Stop Emasculating Cities

The XVIth Finance Commission (FC) has been constituted, and currently we are in the middle of the XVth FC recommendations. The financial architecture woven around the cities under the XVth FC has started shuddering the urban landscape across the country. Though the total outlay for the five-year period from 2021–2026 for both the urban and rural local governments is 4,36,361 crore, which is higher than the XIVth FC (2,87,436 crore), intergovernmental transfers continue to plague these local bodies, particularly the city governments.

The fear of not being able to implement two of the few qualifications required by a vast spectrum of city governments across the country and thus losing grants is quite legitimate and genuine. In fact, city governments and state governments should collaboratively prepare a memorandum in this regard for the central government to relax the norms.

What are the conditions?

Foremost, the condition of the XVth FC’s increasing property tax commensurate with the increase in the state’s GDP is quite worrisome. Why? A cursory look at the property tax collections reveals that this match is nowhere near the desired results, even if there is some rise in property tax collections. This, in fact, is a fallacious condition that should be omitted from the commission recommendations.

Furthermore, another condition of the XVth FC states that “for urban local bodies, an additional entry-level condition for receiving grants is the notification of minimum floor rates of property taxes by the relevant state, followed by consistent improvement in the collection of property taxes in tandem with the growth rate of the state’s own gross state domestic product.”

Some of the states are increasing municipal boundaries and have even awarded concessions for relaxing property taxes for a period of time. How can property taxes then be implemented in such towns and cities? Himalayan towns will be the worst affected if these two conditions are fully implemented. There is another major flaw in such an understanding regarding floor area rates to be specified by the state governments. This is a violation of the 74th constitutional amendment. The rates should be decided by the city governments according to their capacities and not according to the will of either the XVth FC or the central and state governments.

In the absence of a renewed effort, what is going to happen is this: the city governments are going to lose their money, and this will severely impact the civic amenities in the towns. Even under the XIVth FC, the difference between total outlay and actual releases in the period from 2015 to 2022 is 16 per cent. The total outlay for urban was 87,144 crore, whereas the actual release was74,259 crore. With the current two conditions, the difference is bound to be greater.

Flawed financial architecture

The entire financial architecture of municipal finance must be revisited. The cities contribute roughly 70 per cent to the country’s GDP and 90 per cent to its revenue. Still, the cities are left with just one major source of revenue.

Let us have a global look around. The intergovernmental transfers (IGT) for city governments in India remain at 0.5 per cent of the GDP, which is quite low when compared to developing nations, which are between two and five per cent. IGTs to urban local bodies in countries like Mexico are 1.60 per cent, the Philippines is 2.50 per cent, South Africa is 2.60 per cent, and Brazil’s is 5.70 per cent of their GDP. While IGTs constitute around 40 per cent of the total revenue sources of ULBs, there are issues around their predictability, tied nature, earmarking for vulnerable groups, and horizontal equity. IGTs assume significance given the present state of ULB finances and their need for stable support until their own revenues improve.

With the implementation of the GST (Goods and Services Tax), the share of ULBs’ tax revenue (other than property tax) in total revenue has declined from about 23 per cent in 2012–13 to about 9 per cent in 2017–18. This is phenomenal, and the current financial architecture does not address it. IGTs from states to ULBs are very low, with State Finance Commissions (SFCs), on average, recommending devolution of only about 7 per cent of the state’s own revenue in 2018–19. Even after various recommendations, the total municipal revenue has remained at 0.4 per cent of the GDP for many years. Though the 74th CA aimed at creating space for financial strengthening, successive periods have done exactly the opposite. Primarily because of the flawed financial architecture. Municipal revenue is about 6 per cent of GDP in South Africa and 7.4 per cent in Brazil.

As is evident from the figure, the total municipal own source revenue (MOSR) fell from 51 per cent to 43 per cent in the last decade. This has happened due to the centralization of taxes and the current financial architecture.

The share of investment in urban infrastructure has remained miniscule and stagnant at 0.44 per cent of GDP. Hence, all of this exhibits a kind of emasculation of municipal bodies, where municipal expenditure in GDP has declined and the share of capital investment by municipal bodies in urban investment has also declined. Further MOSR in GDP and total municipal revenue has declined, leaving the municipal bodies with just one source of tax: the property tax. In such a situation of precarity and emasculation, the conditions of the XVth FC will further strangulate the municipal bodies and be detrimental to the growth of both the municipal bodies and the cities. This will be violating the basic principles of the 74th CA.

What needs to be done?

Discussing, arguing, debating, and politicising for a new financial architecture for the cities. And for that, what is essential is democratising and decentralising the financial architecture. How? Incidentally, two major interventions involved shedding some of the total income tax collected from the cities back to them. Let us say 10 per cent of the total. Imagine the impact that it will bring in. Second, either getting rid of the GST or arguing for a new GST, which has cities as important stakeholders.

Is it possible? Of course, yes, but we know this will not be done because, for that, there has to be a major disruption both in politics and financial regimes. But that is the only sustainable way of imagining liveable, resilient cities.

The intergovernmental transfers (IGT) for city governments in India remain at 0.5% of the GDP, which is quite low when compared to developing nations (2-5%).