Local Governments & Finance in India: Upgradation Overdue

Urban Local Bodies in India, barring a few, are not financially independent, and they often look to state and central governments for financial assistance to meet their expenses. A majority of municipal corporations that manage urban operations report deficits almost every year. The situation becomes worrying as we move further down the ladder from municipal corporations to councils and then to nagar panchayats. Last year, in December, the Reserve Bank of India published a report on municipal finances. In this article, we analyze the report and other key findings available on urban financing to underline the significance of overhauling financial reporting and management in local governments of India.

Municipal corporations are the backbone of distributing civic services to urban residents. These services include water supply, sanitation, waste management, roads, parks, street lighting, and public transportation. The corporations also ensure the smooth functioning of urban operations and play a key role in urban planning and development. Many of these activities demand financial resources, and the state of finance in the corporations is largely dependent on their earnings from a few sources, such as property tax, user charges, and land monetization. According to reports, property taxes formed over 40 percent of the municipal corporations’ own tax revenue. These are often insufficient for even paying staff salaries and electricity bills. Also, the budgetary allocations and expenses of municipal corporations in India vary widely from city to city. For example, the financial situation of Mumbai or Ahmedabad corporations is starkly different from that of corporations in Moradabad and Patna. This is due to a number of factors, including the size of the city, its population density, land value, and its level of economic development.

RBI REPORT ON URBAN FINANCE

Last year, the Reserve Bank of India brought out the first-ever report on municipal finances. The RBI has been publishing general statistics of the state and central government since the 1980s, covering their combined fiscal positions, but they had not covered the finances of Urban Local Bodies (ULBs) because of the lack of consolidated budgetary data available on local bodies. In December 2022, they came out with the report; however, the maiden report only covered the Municipal Corporations’ finances, which account for almost 70 percent of the finances of local governments, including municipal councils, municipalities/ nagar panchayats, and panchayati raj institutions.

When you compare the financial situation of Indian cities with cities of the Organization for Economic Cooperation and Development (OECD) countries, a 2017 report found that the average property tax collection in OECD countries was 1.08 percent of GDP. In contrast, India had a ratio of 0.2 percent. It is to be noted that property tax collection is the major source of corporations’ revenue. And if all revenue collections are combined, in 2017-18, it was about 0.61 percent of the GDP, and in 2019-20, it increased slightly to 0.72 percent of the GDP. This was much smaller than Brazil’s seven percent and South Africa’s percent.

Another aspect of finances is revenue generation. For example, municipal corporations in Gujarat and Tamil Nadu have relatively higher own revenue ratios than municipal corporations in other states. This means that they can generate more revenue from their own sources, such as property taxes and user charges. In contrast, municipal corporations in Bihar and Uttar Pradesh have relatively lower own revenue ratios. This means that they are more dependent on grants from the state and central governments. There should be cross-city learning so that cities can learn from the experiences of each other. This is, of course, true that cities have varied capacity based on the state government’s decisions regarding the devolution of administrative authority and financial autonomy.

Despite these challenges, municipal corporations in India have made significant progress in recent years in providing essential services and advancing infrastructure to urban residents. This progress has been possible due to a number of factors, including an increased focus on urban development by the central and state governments, increased awareness among urban residents about their rights and entitlements, and the use of technology to improve efficiency and transparency. It is evident from the fact that the 15th Finance Commission (FC-XV) report, released on February 1, 2021, also recommended Rs 4.36 lakh crore as grants to local governments for the period 2021-22 to 2025-26, the largest share of grants to be assignedto local bodies. It will surely assist in improving the urban finance situation for many corporations. Additionally, several urban missions started in the last couple of years have allocated a good amount of funds for building and improving urban infrastructure.

THE ROAD AHEAD

Municipal corporations in India need to focus on mobilizing more resources from their own sources, improving the efficiency and effectiveness of their operations, investing in new infrastructure and development projects that meet the needs of urban residents, and making their cities more
resilient to climate change.

The RBI report also underlined some suggestions to improve the situation. It is seen that many corporations have been presenting deficits in their annual budgets but they have not been empowered systematically to access debt markets. One suggestion, among many others in the RBI report, was “The next challenge in the context of municipal finances is to ease the resource constraints. A vibrant subsovereign/ municipal debt market catering to a robust investor appetite for municipal bonds can provide an avenue for these entities to access public funds, create an alternative class of assets for investors, and further deepen India’s domestic debt market.”

Some cities have used these options, but it should be scaled up for the larger benefit of the corporations. Many cities in India are also accessing climate financing available for intensifying their climate actions at the local level.

The cities which are signatories of the Global Covenant of Mayors for Climate and Energy in South Asia, of which AIILSG is the regional networking and governance coordinator, are getting technical support in accessing those financing opportunities. I believe that cities should explore new avenues of revenue generation, as it will help them advance their services and infrastructure for the larger public good.

When you compare the financial situation of finances of Indian cities with cities of the Organization for Economic Cooperation and Development (OECD) countries, a 2017 report had found that the average property tax collection in OECD countries was 1.08 per cent of GDP. In contrast, India had a ratio of 0.2 per cent. It is to be noted that the property tax collection is the major source of corporations’ revenue. And, if all revenue collections are combined, in 2017-18, it was about 0.61 per cent of the GDP and in 201i9-20, it increased slightly to 0.72 per cent of the GDP. This was much smaller than Brazil’s seven per cent and South Africa’s per cent