Explore innovative financing mechanisms like PPP, municipal bonds, venture capital financing, crowdsource financing
Municipalities in India have a long way to go in gaining access to buoyant revenue sources from states, utilising such revenue sources optimally through effective assessments, billings and collections, discovering and implementing cost recovery mechanisms for service delivery and fully utilising schemes and missions of central and state governments, said Niti Aayog experts.
They also have to explore innovative financing mechanisms like PPP, municipal bonds, venture capital financing, crowdsource financing, etc. All of the above however depend on robust financial management systems and processes and high quality talent, said Sunita Sanghi , Jaya Priyadarshini and Manshi Singh in a blog “Financially Empowering Municipalities: Way Forward” hosted on the Niti Aayog website.
It is well known that urbanisation and economic growth are interlinked as cities provide economies of agglomeration, and, in India, too the impetus for growth is envisaged to come from the urban sector. Currently, cities accommodate 377 million i.e. 31% of India's current population and contribute 63% of the GDP and are expected to accommodate 800 million in 2050, when one out of every two Indians would be living in urban areas.
However, this rapid urbanisation is putting pressure on available infrastructure facilities like water, sanitation, housing, schools, hospitals, colleges and mobility, etc. in the urban areas. The provisioning of adequate infrastructure requires huge finances.
“A look at the urban local finances in India indicates that most of the ULBs are lacking in mobilisation of resources and financial autonomy. The total revenues of all Urban Local Bodies (ULBs) in India amount to less than Rs 1, 50,000 crore, approximately, 1% of India’s GDP. The deficiency of infrastructure affects the city’s ability to attract investment. The urban local bodies (ULBs) are the principal catalysts and efficacy of urbanisation and economic growth would be impacted in the manner the functions are carried out and finances are mobilised,” they wrote.
While the Constitution of India specified the taxes to be divided between the centre and state governments, it does not specify the revenue base for urban local bodies. Even the 74th Amendment Act does not make specific recommendations about the type of taxes that urban local bodies should have.
The power for determining the revenue base of Urban Local Bodies rests with the state governments. Further, it is recommended to set up States Finance Commission once in five years to decide the distribution of taxes between state and local bodies.
The blog said that the resource base of ULBs typically consists of their own sources, state revenue, government grant, loans from state governments, and market borrowings. The urban local bodies are sometimes not even aware of the opportunities and avenues of generating revenues through taxes and non-tax charges. Even if they are aware, they do not have the skill to optimise tax collection. ULBs in India, therefore, have a minimal revenue base and largely dependent on central and state grants, which constrained the ability of ULBs to invest adequately in capital expenditure like creating infrastructure and, thereby, improve quality of life in the city.
The existing pattern of municipal finances has not been able to meet the required expenditure on infrastructure development in urban areas. Revenues of municipalities come from different sources but are limited in amount. RBI has broadly classified municipal revenue sources consisting of Tax Revenue (property tax, vacant land tax, tax on animals, taxes on carriages and carts; Non-Tax Revenue (user charges, lease amounts); Other Receipts (sundry receipts, lapsed deposits, fees, fines and forfeitures); Assigned (shared) Revenue (profession tax, surcharge on stamp duty, entertainment tax, and motor vehicles tax; borrowings and Grants-in-aid both Plan Grants and Non-Plan Grants.
Central Finance Commissions have also recommended for financial strengthening of ULBs from time to time. The Tenth Finance Commission was the first to recommend grants for rural and urban local bodies. The Thirteenth Finance Commission recommended allocation of Rs. 23,111 crore to ULBs with the aim of strengthening municipal finances and urban governance in India. Taking this forward, the 14th Finance Commission awarded total grants of Rs.87,144 crore to Urban Local Bodies in all States/UTs as Basic Grant (80%) and Performance Grant (20%) which linked to ULBs increase in revenues, ensuring audit of accounts and notification of Service Level Improvement Plans in respect of basic services.
The Urban Rejuvenation Mission (Smart City Mission, AMRUT, HRIDAY and PMAY-U) is another initiative to empower the urban local bodies. The outlays for Smart Ciites Mission and AMRUT are Rs.48, 000 crore and Rs.50,000 crore, respectively, over five years of the Mission period. GOI funds and the matching contribution by the States/ULB will meet only a part of the project cost. Balance funds are expected to be mobilized from other resources including private investment. Successful implementation of these missions finally rests on ULBs efficacy in resource mobilization and service delivery. Hence, financial empowerment of ULBs when seen from this perspective is no larger a matter of choice, it is a necessity. This also requires strong governance in ULBs for efficient delivery of services.
The blog went on to say that although, the Constitutional Amendment in 1992 paved way for greater devolution of power, functionaries and finances, the problems of devolution remains. The Urban Transformation Agenda necessitates the improvement of financial base of municipalities to facilitate provision of adequate basic services to the citizens along with strengthening of municipal cadre.
Strengthening capacities of ULBs is necessary for effective resource mobilization Currently their Financial capacity is restricted not only by low tax base but also low capacity for mobilization of existing resources. As per the available literature, the ULBs are not able to harness property tax as per their potential due to undervaluation; non-availability of database of properties; low rates; low collection efficiency and lack of indexation of property values.
Financial self-sufficiency of the ULBs is the need of the hour. This can be achieved through encouraging municipal bonds, review of property tax system to improve efficiency and transparency in collection and mobilisation of resources. It is also necessary to evolve a time bound strategy to devolve the subjects mentioned under the 74th Constitution Amendment Act, 1992.
Financial sustainability necessitates adequate financial accountability requiring adhering to Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) that provides for finances and borrowings to remain within manageable limits. Due importance needs to be accorded to Public accountability and transparency of revenues and their usage.