Municipal bonds are key to city finances

Rajkot’s success offers hope for other cities, more so with the political challenge that boosting local taxes poses.

Rajkot’s oversubscribed municipal bonds issue comes in the context of surging finance needs of city governments and very little own revenues and transfer of funds from the state governments. As per the World Bank, India’s urban infrastructure investment needs jumped from $16 billion per annum in 2018 over the next 15 years to $55 billion per annum in 2022. Read against the patchy implementation of the 74th Amendment of the Constitution that formalised the third tier of governance, the need for funding supplements becomes stark. Thus, the city’s success offers hope for other cities, more so with the political challenge that boosting local taxes poses.

Rajkot’s oversubscribed municipal bonds issue comes in the context of surging finance needs of city governments and very little own revenues and transfer of funds from the state governments (Trinidade/Wikimedia Commons)

While bonds can be an alternative fund-raising route, the prospect is not without challenges. One, cities must be seen as bankable for bond investors to be interested— as per a report by the non-profit Janaagraha, in 2021, less than half of 226 cities had investment-grade ratings. Two, function overlaps between state government agencies and local governments need to be sorted out. Three, local governments must ensure that clean budgeting and accounting drive ratings and not merely the viability of the projects for which the bonds are being issued — else, project-specific bond issues will be successful while the city government remains strapped for funds elsewhere. Four, citizens will have to be nudged towards a recovery ethic, where they must pay for services, this payment can partially offset the costs.

To the extent that State support is needed, incentives under the Centre’s Atal Mission for Rejuvenation and Urban Transformation mission should encourage more cities to access such financing. Only 17 Indian cities have tapped into bond issues so far, but financing is central to local self-governance, and Rajkot’s success is an opportune moment to have a conversation on how the picture can be changed.