Municipal Bonds To Inspire Self-Sufficiency, Boost Finance At Local Level: TV Somanathan
States are free to choose the path to raise funds and will be rewarded based on the milestones they achieve, Somanathan said.
The Union Budget 2023 continued its aggressive capital expenditure push, driving up the target by 33% in the new fiscal. It translated into a higher outlay under the 'Scheme Special Assistance to States for Capital Investment', more commonly known as the 50-year interest-free loan.
Finance Secretary TV Somanathan told BQ Prime, in an exclusive conversation, that he is confident of states picking up the capex outlay this time around.
He listed the possibilities of municipal bonds, which is one of the 'tied reforms'—linked to completion of some of the reforms—under the scheme.
Somanathan said that the approach, in terms of how the components of special assistance to states can be used, is flexible.
"Our aim will be to get a number of municipalities to bring themselves to a position where they can raise funds through municipal bonds. This could happen through augmenting general revenues by property taxes; it could happen through creating special purpose vehicles, where part of the revenue is escrowed/ring-fenced and then they can use that to raise municipal bonds."
The motive is to augment finances of the municipality either via increased municipal taxation or municipal cost recovery and fee collection, value capture financing, betterment levies in the vicinity of a metro, etc.
The states are free to choose the path to raise funds and will be rewarded based on the milestones they achieve.
"The (particular) component will be used to give money if certain milestones in raising bonds are achieved. One, when the actual raising of municipal bonds happens. Two, there could be an intermediate stage... say if they get an investment-grade credit rating...Something that is measurable as an outcome will lead to release of funds."
The fine print on the exact amount to be tied to this measure is yet to be determined and guidelines are awaited as the Finance Ministry is in discussions with the Ministry of Housing and Urban Affairs.
The RBI had previously recommended states to consider private financing for municipal corporations in its maiden report on municipal finances.
The report said that local governments can also tap the capital market by issuing municipal bonds. It suggested the possibility by highlighting models in China’s Local Government Financing Vehicle, which is an investment company that sells bonds in bond markets for financing real estate development and other local infrastructure projects
Reason For Optimism In FY24
Last year, the capex target was augmented by 30% to Rs 7.5 lakh crore, the ministry's most ambitious target at that time. Of this, states were allocated Rs 1 lakh crore to utilise for capital spending.
Revised estimates showed that the offtake by states had been much lower than the central government anticipated, leaving the FY23 revised estimates at Rs 76,000 crore, from the original outlay of Rs 1 lakh crore.
This year, the budget has increased the amount allocated under the 50-year interest-free loans to Rs 1.3 lakh crore. The ministry expects quick offtake this year, as the cycle of submissions and considerations has already begun. Additionally, Somanathan said he hopes that the learning outcomes of the last two years will lead to better utilisation.
"We have already written to states asking for proposals on the bulk of Rs 1.3 lakh crore. This was issued on Feb. 2. We are hoping to frontload the planning process, so that they can actually execute the projects faster," Somanathan said.
"Secondly, I hope that because they (states) have more experience with this approach, they are also more ready to get the work done in terms of compiling the projects, sending it to us and making sure our conditions are met," he told BQ Prime.
Watch the full interview here: