1. India
  2. Local government PPP landscape

Local government PPP landscape

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  • Overview

    Local image

    Number of SNGs

    • Municipalities
      283963
    • Intermediate
      ----
    • Regional/State
      36
    • Total Number of SNGs
      283999

    SNG Expenditure (% of GDP)

    • Total SNG Expenditure
      14.8
    • SNG Current Expenditure
      12.7
    • SNG Staff Expenditure
      ----
    • SNG Investment
      2.1

    SNG Expenditure (% of govt. expenditure)

    • SNG Expenditure
      53.9
    • SNG Current Expenditure
      ----
    • SNG Staff Expenditure
      ----
    • SNG Investment
      56.8

    SNG Revenue (% of GDP)

    • SNG Revenue
      13
    • SNG Tax Revenue
      10.1
    • SNG Grants
      2
    • Other SNG Revenue
      0.9

    SNG Revenue (% of govt. revenue)

    • SNG Revenue (% of govt. revenue)
      64.5
    • SNG Tax Revenue (% of govt. tax revenue)
      56.6
    • SNG Grants (% of govt. grants)
      ----
    • Other SNG Revenue (% of other govt. evenue)
      ----

    SNG Debt Profile

    • SNG Debt (% of GDP)
      21.5
    • SNG Debt (% of govt. debt)
      32.5

    Transfers to SNGs from National Government

    • SNG Transfers Score
      B+
    • Score for Transfer Allocation System
      B
    • Score for Info Transfer Timeliness
      B
    • Score for Collection and Reporting of Fiscal Data
      A

  • Local Governance System in India

    Local self-government in India refers to government jurisdictions below the level of the state. India is a federal republic with three spheres of government: central (union), state, and local. The 73rd and 74th amendments to the Constitution of India gave recognition and protection to local governments, and each state (province) has its own local government legislation. The ministries for housing and urban affairs, Panchayati Raj, and rural development all have oversight responsibility for local government at the national level and each state has its own enabling legislation. Urban local bodies (ULBs) include municipal corporations for cities, municipalities for larger towns, and town panchayats for smaller towns. Both urban and local governments are governed by state-level legislation, which determines local tax-raising powers.1 The structure of India’s local government is presented in following figure.

    Local Government Structure in India

    Local Government System in India

    Source: Government of India, Ministry of Panchayat Raj. Local Government Directory.

    In the case of rural areas, there are three nested bodies. At the apex is the district council or zilla parishad, which is made up of a cluster of block councils or panchayat samitis, which in turn, are made up of village councils or gram panchayats. Each village has a village assembly or gram sabha comprising all adults in the village, who have the power to directly elect members of the panchayat. States with a population of less than 2 million may also choose to have a two-tiered structure, without the intermediate block-level institution.2

    In urban areas, there are three types of local bodies: (i) municipal corporations or mahanagar palikas for areas with a population of more than 1 million, (ii) municipal councils (municipalities) or nagar palikas for areas with less than one million people, and (iii) town councils or nagar panchayats for areas transitioning from rural to urban. For ease of administration, large municipal areas may be further subdivided into wards.

    In line with their objectives of promoting local economic development and social justice, local government bodies have the power to prepare development plans for the areas they serve and implement a wide range of schemes relating to 29 core areas for rural local governments and 18 for ULBs. These include health, education, poverty alleviation, housing, and promotion of small-scale industries, among others.

    However, since individual state governments are responsible for the functioning of their respective local governments (rather than the central government), the actual powers and functions of these institutions are highly dependent on the laws of the state in which they operate.

  • Infrastructure Development Plan of Local Governments

    Municipal bodies are local self-governments whose mandate includes the provision of basic services such as healthcare, water supply, education, housing, transport, and waste management.

    Various schemes have been announced by the central government to support the local governments in their investment plans for infrastructure development. These schemes aim to develop infrastructure in municipalities by investing in mobility, water supply, municipal waste management, and capacity development, among others. Some of the programs under the Ministry of Urban and Housing Affairs include the following:

    • The Smart Cities Mission aims to transform 100 cities into smart cities over a short term (until June 2024).
    • The Atal Mission for Rejuvenation and Urban Transformation (AMRUT) aims to provide basic services to households (e.g., water supply, sewerage, urban transport) and builds amenities in cities to improve the quality of life for all, especially for poor people and disadvantaged groups.
    • The Swachh Bharat Mission aims to help efficiently manage municipal waste in the form of municipal collection, waste-to-energy, and waste-to-compost.
    • The Jawaharlal Nehru National Urban Renewal Mission (JNNURM), launched in 2005, was implemented by the Ministry of Housing and Urban Poverty Alleviation. JNNURM has two components: (i) Basic Services for Urban Poor, and (ii) Integrated Housing and Slum Development Program (IHSDP). JNNURM aims to achieve integrated development of slums by providing shelter, basic services, and other related civic amenities, with a view to providing utilities to the urban poor. Under the Basic Services for Urban Poor component, the project cost is shared in the ratio of 50:50 for cities with a population of more than 1 million (based on Census 2001), 80:20 for other smaller mission cities, and 90:10 for the North Eastern and special category states. The full cost of construction of dwelling units and associated infrastructure was shared based on this sharing pattern without any limitation. Under the IHSDP, the project cost is shared in the ratio of 80:20 for the remaining smaller cities and 90:10 for the North Eastern and special category states. A cost ceiling of ₹100,000 per dwelling unit, including the cost of infrastructure, was applied to projects taken up under the IHSDP scheme.1
    • The Capacity Building Scheme for Urban Local Bodies aims to identify the gaps in skilled labor across ULBs and undertake the necessary capacity-building programs to bridge those gaps.
    • The Pradhan Mantri Awas Yojana aims at providing affordable housing to residents of the country, where interest subsidy is provided on housing loans availed by beneficiaries under a credit link subsidy scheme.

  • Sectors in which Local Governments can Implement PPPs

    Local governments have the autonomy to induct private partners and undertake PPP projects across all the segments under their purview. There have been many local governments across the country that have taken up PPP projects across urban transportation, water supply, municipal solid waste management, housing, city parking facilities, and other general infrastructure. 1

  • Revenues for Local Governments

    The Constitution of India does not lay down the revenue base for municipalities. The power to determine their revenue base—be it the tax authority, tax base, tax rate setting, local tax autonomy, or even the grant-in-aid and other form of assistance—rests with the state government. Within this framework, state governments specify the taxes that municipalities can levy, which historically have comprised taxes on land and buildings; taxes on advertisements other than advertisements published in the newspapers; taxes on professions, trades, calling, and employment; and taxes on entertainment. In addition, there are charges, fees, and fines forming the nontax revenue base of municipalities. Transfers from the higher to lower tiers of government and revenue-sharing arrangements are perhaps the most important feature of public finance and have been instrumental in making local financial adjustments. However, the states determine the choice of tax rates and exemption policy. An absence of autonomy in matters relating to tax rate setting is one of the key features of the functioning of municipal governments.1

    With the introduction of the goods and services tax (GST) in 2017, this financial autonomy has been restricted. Several taxes have been subsumed under the GST. For example, in compliance with the new GST regime, the Municipal Corporation of Greater Mumbai has had to abolish octroi, which, on average, had contributed almost 35% of its annual total revenue. The Municipal Corporation of Greater Mumbai is one of the largest municipal corporations in India and is responsible for running Mumbai, the country’s financial capital.2

    Below table provides a snapshot of the revenues of the 4,259 ULBs in India based on the statistics published by the Indian Council for Research on International Economic Relations.

    • 1O. P. Mathur. 2018. The Financing of Urban Infrastructure Issues and Challenges. Background note prepared for the Urban Development: Technological Solutions and Governance Challenges conference. 19–20 April.
    • 2S. Mankikar. 2018. The Impact of GST on Municipal Finances in India: A Case Study of Mumbai. ORF Issue Brief. No. 257. Observer Research Foundation.

    Revenues of Urban Local Bodies in India

    Revenue Item FY2015–FY2016 FY2016–FY2017 FY2017–FY2018
    ₹ billion $ billion ₹ billion $ billion ₹ billion $ billion
    Total Tax Revenue 411.69 5.02 434.44 5.30 429.54 5.24
    Tax revenue as % of total revenue 28.09% 26.82% 25.02%
    Property tax 201.66 2.46 216.60 2.64 255.52 3.12
    Other tax 209.92 2.56 217.73 2.66 173.88 2.12
    Total Nontax Revenue 290.54 3.54 286.23 3.49 303.77 3.71
    Nontax revenue as % of total revenue 19.82% 17.67% 17.69%
    Total Central and State Transfers 606.42 7.40 726.92 8.87 761.43 9.29
    Total transfers as % of total revenue 41.37% 44.88% 44.35%
    Central transfers 133.06 1.62 198.19 2.42 205.69 2.51
    Central transfers: CFC grants 75.08 0.92 115.42 1.41 123.25 1.50
    Other central transfers 57.98 0.71 82.77 1.01 82.45 1.00
    State transfers 473.36 5.77 528.73 6.45 555.74 6.78
    Market Borrowings 41.79 0.51 44.21 0.54 37.94 0.46
    Borrowings as % of total revenue 2.85% 2.73% 2.21%
    Other Sources of Finance 115.35 1.41 128.00 1.56 184.28 2.25
    Other sources as % of total revenue 7.87% 7.90% 10.73%
    Total Revenues of Urban Local Bodies 1,465.79 17.88 1,619.79 19.76 1,716.97 20.94
    Share of Total Municipal Revenue in GDP (%) 1.064 1.054 1.004

    CFC = Central Finance Commission, FY = fiscal year, GDP = gross domestic product.

    Note: Numbers may not sum precisely because of rounding.

    Source: Indian Council for Research on International Economic Relations. 2019. State of Municipal Finances in India: A Study Prepared for the Fifteenth Finance Commission.

    The summary of expenditures of ULBs is presented in the following table.

    Expenditures of Urban Local Bodies in India

    Expenditure Item FY2015–FY2016 FY2016–FY2017 FY2017–FY2018
    ₹ billion $ billion ₹ billion $ billion ₹ billion $ billion
    Revenue Expenditure 669.24 8.16 745.47 9.09 781.96 9.54
    Revenue expenditure as % of total expenditure 56.27% 60.12% 58.99%
    Capital Expenditure 520.13 6.34 494.60 6.03 543.57 6.63
    Capital expenditure as % of total expenditure 43.73% 39.88% 41.01%
    Total Municipal Expenditure 1,189.38 14.51 1,240.07 15.13 1,325.53 16.17
    Share of Total Municipal Expenditure in GDP (%) 0.864 0.807 0.775

    FY = fiscal year, GDP = gross domestic product.

    Note: Numbers may not sum precisely because of rounding.

    Source: Indian Council for Research on International Economic Relations. 2019. State of Municipal Finances in India: A Study Prepared for the Fifteenth Finance Commission.

  • Borrowings by Local Governments

    Municipalities have several options for financing urban infrastructure facilities, which—besides own taxes, user charges, and grants-in-aid—include borrowings from the banks and financial intermediaries and mobilization of funds from the capital market. Yet, lending for urban infrastructure in India has been limited. While commercial banks’ lending for infrastructure has risen, they have not considered urban infrastructure as one of their priority sectors. Even nonbanking companies, like nonbanking financial companies, barely lend for core urban infrastructure such as water, sanitation, and drainage.

    Municipal Bonds

    Although India’s municipal financing has been dominated by budgetary outlays, cities have tapped into the capital markets through one-off bond issuances since as early as 1997, when the Bangalore Municipal Corporation issued a municipal bond of ₹1.25 billion with a state guarantee. The first nonguaranteed municipal bond was issued by Ahmedabad Municipal Corporation in 1998. Since then, there have been 29 municipal bond issuances in India, raising about ₹23.83 billion cumulatively since the issuance of the first bonds. However, issuances had dropped sharply after 2005, and 82% of the value of issuances were from ULBs and the rest through the pooled-finance mechanism in Tamil Nadu and Karnataka.

    In 2015, a separate regulatory framework for municipal bond financing was put in place by the Securities and Exchange Board of India. The higher share of financing to be secured by the ULBs for projects under Smart Cities Mission and AMRUT is also expected to provide impetus, at least among the small pool of better-rated ULBs.

    Following the issuance of a ₹2 billion bond by the Pune Municipal Corporation 2020, civic bodies of Indore and Hyderabad have raised issued bonds. The bond issues were supported by an escrow of own funds and assigned revenue including octroi grants, property tax, and water and sanitation charges. Some examples of issues of municipal bonds are presented in the following table.

    Select Case of Municipal Bond Issues in India

    Issuer (Year) Pune Municipal Corporation (2016) Indore Municipal Corporation (2018) Greater Hyderabad Municipal Corporation (2018, in 2 tranches) Vadodara Municipal Corporation (2022)
    Loan size (₹ billion) 2.00 1.40 3.95 (2.00 in February and 1.95 in August) 1.00
    Coupon 7.59% 9.25% 8.90% and 9.38% 7.15%
    Tenor 10 years 10 years (call/put option in 7 years) 10 years 5 years
    Credit rating AA+(SO) by India Ratings and CARE Ratings AA (SO) by Brickwork and SMERA AA by CARE Ratings and India Ratings AA/Stable by CRISIL
    Guarantee No No No No
    Structured payments Escrow of property tax, debt service reserve account, and sinking fund account Escrow of property tax, debt service reserve account, and sinking fund account Escrow and debt servicing Trustee-administered escrow and payment, debt service reserve account
    Issue of proceeds 24/7 water supply scheme AMRUT Strategic road development plan AMRUT

    AMRUT = Atal Mission for Rejuvenation and Urban Transformation, SMERA = SME Rating Agency of India.

    Sources: CARE Ratings. 2017. Pune Municipal Corporation Bond Rating; CRISIL Ratings. 2022. Rating Rationale for Vadodara Municipal Corporation; Greater Hyderabad Municipal Corporation. Budget 2021-22; and Indore Municipal Corporation. 2022. Draft Offer Document.

    Cities are incentivized to improve their creditworthiness for raising funds from municipal bonds through property tax governance and ring-fencing user charges on urban infrastructure.

  • Budgetary Allocation to Local Governments

    Historically, India’s municipalities have faced challenges in their fiscal capacity, often relying on state contributions to finance their budgets. As part of the devolution process through the 73rd and 74th Constitutional Amendments (indicated in the section on Local Governance System in India), state finance commissions were set up to formulate principles for disbursing adequate finances from the state to local governments. In addition to their own revenue handles, these ULBs were to be empowered through grants from the central government and respective state governments (which may or may not be tied) as well as transfers formulated by the Finance Commission. However, an important feature of transfers to municipalities in India is its discretionary nature. Unlike the constitutional provision that lays down the revenue-sharing arrangement between the central government and states, there exists no statutory provision in state municipal laws that define the conditions under which transfers should take place from the states to municipalities. Since local governments are a state subject, and spending responsibilities and taxation powers are determined by state governments, it is assumed that the state governments have the obligation of bridging the gap between what the municipalities are able to raise by way of taxes, charges, and levies, and what they need to implement given their spending responsibilities, with the provision that such a gap is worked out on normative considerations and not attributable to inefficiencies and fiscal profligacy. 1

  • Credit Rating of Local Governments

    Credit ratings for municipal bond issues have been in practice since 1998, focusing on evaluating a specific bond issue. Cities are also rated to raise bonds and have become eligible for various schemes announced by the central government.

    The central government has also encouraged the credit rating of cities under the AMRUT reform agenda, which includes 11 reforms comprising 54 milestones. Credit rating for cities is one of them. As of December 2022, to make cities creditworthy, credit rating work has been completed in 470 cities. A total of 164 cities have received Investible Grade Rating (IGR).1

    • 1Government of India, Ministry of Housing and Urban Affairs, Press Information Bureau. 2022. Status of AMRUT. Press release. 8 December.