements the National Infrastructure Pipeline and enables Indian cities to become engines of sustainable growth and prosperity.
The authors are, respectively, IAS officer, government of Assam, and CEO, Janaagraha.