GS Paper 2
Syllabus: Devolution of Powers and Finances up to Local Levels and Challenges Therein
Source: IE
Context: To make Indian cities smarter, the health of municipal finances must be improved.
Background: The WB suggests that India will need to invest approximately $840 billion in urban infrastructure over the next 15 years.
The health of municipal finances in India:
- Urban local bodies’ (ULBs) own revenue is only 47% of their total revenue and the property tax accounts for approximately 29% of it.
- As per the RBI, at least 141 municipal corporations (in FY21) saw a sharp decline in revenue (by more than 25%) or a significant increase in expenditure (by over 75%).
- There was a decline in projected growth in property tax.
- GST implementation and the pandemic added to these revenue losses.
- Disbursal of external grants from the state and Centre is a concern. The CAG’s performance audit (2020) noted a saving of Rs 5,000 crore due to the non-disbursal of grants in Karnataka.
Impact of shortfall in revenue:
- Cuts in essential services – for example, sewerage services were affected.
- Delayed salary and pension disbursements. For example, 18,000 primary school teachers under the DMC are yet to receive their past few month’s salaries.
Way ahead – A multi-pronged strategy to bridge the gap:
- Many ULBs and municipal corporations need a fiscal stimulus.
- Additional funding needs to be explored. For example,
- A revolving fund along with an overdraft facility when revenues and fiscal transfers are delayed.
- Green bonds along with a joint corpus funded by the Centre and states.
- Rationalisation of property tax. Updating existing databases, reassessing properties using digital tools and imposing taxes on non-compliers and defaulters.
- Concessions (free water and electricity) will need to be rationalised.
- Expenditure efficiency needs to be boosted by pushing for outsourcing (for garbage services) and exploring PPP models (hybrid annuity models) and participatory budgeting.
- Performance-linked incentives. For example, the Centre’s incentives to states to cover aspects like framing building bylaws, pushing for public transport, etc.
- Innovative financing mechanisms can be pursued. For example, asset monetisation, financing from carbon credit generation, etc.
- A push for user charges (levies like betterment, impact fees and tax increment financing should be explored) for public service delivery.
- States and the Centre must ensure that disbursements are made on time.
Some best practices:
- Municipal bonds: Municipal corporations have raised over Rs 6,250 crore since 2017.
- Tamil Nadu’s municipalities are utilising pooled finance and aggregating funds to raise funds from the market for multiple projects.
- Maharashtra seeks to implement land value capture in a range of forms, with municipalities charging property owners for a specific project.
- Gujarat offers an interesting example in land pooling systems – any increase in land value due to public investment or civic initiatives is taxed.
Conclusion: Unlocking smart cities will require rethinking urban financing.
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