Financial Health of Municipal Bodies

Why in News?

As the monsoon sweeps across India, Cities in particular, bear the brunt of the fury of rains and Municipal corporations find themselves perennially underprepared for these seasonal crises.

What are urban municipal bodies?

• Urban Local Self-Governance – It is a system of governance of urban areas through the representatives elected by the people.
• Urban Municipalities – They are lowest unit of governance in cities and towns.
• They are also known as Urban Local Bodies (ULBs)
• Indian Constitution - The original constitution doesn’t contain the provisions for Municipal bodies.
• 74^th Constitutional Amendment Act of 1992 established a framework for Municipalities
  • Part – IX A
  • Articles – 243P to 243ZG
• This amendment, also known as Nagarpalika Act, came into force on 1^st June 1993.
• Constitution of Municipalities - Article 243Q deals with the constitution of Municipalities in urban areas in every state
  • Nagar Panchayat – For a transitional area, an area in transition from a rural area to an urban area.
  • Municipal Council – For a smaller urban area
  • Municipal Corporation – For a larger urban area
• According the constitutional mandate, they are constituted under specific laws enacted by the state legislature to govern cities, towns, and other urban localities.
• Powers and functions – They are constituted for local planning, development and administration in the urban areas.
• They are tasked with providing essential civic amenities such as water supply, sanitation, roads, public health, and urban planning within their jurisdiction.

How do they manage their finances?

• Fiscal governance – It involves managing revenue and expenditure to ensure effective governance and service delivery at the local level.
• State legislatures may authorize a Municipality to levy, collect, and appropriate taxes, duties, tolls, and fees.
• It may assign to a Municipality taxes, duties, tolls, and fees levied and collected by the State Government.

What are their financial challenges?

A recent study by ICRIER, based on data from 37 of the 53 municipal corporations with populations exceeding 1 million, revealed a decline in total municipal revenue as a percentage of GDP from 0.49% in 2012-13 to 0.45% in 2017-18.

• Financial inadequacy – Until 2019-20, municipal corporations’ revenue receipts accounted for less than 1% of India’s GDP.
• Decline in own revenue collection – ICRIER study reveals that municipalities’ ability to raise their own revenues saw a sharper decline from 0.33% of GDP to 0.23% in the same period.
• A significant portion of these revenues, nearly one third comes from their own tax revenue (OTRs), with property taxes constituting almost half of this segment.
• Property tax figures dwarfed the entire OTRs of municipal corporations in Delhi, Bangalore, Chennai, and Hyderabad.

Property taxes contributed just 13.19% of revenue receipts for the Brihanmumbai Municipal Corporation (BMC), India’s wealthiest local body, over the past five years.

• Higher dependence on transfers – Transfers from the central and state governments form a slightly larger share in revenue receipts than OTRs.
• The dependence on state and central transfers underscores a persistent vulnerability.
• Impact of GST - The implementation of Goods and Services Tax (GST) has subsumed several taxes, such as Octroi, which were the prerogative of municipal corporations, exacerbating their dependence on state and central transfers.
• Lesser allocations – While the 15^th Finance Commission, in its 2^nd report, recommended grants amounting to 4.36 trillion for local governments from 2021-22 to 2025-26, up to 67% was earmarked for rural local bodies.
• Lower disbursement of funds – The actual disbursement has lagged recommendations by about 15%, primarily due to municipalities failing to meet stipulated conditions, as per RBI report on municipal finances.
• Non-constitution of SFCs - Many states have not established State Finance Commissions in a timely and regular manner.
• Insufficient capital expenditures – Currently, capital expenditure constitutes about half of the total expenditure of most corporations, though it still falls short in places like Chennai.
• Capital expenditure, crucial for urban development and disaster preparedness, remains a miniscule portion of the country´s economic size.

What lies ahead?

• Increase the revenue assigned to urban local bodies from states as they are highly vulnerable during extreme weather events.
• Reduce the regulation norms for disbursing the full allocated funds.
• Promote selling of municipal bonds.

Municipal bonds are debt securities issued by municipal authorities to fund public projects such as infrastructure development, public schools, and utilities.

• Form partnerships with private sector entities can bring in expertise and funding for infrastructure projects.

References

1. Business Standard| Finance of Municipal bodies
2. The Hindu| Municipal Bodies
3. MoSPI| Local bodies