Last week, at the World Bank–IMF Annual Meetings in Bangkok, Union Finance Minister Nirmala Sitharaman said “municipal bonds can enable cities to mobilise capital market resources for urban infrastructure”, and that the “investment readiness of a city depends on credible accounts” [1]. She called for public investment, stronger municipal finances, development finance and private capital to work together [2]. This week brought reports of a proposed World Bank-backed project, SUTRA (Sustainable Urban Transformation in Rajasthan Accelerated), estimated at $385.7 million for 32 urban local bodies around Jaipur, Jodhpur, Kota and Bharatpur [3], while Kerala’s ministers met to prepare proposals for the Centre’s new Urban Challenge Fund [4]. Three stories, one question: who pays for India’s cities, and who should?

A large bill and thin wallets

The World Bank estimated in 2022 that India must invest $840 billion in urban infrastructure over 15 years, about $55 billion a year, as its urban population heads towards 600 million by 2036. Government investment was about $16 billion in 2018. Central and state governments financed over 75 per cent of city infrastructure, urban local bodies (ULBs) about 15 per cent from their own surpluses, and private sources only 5 per cent [5].

The Reserve Bank of India’s first Report on Municipal Finances (November 2022) found municipal revenue stagnant at around 1 per cent of GDP for over a decade, against 7.4 per cent in Brazil and 6 per cent in South Africa [6]. The World Bank put urban property tax at 0.15 per cent of GDP, compared with 0.3–0.6 per cent in other low- and middle-income countries [5]. The RBI’s 2024 edition, covering 232 municipal corporations, put their revenue receipts at 0.6 per cent of GDP in 2023–24, against 9.2 per cent for the Centre and 14.6 per cent for the states. Own taxes were only 30 per cent of receipts, and property tax made up more than 60 per cent of own tax revenue [7].

The Comptroller and Auditor General’s 2024 compendium, covering 393 urban local governments in 18 states, found that own revenue averaged 32 per cent of total revenue, that only 56 per cent of property tax demand was collected, and that on average only four of the 18 Twelfth Schedule functions had been effectively devolved [8]. Cities are asked to behave like borrowers while lacking control over their own taxes, staff and functions.

Grants, missions and the strings attached

The 15th Finance Commission tied urban grants from 2021–22 to property tax: states had to notify floor rates and show collections improving in step with GSDP growth [9]. The 16th Finance Commission (report tabled 1 February 2026) recommended ₹3,56,257 crore for ULBs over 2026–31, about 45 per cent of local body grants. Entry conditions include publishing audited accounts and constituting State Finance Commissions on time [10].

The Smart Cities Mission’s union budget of ₹47,652 crore supported 8,067 projects worth ₹1.64 lakh crore, 94 per cent complete by May 2025 [11]. AMRUT 2.0 has an indicative outlay of ₹2,99,000 crore, with a central share of ₹76,760 crore [12]. PMAY-Urban 2.0 targets one crore houses with ₹2.30 lakh crore of government assistance [13]. Urban development investment has surged, but such programmes taught cities to look upward to Delhi and state capitals rather than to their own taxpayers.

The newest instrument tries to change that. The Urban Challenge Fund, announced in the Union Budget 2025–26 [14] and approved by the Cabinet in February 2026, offers ₹1 lakh crore of central assistance to mobilise ₹4 lakh crore of investment over five years. It funds up to 25 per cent of a bankable project only if at least 50 per cent comes from bonds, bank loans or PPPs, with further releases tied to reforms. A ₹5,000 crore credit guarantee sub-scheme backs first loans for ULBs in north-eastern and hilly states and towns under one lakh people, up to 70 per cent of the loan or ₹7 crore [15].

Borrowing: development banks and bonds

SUTRA shows the typical multilateral structure: a $270 million IBRD loan plus $115.7 million from the Rajasthan government, covering heritage, transport, waste, heat and waterlogging, and notably municipal revenue administration and borrowing capacity. Board approval is expected by July 2027 [3]. Such loans are long and cheap, but the state carries the repayment risk and councils can be sidelined.

Municipal bonds promise more autonomy. SEBI’s 2015 regulations require a credit rating, no default in the preceding 365 days and dedicated accounts for interest and sinking funds [16]. Pune’s ₹200 crore issue in June 2017 for 24×7 water supply, oversubscribed six times, revived the market [17]. Green bonds followed in Ghaziabad (₹150 crore, 2021), Indore (₹244 crore, 2023), Ahmedabad (₹200 crore, 2024) and Vadodara (₹100 crore, 2024) [7], in line with India’s low-carbon urban policy agenda. Yet outstanding municipal bonds totalled ₹4,204 crore in March 2024 [7]. Meera and Dinesh Mehta count about ₹6,100 crore raised by 25 cities in three decades, driven largely by incentives such as AMRUT’s ₹13 crore per ₹100 crore, mostly at five-year tenors and bought by public institutions [18].

Bonds are no cure-all. A 2026 analysis on the NISM blog notes that Pune’s water project never took off, leaving proceeds idle while the city serviced the debt: “investors won but citizens lost” [17]. Pooling helps: Sitharaman cited a Tamil Nadu bond through which 13 ULBs jointly raised funds for water and sanitation [1].

Private capital and the value of land

Public–private partnerships shift risk to firms only while revenues hold up. Hyderabad’s 69-km metro, awarded to L&T in 2010 as a 35-year design-build-finance-operate-transfer concession, is a warning. After a 169-day Covid shutdown and mounting losses, the state took over in 2026, paying ₹1,461.47 crore for L&T’s 90 per cent stake and assuming ₹13,538 crore of debt [19]. When a PPP fails, the risk returns to the public balance sheet.

Land-based finance taps value created by public investment. The Value Capture Finance Policy Framework lists betterment levies, impact fees, premium FAR, transferable development rights, vacant land tax and land pooling [20]. In Mumbai, two auctions of 13 hectares in the Bandra Kurla Complex in 2006–07 raised ₹5,100 crore for MMRDA, and Maharashtra levies a 1 per cent stamp duty surcharge for urban transport [20]. But land markets are cyclical, and one-off sales should not fund recurring costs.

Weighing the options

Every option lands on residents, as taxpayers, service users or future taxpayers servicing debt; the equity question is which residents. Transfers spread costs nationally; bonds and PPPs reward cities already large and creditworthy; unguarded user charges hit the poorest hardest.

What should change

1. Fix property tax first. The RBI recommends GIS mapping, digital payments and dynamic valuation [7]. Lifting collection above 56 per cent of demand [8] adds revenue without new taxes, and digital twins and spatial data can keep valuations current.

2. Price services fairly, and protect the poor. Water and waste charges should recover operating costs, with lifeline tariffs keeping a basic monthly quantity cheap for low-income households. Affordable water is urban health policy too.

3. Build creditworthiness, and pool smaller cities. Audited accounts are now an entry ticket for grants [10] and ratings for bonds [16]. States should create pooled bond vehicles, as Tamil Nadu has [1], and use the credit guarantee sub-scheme to bring first-time borrowers to market [15].

4. Capture land value around metros. Transit corridors should carry betterment levies and premium FAR [20], with proceeds ring-fenced for transit and affordable housing.

5. Open the books. Publish budgets, audited statements and project progress online, and pilot participatory budgeting so residents see what their taxes buy.

6. Empower ward committees. The CAG found that only nine of 15 states with data had set up ward committees in any city, and only 10 of 18 constituted State Finance Commissions on schedule [8]. The 74th Amendment envisaged local democracy; cities need an authority map that matches money to responsibility.

Private capital will follow cities that can show what they own, what they earn and who decides. Until then, the answer to “who pays?” remains: someone else, somewhere else.

References

Cover image: a Hyderabad Metro train on its elevated line above the city. Photo by Alok Das on Pexels.