The scale of municipal finances is inadequate

Source: The post is based on an article “The scale of municipal finances is inadequate” published in the “The Hindu” on 13^th July 2022.

Syllabus: GS2 Devolution of Powers and Finances up to Local Levels and Challenges Therein.

Relevance: Financial Issues in the ULBs

News: Recently, the Indian Institute for Human Settlements (IIHS) analysed data from 80 Urban Local Bodies (ULBs) across 24 States between 2012-13 and 2016-17 to understand their finance and spending, and found some key trends.

The legal regime for the local bodies in India

The 74th Constitution Amendment Act 1992 mandated setting up of ULBs as the lowest unit of governance in cities and towns in India.

Further, the constitution also mandated the devolution of powers to ULBs’, particularly ensuring their fiscal empowerment.

Importance of municipal finance

The health of municipal finances is a critical element of municipal governance. Further, it is also important for India to realise its economic and developmental promise.

What are the revenue sources for ULBs?

Taxes, fees, fines and charges, and inter-governmental transfers (IGTs) are the key revenue sources of the ULBs.

Inter-Governmental Transfers (IGTs) refers to transfers from Central and State governments. First, the transfers from the Central government are as stipulated by the Central Finance Commissions and through grants towards specific reforms. Second, the State government transfers are as grants-in-aid and devolution of State’s collection of local taxes.

What are the key findings?

ULBs’ own revenue was around 47% of their total revenue, in which the largest component was tax revenue. Their own revenues increased by 7% from 2012-13 to 2016-17.

(A) Own Revenue

The ULBs’ own sources of revenue were less than half of their total revenue. The share of ULBs own revenue, in GDP was only 0.5% for the five-year period.

Further, the share of India’s property tax, the single largest contributor to ULBs’ own revenue, accounted for only about 0.15% of the GDP. In contrast, its share was about 0.6% and 1% in the ULBs of developing and developed countries respectively.

(B) IGTs

It accounted for about 40% of the ULBs’ total revenue. It means ULBs are highly dependent on IGTs.

However, the dependence of ULBs on IGTs has dipped over the last 5 years between 2012-13 and 2016, due to modest increase in own revenue.

Furter, the scale of IGTs in India remained at around 0.5% of GDP, which is far lower than the international average of 2% to 5% of GDP.

(C) Inter-city variations

There are considerable differences in the composition of revenue sources across cities of different sizes.

For example, Class I-A cities (population of over 50 lakh) primarily depend on their own tax revenue, while Class I-B cities and Class I-C cities (population of 10 lakh-50 lakh and 1 lakh-10 lakh, respectively) primarily rely more on IGTs.

(D) Operations and maintenance(O&M)

The O&M expenses refers to expenses used to upkeep of infrastructure and for maintaining quality of service delivery like water supply, solid waste management, etc.

The share of O&M expenses in ULBs’ total revenue expenditure has increased from about 30% in 2012-13 to about 35% in 2016-17. However, these expenses remain inadequate.

Way Forward

The share of own revenue (property taxes, advertisements, and non-tax revenue from user charges and fees from building permissions and trade licencing etc.) to total revenue is an important indicator of ULBs’ fiscal health and autonomy. Therefore, it should be improved

The ULBs can mobilise their own revenue resources like property taxes, other land-based resources and user charges. The ULBs can also explore market-based instruments.

IGTs can be improved by increasing the revenue assigned to ULBs from the State governments. Further, a share of the State and Centre’s GST proceeds can be allocated to ULBs.

– IGTs can also incentivise ULBs to deliver better service quality and maintain fiscal discipline.