Municipal finances

Context: The health of municipal finances is a critical element of municipal governance which will determine whether India realises her economic and developmental promise.

• Three decades since 74^th CAA, 1992 for evolution of powers to urban local bodies (ULBs), growing fiscal deficits, constraints in tax base expansion, and weakening of institutional mechanisms that enable resource mobilisation remain challenges to ULBs.
• Revenue losses after implementation of the Goods and Services Tax (GST) and the pandemic have exacerbated the situation.

Problems

Share of own revenue

• The ULBs’ own sources of revenue were less than half of their total revenue, with large untapped potential.
• The 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).
• The share of own revenue to total revenue is an important indicator of ULBs’ fiscal health and autonomy.
• This ratio reflects the ULBs’ ability to use the sources they are entitled to tap, and their dependency on IGTs.
• Cities with a higher share of own revenue are more financially self-sustaining.

Dependent on IGTs

• Many ULBs were highly dependent on IGTs.
• Most ULBs were highly dependent on external grants — between 2012-13 and 2016-17, IGTs accounted for about 40% of the ULBs’ total revenue.
• Stable and predictable IGTs are particularly important since ULBs’ own revenue collection is inadequate.

Tax revenue depends on the size

• Tax revenue is the largest revenue source for larger cities, while smaller cities are more dependent on grants.
• There are considerable differences in the composition of revenue sources across cities of different sizes.

Operations and maintenance (O&M)

• O&M expenses are on the increase but still inadequate.
• O&M expenses are crucial for the upkeep of infrastructure and for maintaining quality of service delivery.
• The share of O&M expenses in ULBs’ total revenue expenditure increased from about 30% in 2012-13 to about 35% in 2016-17.
• While the expenses were on the rise studies indicate that they remained inadequate.

Thus the scale of municipal finances in India is undoubtedly inadequate.

Way Forward

• Tapping into property taxes, other land-based resources and user charges are all ways to improve the revenue of a ULB.
• IGTs assume significance in the fiscal composition of ULBs, and a stable support from Central and State governments are crucial till ULBs improve their own revenues.
• Measures need to be made to also cover O&M expenses of a ULB for better infrastructure and service.

Source: The Hindu