Can municipal bonds unlock new possibilities for India’s urban future?

Municipal bonds are not only a source of capital but also introduce a degree of fiscal discipline through regular disclosure, compliance, and audit obligations.

By Neeraj Sahai and Dr. Arun Singh 

As India’s cities expand to meet the needs of growing populations and rising economic ambition, the question of how to finance this transformation is becoming increasingly urgent. According to World Bank estimates, India will require close to ₹60 trillion in urban infrastructure investments between 2022 and 2036. Yet, Urban Local Bodies (ULBs) currently generate only around ₹1.4 trillion in annual revenue, highlighting a widening financing gap.

This shortfall presents not just a challenge, but an opportunity to explore innovative, sustainable, and decentralised funding models. Among the options gaining traction is the use of municipal bonds, increasingly viewed as a tool that could help cities tap capital markets while promoting better financial governance.

India’s Urban Financing Challenge

While ULBs have historically relied on local revenues, this model has weakened over time. In 1961, 89% of ULB finances came from self-generated sources, a figure that has since fallen to 51%, with more funds now coming from state and central grants. This shift has led to reduced fiscal autonomy and flexibility.

Several factors have contributed to this decline, including limited fiscal decentralisation. Despite constitutional reforms, most ULBs still lack full authority over key taxes. Only Assam, for instance, allows its municipalities to independently levy property and entertainment taxes. Internationally, countries such as Denmark and Canada grant local governments control over the majority of their revenue streams and see significantly higher local tax contributions to GDP.

Even where ULBs do have taxation powers, efficiency in revenue collection is often lacking. Property tax, a cornerstone of local revenue globally, represents just 0.1% of India’s GDP — well below the 1.9% OECD average.

Unlocking Capital Through Municipal Bonds

Given these systemic constraints, greater participation in capital markets could be one path forward. Municipal bonds are not only a source of capital but also introduce a degree of fiscal discipline through regular disclosure, compliance, and audit obligations.

However, India’s municipal bond market remains underdeveloped. From 1997 to 2021, just $800 million was raised — a fraction compared to peer markets. Encouragingly, there has been a noticeable uptick in recent years, with two-thirds of total issuances occurring after 2017.

A recent Dun & Bradstreet survey of over 3,200 businesses across 32 countries revealed that while many Indian investors are open to exploring municipal bonds, concerns remain. Chief among them: limited financial transparency and perceived credit risks. Notably, only 41% of ULBs had submitted financial data to the City Finance Portal as of 2022, and no recent updates have been recorded.

Barriers to Market Participation

Awareness is also a barrier. Many investors are unaware that AA-rated municipal bonds in India yield between 8.5% and 10% — significantly higher than 10-year government securities. Interestingly, more Indian investors perceive municipal bonds as highly liquid compared to their counterparts in the US, UK, and South Africa, pointing to untapped appetite if the right conditions are created.

To foster a more enabling environment, the following steps could be considered:

1. Encouraging deeper fiscal decentralisation to allow ULBs more control over revenue.

2. Strengthening tax collection mechanisms through better systems and capacity-building.

3. Promoting transparency via consistent, timely financial disclosures.

4. Exploring the creation of municipal finance intermediaries — similar to KommuneKredit in Denmark or MuniFin in Finland — to support smaller cities.

The Way Forward

While municipal bonds are not a panacea, they could play a vital role in diversifying urban finance and unlocking new pathways for infrastructure investment. With the right ecosystem in place, Indian cities could move towards greater financial self-reliance and a more resilient urban future.

(Neeraj Sahai – President, International, Dun & Bradstreet and Dr. Arun Singh, Global Chief Economist, Dun & Bradstreet.)

Views are personal, and do not represent the stand of this publication.