The RBI recently published a report on municipal finances. This is the first municipal finance report to be published regularly on an annual basis. The report highlights the inadequacy of local government revenues and their increasing reliance on grants and transfers.
The Reserve Bank of India (RBI) regularly publishes reports on financial statistics related to the central and state governments. Despite being a crucial tier in India’s three-tier system of government, data on local government finances is not released by the Central Bank due to the lack of consolidated data on local governments. Local governments include Municipal Corporations (MCs), Local Councils, Municipalities/Nagar Panchayats and Panchayati Raj Institutions. To fill this gap in data availability, the RBI recently published a report on municipal finances. This is the first municipal finance report to be published regularly on an annual basis. In the future, RBI will also include municipal finances in the state statistics. The RBI has also stated that efforts are being made to continuously expand the coverage of local authorities in general government statistics.
Local self-government was introduced in India by 73approx & 74th Constitutional Amendment 1992
The 73rdapprox and 74th In 1992, amendments were made to the Indian Constitution which gave several powers and functions to local governments. The functions were transferred separately for urban and rural India-Urban Local Bodies (ULBs) and the Panchayati Raj Institutions (PRIs), respectively. City local governments include municipal corporations, local councils and nagar panchayats. While municipal bodies are for larger urban places with more than one million inhabitants, municipal councils and nagar panchayats govern smaller urban agglomerations and transitional areas. Through the 74th Addendum, Annex 12 contains a list of 18 tasks that state governments can assign to local authorities.
Despite their importance, municipal finances are given too little attention
Municipal finances refer to the budget, income and expenditure of these municipal bodies. This is an important factor to consider as it helps local government to plan, mobilize and use financial resources to provide services for the benefit of citizens alongside development and infrastructure activities. However, not enough attention is paid to this, especially when the role of local government becomes increasingly important as India’s urban population approaches 500 million.
The RBI report compiled the budgetary data of 201 local government bodies for the three years ending in 2019-20. Local government revenues include tax revenues, tax-exempt revenues, earmarked (shared) revenues, grants, loans, etc. Expenditure made by local governments can be classified as revenue expenses and capital expenditures. Revenue expenses include facility expenses, administrative expenses, operations and maintenance expenses, and interest payments on loans, etc.
Indian local government revenue revenues are only 0.6-0.7% of GDP
According to RBI’s sample analysis, local government revenue revenues are estimated at 0.61% of GDP in 2017-18 and increased to 0.72% of GDP in 2019-20.
Own tax revenues, consisting of property tax, water tax, toll tax and other local taxes, accounted for 31-34% of the total revenues in the three years considered in the study. In addition, there were major disparities in local government bodies in Delhi, Gujarat, Maharashtra, Chandigarh and Chhattisgarh, which collected more taxes compared to other states. Property tax has now become an important source as other taxes such as octroi and local corporate tax (which were the main source of revenue in Maharashtra and Gujarat) have been subsumed under GST.
Non-tax revenues accounted for around 30% of total revenues. Fees and user charges account for the largest portion of tax-free income, followed by investment income, primarily in the form of interest income and dividends, rental income from municipal properties, and sales and rental fees.
Total spending increased to 1.05% of GDP in 2019-20
The total spending of these MCs was 0.68% of GDP in 2017-18, rising to 0.9% in 2018-19 and 1.05% in 2019-20. Revenue expenditure increased from 0.48% to 0.6% of GDP and investment expenditure increased from 0.2% to 0.44% of GDP. As a share of total expenditure, revenue expenditure fell from 70% in 2017-18 to 58% in 2019-20, while capital expenditure fell from 30% of total expenditure in 2017-18 to 42% in 2019-20 increased. The proportion of capital spending varies greatly between states – from less than 10% in Delhi to around 80% in Sikkim & Jharkhand.
Borrowing is a tiny fraction of GDP
Municipal gross debt accounts for less than 0.05% of GDP for all municipal bodies. It was around 6% of the total revenue of local government at the national level. Borrowing as a percentage of total income was higher in Telangana, Bihar and Kerala. Again, a large proportion of these loans come from a few large city corporations. In Telangana, for example, the Greater Hyderabad Municipal Corporation (GHMC) alone accounts for more than 90% of total municipal borrowing.
India’s municipal finances have been unsatisfactory for decades
The state of Indian municipal finances has been unsatisfactory for decades. Even after institutional changes in 1992, the financing of the local authority has not improved significantly. RBI’s analysis of local government finances for the period 2017-18 to 2019-20 shows that the combined budget size of local governments in India is much smaller than that of central and state governments. The composition of municipal revenues in India has changed significantly over time, with increased reliance on transfers. In addition, the ratio of revenue expenditures to capital expenditures is lower than that of the center and the states.
When it comes to municipal finances, India lags behind the BRICS and OECD members
The report also found that Indian cities lag far behind in generating the resources needed to provide quality infrastructure and services to their citizens and lack financial autonomy. India lags behind the level achieved by the OECD and other BRICS countries. Local governments in major economies such as Australia, Belgium, Canada, France, New Zealand, Spain, Sweden, Switzerland, etc. depended mainly on their own tax and non-tax sources of revenue, while those in Austria, Greece, Ireland, Lithuania, Mexico, the Netherlands , Turkey, UK, etc. relied on government grants. Switzerland, Iceland and Australia generate over 80% of their revenue from tax and non-tax sources.
Among the BRICS, local governments in Brazil and Russia depended on government grants, while China and South Africa generated their own tax and non-tax revenues. Both China and South Africa generated more than 50% of revenue from tax and non-tax sources, while India generated only about 40% from these sources.
The report indicates that the growth of urban infrastructure in India has not kept pace with the pace of urbanization, as evidenced by the performance of urban local bodies. The reliance on the decentralization of taxes and grants from the upper tiers has increased over the years. According to the report, an alternative sustainable resource mobilization through municipal bonds can be explored.
According to the World Bank, India is to invest USD 840 billion over the next 15 years
A new World Bank report estimates that India will need to invest US$840 billion, or an average of US$55 billion a year, in urban infrastructure over the next 15 years to effectively meet the needs of its fast-growing urban population. About 40% of the population is expected to live in cities by 2036, which will further increase the pressure on already overstretched urban infrastructure and services such as clean drinking water, electricity, road transport, etc. In addition, effective stewardship of cities is crucial to sustainable development in line with Sustainable Development Goal 11 – Sustainable Cities and Communities. Therefore, it is high time that local governments and their finances come to the fore in the governance discourse.
Featured Image: Municipal financial report of the RBI