"It is possible for urban institutions to access funds from the capital market to finance a large portion of urban capital expenditure, to be serviced by user charges in the future," the survey said.
The empowerment of local governments to take economic and service delivery decisions needs a new system for public finance, where urban expenditures are driven through urban local governments, it said.
Tapping capital market would help increase expenditure on urban infrastructure without worsening the fiscal problem, it added.
This would require focus on the 74th Amendment of the Constitution, empowering cities, supporting institutional reforms at cities and directing fiscal transfers for paying transition costs and poverty targeting, it said.
Water supply, sanitation and solid waste management were the core activities of urban local bodies, the survey said, adding during the Tenth Plan period these services would need an estimated Rs 53,719 crore (Rs 537.19 billion).
The funds available from central, state governments and financial institutions are to the tune of Rs 35,800 crore (Rs 358 billion) resulting in a shortfall of about Rs 18,000 crore (Rs 180 billion), it added.
Economic Survey 2004-05: Complete Coverage
The ongoing schemes of urban infrastructure development in mega cities and integrated development of small and medium towns were not sufficient, the survey said and linked funding to reforms, which were "mandatory" and "optional" for states and urban local bodies.
The pre-budget document favoured repeal of Urban Land Ceiling and Regulation Act, reform of rent control laws and setting up independent regulators for urban services as mandatory reform measures at the state level.
It also suggested framing a community participation law, double entry system of accounting for urban local bodies, adoption of public disclosure law, reform of property tax laws and introduction of e-governance, global information system and monitoring information system at the level of urban local bodies.
A citizens technical advisory group on the lines of Bangalore Action Task Force should also be constituted to guide the process of urban reforms, the survey added.
Under the optional reform initiatives, it listed revision of bye-laws to streamline the approval process, simplifying legal and procedural framework for conversion of agricultural land for non-agricultural purposes, and earmarking 20-25 per cent of developed land in all housing projects for the poor.
It also suggested administrative reforms for "right sizing" of the urban local bodies and revising bye-laws to make rain water harvesting mandatory as other measures to improve the condition of urban infrastructure.