Advanced Search
MyIDEAS: Login to save this paper or follow this series

Municipal Bonds : Is India ready for more?

Contents:

Author Info

  • Chandrasekaran, Pravin
  • Katayama, Roy
Registered author(s):

    Abstract

    In India, municipal development projects benefiting the public often get impeded by the political and institutional framework of the Central Government. In many cases in India, a major constraint is financing these projects. According to the 12th Finance Commission report most of the infrastructure initiatives have been stalled due to financial constraints. For instance, the shortfall in financing to achieve the water and sanitation sector goals in India’s Tenth Plan is estimated at INR 179 billion. Without the discretion to issue municipal bonds, municipalities are often dependent on transfers from the Government of India (GOI) since direct investment for these projects is difficult to secure. While municipal governments are responsible for public service provision, their ability to do so is often constrained by inadequate GOI appropriations and/or missing municipal bond markets. On the other hand, private investors often lack the incentives to invest in public service projects due to high risks and insufficient returns. As a result, the provision of public goods such as infrastructure projects can be delayed or cancelled. Tax-free municipal bonds provide a potential mechanism to bridge the financing gap. We have described the actual process of municipal bond process using the example of Corporation of Chennai and the desalination water project they propose to build. We present how tax incentives, transfers and private savings tie into the municipal bond framework. We believe that only a well performing municipality can be allowed to be fiscally independent and thus chose the Corporation of Chennai for analysis and go on to show what checks and balances are needed in the Indian scenario to support such a move towards sustainable financial decentralization. This policy paper analyzes four key dimensions of the expansion of the municipal bond market. Firstly, we analyze the driving forces for the evolution of a municipal bond market. Secondly, we develop an economic framework to value a municipal debt instrument and to estimate the optimal debt for the municipality to issue. In this section we also discuss the dynamics of the model and impacts of shocks and economic transfers on the municipal debt. Thirdly, we map the stakeholders and analyze the threats and benefits of a municipal bond issuance for these stakeholders. Finally, we recommend a framework for expansion of the municipal bond market while minimizing the potential for fiscal irresponsibility and uncontrolled growth of sub-national debt. We propose the creation of Special Municipal Zones based on strong credit rating, accrual based accounting systems, optimal debt to revenue collection ratios and a strong financial need of the municipalities. To support such Special Municipal Zones, we recommend several key changes in the institutional framework including creation of the Municipal Securities Board of India.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://mpra.ub.uni-muenchen.de/9807/
    File Function: original version
    Download Restriction: no

    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9807.

    as in new window
    Length:
    Date of creation: 26 Mar 2006
    Date of revision:
    Handle: RePEc:pra:mprapa:9807

    Contact details of provider:
    Postal: Schackstr. 4, D-80539 Munich, Germany
    Phone: +49-(0)89-2180-2219
    Fax: +49-(0)89-2180-3900
    Web page: http://mpra.ub.uni-muenchen.de
    More information through EDIRC

    Related research

    Keywords: COC Corporation of Chennai; CRISIL Credit Rating Agency in India; FED Federal Reserve Bank; GOI Government of India; HUDCO Housing and Urban Development Corporation; INR Currency code for Indian Currency Rupee; MSBI Municipal Securities Board of India; MSRB Municipal Securities Regulation Board; MWSSB Metropolitan Water Supply and Sewerage Board; RBI Reserve Bank of India; SEBI Securities and Exchange Board of India; SMZ Special Municipal Zone; TNULB Tamil Nadu Urban Local Body; ULB Urban Local Bodies (Municipality);

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:9807. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.