India’s urban centres are ailing due to lack of funds

Source– The post is based on the article “India’s urban centres are ailing due to lack of funds” published in The Indian Express on 11th February 2023.

Syllabus: GS1- Urbanisation. GS2- Devolution of Powers and Finances up to Local Levels

Relevance– Urban financing

News– The health of municipal finances in India is in poor state. Revenue losses after GST implementation and the pandemic has further deteriorated it.

What is the scenario of urban financing in India?

As per the RBI, in FY21, at least 141 municipal corporations saw a sharp decline in revenue. Revenue shortfall greater than 25%.

There was a significant increase in expenditure of over 75%.

There was a decline in projected growth in property tax by approximately 11%, and municipal fees by 50%.

Raising municipal revenue is a challenge. Studies by the Indian Institute for Human Settlements have highlighted that urban local bodies’ own revenue was only 47% of their total revenue. Property tax accounts for approximately 29% of it.

Most ULBs were dependent on transfers from the Centre and state governments.

The urban financing challenge is huge. A World Bank estimate suggests that India will need to invest approximately $840 billion in urban infrastructure over the next 15 years.

What are the impacts of lack of urban financing?

This has led to cuts in essential services. Sewerage services have been affected by 55-71% in most cases.

Delayed salary and pension disbursements, and the decline in general upkeep of such cities are other fallouts.

What is the way forward for urban financing in India?

We need a multi-pronged strategy to bridge the gap.

Many urban local bodies and municipal corporations need a fiscal stimulus. Disbursal of external grants from the state and Centre is a concern.

In September 2020, the CAG’s performance audit highlighted a saving of over Rs 5,000 crore due to non-disbursal of grants in Karnataka. The urban local bodies in Karnataka had delayed disbursements.

This needs to change. States and the Centre must ensure that disbursements are made on time.

Additional funding needs to be explored. A revolving fund, which offers budgetary stabilisation measures can be considered. Along with it, the provision of an overdraft facility when revenues and fiscal transfers are delayed can be considered.

Green bonds need to be promoted, along with a joint corpus fund, funded by the Centre and states.

Property taxes also need rationalisation. It can be improved by updating existing databases, reassessing properties using digital tools and imposing taxes on non-compliers and defaulters.

Concessions will need to be rationalised. State and local bodies should be incentivised to move away from fiscally ruinous measures.

Expenditure efficiency needs to be boosted by pushing for outsourcing of services and exploring PPP models, and participatory budgeting.

The Centre can expand incentives given to states under interest-free capex loans to cover aspects of urban development like framing building bylaws, pushing for public transport and pursuing mixed housing schemes.

Innovative financing mechanisms can be pursued. These include asset monetisation, financing from carbon credit generation.

Civic action will be required. There should be a push for user charges for public service delivery. For capital expenditure needs, levies like betterment fees, impact fees and tax increment financing should be explored.