0.1215
900 319 0030
x

Municipal Finances

iasparliament Logo
July 13, 2022

Why in 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 ULB finance and spending, and found some key trends.

What are the challenges for the ULBs?

  • The 74th Constitution Amendment Act 1992 mandates the setting up and devolution of powers to ULBs as the lowest unit of governance in cities and towns.
  • The health of municipal finances is a critical element of municipal governance, which will determine whether India realizes her economic and developmental promise.
  • Growing fiscal deficits, constraints in tax base expansion, and weakening of institutional mechanisms that enable resource mobilization remain challenges to the ulbS.
  • Revenue losses after implementation of the Goods and Services Tax (GST) and the pandemic have exacerbated the situation.

What are the findings of the IIHS study?

  • The own sources of revenue of the ULBs include revenue from taxes on property and advertisements, and non-tax revenue from user charges and fees from building permissions and trade licencing.
  • 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).
  • Share of own revenue to total revenue (ratio) reflects the ULBs’ ability to use the sources they are entitled to tap, and their dependency on IGTs.
  • Our study found that the ULBs’s own revenue was 47% of their total revenue.
  • Of this, tax revenue was the largest component - 29% of the total.
  • There was a 7% increase in own revenue from 2012-13 to 2016-17, but ULBs still lacked revenue buoyancy as their share in GDP of own revenue was only 0.5% for the five-year period.
  • Property tax - Property tax, the single largest contributor to ULBs’ own revenue, accounted for only about 0.15% of the GDP.
  • The corresponding figures for developing and developed countries were significantly higher (0.6% and 1% respectively) indicating that this is not being harnessed to potential in India.
  • Estimates suggest that Indian ULBs’ can achieve these levels by leveraging their own revenue-raising powers to be fiscally sustainable and empowered. 

RevenueReceipts

Composition of revenue receipts for the year 2016-2017

totalrevenue.jpg

Share in total revenue over the years from 2012-13 to 2016-17

 

ownvstotalrevenue.jpg

Comparison of own review vs total revenue from 2012-13 to 2016-17

What does the study say about the IGTs?

  • Many ULBs were highly dependent on IGTs.
  • Transfers from the Central government are as stipulated by the Central Finance Commissions and through grants towards specific reforms.
  • Whereas, the State government transfers are stipulated as grants-in-aid and devolution of State’s collection of local taxes.
  • Most ULBs were highly dependent on external grants, IGTs accounted for about 40% of the ULBs’ total revenue.

revenuedependency.jpg

Graph showing the comparison of revenue through IGTs vs Own Revenue

What is the importance of IGTs?

  • Stable and predictable IGTs are particularly important since ULBs’ own revenue collection is inadequate.
  • While dependence on IGTs dipped over the years due to modest increase in own revenue, the scale of IGTs in India remained at around 0.5% of GDP - far lower than the international average of 2% to 5% of GDP.
  • This can be improved by increasing the revenue assigned to ULBs from the State governments, and by allocating a share of the State and Centre’s GST proceeds to ULBs.

What is the importance of tax revenue?

  • 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.

City Type

Dependence

Class I-A cities

(population of over 50 lakh)

Primarily depend on their own tax revenue

Class I-B cities

(population of 10 lakh-50 lakh)

Rely more on IGTs

Class I-C cities

(population of 1 lakh-10 lakh)

Rely more on IGTs

What is the situation of own revenue?

  • Own revenue mobilisation in Class I-A cities increased substantially, which was primarily driven by increases in non-tax revenue.
  • In the five-year period studied, tax revenue in Class I-A cities grew by about 11%, while non-tax revenue grew by about 30%.
  • The external revenue dependency of these larger cities gradually reduced over time, from around 27% in 2012-13 to about 15% in 2016-17.
  • Own revenues of Class I-B and Class I-C cities, on the other hand, were stagnant even while these cities grew in size.

 

revenuesources.jpg

What about the O&M expenses?

  • Operations and maintenance (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.
  • O&M expenses should ideally be covered through user charges, but total non-tax revenues, of which user charges are a part, are insufficient to meet current O&M expenses.
  • Increasing cost recovery levels through improved user charge regimes would not only improve services but also contribute to the financial vitality of ULBs.

What is next?

  • The scale of municipal finances in India is undoubtedly inadequate.
  • A ULB’s realized own revenue resources are far below the estimated potential.
  • 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.

Reference

https://www.thehindu.com/opinion/op-ed/the-scale-of-municipal-finances-is-inadequate/article65631481.ece

Login or Register to Post Comments
There are no reviews yet. Be the first one to review.

ARCHIVES

MONTH/YEARWISE ARCHIVES

Upsc Mains 2022