It is well known that urbanization and economic growth are interlinked as cities provide economies of agglomeration, and, in India, too the impetus for growth is envisaged to come from the urban sector. Currently, cities accommodate 377 million i.e. 31% of India's current population and contribute 63% of the GDP and are expected to accommodate 800 million in 2050, when one out of every two Indians would be living in urban areas. However, this rapid urbanization is putting pressure on available infrastructure facilities like water, sanitation, housing, schools, hospitals, colleges and mobility etc. in the urban areas. The provisioning of adequate infrastructure requires huge finances. A look at the urban local finances in India indicates that most of the ULBs are lacking in mobilization of resources and financial autonomy. The total revenues of all Urban Local Bodies (ULBs) in India amount to less than Rs. 1, 50,000 crores, approximately, 1% of India’s GDP. The deficiency of infrastructure affects the city’s ability to attract investment. The urban local bodies (ULBs) are the principal catalysts and efficacy of urbanization and economic growth would be impacted in the manner the functions are carried out and finances are mobilized.
While the Constitution of India envisaged a two-tier system of federation, the 74th Constitutional Amendment Act, 1992 added third tier of government viz. urban local bodies. The amendment aimed at devolution of functions, finances and functionaries to ULBs. Enormous responsibilities like preparation and implementation of plans for economic developments and social justice, etc., have been identified for ULBs in the Act, besides the 18 items of responsibilities envisaged in 12th Schedule of the constitution as legitimate functions of Urban Local Bodies.
While the Constitution of India specified the taxes to be divided between the Centre and State Governments, it does not specify the revenue base for urban local bodies. Even the 74th Amendment Act does not make specific recommendations about the type of taxes that urban local bodies should have. It simply states that the Legislature of a State may, by law, i) authorize a municipality to levy, collect and appropriate such taxes, duties, tolls and fees, ii) assign to a municipality such taxes, duties, tolls and fees levied and collected by the State Government, iii) provide for making such grants-in-aid to the municipality from the consolidated fund of the state and iv) provide for the constitution of such funds for crediting all cash received. Hence, the power for determining the revenue base of Urban Local Bodies rests with the State Governments. Further, it is recommended to set up States Finance Commission once in five years to decide the distribution of taxes between State and local bodies.
The resource base of ULBs typically consists of their own sources, state revenue, government grant, loans from state governments, and market borrowings. The urban local bodies are sometimes not even aware of the opportunities and avenues of generating revenues through taxes and non-tax charges. Even if they are aware, they do not have the skill to optimize tax collection. ULBs in India, therefore, have a minimal revenue base and largely dependent on Central and State grants, which constrained the ability of ULBs to invest adequately in capital expenditure like creating infrastructure and, thereby, improve quality of life in the city.
The existing pattern of municipal finances has not been able to meet the required expenditure on infrastructure development in urban areas. Revenues of municipalities come from different sources but are limited in amount. RBI has broadly classified municipal revenue sources consisting of Tax Revenue (property tax, vacant land tax, tax on animals, taxes on carriages and carts; Non-Tax Revenue (user charges, lease amounts); Other Receipts (sundry receipts, lapsed deposits, fees, fines and forfeitures); Assigned (shared) Revenue (profession tax, surcharge on stamp duty, entertainment tax, and motor vehicles tax; borrowings and Grants-in-aid both Plan Grants and Non-Plan Grants.
Central Finance Commissions have also recommended for financial strengthening of ULBs from time to time. The Tenth Finance Commission was the first to recommend grants for rural and urban local bodies. The Thirteenth Finance Commission recommended allocation of Rs. 23,111 crore to ULBs with the aim of strengthening municipal finances and urban governance in India. Taking this forward, the 14th Finance Commission awarded total grants of Rs.87,144 crores to Urban Local Bodies in all States/UTs as Basic Grant (80%) and Performance Grant (20%) which linked to ULBs increase in revenues, ensuring audit of accounts and notification of Service Level Improvement Plans in respect of basic services.
The Urban Rejuvenation Mission (Smart City Mission, AMRUT, HRIDAY and PMAY-U) is another initiative to empower the urban local bodies. The outlays for Smart Ciites Mission and AMRUT are Rs.48, 000 crore and Rs.50,000 crore, respectively, over five years of the Mission period. GOI funds and the matching contribution by the States/ULB will meet only a part of the project cost. Balance funds are expected to be mobilized from other resources including private investment. Successful implementation of these missions finally rests on ULBs efficacy in resource mobilization and service delivery. Hence, financial empowerment of ULBs when seen from this perspective is no larger a matter of choice, it is a necessity. This also requires strong governance in ULBs for efficient delivery of services.
But, Municipalities in India have a long way to go in gaining access to buoyant revenue sources from states, utilizing such revenue sources optimally through effective assessments, billings and collections, discovering and implementing cost recovery mechanisms for service delivery and fully utilizing schemes and missions of central and state governments. They also have to explore innovative financing mechanisms like PPP, Municipal bonds, venture capital financing, crowd source financing etc. All of the above however depend on robust financial management systems and processes and high quality talent.
AMRUT reforms are some of the steps taken by Government towards financial strengthening of these ULBs. The recent updates like 94 cities in 14 states of India receiving credit ratings from rating agencies such as Crisil; as part of the cities’ preparations for issuing municipal bonds and Pune Municipal Corporation raised Rs. 200 crore by issuing 10-year municipal bonds are welcoming steps towards the financial empowerment of ULBs. CARE estimation that of Rs. 1,000- Rs. 1,500 Cr. per annum over the next five years would be raised by way of Municipal bonds is an indication of the expected growth in the market in the years to come.
Although, the Constitutional Amendment in 1992 paved way for greater devolution of power, functionaries and finances, the problems of devolution remains. The Urban Transformation Agenda necessitates the improvement of financial base of municipalities to facilitate provision of adequate basic services to the citizens along with strengthening of municipal cadre.
Strengthening capacities of ULBs is necessary for effective resource mobilization Currently their Financial capacity is restricted not only by low tax base but also low capacity for mobilization of existing resources. As per the available literature, the ULBs are not able to harness property tax as per their potential due to undervaluation; non-availability of database of properties; low rates; low collection efficiency and lack of indexation of property values.
Financial self-sufficiency of the ULBs is the need of the hour. This can be achieved through encouraging municipal bonds, review of property tax system to improve efficiency and transparency in collection and mobilization of resources. It is also necessary to evolve a time bound strategy to devolve the subjects mentioned under the 74th Constitution Amendment Act, 1992.
Financial sustainability necessitates adequate financial accountability requiring adhering to Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) that provides for finances and borrowings to remain within manageable limits. Due importance needs to be accorded to Public accountability and transparency of revenues and their usage.
Further, need for Capacity building of Commissioners as to the importance of financial management, time bound preparation of financial statements for increase in efficiency. The improved Service Delivery is the cornerstone for effective and sustainable urbanisation. There is also a need to explore alternative sources of revenue generation by the municipalities such as entertainment tax, mobile towers, user charges for solid waste, water, parking, value capture financing, etc. In order to enhance citizen participation, e-governance tools like on-line procurement, tenders, and online expenditure reports, should be used.
Showcasing best practices from different states can also be replicated in other areas such as the success of Karnataka’s Municipal Accounting and Budgeting Rules, 2006 (KMABR, 2006) and the formation of Karnataka Municipal Data Society (previously known as Municipal Reform Cell). This requires strong commitment from both Centre and State to empower the ULBs to improving their financial positions and efficient delivery of services and implementation of the Urban Transformation Agenda through a well-designed roadmap.
Disclaimer: The views and analysis expressed here are personally those of the authors. They do not reflect the views of NITI Aayog. NITI Aayog does not guarantee the accuracy of data included in the publication nor does it accept any responsibility for consequences of its use.