India’s Beverage Industry Faces a Major Challenge

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In today’s edition of The Daily Brief:

1. Will all drinks come in green bottles?
2. Can urban India solve its problems?

Will all drinks come in green bottles?

Summer is approaching. It’s the peak season for India’s big beverage manufacturers — like Coca-Cola, Bisleri, or Parle. You’d imagine they were all looking forward to the spike in their sales. But at the moment, they’re deeply worried.

Why? See, 7 out of every 10 beverages sold in India are packed in plastic bottles. And according to a two-year-old government directive, starting from April 1st of this year, they can all only use bottles where 30% of the plastic content is recycled. Every year, this will be ramped up by 10% — until, by 2028-29, 60% of their bottles will have to be made of recycled plastic.

This is, in theory, a good thing. It promotes what is called ‘closed loop recycling’: a system where old things, once recycled, play the same role as before. Instead of old bottles being turned into road paving, for instance, here, old bottles will become new bottles. In principle, this is the most efficient way of recycling anything. If you’re worried about seeing heaps of plastic bottles everywhere, this should give you hope.

Source: Idrenvironmental

Only, there’s one big problem. According to the industry, it simply isn’t feasible — all of India, collectively, can’t recycle a fraction of all the plastic they would need.

At the heart of this entire controversy is a chicken-and-egg problem. India can only set up enough plants to recycle plastic if there’s demand from the industry. But the industry will only demand recycled bottles once there’s enough supply from recyclers. It’s hard to start one without the other. Only, the government is trying anyway — but that might just backfire.

Let us explain.

All recycling is not the same

India has a huge recycling industry around PET — the sort of plastic that goes into bottles. In 2024, for instance, India’s total PET recycling capacity was estimated to be around 2.2 million tons per year. But there’s a challenge: most of India’s recycled PET isn’t meant to touch food. Most of this plastic goes into making polyester fiber for textiles. (Yep, that’s right. In case you didn’t know, a lot of your clothes might be made out of old Coke bottles. As much as one-fifth of a pair of Levi’s jeans, for instance, apparently comes from old plastic)

Very little of our recycled plastic is meant to be turned back into bottles.

Source: India Plastics Pact

Why so? For one, there’s a big, though basic, problem. Think of what’s actually happening when you recycle an old bottle. That bottle comes from trash heaps and has all sorts of waste and toxins stuck to it. It needs to be cleaned thoroughly before you can even think of recycling it. India finds these problems especially challenging; we rely on an unorganized network of kabadiwaalas to do our sorting — as opposed to the sophisticated, AI-based sorting you might see in a developed country. This makes quality control even more difficult. From the very beginning, the bottles we collect are mixed with all sorts of other trash.

But even if you can collect these bottles, sort them, and clean them properly, there’s a fundamental technical limitation you face: If you want to make a bottle, recycled plastic isn’t nearly as good as virgin plastic. When you zoom in to the atomic level, plastic is made of long chains of carbon atoms that are strung together like a necklace.

Source: Onearmy.github

As you recycle an old bottle, these chains break, and you’re left with shorter chains. The plastic you get from it, therefore, is brittle and weak. For one, that weaker plastic can leach into your food much more easily. Two, this plastic becomes porous, allowing gases to escape — which doesn’t work for you if you’re bottling a soft drink like Coca-Cola.

None of this is a big concern when you’re using that bottle to make a pair of jeans. When you’re using it to store food, though, you first have to decontaminate all that plastic thoroughly and process it in a way where it retains its quality.

This is why it’s extremely hard to make “food-grade” plastic through recycling. To deal with all these issues and make something that works, you need to invest heavily in innovative processes. In fact, by one estimate, there are just five plants in all of India that the FSSAI has licensed to make food-grade recycled plastic. And now, they’re supposed to cater to all of India’s beverage industry.

Can we make enough recycled plastic bottles?

Whether the government’s latest requirements can work is, at its heart, a maths problem.

See, every year, India needs roughly one million tonnes of PET for all its bottling needs. If the government’s mandate was to kick in, we would need around 300,000 tonnes of food-grade recycled plastic every year to blend into new bottles.

Meanwhile, India’s five food-grade recycling facilities don’t come close to meeting that demand. Though there’s very little data on this, by some estimates, they can at most cater to 1/6th of that demand. There’s simply no way that we can meet the shortfall — at least not in one month’s time. If the rule is implemented anyway, you should expect massive shortages. In fact, bottlers are even considering importing recycled plastic if they’re forced to comply — which would completely defeat the purpose of reducing our plastic waste.

Source: India Plastics Pact

This just isn’t a problem that will be solved soon. Many things will have to fall in place before we can actually set up a recycled plastic supply chain that works:

• Poor raw materials: Perhaps the biggest challenge to our plastic recycling industry comes from our exceptionally poor raw materials. Indians don’t segregate waste at the source, and our municipal waste segregation is particularly bad. Most plastic that reaches recyclers, therefore, is terribly contaminated. This is a severe bottleneck for the industry and hurts its economics. Recyclers can only get around this by investing heavily in processing the waste they receive.

• Logistics and supply chains: India doesn’t have a proper waste supply chain. The demand for recycled plastic may come from far away, and we don’t yet have processes in place to manage transportation. India’s logistics network is poor by global standards, and transporting goods is expensive. This is a problem for most industries — but it’s especially bad for waste management. It simply isn’t lucrative to carry trash over long distances.

• Regulatory uncertainty: Indian recyclers need to clear various regulatory hurdles to make food-grade plastic. For instance, they need to take a specific license from FSSAI for this purpose, which can be complex. Even that possibility is new — until 2021, India had banned the use of recycled plastic for food packaging. The FSSAI has come up with some guidelines for this purpose — but they’re still in draft form. There’s no clarity on what the final guidelines might look like.

All these bottlenecks (pun unintended) make it difficult for the beverage industry to move to recycled bottles. At the moment, it’s much more costly — 30% more than virgin plastic, by some estimates — to use recycled plastic in food packaging. There are others who can happily pay good money for recycled plastic — such as clothing manufacturers or importers in other countries — which means that the industry faces serious competition for its inputs. As a result, costs will only go up, if anything.

The chicken-and-egg problem

Ultimately, here’s the problem.

Think about this situation from the perspective of recyclers. They’re in an industry where things are already hard. They get inferior raw materials, and unless India gets its waste management in order — a long shot — things won’t get better soon. They have enough growing demand for low-quality recycled plastics. Meanwhile, to get into high-end food-grade recycling, they’d have to invest heavily in their processes and navigate complicated government red-tape. The business case for doing so is still weak.

Now, think about it from the perspective of bottlers. Fresh, virgin plastic is cheap, and it is better suited for bottling their drinks. Meanwhile, if you want to move to recycled plastic, you’ll have to pay heavily — and it isn’t clear that you can pass those costs on to your customers. There isn’t a business case for doing so either.

Which is why we’re at our current equilibrium: one where bottlers don’t use recycled plastic, and recyclers don’t provide it.

The government, in a sense, is trying to break this deadlock. It’s trying to kickstart a food-grade recycling industry — by creating a massive source of demand. That’s a noble cause, but it isn’t clear if it’s practical. It requires the creation of a complex ecosystem: one that starts at your dustbin and ends at beverage factories. Can a single legal requirement create all of that? We’re not sure.

But we’re definitely curious about what happens next.

Can urban India solve its problems?

Anyone who has ever lived in India knows that constant feeling of disappointment in how things are run: when a sudden downpour leads to waterlogged streets; potholes slow down traffic to a crawl; or civic services feel like they can’t keep up.

Why does this keep happening? Well, put simply, our cities are expanding faster than the infrastructure that supports them. India’s urban population is growing rapidly—rising from nearly 28% of the population in the early 2000s to around 36% now, with expectations that it will surpass 40% by 2036.

All these additional city-dwellers need new facilities. Cities have to boost roads, water supply, sewage lines, and overall civic amenities. All of this is non-negotiable if we aspire to be a developed country. At the same time, it creates a lot of pressure on our city governments. For example, of the total waste generated in urban centres, only 22% is treated properly. Forget treatment; only 78% of the solid waste is even collected.

Source: Municipal Bonds for Financing India's Urban Infrastructure: The Case of Indore

Here’s the problem: none of this is cheap. New roads, flyovers, sanitation projects, public transport systems — all of these come with hefty price tags. In fact, the 2025 Union Budget recognized this mounting pressure — so much so that it proposed an “Urban Challenge Fund” of ?1 lakh crore to help finance new urban projects.

But ultimately, we still have to ask: Where do our city governments get the money to pay for all this?

Why Funding Urban Infrastructure Is Tough

Cities need a steady stream of revenue to upgrade or maintain their infrastructure. Only, India’s municipal bodies — the civic bodies that run our cities — often struggle to cover even day-to-day expenses. We’ve talked about this earlier.

See, municipal bodies have two main ways of making money:

1. They can rely on their own revenue. This is money they collect themselves through:

• Taxes: Property tax, water tax, electricity tax, and so on.
• Fees and Charges: Parking fees, garbage collection charges, fines, etc

2. They can get money from transfers. These are funds or grants given by state or central governments. This is almost like pocket money — it’s not earned but handed over by someone else — and they set the terms for how it will be used.

Source: Municipal Bonds for Financing India's Urban Infrastructure: The Case of Indore

Unfortunately, these aren’t utilised to their full potential. In fact, in the way municipal finances are structured, they face constant shortfalls:

• Property tax is a major source of own revenue, but it’s often underexploited. It is deeply unpopular to revise rates, and loopholes can be plentiful.

• User charges for water supply, waste management, or parking often remain below cost-recovery levels — once again for political reasons.

• Central or State grants can fill in gaps, but these funds are neither predictable nor sufficient.

A Reserve Bank of India (RBI) study noted, in fact, that all municipal bodies combined contribute just over 1% of the country’s GDP. Given the size of the tasks they have to take on — creating the conditions of a good life for one-third of India — that’s shockingly small. Moreover, this too, is skewed. India’s top 10 cities — like Mumbai, Delhi, etc. — make for more than half of India’s total municipal revenue. All of India’s other cities, many of which house millions of people, are perennially cash-strapped.

This creates a logjam: as a city’s population grows, its need for funds grows too. But because municipalities’ revenues are limited by political concerns, they can never earn enough to provide for those extra people. But that only makes things worse: when people see their cities fail to deliver basic facilities, they become even more sceptical about their revenue needs — and the difficulty of raising revenue only goes up.

Municipal Bonds: An Alternate (and Promising) Source

Enter municipal bonds. These are essentially debt instruments that municipal bodies issue in capital markets. Here are some big-picture numbers:

The Indian municipal bond market remains in a nascent stage. As of March 2024, the total outstanding municipal bonds came to ?4,204 crore. While that might sound like a big number, it’s just 0.09% of India’s total corporate bonds outstanding. These outstanding municipal bonds account for just 18% of municipal borrowings — the rest of their borrowing all comes from elsewhere.

This isn’t how things work elsewhere. Municipal bonds in India are a tiny fraction of what you see in places like the US. For context, as of December 2024, outstanding municipal bonds in the USA totaled $4,171 billion, compared to less than 1 billion in India.

Source: CareEdge

Yet, Indian municipal bonds could have enormous potential — even if you limit them to financially healthy cities. CareEdge estimates that municipal corporations with healthy surpluses can raise an additional ?25,000–30,000 crore over the next 5–8 years. That would make for around a 15x growth for the muni-bond market.

The 2025 Union Budget’s proposed “Urban Challenge Fund” explicitly encourages the use of bonds. While the fund will cover 25% of project costs, another 50% will have to come from other sources — like bonds, bank loans, and public-private partnerships. This could unlock some latent demand for municipal bonds.

A Brief History of India’s Municipal Bond Market

India’s municipal bond market evolved in roughly three stages:

1. Early Experiments (Late 1990s):

Early on, cities like Ahmedabad tried to issue bonds — which were mostly privately placed. Regulatory frameworks were minimal back then, and only a handful of cities tested the waters. Between 1995 and 2005, a total of ten municipal corporations and other civic bodies raised a total of ?1,325 crore. Bengaluru was the first to issue a bond worth ?125 crore in 1997.

1. Infrastructure-Focused Push (Mid-2000s):

Bond issuances declined from 2006 to 2016 — cities instead turned to grants under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which offered ?1 lakh crore to the qualifying corporations. This obviated the need for issuing municipal bonds — which were becoming increasingly difficult as SEBI began prescribing disclosure requirements.

1. Recent Developments (Post-2015):

In March 2015, SEBI passed regulations to facilitate the issuance of municipal debt and the listing of debt securities by municipalities in India. This helped in clarifying the regulatory status of the municipal bonds and made them safer for investors.

Some cities embraced bond financing. Indore famously did a public issuance in 2018 and then a green bond in 2023. More cities (like Pune, Hyderabad, and others) raised money as well.

But despite their potential, bond issuances never caught on like they could have. There are some structural reasons for this unpopularity:

1. Weak Revenue Autonomy: Many cities have insufficient revenues. This means that even if they do borrow money, they don’t have a source of revenue from which to comfortably service their bond repayments. This scares off investors. Janaagraha (2019) also highlighted how limited local tax powers hamper creditworthiness.

1. No Tax Benefit: Municipal bodies, unlike corporations, cannot offer high interest rates on their borrowings. To an investor, therefore, they’re unattractive investments — unless there’s a special incentive to buy them. In countries like the US, interest from municipal bonds is tax-exempt, making them very attractive. India currently doesn’t extend a similar broad-based exemption. There have been some limited tax-free bonds, but this isn’t yet baked into the system.

1. Shallow Corporate Bond Market: In general, India has a small bond market and relatively few investors that actively invest in the market. Even larger corporations in India find it challenging to issue bonds. If the overall bond market is small, municipal bonds become an even tinier sliver.

1. Credit Ratings: Many municipalities lack the ability to demonstrate creditworthiness. They can’t demonstrate adequate auditing, revenue stability, or transparency. Credit rating agencies then give them lower ratings, deterring potential investors.

1. Short-Term Budgeting and Hesitancy to Borrow: The lack of emphasis on long-term capital budgeting and hesitancy to take on debt have significantly held municipal bodies back and contributed to their low borrowing rates. Typically, their budget plans are drawn up for just one year rather than for long-term capital expenditure financing, leading to misaligned fund allocations and delays in project completion.

Thus, while the concept of municipal bonds as a sustainable long-term funding source is hugely appealing, the ecosystem constraints still slow it down.

The Way Ahead

So, where do we go from here? How can more cities be nudged into embracing bond financing?

• Strengthen Revenue Autonomy: Cities must build confidence among investors by strengthening property tax coverage and effectively collecting user charges. If we can modernize property tax assessment (for example, using GIS mapping), municipal bodies might see a significant jump in annual collections.

• Policy Incentives: A consistent tax exemption on interest from municipal bonds could spark investor interest. If the broader market sees muni bonds as a stable, tax-efficient product, demand might surge.

• Bond Pooling: Smaller cities can pool their bonds together through a state-level “bond bank” or “bond-pooling mechanism.” This spreads the risk and creates scale, making the issuance more attractive. This can be a way to help tier-II or tier-III cities that alone don’t have the scale or rating to attract big investors.

• Transparency and Disclosure: Municipal bodies must maintain more standardized financial statements, which investors can easily compare with other cities. This is crucial for building trust and reassuring investors about default risks.

• Better Urban Planning: Ultimately, issuing bonds needs credible projects on the ground. Thoughtful planning—like Indore’s green bond for a solar project—makes the city’s bond story more appealing.

If cities are willing to put in all this work, municipal bonds could truly become a cornerstone of India’s urban growth strategy. And this is something that India’s crumbling cities genuinely need.

Conclusion

Our cities stand at a crossroads. Urbanization is accelerating, and with it comes the demand for better roads, cleaner water, and reliable public transportation. Traditional sources like property tax, user charges, and grants haven’t been enough to keep pace. That’s why municipal bonds are so intriguing — they’re a key solution to so many of our challenges, which is simply staring us in the face.

Of course, this financing tool isn’t a magic bullet. It can only help our cities if they overhaul their finances and governance systems more generally. But if done carefully — backed by strong transparency, tax reforms, and supportive policies — municipal bonds can help our cities secure the funds they desperately need. The story of Indore shows that it’s possible to raise significant capital from the bond market, even involving retail investors.

As more cities follow suit, we might see a day when urban infrastructure projects are no longer stuck for want of money, and the roads we drive on are smoother — and pothole-free, we hope!

Tidbits

1. The Indian two-wheeler market showed a mixed performance in February 2025, with Royal Enfield and TVS Motor posting growth while Bajaj Auto, Hero MotoCorp, and Suzuki Motorcycle saw declines. Royal Enfield led with a 19% increase in domestic sales to 80,799 units, while TVS Motors saw a 3% rise to 276,072 units, driven by a 24% growth in scooters and a 34% growth in EVs. In contrast, Bajaj Auto’s domestic sales fell 14% to 146,138 units, Hero MotoCorp declined 19% to 357,296 units, and Suzuki Motorcycle dropped 13.4% to 73,455 units. However, exports provided relief, with Royal Enfield’s overseas sales rising 23% to 9,871 units, TVS and Bajaj recording 26% and 23% growth, respectively, and Hero MotoCorp and Suzuki posting 32.9% and 19% increases in exports. Industry experts note that while new demand is slowing, premium bikes and exports are key growth drivers. (Source)
2. The Indian government has upgraded IRCTC and IRFC to Navratna status, increasing the total number of Navratna CPSEs to 26. This elevation allows both companies to invest up to ?1,000 crore, or 15% of their net worth in a single project without requiring prior government approval. The move grants them greater financial autonomy to expand operations, form joint ventures, and pursue strategic agreements. Currently, there are 14 Maharatna CPSEs in India. This development is expected to enhance their operational efficiency, support railway modernization efforts, and strengthen investor confidence in both companies' growth potential. (Source)
3. Som Distilleries and Breweries Limited (SDBL) has announced a ?600 crore investment to set up a greenfield brewery and distillery in Khimsepur, Uttar Pradesh, through its subsidiary, Woodpecker Greenagri Nutrients Private Limited. The Uttar Pradesh State Industrial Development Authority (UPSIDA) has allotted a 40-acre land parcel for the project, with construction set to begin after regulatory approvals. (Source)

- This edition of the newsletter was written by Pranav and Kashish

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