Urban local bodies in India, encompassing municipal corporations, municipal councils, and nagar panchayats, are instrumental in managing and improving the urban landscape. They are entrusted with the task of providing essential services, infrastructure, and amenities to the ever-expanding urban population. However, despite their pivotal role, many urban local bodies in India find themselves grappling with significant financial challenges, which hamper their ability to meet the growing demands of their constituents and deliver quality services.
“Race to the bottom” is a phrase coined by Louis Brandeis, a US Supreme Court Justice, describes a situation in which competing entities, such as states try to gain a competitive advantage by lowering standards or regulations, often related to labor, or tax policies in an attempt to attract investment . In context of the financial status of the Indian local bodies, this phrase can be related among several Indian states that undermines the 73rd and 74th amendments of the Indian Constitution (establishment of local self-governance in rural and urban India). How? Will get back to it.
THE STRUGGLE OF ULBS
We all know by now that urbanisation is a rising trend. With the urban population ever-expanding, the infrastructure is under immens pressure. It is the responsibility of the local authorities to provide basic amenities such as affordable housing, water supply, electricity, etc to all citizens. But most of the ULBs in India find themselves without the requisite finance.
A report by Indian Council for Research on International Economic Relations (ICRIER) stated that the urban local governments in India are among the weakest in the world with regards to their “fiscal autonomy” and their ability to deliver civic infrastructure and services to meet the demands of rapid urbanization and economic growth.
Municipal revenues and expenditures of the country have remained stagnant at around one per cent of GDP for over a decade, according to a RBI report, titled ‘Report on municipal finances.’ This is because the “constitutional provisions for devolution in India are weak, and even the existing provisions are not fully implemented,” the report stated. And furthermore, the sources of revenue for the civic bodies are limited and ineffective.
The report also revealed that the country’s municipal corporations heavily rely on grants from the central and state governments to meet their expenditure needs. In 2017-18, the total expenditure of municipal corporations in India spent 70 per cent on salaries, 7.4 per cent on pensions, 16.2 per cent on operational and maintenance charges, etc., while less than 30% was used for capital expenditure. And above all, municipal corporations don’t borrow much, leaving them gasping for funds.
REVENUE SOURCES
Municipal bodies in India derive their revenue from various sources, with property tax, user charges, and state government grants. Property tax is perhaps the most crucial source of revenue for local governments across the globe. But it often falls short of its potential due to outdated valuation methods, low compliance, and a lack of systematic assessments. User charges, including water supply, sewage, and waste management fees, also constitute a substantial portion of revenue.
A GLOBAL PERSPECTIVE
The structures of urban local governance vary significantly from one country to another. For example, South Africa has adopted a single-tier unified structure to provide services to the entire metropolitan area. The six metropolitan cities of Johannesburg, Durban, Cape Town, Port Elizabeth, Tshwane, and Ekurhuleni have been granted direct powers by the Constitution, which reduces interference from the Provincial governments. The decision-making process is uncomplicated, which leads to an excellent delivery of services.
Most cities in Canada are governed by their respective provincial legislation. However, large metropolises such as Toronto and Vancouver have a special status. They have additional avenues to raise funds and are also expected to carry out additional responsibilities. For example, Vancouver can charge a business tax on a property’s annual rental value even if it’s not currently being used for business purposes. Similarly, Toronto has the authority to levy additional taxes and also determine the base rates, method of administration, and collection and enforcement mechanisms for such a tax.
While it may be difficult to transform Indian cities completely, metropolitan cities in India should strive to establish a consistent local taxation structure and uniform service delivery standards.
In comparison, it seems conflicting that megacities like Mumbai, Hyderabad, Chennai, Bangalore, and others, which contribute significantly to the national economy, are required to obtain the state government’s approval for adjusting tax rates, deciding on a local tax policy, or determining tax exemptions.
FISCAL AUTONOMY
The Indian civic bodies need to understand the importance of fiscal autonomy. It provides the right to collect and utilize revenue for service delivery. This grants them more control over their finances, budget allocation, and decision-making based on their local needs.
Coming back to the phrase which Louis Brandeis called “a race not of diligence but of laxity”, sits well with the Indian ULBs. Most municipal corporations rely heavily on state and central grants rather than focusing on the problems plaguing property tax collection – which can be a major boost for municipal finances. A report published by the Hindu, stated that in Chennai, out of 13.27 lakh assessees, only 6.94 lakh paid the property tax, while 6.33 lakh were yet to pay. This makes them deliberately dependent on transfers with their revenue raising potential being limited.
WAYS FOR A BETTER CHANGE
The RBI report reveals that there has been no significant increase in overall municipal revenue, which has remained largely unchanged since 1946-47.
The major boost for municipal finances in India will be through property tax reforms and the development of a vibrant municipal bond market.
Property tax reforms
The potential of property tax needs to be fully utilized by extending coverage, regularly revising tax rates, improving the assessment system, and enhancing efficiency in tax administration. Municipal corporations should use technologies such as satellite photography and geo-coding of data to expand the tax base and improve tax collection efficiency.
Municipal bonds
Municipal bonds refer to debt securities that are issued by local governments and municipal corporations. The funds raised from these bonds are utilized to finance various public works projects, including the construction of schools, highways, bridges, and other municipal infrastructure. Encouraging civic bodies to issue municipal bonds can be an effective way for them to raise funds for large-scale infrastructure projects. This approach has proven to be successful in cities like Mumbai and Pune, setting a precedent for other urban areas to follow.
CONCLUSION
The dire fiscal state of the civic bodies underscores the urgent need for reform and enhanced financial autonomy. The “race to the bottom” mentality, where many municipal corporations rely heavily on state and central grants rather than tapping into their own revenue potential, has left them struggling to meet the growing demands of urbanization.
By empowering local governments with fiscal autonomy and sustainable revenue sources, India can pave the way for more efficient and effective urban governance, ultimately improving the quality of life for its rapidly growing urban population.
‘Report on municipal finances,’ an analysis in the finances of urban local bodies published by the Reserve bank of India,2022 has revealed that the country’s municipal corporations heavily rely on grants from the central and state governments to meet their expenditure needs due to limited sources of revenue generation