Successive Finance Commissions (FCs) have recommended a quantum jump (Rs 1,000 crore by X-FC to Rs 87,000 crore by XIV-FC) in the allocation to supplement the resources of urban local bodies (ULBs) in line with their constitutional mandate (Clause C of Article 280). Successive FCs have also suggested part of grants for systemic reforms at ULBs. Yet these measures have not yielded expected results, especially with respect to (1) vertical and horizontal gaps in municipal finance, (2) data gaps for assessment and normative allocation, (3) exclusion of emerging functions, and (4) omission of areas under transition (rural to urban).

The size of municipal finance in India is far below potential (around 1% of GDP), whereas most of the non-farm sector GDP (86%) is generated within/around cities and the global share of local government expenditure is 12.7%. The mobilisation of own sources has declined from 48% in 2013 to 44% in 2016, as per the Economic Survey 2018. Property tax potential is largely underutilised. Systemic reforms in financial management and services have not yielded positive results. Accounting statements/sheets are not prepared as expected. Line item incremental budgeting is still used ignoring the potential revenue and purpose to be accomplished.

Over 33,000 unanswered queries from CAG on municipal audit are pending. Small part of ULB expenditure is recovered directly. Since 2003, only Pune (2017), Hyderabad and Indore (2018) have issued municipal bonds. Horizontal gap is noted as per size class of ULB. Data collected by XIV-FC (2012) pointed out that municipal corporations (41% urban population) incur 72% of total municipal expenditure as compared to 28% by other ULBs (59% population). The Economic Survey 2018 recently noted lack of uniform State Finance Commission (SFC) data on local functions and resources, making it impossible to have cross-state comparisons.

SFCs failed to provide requisite data on finances and services to respective FCs. Similarly, the data used for benchmarking of services is not updated to current norms and coverage of services. Man-made disaster (urban flooding, building collapse, pollution-PM 2.5 and 10, and waste-related epidemic) is directly linked with the functional domain of ULBs. Yet ULBs are not included in the FC allocation, institutional arrangements (national, state, district disaster management authorities) and funds. Nearly half of the 8,000 urban centres (census towns) are not covered under FC allocation as ULB due to go-slow approach of states to create city governments.

XV-FC has to firm up its municipal agenda to promote (1) the allocation for fiscal and regional balance, (2) modified performance grants to ULBs for systemic reforms, (3) inclusion of all the ULB functions, and (4) the development of the requisite database for ULBs. FC allocation should be based on strategic fiscal gap at ULB level across the size class of cities/regions based on reliable data, failing which the pace of increase may be maintained. Small and medium towns deserve specific attention to promote regional balance and productivity both within the metro region and hinterland. The current approach of unconditional and performance grant needs to be restructured to have regional balance and systemic reforms to enable ULBs to improve services and raise additional funds.

Untied grants should cover a vast range of eligible services as per revised norms of benchmarking. Performance grants should cover municipal ability to meet salary bill from own sources rather than the simple increase over last year. It will engage ULBs to have efficiency in expenditure and O&M, raise income from own sources, and reduce salary bill using PPP and outsourcing/community. Performance grants should also cover property tax reforms and application of other land-based tools (valourisation, exactions, impact fee, betterment levy) and issuance of municipal bonds. It should include creation of ULB among census towns, too.

ULBs should be covered under FC allocation for disaster management along with their participation in DDMA and dedicated funds for man-made urban disaster in line with the India Habitat Report of 2016. The FC should create urban data bank (e- or m-governance) at the national level to release data on municipal finance and services periodically. A pilot study needs to be conducted to create requisite database and provide data sheets/formats for assessment and benchmarking.

KK Pandey

Professor, Urban Management, and coordinator, Centre for Urban Studies, IIPA, New Delhi