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NEW DELHI, Dec 12 (AFP) - India warned Wednesday it will have to sharply lift spending on urban infrastructure above the budgeted nine billion dollars to deal with "catastrophic people pressure".

Urban Development Minister Ananth Kumar told a three-day international conference on infrastructure development the Planning Commission's budget for 1998-2002 was insufficient.

"Much more money is required to cope with the catastrophic people pressure on India's strained infrastructure," Kumar said.

"We are going to mobilise extra-budgetary funds by coming out with tax-free municipal bonds. We are also arranging low-interest credit lines for city municipal bodies engaged in restructuring themselves."

Kumar said the western state of Gujarat had already come out with a one billion-rupee (21.3 million-dollar) tax-free municipal bond to improve its drinking water, sanitation and transport facilities.

"Other states must take their cue from Gujarat."

Almost 28 percent of India's population lived in urban areas without proper access to clean drinking water, sanitation or electricity, Kumar said.

The federal government was setting up a 1.6 billion-rupee "Challenge Fund" with help from British-based multilateral funding agency, the Development Finance Institute, he said.

"A municipal corporation looking to restructure itself and push through urban reforms can approach us for a four million-dollar grant from the Challenge Fund."

India's billion-plus population is fast closing the gap on China and the task of controlling this is seen as a key element in solving the country's crushing social problems.

"I know our problems are enormous and complex," said Kumar, citing population growth as well as the existence of nearly 1,200 illegal slums or shanties in New Delhi alone.

"But it is time to shed our defeatist attitude and concentrate on reform, building a consensus on reforms, participating in them and lastly implementing them."

In addition to starting infrastructure funds, Kumar said Indians would have to accept a tax on certain basic commodities like diesel and petrol to boost investment.

"The government has tried to create road funds by levying a cess (tax) on fuels. That is the only way forward to overcome a serious shortage of revenues for investment in infrastructure," said Kumar.

In August this year, India's cabinet approved a 340 billion-rupee (7.4 billion-dollar) proposal to connect 140,000 rural areas with all-weather roads.

The funds for the programme have come from a levy on diesel, as well as borrowings from the World Bank and the Asian Development Bank.

"There have to be professional fund managers to make sure the money unlocked by imposing a cess on commodities is used intelligently and effectively," said Kumar.

"Although applying a cess on basic items has a great political risk in India, we have no choice. Our existing tax system is not designed to finance major economic sectors like roads, power and urban infrastructure," said Kumar.

Government attempts to withdraw the hefty subsidies that keep retail fuel prices artificially low have triggered large-scale public protests in the past.

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