Central funding for Smart Cities can breathe new life into the economy

The Cabinet approval of Central funding for 100 smart cities and 500 rejuvenated cities can be the much-needed shot in the arm for the country's economy, as well as a growth engine for the global economy.

To understand the magnitude of this decision, it is important to keep the macro perspective in place. The total cost of upgradation and renewal of 500 cities is estimated to be around $5 trillion. However, this amount will not be spent or consumed within one or two years. This initiative and the related expenditure will be executed at least over a twenty-year period. However, what is critical is to start the process and create upgraded cities that have a demonstrative effect.

Therefore, the roughly $16 billion committed for the initial Central government spend is an important first step towards unlocking the larger, longer-term economic activity of upgrading and building smart cities and rejuvenated cities.

Moreover, the initiative will trigger a virtuous cycle of efficiencies being unleashed in the economy due to the building of efficient cities. If this is combined with the 'Make in India' initiative, then the multiplier effect of the spending will also be captured within the Indian economy, thus propelling the country to an even faster growth rate. If the initiative stays on track and gains the expected momentum, it would lead to an explosive growth in the Indian economy.

What is more heartening is that this initiative will also provide the much-needed growth impetus to the global economy. Vast amounts of steel, cement, electronics, furnishings, electrical equipment, sewage plants etc, will be required to build these cities, not all of which will be available in India in the short-term. Thus, some of these will be imported from the world over, triggering growth in the global economy.

However, it is important to note that it would be unfair to expect that the bulk of the funding required will come from the government. This is not going to happen simply because the government does not have the required funds.

Thus, what is expected is that the initial government funding will trigger private participation in the funding of further development of cities. Large-scale public-private partnerships would presumably be the larger source of funding for the 100 smart cities and the 500 rejuvenated cities. And the economic growth that is expected to be triggered will also help in providing the funding required to build the rest of the cities.

It is obvious that this Cabinet decision is historic for not just the growth of the economy; it will also have a deep impact on how we live and work.

(The author is Partner, Infrastructure & Government Services, KPMG India)