Financial struggles of Indian municipal corporations

Source: The post financial struggles of Indian municipal corporations has been created, based on the article “Financial drought strains municipal bodies” published in “Business standard” on 15th July 2024

UPSC Syllabus Topic: GS Paper2-polity- devolution of powers and finances up to local levels and challenges therein.

Context: The article discusses the financial struggles of Indian municipal corporations, highlighting their limited budgets, dependence on government transfers, and challenges in generating their own revenue. It suggests expanding property taxes and other funding methods to better prepare for monsoons and other needs.

For detailed information on Challenges faced by Urban Local Bodies in India read this article here

Why are Indian municipalities facing financial challenges?

1. Low Revenue Generation: Municipalities generate less than 1% of India’s GDP from their revenues, with about one-third of this coming from their own taxes like property taxes. The rest mostly comes from state and central government transfers. A study by ICRIER showed that total municipal revenue as a percentage of GDP declined from 0.49% in 2012-13 to 0.45% in 2017-18, indicating a decrease in their ability to raise funds independently.
2. Heavy Dependence on Government Transfers: Municipalities rely extensively on transfers from state and central governments. The 15th Finance Commission recommended ₹4.36 trillion for local governments until 2025-26, but most of this is earmarked for rural areas.
3. Impact of GST: The Goods and Services Tax (GST) took away some taxes that municipalities used to collect, like Octroi. This change has made municipalities even more dependent on government transfers.
4. Inadequate State Support: Many states have delayed or failed to set up State Finance Commissions (SFCs), which hinders proper allocation and management of resources at the municipal level.

What should be done?

1. Expand the scope: Municipalities should expand the scope of property tax, enhance non-tax revenues by going for user charges for various services.
2. Utilize Municipal Bonds: More municipalities could issue bonds to raise funds, as demonstrated by the Greater Hyderabad Municipal Corporation, which raised ₹495 crore, and the Ahmedabad Municipal Corporation, which secured ₹400 crore.
3. Increase Capital Expenditure: Boost funding for capital expenditures critical for urban development and disaster preparedness. For example, Mumbai’s projected capital expenditure of ₹31,775 crore, representing a significant portion (53%) of its total expenditure.

Question for practice:

Examine the financial challenges faced by Indian municipalities and suggest methods to improve their revenue generation.