With increased urbanisation and intensification of climate risks, Indian cities face an unprecedented challenge: how to finance the massive infrastructure investments needed to build climate-resilient futures. According to a World Bank report, India needs to invest an estimated $2.16-$2.41 trillion — equivalent to 1.95% of its GDP — by 2050 to build climate-resilient urban infrastructure. However, between 2011 and 2018, capital spending on urban infrastructure averaged just 0.6% of GDP.
This affordability crisis stems from severely constrained fiscal capacity. Indian cities generate just 0.6% of GDP in revenue, a stark contrast to the 7.5% contributed by cities in OECD countries.
At the heart of this revenue crisis lies underutilised property tax. The reasons are multiple: incomplete tax bases, outdated valuations and inefficient collection. Citizens resist paying property tax because they do not see the connection between taxes paid and services received. User fees remain underutilised due to the lack of political will and the public dissatisfaction with service quality. This creates a vicious cycle: poor services lead to resistance against taxes and fees, which limits revenue, further constraining cities’ ability to provide basic services necessary for climate action.
Compounding this revenue weakness is the failure to capture urban land value appreciation for public benefit. Most cities have failed to deploy land-based financing instruments systematically. Hyderabad uses multiple land-based instruments — impact fees on high-rises, betterment charges for development permissions, levies on land use changes; Chennai charges premiums on additional floor area ratios; Bengaluru imposes development charges near metro corridors. Yet most such initiatives lack proper legislative backing, relying instead on administrative orders vulnerable to court challenges. Moreover, revenues from these instruments are rarely tracked for climate-specific spending.
Cities, consequently, have become heavily dependent on Central and state schemes, which currently finance 75% of urban climate action plans. Some cities have used these schemes innovatively. For example, Rajkot incorporated rainwater harvesting and passive ventilation into PMAY housing designs. But scheme-dependency has serious limitations. Cities prioritise projects with visible short-term outputs over longer-term climate mitigation. Multiple agencies implement programmes without coordination. Under the 15th Finance Commission, about three-fourths of urban funds for 2021-26 are now tied. Some of the conditions, such as state notification of property tax floor rates, constitution of State Finance Commissions, are often beyond city governments’ control. The outcome is predictable and perverse: cities struggle to meet conditions, grants remain inaccessible, and climate action plans become even more underfunded.
Weak fiscal foundation also explains why capital market instruments remain largely inaccessible. Only 14 cities and two state development authorities have mobilised $490 million through municipal and green bonds between 1997 and 2023. The rest face prohibitively high borrowing costs due to weak financial health and lack of capacity.
Building climate-resilient cities requires a multi-pronged approach. First, strengthening source revenue generation through improved property valuation, expanded tax bases, and efficient collection must become a priority. Second, land-based financing instruments must be given proper legal backing and systematically deployed. Third, scheme-based financing must be restructured to prioritise long-term climate mitigation. Fourth, institutional support for climate budgeting must be scaled up. Finally, and most critically, city climate plans and budgets must focus on people in greatest need and exposed to multiple risks.
Soumyadip Chattopadhyay is Associate Professor, Department of Economics and Politics, Visva-Bharati
