India’s cities are mired in a cycle of mediocrity

By Andy Mukherjee

The real India lives in her 700,000 villages, Mahatma Gandhi once said, and generations of schoolchildren across the country memorized the words as an everlasting truth.

Except it isn’t any longer. Officially, the proportion of people residing in cities was 31 per cent in 2011, the year of the last census. But areas with “urban-like features” may have been home to 55 per cent of the population even back then, according to the World Bank. Now that India has overtaken China as the world’s most-populous nation, the figure may have grown further.

Trouble is, politicians don’t want to acknowledge that urban agglomerations are far more important to economic growth today than they were in Gandhi’s times. Once they do, they would have to explain why they have paid so little attention to making them more livable. New Delhi, the nation’s capital, routinely features among the world’s most-polluted cities. According to the same outdated 2011 census, 65 million people live in slums. The financial hub of Mumbai is home to 5 million of them.

Yet the average municipal budget for capital expenditure — or what they invest in land, buildings, parks and playgrounds, roads and bridges, public lighting, and heritage assets — is less than $150 a year per resident, according to a recent study by the Reserve Bank of India. As a result, the strain on public infrastructure and services is getting a little worse with every passing year. Climate change is compounding the challenge.

The failure to address this deficit is seemingly a result of resource scarcity, though at its heart the problem is political.

The federal budget amounts to 15 per cent of gross domestic product; the 28 state governments, taken together, spend slightly more. When it comes to municipalities, however, the expenditure dwindles to just over 1%. Clearly, city officials need access to funds beyond what they can generate from levies on property, and fees on water and sewage.

An opportunity had arisen in 2017 when authorities implemented a nationwide goods and services tax. But politicians blew the chance. The Indian GST, with its five different rates, is frustratingly complex. Not only that, the spoils are shared only between New Delhi and state capitals. Municipalities, which don’t get anything directly, are left to the mercy of transfers and grants from upper tiers of administration.

Credit: Bloomberg

But projects driven from the top aren’t always tailored to the local realities. Suburban railway systems are coming up in many places — even though most will probably remain just an expensive fashion statement: Civic authorities will boast having them, but they won’t really be an integral part of residents’ economic life. Meanwhile, the 100 “smart cities” promised by Prime Minister Narendra Modi are nowhere in sight.

The richer municipalities are concentrated on India’s western coast — in the states of Maharashtra and Gujarat — and in Karnataka in the south, home to the software hub of Bengaluru. For most, though, their own revenue sources are nowhere adequate to meet their recurrent expenditure, and this affects their functional and financial autonomy, the RBI study noted.

Nor is there much traction when it comes to involving private investors. Even though the market value of Indian stocks exceeds the size of its economy, the entire municipal bond market amounts to a mere 0.01% of GDP. While India has rightly avoided a Chinese-style $4 trillion pile of special-purpose municipal bonds (not including off-budget, special-purpose debt floated by cities), the smaller economy definitely has the scope to be bolder. Many municipalities haven’t even adopted standard accounting practices. How will they tap institutional investors?

Fixing cities then boils down to tax reforms. Economist Vijay Kelkar, known as the architect of India’s GST, has suggested an alternative single-rate levy of, say, 12 per cent shared between the federal, state and urban governments in the ratio of 5:5:2. Only then will local governments have enough money to attract the right talent, clean up their books, and approach capital markets.

Greater fiscal autonomy would empower local governments that are currently adrift because of a lack of effective leadership. Ludhiana in Punjab boasts of more Mercedes-Benz cars per capita than any other Indian city. “But 50 per cent of the city has no drainage facility,” Kelkar said.

Or take Mumbai. The megalopolis of 22 million people hasn’t had an elected government since 2022. Which is why a “cooker scandal” in August made headlines, even though the money involved was tiny: The 50,000 kitchen appliances, allegedly purchased at heavily inflated prices for distribution among Mumbai’s disadvantaged women, amounted to no more than a rounding error in the $7 billion annual budget of India’s richest municipality. What really incensed people was that the state legislator distributing them — ahead of Maharashtra’s assembly elections — had etched his name on the cookers.

Hefty construction awards and juicy maintenance contracts are feeding troughs for politicians around the world. But without democratic accountability, those claiming the credit (and pocketing the favors) are not around to share the blame when suburban roads get flooded and pedestrian bridges collapse. The cycle of mediocre management from which India’s cities can’t seem to extricate themselves is the biggest hindrance to their makeover. Giving urban governments a direct right on GST could be the way out of the rut.