Funding A City's Future

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Taxes may be the most straightforward way to fund development, but local governments often struggle with limited financial resources. While municipal bonds offer a lifeline, the path hasn’t always been smooth; some bonds have fallen short of expectations. However, with greener alternatives on the rise, local governments are exploring innovative ways to finance development. As cities rethink their financial strategies, could strengthening bond collection become the game-changer for urban growth?

Lucknow Municipal Corporation | Source:knocksense

Have you ever wondered how governments fund their developmental work? The easy answer – taxes. In India, Central and State Governments raise funds from the taxes paid by the citizens. However, apart from taxes, there are other means through which the governments fund their projects, such as through capital markets. Central Government may also raise funds through the sale of securities, bonds and treasury bills, while State Governments can raise funds through developmental loans.

Flow of funds under Municipal bonds | Adapted from Municipal Bonds as s Source of Finance for Urban Infrastructure Development in India by Ramakrishna Nallathiga

Though the third tier of our governance, which are the local municipal governments, form the weakest link in terms of financing capabilities. However, they have been empowered by specific guidelines to raise funds by issuing municipal bonds. These can be thought of as loans that citizens make to local governments and are used to fund public works such as bridges, roads and other infrastructure.

Bangalore Municipal Corporation was the first local government to issue municipal bonds in 1997.

However, municipal bonds lost ground after they failed to raise the desired amount of funds. To revive the funding mechanism, the Securities and Exchange Board of India circulated detailed guidelines in 2015 for urban governments to raise money by issuing revenue bonds.

Just last week, the UP government permitted four municipal corporations to issue municipal bonds to meet expenses on developmental works.

In 2019, Lucknow Municipal Corporation had become the first civic body in UP to bring a bond of Rs 200 crore.

Other city governments like in Pune and Chennai, are also thinking of exploring this option, as their current sources of revenue are becoming inadequate.

Some of the Municipal Bonds in India

Apart from this, there is another set of bonds that is solely dedicated to raising money for climate and environmental projects, known as the Green Municipal Bonds. This year in April, Ghaziabad Nagar Nigam raised India’s first Green Municipal Bond issue of ₹150 crore to recycle waste water into drinking water. To know about UP, read.

How does your city’s urban local government finance its projects?

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