Summary of Report on Indian Urban Infrastructure and Services (2011) – Part I

By Vishnu Prasad, IFMR Finance Foundation

Continuing our series on Municipal Finance in India, we review two recent developments- Report on Indian Urban Infrastructure and Services (2011) and JNNURM. This blog post summarizes the report’s finding on three key themes- Urbanization in India: Characteristics and Challenges, Urban Service Delivery and Investments for Urban Infrastructure.

Urbanization in India: Characteristics

The Report identifies three trends that characterize urbanization in India (up to 2001):

  • i. Structural transformation and decelerating urban population growth: India’s rapid economic growth has entailed a structural transformation in the economy such that the share of agriculture in GDP has declined from 34% in 1983-84 to 15% in 2009-10. During the same period, the share of services has burgeoned from 40% to 57% while the share of industry has remained constant. Structural transformation is typically associated with rapid urbanization as labour moves from low-productivity agriculture to high-productivity industry and services, which are typically located in urban areas. However, the Indian experience shows that there was only a moderate dip in the share of agriculture in total employment (agriculture still employs 52% of the workforce (2004-05)). Since employment was being generated in high-skilled sectors like IT, banking and telecom, it did not draw labour from rural areas. This led to a decelerating growth in India’s urban population- from 3.2% in the 1980s to 2.8% in the 1990s. However, a turnaround of this trend is expected for the year 2001-11. UN estimates suggest that urban population will be larger than their rural counterparts by 2045.
  • ii. Low levels of Migration: Although urban-rural productivity differentials have increased since 1993-94, this has not led to a commensurate increase in migration as Lewis and Harris-Todaro models have predicted. For reasons cited in the previous section, rural-urban migration accounted for only 21% of the total increase in urban population in 1991-2001. However, with urban India poised to generate 70% of all new jobs in India over 2010-30, the trend of low rural-urban migration is set to be reversed.
  • iii. Prevalence of Urban poverty: Even though urban poverty ratio has declined by half from 1973-74 to 2003-04, urban service deprivation and shelter poverty continue to be pressing problems for urban India. An environment of poor access to basic services, public health and other human development inputs perpetuates poverty in urban India. Heavily distorted land markets, an inadequate regulatory regime safeguarding property rights and absence of a strategy for inclusion of urban poor exacerbate the problem of shelter poverty. This is visibly manifested in the mushrooming of slums in urban areas. As of 2001, almost a quarter of India’s urban population lived in slums.

Urbanization in India: Challenges

The Report outlines the following challenges for urbanization in India:

  • i. Agglomeration vs. Congestion: Cities tend to exhibit agglomeration economies due to close proximity of firms to skilled labour, informational spillovers between individuals and firms, access to institutions and localization externalities. On the other hand, in the absence of robust urban infrastructure, congestion diseconomies in the form of traffic congestion, pollution and environmental degradation, deterioration in civil services etc. set in. India needs to tackle the challenge of maximizing agglomeration economies while minimizing the impact of congestion diseconomies.
  • ii. Creating synergy with rural development: In 2009-10, cities and towns are estimated to have contributed 62% to total GDP. As this growth continues, India needs to ensure that there are synergetic linkages with the rural economy, particularly agriculture. With boundaries of urban settlements being increasingly blurred and technology bridging the rural-urban divide, policies must aid rural poor in accessing the fruits of urban growth.
  • iii. Small cities and towns: India’s urban growth has been largely concentrated in ‘big cities’ (50 cities with population over 1 million account for 42.3% of urban population). The period of growth of big cities has also witnessed the slowing down of India’s towns. The slower growth of towns has “implications for how the urbanization challenge needs to be managed. The 3984 Class II and smaller towns with population of less than 100,000 in India also have very different levels of managerial and governance systems compared to larger Class I and metropolitan cities. Hence, interventions for preparing our cities will need to distinguish between the challenges and capacities of larger cities versus the smaller towns in the country.1

Urban Service Delivery

The Report reviews the current state of urban service delivery in India and attributes the negligent state of service delivery to four factors that are discussed below. The Report also recommends new service delivery norms and standards for urban areas in India.

State of Urban Service Delivery

Table 1 below provides a glimpse of the Report’s compilation on the dismal state of urban service delivery.

Factors for poor urban service delivery2

  • i. Inadequate investments in urban infrastructure: ULBs in India are heavily dependent on fiscal transfers from the higher tiers of government, which tend to be inadequate considering the needs of Indian cities. Mohanty et al. (2007) shows that for 35 municipal corporations, there was, on average, under-spending of 76 per cent on capital investments necessary to meet minimum standards of services.
  • ii. Poor maintenance of assets: The low spending on O&M of existing assets has further contributed to the problem of service delivery. Salaries and wages account for 54 per cent of the total municipal expenditure, on average.
  • iii. Fragmented institutional set up: The multiplicity of agencies with overlapping jurisdictions and fragmented roles and responsibilities has been a major factor in the poor delivery of urban services.
  • iv. Capacity constraints: Municipal administration has typically suffered from overstaffing of untrained, unskilled manpower on the one hand and shortage of qualified technical staff and managerial supervisors on the other.

Service Delivery Standards and Norms

A summary of service delivery standards and norms recommended by the Report are provided in Table 2 below:

Investment for Urban Infrastructure

The Report estimates Investment for urban infrastructure over the 20-year period from 2012 to 2031 to be Rs 39.2 lakh crore (at 2009-10 prices). This includes:

i. Rs 34.1 lakh crore for asset creation, out of which the investment for the eight major sectors is Rs 31 lakh crore;
ii. Rs 4.1 lakh crore for renewal and redevelopment including slums; and
iii. Rs 1 lakh crore for capacity building.

The relative shares of the eight major sectors are provided in Figure 1 below. Investments on urban roads form the bulk of the investments (55.8%) followed by urban transport and water supply (14.5% and 10.4%).

The capital expenditure estimates by city size class are given in Table 3 below.

1 – Page 16, Chapter 1. Report on Indian Urban Infrastructure and Services (2011)
2 – For a detailed discussion, see our previous posts in the Municipal Finance in India series