ECONOMIC SURVEY 2016-17 Summary Chapter 14 – From Competitive Federalism to Competitive Sub-Federalism: Cities as Dynamos

Following is the Summary of ECONOMIC SURVEY 2016-17 – Chapter 14 – From Competitive Federalism to Competitive Sub-Federalism: Cities as Dynamos

Introduction

India, urbanisation is rapidly on the rise. As recently as 1991, there were only 220 million Indians living in cities, equivalent to about one-quarter of the population.

By 2011, there were no less than 380 million, living in around 8,000 cities/towns, at least 53 of which were home to over 1 million people.

Urban Indians now form about one-third of the population – and they produce more than three-fifths of the country’s GDP.

Cities that are entrusted with responsibilities, empowered with resources, and encumbered by accountability can become effective vehicles for unleashing dynamism so that to competitive federalism India can add, and rely on, competitive sub-federalism.

Background

Contrary to perception, India’s urbanisation rate appears to have been similar to that in other countries. Countries have followed a pattern of urbanisation where the level of urbanization has increased with the per capita GDP.

Contrary to perception, India and China have had very similar trends of urbanization.

In India many of the smaller cities are unusually small. And contrary to what one might think, so are the bigger ones. There are many reasons why the large cities are unusually small.

• One explanation might be that their infrastructure is overburdened.
• Another is that India is land-scarce relative to most countries, discouraging migration particularly because distorted land markets render rents unaffordable.
• By 2050, its land-to-population ratio will have declined fourfold relative to 1960, and India will be among the most land-scarce countries in the world.
• Further mobility in India is limited by strong place-based preferences embedded in deep social networks in India.

India’s urbanisation rate should begin to converge with those in similar emerging markets, rising to 40 per cent by 2030. And much of this urban growth is likely to take place in the bigger cities. This will create opportunities – and risks.

Key Challenges

• Urban local bodies (ULBs) face major and inextricably linked problems: poor governance capacities, large infrastructure deficits and inadequate finances.
• ULBs face a governance challenge.
• Cities do not have a single city government or a local self-government, leading to functional overlap.
• There is a significant fragmentation of responsibilities and service delivery across a gamut of institutions
• The second challenge is the infrastructure deficit.
• Addressing this infrastructure deficit will require resources, some of which could come from the Centre and the states.
• The Fourteenth Finance Commission (FFC) has recommended a grant of around $ 87,000 crore to the municipalities for the period 2015-20, but raising sufficient resources has not proved easy.
• The 74th Constitutional Amendment Act of 1992 leaves it to the discretion of state legislatures to devolve finances so that ULBs can fulfil these functions.
• ULBs by and large have not been able to levy adequate user charges to cover even the operation and maintenance costs.
• Issuing municipal bonds has been challenging owing to the poor state of ULB finances and governance.
• As a result of these challenges, cities face grave difficulties in securing sufficient revenues.

Lessons from Across India

According to the data provided by Janaagraha Centre for Citizenship and Democracy, Bengaluru, and the 2011 Census, we can now examine the links between service delivery and fiscal strength, with the latter measured in four different ways.

Greater service delivery is correlated with more:

1. Staffing
2. Capital expenditure per capita
3. Resources
4. Own revenue

The correlation is especially strong with staffing and expenditures. A clear conclusion is that more resources seem to be associated with better outcomes.

In contrast, it is difficult to find a relationship between service delivery and governance.

• On the other hand there is actually a negative relationship between having a directly elected Mayor and the availability of services.
• There also does not seem to be a strong correlation between mayoral tenure and outcomes.
• One possible reason could be that a directly elected Mayor can function effectively only if he/she has the support of majority members of the municipal council, which is not always the case.
• Considering this fact, two state governments namely, Rajasthan and Tamil Nadu, have amended their respective municipal act to provide for indirect mayoral elections.

Mobilizing Resources

• One striking correlation (or its absence) is between formal taxation powers and actual mobilisation of resources.
• ULBs like Mumbai and Pune even with low scores on taxation powers do very well in own revenue while, at the same time, ULBs like Kanpur, Dehradun etc. even with relatively higher taxation powers perform badly in terms of own revenue.
• At first, this may seem counter-intuitive, which, at closer inspection would reveal that it is not the case.
• This is because having the powers to impose a greater number of taxes do not necessarily mean greater revenues for an ULB.
• Many other factors are important for being able to collect greater revenues such as the size of the tax base, the efficiency in tax collection and the level of economic activity in the city area.
• Perhaps the greatest immediate scope for revenue comes from the property tax. Property tax as a share of own revenue is above 50 per cent in Kanpur and Lucknow, but it is less than 15 per cent in Bhopal and Ranchi. So, the problem is not necessarily that ULBs cannot raise resources because they are prevented from doing so.
• The major factors contributing to poor realisation from property tax are the poor assessment rate, weak collection efficiency, flawed methods for property valuation, loss on account of exemptions, and poor enforcement.

Conclusion

Urbanisation will pose considerable challenges for municipalities over the coming decades. But these challenges can be – indeed, must be – overcome, and the analysis in this chapter points to some priority areas.

The first task is empowering ULBs financially.

• The analysis shows that municipalities that have generated more resources have been able to deliver more basic services. The
• states should, therefore, empower cities to levy all feasible taxes.
• Municipalities also need to make the most of their existing tax bases. There is a need to adopt the latest satellite based techniques to map urban properties. The Government should leverage the Indian Space Research Organization (ISRO)/ National Remote Sensing Agency (NRSA) to assist ULBs in implementing GIS mapping of all properties in the area of a ULB. Property tax potential is large and can be tapped to generate additional revenue at city level.
• It is true but tiresome to repeat that ULBs need to be empowered but the political economy challenges—higher level bodies (state governments) needing to cede power and sharing resources–are daunting. The big question here is whether Finance Commissions should take cognizance of this political economy challenge identified by Professor Chelliah and allocate even more resources to ULBs or whether to respect the sovereignty of states and hope that they will themselves be forthcoming in decentralizing down – fiscally and goverancewise – commensurate with the needs of urbanisation.

Finally, data and transparency can play an important role here.

• MoUD should give greater priority to compile and publish comprehensive data on ULBs and urban sector. Perhaps, grants to ULBs should be more tightly linked to comprehensive and updated data disclosure and transparency by ULBs.
• NITI Aayog should compile comparative indices of municipalities’ performance annually based on the actual accountability and administrative capacity to deliver the core public services.
  

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