Financial sustainability is a tough boat to sail

When cities are addressing inequalities in planning and policies, they also need to become self-sufficient financially to ensure they are at par with other cities in addressing pressing urban concerns

There are around 5000 Urban Local Bodies (ULBs) in India for catering to the needs of the urban population – 35 per cent (according to the World Bank) of the population in our country. In the past three decades, some local bodies have become financially sustainable. One such is the Brihanmumbai Municipal Corporation (BMC), whose budget size has grown to 47,058 crores, as per the budget estimates for 2021-22, making it the richest local body in India. All thanks to the growth of Mumbai in the last three decades following the economic reforms of 1991. However, not all urban local bodies (ULBs) have been as fortunate. Apart from a handful of urban local bodies, all the other civic bodies are still struggling for adequate financial resources to meet their requirements. Due to this, they are heavily dependent on the grants provided by the central and state governments. Keeping that in mind, the 15th Finance Commission has earmarked121,055 crore for ULBs for 2021-26. A study by the Indian Institute for Human Settlements (IIHS) evaluated the data of 80 urban local bodies spread across 24 states between 2012-13 and 2015-16. It shows that the local bodies can generate only 47 per cent of their total revenues. For this reason, most of the ULBs are always under a financial crunch. It was claimed to be the major factor behind the merger of three municipal corporations in Delhi by the Ministry of Home Affairs, Government of India.

What is the issue?

High Dependency Ratio: The dependency ratio signifies the proportion of government grants in the budget of a local body. Even BMC gets one-fourth of its revenue (26 per cent) in the form of government grants as per the revenue estimates for 2021-22. Similarly, the “Performance Audit of Implementation of 74th Constitutional Amendment Act” report in 2020, prepared by the Comptroller and Auditor General (CAG), shows that in the financial year 2018-19, 271 ULBs in Karnataka were raising only 41 per cent of their total revenue. Cumulatively, these ULBs received a total of 11,380.72 crore in the form of government grants out of their budget of18,105.41 crore.

Role of State Finance Commission (SFC): At the central level, the President of India constitutes a finance commission under Article 280 of the Indian Constitution. In the same manner, the Constitution endowed the power of forming the State Finance Commission on the Governor under Article 243 of the Indian Constitution. Its primary function is to allocate revenue to the local bodies from the state government. However, it has an inherent weakness: the advisory nature of its recommendations. Because of this, the state government often delays the constitution of the SFC, and if constituted, its suggestions are either overlooked or accepted as per the whims of the state government. The CAG report also highlighted that in the state of Karnataka, the formation of SFC was delayed, ranging from 10 days to four and a half years. It delays the process of releasing funds to civic bodies along with the monetary loss. The CAG report showed that the 271 local bodies of Karnataka suffered a revenue loss of `1,036 crore in 2018-19 alone due to delays in SFC formation.
Performance-linked incentives: The 15th Finance Commission, headed by N K Singh, has proposed only basic grants for towns and cities having a population of less than a million, while on the other hand, cities having a population over a million must earn every penny as for them 100 per cent of the grants is performance linked under the Million-Plus cities Challenge Fund (MCF). The policy change may not have much effect on wealthier ULBs, but for smaller civic bodies like Jhansi Municipal Corporation, which gets over 60 per cent of its revenue in the form of government grants, even the slightest revenue loss can have a drastic effect on its functioning.

Reforms introduced

As mentioned earlier, civic bodies, especially the smaller ones in India heavily depend on government grants. But the governments themselves are undergoing financial difficulties due to COVID-19 and the Goods and Services Tax (GST) introduction in 2017. As per the mandate of the GST Act, states which lost their tax income were supposed to be compensated from the GST compensation cess collected by the Centre.
Therefore, several reforms have been introduced recently to reduce the dependency ratio. During the pandemic, the government of India allowed the state governments to borrow two per cent of their Goss State Domestic Product (GSDP) provided they introduced four reforms, one of which concerns the property tax collection of ULB. The property tax is the second major source of revenue in ULB budgets.
As per the reform mandate, the state governments were to link the property tax ratio to prevailing circle rates and periodically increase the property tax proportionate to the rise in valuation of the property. The move will supposedly provide a stable source of income for ULBs in the long run.
To shrug off the lethargy of state governments to form SFC, the 15th Finance Commission has prescribed a deadline of March 2024, after which it would be mandatory to form SFC for the states and implement its recommendations to receive any grants from the central coffers. Mukesh Mathur, former Professor National Institute of Urban Affairs, said, “It depends on the political wisdom behind the adoption of these reforms, and even if they were able to implement them successfully, there is not much to achieve. What the states should really work on is land-based non-property taxes.”