Rapid Urbanization Pushing Local Government Budgets to the Limit in India

News Release | 22 October 2009

MANILA, PHILIPPINES - Rapid urbanization is placing significant stress on the budgets of India's local governments and more must be done to improve their financial status to enable them to fund infrastructure projects and delivery of essential services.

To address the issue, the Asian Development Bank (ADB) has agreed to a request from the Government of India to support a study to assess the state of India's local government finances and identify key areas for fiscal and financial reform.

The e-Asia and Knowledge Partnership Fund will provide a $500,000 grant to the India Municipal Finance Study. The Fund was set up at ADB in 2006 through a $20 million contribution from the Republic of Korea. The Government will contribute $170,000 to the study.

India is rapidly urbanizing, with the population in urban areas expanding at an annual rate of 2.4%, outpacing the 1.5% nationwide population growth rate. Over the next decade, the urban population in the country is expected to increase by at least 100 million people. The Government estimates that nearly $475 billion will be required to fund infrastructure development for the next 5 years.

"India's local governments are responsible for providing basic infrastructure and services in cities and towns," said Kyeongae Choe, Principal Urban Development Specialist in ADB's South Asia Department. "But these local bodies - particularly small and medium-sized organizations - are plagued by low municipal revenues and poor financial management skills, and therefore they struggle to finance the kind of essential infrastructure that a rapidly growing population needs."

Ms. Choe said the study will identify problems affecting the finances of urban municipalities in four to six selected states, as representative sample cases.

The study will provide an overview of the issues of the local government finance structure, and identify key reform measures in India's rapidly changing urban context. Policy recommendations on short- and long-term action plans and capacity building areas are expected to strengthen India's municipal financing capacities.

The 18-month ADB-supported study is expected to be completed by February 2011. The Department of Economic Affairs in the Ministry of Finance will be the executing agency.