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India’s urban centres are ailing due to lack of funds

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.


Insta Links:

Municipal Mess – From MCD to BMC, paralysis of urban local bodies undermines local governance and democracy