Indian cities are fast expanding. Rapid urbanisation, mass migration from rural areas in search of employment and a better life has been leading people to urban areas. According to the data presented by the United Nations (UN), more than 50 percent of India’s population, or 877 million people, will live in our cities by 2050. What this means is that our cities will continue to contribute significantly to the nation’s growth. However, with rapid growth of services and geographical expansion, the problems across our cities have become complex over the past several decades. Urban infrastructure needs are projected to touch ? 70 lakh crore in the next decade; cities must rethink how they manage finances and attract investment.
The latest CAG report (March 2025) sheds light on the dire financial state of Urban Local Bodies (ULBs). It reveals that municipal per capita revenue in India is just ?58—significantly lower than the national average of ?2,540. This gap highlights the severe funding crisis plaguing our cities, making it difficult for them to maintain infrastructure and provide essential services. Moreover, municipal borrowings remain at a mere 0.05% of GDP, reflecting a lack of investor confidence. If cities are to sustain their growth and serve their residents effectively, a radical overhaul of municipal financing is non-negotiable.
Why are city governments struggling?
ULBs face severe financial constraints that hinder their ability to provide essential services. Insufficient infrastructure, unsustainable development, and a shortage of urban housing have made city management increasingly complex. At the core of these challenges is the lack of a robust funding mechanism and limited access to credit.
Weak governance and administration further exacerbate the problem. ULBs often struggle with inadequate skills, bureaucratic red tape, and political interference, leaving officials with little real power. Funding control remains limited, and ambiguity over responsibilities weakens city-level administration.
Investment remains a challenge, particularly for smaller towns that receive poor credit ratings, making it difficult to secure funds for development. The financial health of cities is often judged by tax collection and debt levels, ignoring crucial factors like efficient service management and public engagement. As a result, well-run municipalities often miss out on much-needed investment.
Outdated tax collection methods also lead to significant revenue losses, while an over-reliance on state and central grants restricts financial autonomy. Without urgent reforms, ULBs will continue to struggle and keep pace with India’s rapid urban expansion.
Securing the future: How can cities win back investor confidence
To attract investment and ensure long-term financial sustainability, ULBs must embrace innovative solutions. Key strategies may include:
- Enhancing creditworthiness: Cities need to be evaluated based on financial transparency, governance efficiency, and public service delivery rather than just tax collection and debt levels. A city with the right potential can be marketed at a global level as a destination. In September 2024, Karnataka's Chief Minister Siddaramaiah announced a ?1,685 crore plan to transform Kalaburagi into a smart city. The initiative aims to improve infrastructure, enhance the quality of life, and attract investments to the region. This project is part of a broader strategy to develop the Kalyana Karnataka area, with additional funds allocated for rural development and road connectivity. The example of Kalaburagi can be replicated elsewhere with certain level of localisation to help investors see the bigger picture.
- Leveraging technology: AI-based property valuation systems and digital tax platforms can streamline municipal revenue collection. Many cities are adopting single-window clearance systems to streamline approvals and reduce bureaucratic delays. The digitisation of land records, already a reality in many states Maharashtra, Madhya Pradesh and Uttar Pradesh, is enhancing transparency and easing property disputes. Additionally, GIS-based mapping is helping cities monitor land use and optimize infrastructure planning, making urban governance more efficient and investment-friendly.
- Monetizing public assets: Cities can explore asset monetization models, allowing residents to invest in infrastructure projects in exchange for returns. This has been successfully implemented in smart cities worldwide. Copenhagen is using revenue from leasing and selling port land to expand its metro network, while Hamburg’s HafenCity project is financing roads and parks through strategic land sales . In India, Nagpur is leveraging land assets to support metro rail expansion, and Ahmedabad is auctioning land to upgrade roads and transport. These models highlight how cities can turn underutilised assets into engines of sustainable urban growth.
- Expanding municipal bonds and PPP models: While metros like Pune and Indore have successfully issued municipal bonds, smaller cities struggle due to poor credit ratings. Credit enhancement schemes, where state or central governments provide partial guarantees, can make municipal bonds more attractive. In June 2017, Pune Municipal Corporation (PMC) issued municipal bonds worth ?200 crore to fund its ambitious 24x7 water supply project. The bonds, rated AA+, attracted over 20 institutional investors and were oversubscribed six times, receiving subscriptions totalling ?1,200 crore. More recently, in 2023, Indore Municipal Corporation (IMC) achieved the highest amount raised through a single municipal bond listing, securing ?244 crore. These successes highlight the potential of municipal bonds in financing urban infrastructure and improving service delivery.
- Enhancing the appreciation potential of cities: In the end, these measures, when applied, could result in a rise in property values. This is mostly true for properties around infrastructure projects. Thus, cities can reinvest funds into further urban development.
But factor in the climate change shock
While cities can be readied to make investment-worthy in the long run, environment degradation is now a reality. Hence, we must plan for climate shocks before it’s too late. Climate resilience must be a core focus of urban planning. Cities must integrate climate adaptation strategies into their development plans.
For cities to grow sustainably, they need to focus on green buildings, saving water, and using energy-efficient public transport. At the same time, they must prepare for disasters by building flood control systems and finding ways to handle extreme heat. Good urban planning should also include environmental checks to make sure development does not harm nature.
Indian cities stand at a crucial juncture. Strengthening ULBs through financial autonomy, better governance, climate resilience and innovative funding mechanisms will be key to ensuring sustainable urban growth. By prioritizing transparency, leveraging technology, and fostering investment-friendly policies, cities can secure the resources needed to enhance infrastructure, improve service delivery, and provide a better quality of life for residents. The time to act is now.
