5 min readApr 10, 2025 04:51 PM IST
First published on: Apr 10, 2025 at 04:51 PM IST
Written by Tanay Goel, Shikhar Chauhan and Tanay S. Naidu
The famous saying, “rule of the people, by the people, for the people” may not fare well if governance does not trickle down “to the people”. In the realm of decentralised governance, municipalities go a long way in bridging the gap between policy-making and its implementation. However, the present state of these urban local bodies (ULBs) is not well-suited to meeting the needs they were supposed to serve.
A pertinent problem troubling the municipal corporations (MCs) is the lack of funds to function sustainably. Recently, Kochi Corporation has been planning to issue municipal bonds to bankroll its developmental initiatives. Exploring this route has the potential to reinvigorate MCs.
Although urban India contributes almost 60 per cent to the country’s economic output, the paralysed state of MCs should worry us all. As per the latest report on municipal finances by the RBI, MCs generate feeble revenue collection, adding up to merely 0.6 per cent of GDP for FY24. The revenue receipts are not just puny when compared with the receipts of the Centre (9.2 per cent) and state governments (14.6 per cent) but are also heavily dependent on property tax as the prime source of revenue.
The report exposed another vulnerability plaguing the MCs: Undue overreliance on the central and state governments for transfers. For FY23, cumulative grants from the Centre and the states increased by 24.9 per cent and 20.4 per cent, respectively, with central transfers accounting for 2.5 per cent of the MCs’ total revenue receipts. The heavy reliance on transfers from upper tiers of government for revenues impinges on the financial autonomy of MCs, and also immobilises capacity-building efforts at the local level.
The above-stated figures may not fit well with the vision of “Viksit Bharat @2047”. As also recognised by the RBI, MCs need to look for alternative sources of financing to meet their expenditure needs.
A venue in this direction is the gamut of municipal bonds (or “munis” for short). Recently, Kochi Corporation has proposed raising Rs 1,000 crore via muni bonds for its infrastructure projects.
The need for capital and funds arises from the several public infrastructure and development projects that MCs undertake. The World Bank estimates that India will require about Rs 70 lakh crore by 2036 to meet its growing urban infrastructure needs.
Muni bonds are debt securities issued by local governments and MCs to raise funds to fulfil their financial obligations. Investors facilitate the working of a muni bond by lending money to the local government in return for interest for a specific period of time.
India’s saga with municipal bonds began with the 74th Constitutional Amendment Act of 1992, which devolved powers to municipalities. The Bangalore Municipal Corporation issued the first muni bond in 1997 to raise Rs 125 crore. As per SEBI, since 2017, merely 17 muni bonds have been issued, with an amount hovering around approximately Rs 2,800 crore. To render these bonds safe for investors, SEBI came up with guidelines for the issuance of municipal bonds in 2015. Still, the market for muni bonds in India remains nascent.
Muni bonds function as effective instruments to raise money for high-cost public projects directly from public investors. They serve the dual purpose of enhancing financial autonomy and maintaining financial transparency. The Union Budget 2025 also recognised the potential of muni bonds. Finance Minister Nirmala Sitharaman announced the creation of an Urban Challenge Fund worth Rs 1 lakh crore. The objective is to incentivise cities to raise money through innovative financing, which includes muni bonds, public-private partnerships (PPPs), and loans.
By virtue of such schemes and increased attention, the muni bond market, which is currently at Rs 3,000 crore, has a tenfold potential growth to Rs 30,000 crore by FY34. The unprecedented increase in towns and cities, projected to serve 40 per cent of the population by 2036, is bound to garner investor support for necessary urban infrastructure projects.
Apart from fulfilling the immediate financial needs of MCs, exploring the route of muni bonds may very well revitalise the thread of fiscal federalism. Amid growing Centre-state tussles over resource allocation, the debt security route turns up as a self-financing mechanism to resuscitate MCs.
A core tenet that forms part of the broader goal of fiscal federalism is empowered decentralisation, which entails the ability of local governments to manage and generate their own revenue. In a situation where these local bodies are exceedingly dependent on the Centre and states, the crux of fiscal power sharing and decentralisation is encroached upon. Muni bonds weave through this issue by allowing ULBs to raise capital directly from the market to finance public projects.
The Finance Commission has the task of deciding the quantum of taxes and grants allocated to municipalities, which are called Finance Commission Grants and form part of the Union Budget. The 15th Finance Commission has already allocated Rs 1.2 lakh crore to ULBs for five years with the requirement to disclose annual accounts and service level benchmarks. Although this brings confidence, the 16th Finance Commission may need to do much more to help ULBs recuperate.
The need is to recognise muni bonds as a prudent source of sound revenue for grassroots governance; the 16th Finance Commission would do well to earmark funds for such bonds in its report.
Goyal is an associate in the office of the advocate general of Rajasthan. Chauhan and Naidu are fourth-year law students at NALSAR University of Law, Hyderabad.
As per the latest report on municipal finances by the RBI, municipal corporations generate feeble revenue collection, adding up to merely 0.6 per cent of GDP for FY24. (PTI Photo) 
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