Open Forum
New
Delhi, 7 December 2022
Municipal Financing
A SORRY STATE OF AFFAIRS!
By Dhurjati Mukherjee
The Reserve Bank of
India’s recent release of the annual ‘Report on Municipal Finance’ is
undoubtedly a good yardstick to assess the poor states of municipal finances
that is existing in the country today. As is well known, the 74th amendment,
which came into force in 1993, suggested 18 functions that local bodies have to
manage. But sources of funds being too meagre and localised revenue generation
being insufficient, urban development has been greatly affected. The
demographic skew in rural and semi-urban areas has been very much manifest.
Cities are treated like piggy banks to fund programmes outside the cities while
infrastructure requirements in these cities languish, reducing their growth
potential.
“Most municipalities
only prepare budgets and review actuals against budgeted plans but do not use
their audited financial statements for balance sheet and cash flow management,
resulting in significant inefficiencies,” the report said. The Municipal
Corporation of Delhi has just gone through an election, and it is critical that
the elected bodies consider the report seriously and remove the inefficiencies
through better functioning.
As is well known,
local self-governance was introduced in India through 73rd and 74th amendment
to the Constitution in 1992 through which multiple powers and functions were
devolved to the local governments. Functions were devolved separately for urban
and rural India -- urban local bodies (ULBs) and the panchayati raj
institutions (PRIs), respectively. Urban local governments include municipal
corporations, municipal councils, and nagar panchayats. While municipal
corporations are for larger urban localities with a population of more than one
million, municipal councils and nagar panchayats govern smaller urban
agglomerations and transition areas.
The state of India’s
municipal finances has been quite critical since decades. Even after
institutional amendments were made in 1992, there has been no considerable
improvement in the finance of the municipal corporation. An analysis of the
structure and composition of revenue and expenditure of 35 metropolitan
municipal corporationsfor the period 1999-00 to 2003-04 reveals that there is a
mismatch between functions and finances of ULBs, which primarily explains the
vertical imbalance. Out of 18 functions to be performed by municipal bodies in
India, less than half have a corresponding financing source. Own taxes and user
charges of the ULBs in India are grossly inadequate to meet their expenditure
needs.
The availability and
quality of essential services for urban population in India has consequently
remained poor. The rapid rise in urban population density, however, calls for
better urban infrastructure, and hence, requires greater flow of financial
resources to local governments. With own revenue generation capacity of
municipal corporations declining over time, dependence on the devolution of
taxes and grants from the upper tiers has risen. This calls for innovative
financing mechanisms.
RBI’s analysis of
municipal finances for the period 2017-18 to 2019-20 reveals that the combined
budget size of the municipal corporations in India is much smaller than that of
the Central and State governments. The composition of municipal revenue in
India has changed considerably over time, with increased reliance on transfers.
Also, the ratio of revenue expenditure to capital expenditure is lower than
that of the Centre and the States.
The report noted that
Indian cities are far behind in being able to generate the resources required
for providing good quality infrastructure and services to their citizens and
lack financial autonomy. India lags the levels achieved by OECD and other BRICS
countries. It may be mentioned here that countries such as Austria, Greece,
Ireland, Lithuania, Mexico, Netherlands, Turkey, United Kingdom, etc. were
dependent on grants from the general government. However, the municipal
finances of the developing countries and specially those in South Asia have
been quite precarious like that of India.
Among the BRICS
nations, the local governments in Brazil and Russia depended on general
government grants whereas China and South Africa generated their own tax and
non-tax revenues. Both China and South Africa generated more than 50 percent of
revenue through tax and non-tax sources while India generated only about 40
percent through these sources.
As the report rightly
suggested, the increase in urban infrastructure in the country has not been on
par with the pace of urbanisation that has taken place in the last decade or so
as the performance of the urban local bodies has been rather poor. The
dependence on the devolution of taxes and grants from the upper tiers has risen
over the years. Alternative sustainable resource mobilization through municipal
bonds needs to be explored as per the report.
India’s big
development targets in areas like climate change, education and healthcare
require a much higher degree of local autonomy. it goes without saying that
city government need more powers to raise revenue and needs to be aggressive in
this matter. They need to invest these resources to improve the lives of urban
citizens. Water, power, sanitation, roads etc. are critical constraints in
India’s desire to attract higher levels of manufacturing investment. Most
studies predict India’s urban population will surpass its rural population
around the 100th anniversary of the nation’s independence – around 2047. Once
urban voters become crucial to electoral fortunes, state governments will have
no alternative but to focus attention on city infrastructure.
According to the
recent World Bank estimates, India will have to invest USD 840 billion over the
next 15 years, or an average of USD 55 billion per annum into urban
infrastructure to effectively meet the needs of its fast-growing urban population.
About 40 percent of the population is expected to live in cities by 2036 which
will add more pressure on the already stretched urban infrastructure and
services such as clean drinking water, power supply, road transportation, etc.
Furthermore, effective governance of cities is critical to sustainable
development as per Sustainable Development Goal 11- Sustainable Cities and
Communities.
Improvement of roads
is of prime necessity in cities and towns and most of these are in a pitiable
condition due to lack of repairs. For regular maintenance huge funds are
required and from of these toll tax may be levied. With the dwindling financial
position of municipalities, there is possibly no other option but to resort to
this method.
Keeping this in view,
there would obviously be more need for more resources to meet the increased
demands, specially that of proper maintenance of roads, power stations and
water supply units. Municipal finances have to be improved at any cost for
which taxes have to be raised to ensure proper infrastructure to the citizens.
High taxation structure has to be imposed on the rich and upper middle class
who enjoy the maximum benefits and can afford to pay.
It needs to be
mentioned here that special focus has to be given to certain areas of the city
where there are slums and slummish type settlements and there is no way out but
upgradation of essential facilities. High taxation structure must be imposed on
the rich and upper middle class which enjoys the maximum benefits. It is to notedthat
the Adani Group has been roped in for redevelopment of Dharavi, one of the
biggest slums of the world. Such redevelopment can be considered in most metros
with public-private participation, if necessary, as such development is sure to
bring in money from sales of commercial spaces. How this project pans out is
worth a watch.
However, overall, says
the report, despite institutionalisation of the structure of local governance
in India, there has been no appreciable improvement in the functioning of municipal
corporations!---INFA
(Copyright, India News and Feature Alliance)
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