A sorry state of affairs!

Municipal Financing
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