Resource information
This paper examines international
experience with mobilizing funding for both capital and
recurrent costs for municipal infrastructure with a view to
identifying areas where India could improve its system of
financing infrastructure in cities. Based on international
data, the analysis shows that there is indeed a wide range
of models for funding municipal infrastructure across a
group even as relatively homogeneous as the European Union.
Although a number of different models operate in countries
with very good services, important features of India s
municipal finance system stand out. The spending per capita
is exceptionally low, even when compared with local
governments with few functions. The real estate sector
generates meager tax revenues, but transfers from higher
levels of government are also meager. Turning to cost
recovery models for services, the paper examines
international evidence on cost recovery. In practice, a
surprisingly large number of countries, including
high-income countries, subsidize basic municipal services,
particularly in water supply and sanitation. Analysis shows
that these subsidies often have perverse distributional
effects. Likewise, pricing schemes designed to skew
subsidies to low-income households often have unintended
distributional effects. Again, evidence from urban India
suggests that cost recovery is exceptionally low, not only
in absolute terms but relative to the experience of other
low and middle-income countries. The paper concludes with a
discussion of some of the measures that should be considered
for improving finances in Indian cities, including land
monetization and capital grants systems designed
specifically for reaching secondary cities and towns.
