Municipal Finances

General Studies Paper 2

In News

• The study titled “Report on municipal finances” was published by the RBI.

Key Points

• Budgetary allocations & fund transfers:
  • The combined budget of all the municipal corporations in India is much smaller than that of the Central and State governments.
  • The report reveals how municipal bodies are increasingly dependent on fund transfers from the State and the Centre, while their revenue earning capacity is limited. 
• Revenue raising of municipal corporations:
  • Their revenue raising powers are curtailed according to the study.
  • The municipal corporations don’t borrow much, leaving them gasping for funds.
  • The share of own revenue(both tax and non-tax) in the total revenue of urban local bodies in India has declined, while that of government transfers has increased.
    • Spendings:

About 70% of it gets spent on salaries, pensions and administrative expenses with the rest left for capital expenditure.

• Tax earnings of municipal corporations:
  • Taxes earned by municipal corporations in India are grossly inadequate to meet their expenditure needs.
  • In India, the own tax revenue of municipal corporations, comprising property tax, water tax, toll tax and other local taxes, formed 31-34% of the total revenue in the FY18-FY20 period.
    • This share was low compared to many other countries and it also declined over time.
  • State-wise variations:
    • Large variations can be observed if the municipal corporations’ own tax revenue is sliced State-wise.
    • The own tax revenue of municipal corporations as a share of the State’s GDP in 2017-18 crossed the 1% mark in Delhi, Gujarat, Chandigarh, Maharashtra and Chhattisgarh, while it was 0.1% or less in Karnataka, Goa, Assam and Sikkim.
  • Dependence on property taxes:
    • Another major issue with the municipal corporations’ revenue raising capabilities was their dependence on property taxes.
    • In 2017-18, the property taxes formed over 40% of the municipal corporations’ own tax revenue.
    • Despite such dominance, property tax collection in India was much lower compared to OECD countries due to undervaluation, and poor administration, the report argues.

About  Urban local bodies (ULBs) in India

• Establishment of ULBs in India:
  • The 74th Constitution Amendment Act was passed in 1992 mandating the setting up and devolution of powers to urban local bodies (ULBs) as the lowest unit of governance in cities and towns.
• Types of ULBs:
  • There are several types of Urban Local bodies in India such as Municipal Corporation, Municipality, Notified Area Committee, Town Area Committee, Special Purpose Agency, Township, Port Trust, Cantonment Board etc.
• Functions: 
  • These local bodies are entrusted with functions related to welfare, public health and safety, infrastructural works, and other activities related to city development.
• Fiscal empowerment:
  • Constitutional provisions were made for ULBs’ fiscal empowerment.
  • The ULBs’ key revenue sources are taxes, fees, fines and charges, and transfers from Central and State governments, which are known as inter-governmental transfers (IGTs).
  • The share of own revenue (including revenue from taxes on property and advertisements, and non-tax revenue from user charges and fees from building permissions and trade licensing) to total revenue is an important indicator of ULBs’ fiscal health and autonomy.

Challenges faced by ULBs 

• Fiscal challenges:
  • Three decades since, growing fiscal deficits, constraints in tax base expansion, and weakening of institutional mechanisms that enable resource mobilisation remain challenges.
    • Revenue losses after the implementation of the Goods and Services Tax (GST) and the pandemic have exacerbated the situation.
  • Lack of finances:
    • The transfer of duties from the national and subnational governments to local governments has not always been accompanied by a corresponding transfer of financial authority.
    • The generated funds are mostly spent on revenue expenditure, leaving a much smaller pie for capacity building.
  • Over-reliance on property taxes:
    • Over-reliance on property taxes has prevented local governments from fully utilising other revenue streams such as trade permits, entertainment taxes, mobile tower taxes, solid waste user fees, water fees, and value capture finance.
    • Property taxes are also not efficiently collected.
  • Other:
    • ULBs across the country lack autonomy in city management and several city-level functions are managed by parastatals (managed by and accountable to the state).
    • Municipal administration in India suffers from staffing issues which leads to a failure in delivering basic urban services.
    • Other concerns include
      • Overstaffing of untrained manpower,
      • Shortage of qualified technical staff and managerial supervisors, and
      • Unwillingness to innovate in methods for service delivery.

Suggestions & Way ahead

• The scale of municipal finances in India is undoubtedly inadequate. A ULB’s own revenue resources are far below the estimated potential.
• As noted in the Sustainable Development Goal (SDG) 11: Sustainable Cities and Communities, an effective city government is essential for sustainable development.
  • Tapping into property taxes, other land-based resources and user charges are all ways to improve the revenue of a ULB.
  • inter-governmental transfers (IGTs) assume significance in the fiscal composition of ULBs, and a stable support from Central and State governments is crucial till ULBs improve their own revenues.
  • Measures need to be made to also cover operations and maintenance expenses of a ULB for better infrastructure and service.