India’s Urban Gamble: Local Bodies in the Corporate Bond Game

THE GEOSTRATA
6 hours ago
5 min read

The framers of the Constitution of India were wise enough to understand the vast, dynamic and expansive nature of the country. Therefore, by placing the sovereignty of India in its Constitution, it allowed for a quasi-federal relationship between the centre and the state. The administration of the evolving urban areas comes under the domain of each state, respectively.

Illustration by The Geostrata

Thus, one can say it's an individual performance-based public management of resources. The local body administration, as per the constitution, is done on two fronts. In 1992, the landmark 73rd and 74th Constitutional Amendments Act shifted the country's administration toward a more bottom-up approach, addressing issues at the grassroots through local self-government in both rural and urban areas.

Over time, as society progressed, its needs evolved and expanded; the demography demanded more precise administration, thereby necessitating a new approach. The Urban Local Bodies (ULBs) in India have long been constrained by limited fiscal autonomy, relying heavily on state and central transfers. The Government of India’s evolving stance on fiscal decentralization reflects a recognition that empowered cities are critical to sustainable urban development.

Urban Local Bodies contribute nearly two-thirds of India's GDP but control less than 1% of total tax revenue, highlighting a significant fiscal gap.

This research article first examines the Urban Local Body in a contemporary perspective and traces its role since 1992 within the context of fiscal decentralisation. Secondly, it will discuss the potential implications of introducing initiatives such as municipal bonds, in contrast to the Indian corporate bond market with comparative year wise data set.

THE IMPLICATION OF MUNICIPAL BONDS IN THE CORPORATE BOND MARKET

In India, the Constitution provides for a three-tiered government: the Central Government, the State Legislature, and Local Self-Government. The 74th CAA mandates the formation of municipalities at each urban centres across the country. According to the size and population of a given urban area, the Constitution provides for three forms of municipalities in a state, namely Nagar Panchayat, Municipal Council, and Municipal Corporation (in increasing order).

Apart from the eighteen functions listed in the twelfth schedule, such as urban planning and socio-economic development, municipalities play a crucial role in upholding the decentralised democratic fabric of our country.

This basic understanding of the Urban Local Bodies gives way to the article's more nuanced discussion. The entry of ULBs into the corporate bond market which marks a significant shift in India’s urban finance landscape.

Like other government institutions, Urban Local Bodies, to function efficiently as independent self-governing organisations delivering public services, require a stable source of finance to fulfil their duties toward the sustainable development of urban India. The finances of ULBs fall under the purview of the respective state legislatures, which authorise municipalities to levy, collect, and appropriate taxes, duties, tolls, and fees. Thus, it's imperative to analyse the concept of fiscal decentralization in ULBs.

“Fiscal Decentralisation has emerged as a critical pillar of urban governance worldwide, enabling local governments to deliver efficient public services tailored to regional ends.”

In India, the traditional reliance on state legislatures for funding often creates barriers and delays to the smooth delivery of public services by local government bodies. Hence, adopting moderate forms of decentralisation to generate revenue helps increase municipal performance and governance capacity by strengthening their fiscal independence. The central government initiated programs like AMRUT and Smart Cities Mission, which emphasise financial independence, encouraging ULBs to mobilize resources beyond grants.

The effective and rapid development of contemporary urban infrastructure, including improved water supply, sanitation, transport, and housing, is no longer merely a civic demand but an urgent necessity, given the need to accommodate the vast and ever-increasing urban population. The United Nations estimated India’s urban population to reach 675 million by 2035.

Therefore, to finance the rapid urbanisation projects, a few major urban local bodies have been slowly incorporating and issuing municipal bonds or muni bonds. Accessing the bond markets allows ULBs to raise long-term capital for infrastructure projects, reducing reliance on government transfers.

Hereby highlighting some of the SEBI municipal bonds statistics as per the report (2024-26):-

Total Issuances (as of Feb 28, 2026): ₹4,340.34 crore.
Earliest issuance: Pune Municipal Corporation (2017, ₹200 crore, 7.59% coupon, 10-year tenure).
Latest issuances: Tiruchirappalli City Municipal Corporation (Feb 2026, ₹100 crore, 8.50% coupon, 10-year tenure).
Coupon rates: Range from 7.15% (Vadodara, 2022) to 10.23% (Hyderabad, 2019).
Tenures: Mostly 4–10 years, with some staggered maturities (Lucknow, Ghaziabad, Indore, Chennai, Coimbatore).

2024

Lucknow Municipal Corporation – ₹200 crore, staggered maturities (5, 7, 10 years), coupon ~7.85%.
Ghaziabad Municipal Corporation – ₹150 crore, staggered maturities, coupon ~7.85%.
Indore Municipal Corporation – ₹244 crore, staggered maturities, coupon ~7.85%.
Agra Municipal Corporation – ₹100 crore, 10-year tenure, coupon ~7.85%.
Prayagraj Municipal Corporation – ₹100 crore, 10-year tenure, coupon ~7.85
Varanasi Municipal Corporation – ₹150 crore, 10-year tenure, coupon ~7.85%

2025

Chennai Corporation - ₹400 crore, staggered maturities (5,7,10 years), coupon ~ 7.85%
Coimbatore Corporation – ₹200 crore, staggered maturities, coupon ~7.85%.
Tiruppur Corporation – ₹100 crore, 10-year tenure, coupon ~7.85%.
Gandhinagar Municipal Corporation – ₹50 crore, 10-year tenure, coupon ~7.85%.
Bhavnagar Municipal Corporation – ₹25 crore, 10-year tenure, coupon ~7.85%.

2026 (up to Feb)

Tiruchirappalli City Municipal Corporation – ₹100 crore, 10-year tenure, coupon 8.50%, this reflects tightening liquidity or higher risk premiums.
Policy success: SEBI’s framework is enabling more municipalities to access capital markets.
Investor appeal: Coupons remain attractive compared to government securities.
Urban infrastructure: Funds likely directed toward water, sanitation, transport, and smart city projects.
Future outlook: Expect more southern and smaller cities to issue bonds, possibly with green financing themes.

“The municipal bonds are debt obligations issued by local governments such as municipal corporations or related agencies to raise funds for various public purposes.”

These municipal bonds give the local government a chance to access the private capital market to self-generate finances instead of waiting for government grants. Over-centralization of tax powers post-GST has weakened local fiscal control, with municipal corporations relying on state and central transfers for over 75% of their budgets.

CONCLUSION

How do municipal bonds work in India? Firstly, the municipal council/corporation issues bonds to raise funds for the implementation of urban capital projects and the refinancing of existing loans. The investors are primarily private-sector companies, banks, and retailers. Cities like Pune, Ahmedabad, and Indore have successfully issued municipal bonds, signalling growing confidence in market-based financing.

Pune Municipal Corporation was the first to issue municipal bonds in 2017, under SEBI’s revised tax-free guidelines, which attracted investors. According to the Reserve Bank of India’s 2023 report on municipal finances, states like Maharashtra, Tamil Nadu, Karnataka, and Gujarat show relatively higher own-revenue generation by ULBs compared to others.

Therefore, it's safe to say that municipal bonds complement India’s corporate bond market by ensuring financial discipline and offering lower risk than investment-grade corporate bonds. India’s municipal bonds remain at a very nascent stage; only large municipal corporations can undertake the associated risks and raise funds.

While the entry of ULBs into the corporate bond market offers opportunities for financial empowerment and infrastructure growth, it also demands careful regulation, capacity building, and prudent fiscal management. It is important to recognise that such measures cannot be applied to all ULBs across the country evenly.

BY RACHITA SAHA

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