Context
Cities in India are experiencing unprecedented warming at an average rate of 0.53°C per decade, surpassing non-urban regions by 37.73% in terms of temperature increase[1]. This rapid temperature increase increases the likelihood of more frequent and intense extreme weather events. Implementing robust urban adaptation measures to enhance resilience is crucial. Local governments must drive these efforts and ensure sustainable urban development.
The urban local bodies (ULBs) are the first point of contact for the public provisioning of social goods. However, like in other parts of the developing world, ULBs in India are often under-resourced to take appropriate climate action. India does not have specific estimates for urban adaptation investment needs, but the available literature indicates that the finance flows for adaptation-related interventions in South Asian cities are insufficient. The 2024 State of Cities Climate Finance report, for instance, estimates that cities in emerging markets and developing economies require USD 147 billion annually until 2030 and USD 165 billion annually until 2050 for adaptation. However, only 4% of this demand was met in 2021/2022.[2] In the same period, the urban areas in South Asia received a mere 0.7 billion USD to finance adaptation-related interventions. This shortfall underscores the urgent need for increased urban adaptation-related investment.
Challenges in scaling climate-responsive municipal finance in India
ULBs in India face functional and financial constraints when taking up effective climate action. They encounter significant constraints in addressing local issues as their authority gets restricted to the functions devolved to them by their respective state governments. So, while ULBs in one state might be able to address climate concerns, other ULBs in a different state might not. ULBs in India are also known to be amongst the weakest globally regarding fiscal autonomy, with limited ability and authority to raise revenue through taxes and user charges.[3] The current state of the municipal finances in India paints a grim picture. Municipal revenues/expenditures in India have stagnated at around 1% of GDP since the late 2000s—much lower compared to countries at similar levels of development, such as Brazil (7.5% of GDP) and South Africa (6% of GDP).[4] The absence of buoyant revenue sources has also led to excessive reliance on grants from the Central and State governments for ULBs to fulfill their mandated functions.
Additionally, ULBs have limited access to the capital market due to poor creditworthiness and a lack of institutional capacity. In recent years, regulatory reforms (SEBI guidelines for municipal issuance 2015) and incentives carved out by the Ministry of Housing and Urban Affairs have enabled ULBs to access finance from the capital market by issuing municipal bonds, including municipal green bonds. While some ULBs, such as Ghaziabad Municipal Corporation, Indore Municipal Corporation, Vadodara Municipal Corporation, and Pimpri-Chinchwad Municipal Corporation, have successfully raised finance via green bonds [5], [6], [7], these cases are few and far between.
The lack of bankable projects also results from weak institutional capacity to integrate climate resilience into planning and development. While large and financially sound ULBs such as Brihanmumbai Municipal Corporation and Solapur Municipal Corporation have taken the lead in preparing climate action plans, India still needs to go a long way to build this capacity, specifically in the ULBs located in tier II and tier III cities. This institutional gap also hinders the exploration of innovative financing mechanisms, such as the Public-Private Partnership (PPP), which remains underutilized by municipalities despite its potential for mobilizing private finance.
Way forward for scaling urban adaptation—need for coordinated action
The need for scaling urban adaptation finance in India is imperative, especially as the climate crisis unfolds more rapidly. Addressing systemic barriers to building urban climate resilience involves innovative financing and strong governance structures. Therefore, bridging India’s urban adaptation finance gap requires coordinated efforts between various actors, from national governments to local authorities and private investors.
To address the functional and financial constraints, India could adopt the Cities Climate Finance Leadership Alliance (CCFLA)’s 4C Agenda, as detailed below.
1. Commitment: National and state-level climate actions and agendas should reflect local adaptation priorities. The planning of climate goals should flow bottom-up, with cities identifying and planning for their priorities. These plans can be developed like ‘Gram Panchayat Development Plans (GPDP)’ to outline the annual climate goals and financial requirements to attain those. These should then inform the planning and implementation of state and national-level action plans. Institutions such as State Finance Commissions should include climate vulnerabilities in deciding devolution and grants for local bodies.
2. Collaboration: State governments should explore collaborating with the local governments while planning and implementing any program in their jurisdiction. The national and state governments could leverage their existing partnerships with DFIs and MDBs to collaborate with ULBs and develop a pipeline of adaptation-related interventions.
3. Capacity Building: There is a need to develop soft skills among the functionaries of ULBs on climate vulnerabilities, adaptation-oriented interventions, and mobilization of finance from public and private sources. State governments can utilize their existing institutions, such as the State Institute of Urban Development, to conduct regular training for ULB functionaries.
4. Capital Mobilization: The ULBs need to identify their constraints in accessing private finance, such as poor creditworthiness, and collaborate with the state governments and development finance institutions (DFIs) to improve these aspects. They must also leverage public-private partnerships to mobilize finance for their adaptation requirements. Learning from the success stories of other ULBs that have prepared climate action plans and budgets and raised finance through green bonds and carbon credits can help close funding gaps.
In sum, the 4C agenda provides a framework to align the efforts of all stakeholders from the public and private sectors and can help scale up and enhance the effectiveness of urban adaptation finance.
[1] https://www.nature.com/articles/s44284-024-00074-0#Fig2
[2] https://citiesclimatefinance.org/publications/2024-state-of-cities-climate-finance
[3]https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RMF101120223A34C4F7023A4A9E99CB7F7FEF6881D0.PDF
[4]https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RMF101120223A34C4F7023A4A9E99CB7F7FEF6881D0.PDF
[5] https://www.climatebonds.net/resources/press-releases/2024/02/vadodara-municipal-corporation-initiates-india-and-asias-first
[6] https://indianexpress.com/article/india/climate-change-mitigation-needs-funding-9564785/
[7] https://economictimes.indiatimes.com/markets/bonds/green-bonds-municipal-bodies-think-change-climate-change/articleshow/111500696.cms
