[Answered] The scale of municipal finances in India is undoubtedly inadequate. Measures are required to improve the revenue of ULBs for better infrastructure and services. In the light of the statement, highlight the hurdles facing ULBs in resource mobilization.

The 74th Constitution Amendment Act, 1992 mandates the setting up and devolution of powers to urban local bodies (ULBs) as the lowest unit of governance in cities and towns. ULBs’ key revenue sources are taxes, fees, fines and charges, and transfers from Central and State governments, which are known as inter-governmental transfers (IGTs). It is essential that ULBs leverage their own revenue-raising powers to be fiscally sustainable and have better amenities and quality of service delivery.

Hurdles faced by ULBs in resource mobilization:

• Property tax, the single largest contributor to ULBs’ own revenue, accounted for only about 0.15% of the GDP.
• Many ULBs are highly dependent on IGTs. Between 2012-13 and 2016-17, IGTs accounted for about 40% of the ULBs’ total revenue.
• Operations and maintenance (O&M) expenses incurred in 2016-17 covered only around a fifth of the investment requirements for urban infrastructure services.
• The shortfall of non-tax revenues contributed to the increasing revenue deficit in ULBs.
• Growing fiscal deficits, constraints in tax base expansion, and weakening of institutional mechanisms that enable resource mobilisation remain challenging.
• Revenue losses after implementation of the Goods and Services Tax (GST) and the pandemic have worsened the situation.
• There are considerable differences in the composition of revenue sources across cities of different sizes. Tax revenue is the largest revenue source for larger cities, while smaller cities are more dependent on grants.

Way forward:

• Stable and predictable IGTs are particularly important since ULBs’ own revenue collection is inadequate.
• Increasing cost recovery levels through improved user charge regimes would not only improve services but also contribute to the financial vitality of ULBs.
• IGTs can also incentivise ULBs to deliver better service quality and maintain fiscal discipline.
• Measures need to be made to also cover O&M expenses of a ULB for better infrastructure and service.