Listing of municipal bonds needed to fund local bodies: RBI report

Mumbai (Maharashtra) [India], November 11 : The Reserve Bank of India has said that listing municipal bonds in the stock exchanges can pave the way for developing the much-needed secondary market for municipal bonds in India.
The RBI's report on Municipal Finances said that for policies to improve the environment for financial investment, greater transparency, and better governance can help nurture a vibrant municipal bond market. Listing municipal bonds in the stock exchanges can pave the way for developing the much-needed secondary market for municipal bonds in India, the report said.
The report is the first attempt to compile and analyse the consolidated fiscal position of the municipal corporations (MCs) in India. Going forward, it will be important to create an institutional framework to collect, compile and publish data on municipal finances on a regular and timely basis, said RBI in the report that was released on Thursday.
As the demand for infrastructure grows among Indian cities, MCs must further explore ways to reinvigorate and foster alternative and sustainable resource mobilisation through municipal bonds, the report said.
The central bank said that lack of consolidated data on local government finances in India poses several challenges for fashioning developmental policies for bottom rungs of the three-tier governance structure, evaluating the quality of expenditure at the local level and even for determining the nature and the extent of grants that should flow to the local governments from central and state government agencies, including Finance Commissions.
Even where budgetary data are available for municipal corporations, the report said the lack of standard accounting practices had rendered the task of comparison and consolidation difficult. The inclusion of local governments in general government fiscal data would bring India on par with international standards for government finance statistics.
A standardised, double entry-based accounting system for municipal bodies would facilitate the consolidation of local government data, according to the report. The Finance Commission XV's (FC XV's) recommendation to make audited accounts of municipal corporations available online as a prerequisite for accessing grants is a welcome step in the right direction.
The next challenge in the context of municipal finances is to ease the resource constraints, the RBI report said. It said a vibrant sub-sovereign municipal debt market catering to a robust investor appetite for municipal bonds can provide an avenue for these entities to access public funds, create an alternative class of assets for investors and further deepen India's domestic debt market.
Third, it has been suggested that land-based financing is an area that is grossly undertapped and it has enormous potential for revenue generation in the case of municipal corporations, according to the report.
Instruments may include vacant land tax (VLT); a two-part property tax with a higher rate for land than buildings; sharing of stamp duty (collected by state governments) with local governments; and development impact fees (DIF). RBI said municipal finance can also be boosted by developing partnerships with impact finance in the private space.
Fourth, effective governance of cities is critical to sustainable development, as embodied in the Sustainable Development Goal (SDG 11)- Sustainable Cities and Communities. National development strategies have to be put in place to make cities inclusive, safe, resilient and sustainable, according to the report.
The RBI report said modernisation of local governance systems and getting them to work in close coordination with local communities consistent with a clean and efficient administrative structure will help ensure greater public participation and more effective delivery of public services.
The central bank said the study was the first attempt to compile and analyse the consolidated fiscal position of municipal corporations in India. Going forward, it will be important to create an institutional framework to collect, compile and publish data on municipal finances on a regular and timely basis.