Improving the fiscal state of cities will need a holistic push from all tiers of the government.
This article is part of the series — Colaba Edit.
India will see 600 million people live in cities by 2030 and add 700 to 900 million square meters of space, a new Chicago, to its urbanscape every year. There will also be an uptick in the number of census towns (peri-urban spaces), which increased by 2,532 between 2001 and 2011 and accounts for almost 14 percent of India’s urban population.
To keep up with these urbanisation trends, India has invested INR 10,570 billion in urban programmatic interventions over the past six years. From the Swaccha Bharat Abhiyan (a nationwide cleanliness and sanitation programme) and the AMRUT mission for urban rejuvenation to the 100 Smart City mission, these reforms are designed to ensure a dignified, safe and healthy future for cities.
However, these interventions have a top-down approach and do not strengthen the fiscal autonomy of cities, nor do they aim at improving the capacity of urban local bodies (ULBs) to meet the civic infrastructure needs and growing demands of the cities and its citizens.
The larger question is how will Indian cities, with their limited finances, meet their citizens’ infrastructure and services needs by 2030, the target year to achieve the UN’s Sustainable Development Goals and New Urban Agenda?
Typically, municipal corporations meet their capital and revenue expenses through their revenue and transfers and grants-in-aid from state and central government schemes. In 2018, the consolidated revenue receipts of ULBs in India was estimated to be less than INR 1500 billion, less than one-third of which was raised by the cities themselves.
This is concerning since a 2011 report by the High Powered Expert Committee (HPEC) for Estimating the Investment Requirements for Urban Infrastructure Services, India would need capital expenditure (not including the cost of land) of INR 31,000 billion at 2009-10 prices to meet the urban infrastructure deficit over the 2012-31 period. This has now been revised to INR 65,000 billion. This deficit could be met through the municipal corporations’ internal and external revenue sources, including revenue from their own internal tax sources, state and central revenue and grant, loans from state and central governments, and market borrowings.
The municipal corporations have weak internal revenue sources that are insufficient to meet the current demand independently. Currently, property tax is the only major tax instrument, contributing 60 percent of India’s total municipal revenue and 0.5 percent of its GDP. The low recovery of property tax across cities due to the COVID-19 pandemic has deteriorated the situation further.
In 2020, the Ministry of Housing and Urban Affairs called for urgent reforms in property tax — increasing property tax coverage, integrating information, frequently re-evaluating property, cutting down on exemptions and concessions, sorting billing processes, simplifying payment gateways and making enforcement stringent. Despite these measures, the tax collection is insufficient to meet the projected revenue deficit.
In countries like China and Spain, municipal revenue sources include several other taxes such as those on business, real estate, resource, vehicle and land appreciation. In countries like Brazil, VAT, a share of income tax, stamp duty, vehicle tax and construction tax are devolved to the cities.
Octroi and local body taxes, previously the highest revenue earner for cities, were subsumed into the central government kitty through the goods and services tax (GST), leading to a reduced internal income source for ULBs and consequently increasing their dependence on central and state funds. In a way, the GST introduction set the stage for lesser transfer of power to ULBs, bucking the demands of the 74th Amendment of the Constitution Act, which formally recognised ULBs as the third tier of government and aimed to empower them. It devolved 18 municipal functions to the cities, but many do not have a revenue source against it. It is time for the central government to think afresh and pass on some tax revenues to the cities or develop a sort of ‘equalisation grant,’ like in South Africa, to compensate for the revenue deficits. This cannot be in the form of compensation but could be a percentage of GDP that is passed on as a GST for cities.
While it appears difficult to initiate drastic reforms to increase cities' internal finance even if the government were to streamline processes, a bulk of city budgets remain tied down in administrative expenses and employee salary and pension payments. This leaves ULBs with little to no money to create assets like infrastructure.
Cities thus have no option but to turn to external borrowing for their growth and survival. According to the HPEC report, municipal borrowings accounted for only 2 percent to 3 percent of the municipal revenue and made up for only 0.02 per cent of the GDP in 2017-18. The main reasons for such low borrowing are the credibility, project completion and repaying capacities of municipal bodies.
Irrespective of if it is municipal bonds, loans or any other capital market instrument, the external sources of income for cities will depend on their internal revenues and how these have been managed. Several central government schemes like the Smart Cities Mission and AMRUT are partially funded by the central government, with the city expected to raise the remaining funding through borrowing. It is thus imperative for municipal bodies to fix their house.
A credit rating exercise has been initiated to make borrowing easy for ULBs, with the government seeking help from international agencies and the SEBI Municipal Boards Advisory Council to create the rating system. As of December 2020, 469 of the 485 cities with projects under the AMRUT scheme have been rated for enabling borrowing. Since 2015, when the AMRUT mission was launched, nine cities have raised INR 36.9 billion in funding.
Improving the fiscal state of cities will need a holistic push from all tiers of the government. The central and state governments must make more room for cities, and the ULBs must start running on their own to create financially sustainable cities in the future.
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Sayli UdasMankikar was a Senior Fellow with the ORF's political economy programme. She works on issues related to sustainable urbanisation with special focus on urban ...
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