Indian cities are turning to bond markets for infrastructure needs, with a focus on Uttar Pradesh. Municipal bonds are seen as a solution to funding challenges. The rise of municipal bonds in India has challenges like transparency and investor trust. Successful examples of cities using bonds are showcased.
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Quick takeaways
Cities in India are increasingly turning to bond markets to raise funds for infrastructure development, aiming to attract businesses and investment by showcasing good infrastructure and favorable business policies.
The introduction of municipal bonds in India is helping cities become self-sufficient and quickly access funds for infrastructure development, with the government and regulatory bodies working on increasing transparency and credibility to attract public investors and spur city development.
Deep dives
Increasing Bond Market Usage for Infrastructure Needs in Indian Cities
Cities in India, such as Kanpur, Prayagraj, Agra, and Varanasi, are turning to bond markets to raise funds for improving their infrastructure. This move is fueled by the need to attract businesses and investment by showcasing good infrastructure, along with favorable business policies. Municipalities in India have faced financial dependence on the central and state governments, hampering their ability to raise funds independently. This financial reliance is considered one of the weakest globally, with municipal revenue accounting for only 1% of India's GDP. Municipal bonds are being introduced as a solution to help cities become self-sufficient and quickly access funds for infrastructure development. The government and regulatory bodies are working on increasing transparency and credibility for municipal bonds to attract public investors and spur city development.
Advancements in Municipal Bonds to Support City Development
Municipal bonds, similar to central government bonds, are being issued by cities for local development projects. To address concerns around transparency and governance, the Indian government has introduced a uniform reporting system based on international standards for municipal corporations issuing bonds. Municipalities need to meet certain criteria, including having a credit rating above triple B, no recent loan defaults, and contributing 20% of project costs. Revenue from the projects is ring-fenced and linked to bond payouts, providing visibility to investors. Although explicit guarantees are not given, the government aims to make it easier for municipalities to take the bond route, offering subsidies and incentivizing interest burdens. With several cities already issuing bonds and Uttar Pradesh doubling down on this approach, municipal bonds are emerging as a significant financing method for city infrastructure.
In today’s episode for 24th August 2023, we explain why cities in India are increasingly tapping the bond markets for their infrastructure needs.
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