The Indian government should address the challenge of municipal inequity, and ensure that better opportunities are available to enhance urban governance.
What gets measured, performs better. That could be one reason why municipal finance in India has seen a secular decline in the share of its own revenues to total receipts from 63 percent in 2002–03 to 53 percent in 2007–08 and further to 43 percent by 2017–18. The resultant gap between need and resources is met by Union government transfers (12 percent of which7 percent were Union Finance Commissions grants and 5 percent were other grants), state government transfers (33 percent), and borrowings (2 percent). Municipal governance remains below the radar at the national level. Most states view municipalities as their deconcentrated local offices not a third level of government. Even the 74th Amendment to the Constitution, 1992, circumscribed their autonomy versus state governments.The robust form of parliamentary democracy in the Union and state governments, is missing in municipalities. In most of the municipalities, the mayor is not elected. State governments decide the terms of appointment for a mayor—usually annually or for two years versus the full term of the elected municipal council of five years. This effectively undermines municipal political leadership.
Most states view municipalities as their deconcentrated local offices not a third level of government.Admittedly, Union and state governments have a four-decade head start over them. Some of the asymmetry in local vs provincial or national democratic architecture is because of the recency of this democratic experiment. But legislated municipalities have traditions going back to 1688 in erstwhile Madras. By the late 19th century, municipalities had elected presidents under the colonial policy of using limited democracy as a “safety valve”. So more than the recency factor, local government appears dwarfed by design. State governments have demurred from delegating the power to tax except property tax and the power to levy sundry usage fees. Secondly, state government parastatals, directly funded by the state government or the Union government (Smart City Mission), plan and implement a range of public services including water supply and sewage management, building of major roads and bridges, transport services, fire services, electricity supply, and now e-mobility. This administrative “work around” effectively excludes the municipality and depletes its functional range even below the 18 functions specified in the 12th Schedule of the Constitution. In addition, cleverly designed administrative barriers constrain the ability of elected municipal government to act autonomously. The state government appoints the chief executive officer—albeit sometimes after consulting the mayor—who is invariably an officer from the elite Union/state level administrative cadres deputed to the municipality. Secondly, the cadre controlling authority for even the senior technical municipal staff, is the state government. Thirdly, the state government can directly instruct the CEO to act in a specified manner even without the consent of the elected council or the mayor. Reforms, stop short of severing the political control of state governments. The Bruhat Bengaluru Mahanagara Palike Act, 2020 requires the Chief Commissioner (CEO) to report to both the State government and the Mayor and zonal officers report to both the Mayor and the Chief Commissioner. An expert comments “It is a strange arrangement that will destroy the chain of command and invite frequent stalemate.” The existing political architecture for municipalities remains sub-optimal. It gives few opportunities, for local innovation and skills to enhance urban governance and discourages full utilisation of the economic growth and tax potential of municipalities. Letting state or national governments lead in planning and financing infrastructure and public service delivery is unnecessary and exclusionary, since the expertise and wealth within cities, could be harnessed directly.
The state government appoints the chief executive officer—albeit sometimes after consulting the mayor—who is invariably an officer from the elite Union/state level administrative cadres deputed to the municipality.Cities accounted for nearly two-thirds of GDP in 2010 and around one-third of the population in 2011. So, the economic or political consequences of urban neglect are not trivial. But all parties draw the line at full municipal autonomy. Unsurprisingly municipal political office is the last choice of aspiring politicians who fear getting trapped in the low-level political economy equilibrium cities offer. The lack of municipal level, visionary, political leadership shows in the truncated, copy-cat, bureaucratic 20-year plans for cities, constrained by backward-looking planning models and minimalist aspirations. Rigid land and town planning laws provide a static model of dividing land into zones by the nature of use and thereafter, loosely regulating land development therein. This often goes again the grain of how a city develops dynamically, based on market incentives. The best illustration of planning, uncoordinated with ground reality, is the horizontal urban sprawl. Long-term fiscal constraints lead to “Planning Pessimism” which reflects in regulations prohibiting incremental vertical development, to contain the volume of population served per the historical service capacity. This approach ends up encouraging the horizontal sprawl of low-level housing which becomes even more expensive to service equitably, rather than exploiting the potential for enhancing the basic services supply in-situ, through higher efficiency. Examples are decongesting by changing the mode of transportation from private to public (London and Singapore), enhancing the drinking water supply by reducing leakages, more efficient end-use appliances and additional decentralised community-based management of sanitation and sewage to recirculate treated water and the use of waste or solar energy for generating electricity (San Francisco).
Rigid land and town planning laws provide a static model of dividing land into zones by the nature of use and thereafter, loosely regulating land development therein.The fiscal fragility of municipalities can be attributed to less than adequate transfers by the state and central governments and the low tax revenues of even the bigger municipalities. The two are linked by the “broken window” effect—perpetual fiscal imbalance leads to a deterioration of public service standards, lower citizen expectations, and low tax revenue. Evidence shows that linking the availability of additional central/state grants to improvements in local tax revenue collection works. In 2017-18, taxes accounted for around 59 percent of the own revenue of municipalities. Property tax had a 59 percent share in tax revenue. Property tax collection at 0.15 percent of GDP is low compared to an average of 0.6 to 0.7 percent of GDP in developing countries and more than 2 percent of GDP in OECD countries. Rates are low and are often linked to the nature of use with self-owned, low rise, temporary houses attracting the lowest rates, irrespective of the soaring rates for the underlying land. This blunts the market signal which could otherwise incentivise collective, vertical growth, or “densification” in high value land parcels. It is not as if city managers are not aware of the asymmetry between soaring urban land rates and stagnating property tax rates. But in the absence of visionary local leadership, they feel disempowered to disrupt the existing low-level equilibrium, out of fear of lack of political support in the event of a public backlash. The “successful” agitation against the now repealed, reformist “Farm Laws” provides all the wrong lessons to the bureaucracy. The property tax is resented for two reasons. First, taxpayers already pay tax on capital gains in property (at the time of sale) to the Union government. So, an annual tax on property value, unconnected to value enhancing benefits, is unpopular, unless levied at low rates. The city already charges separately for supply of drinking water and maintaining the drains. Those who own pets pay a separate annual fee. The municipality also collects fees from roadside vendors and street markets. But it is the state government which does the heavy lifting in policing, building roads, and bridges, providing fire-fighting services, maintaining the waste treatment and sewage systems, against which it appropriates road tax from owners of motorised vehicles, stamp duty paid at the time of transfer of property and entertainment tax, now bundled into Goods and Services Tax.
Rates are low and are often linked to the nature of use with self-owned, low rise, temporary houses attracting the lowest rates, irrespective of the soaring rates for the underlying land.Property tax rates can be doubled, if at least one half of the collections in each ward, are used for specified purposes which directly enhance the taxpayer’s property value—street lighting, solid waste management services, maintenance of public parks, playgrounds, blue-green areas, e-security networks, pedestrian road over and under bridges and intelligent traffic signals to reduce congestion. Further, it would help if ward committees are formed and empowered to consent in the proposed allocations on an annual basis. Participative budgeting must be nurtured by an identified framework for consultative expenditure management. The city of Bengaluru has implemented far-reaching reforms in property tax rate setting, GIS enabled assessment and collection leading to a near doubling to 1.2 million in the number of properties assessed between 2007-08 to 2010-11 and 2.6 times increase in property tax revenue. Indian cities vary enormously in size, fiscal capacity, and regional context. Finding a single template solution is consequently difficult, beyond emphasising the common lacuna, that incomplete democratisation has sapped cities of the vitality they possess. City elites are also to blame since they ignore the cycle of inequity and sub-standard public services, simply because they can afford to cocoon themselves in a “private services bubble.” These “private bubbles” burst during the COVID-19 pandemic, which hit all income classes. Let us not wait for the next urban disaster to evoke a common response to the root causes of municipal inequity—both structural and fiscal. Economic growth, jobs, and innovation cannot spring from municipalities sans empowered local leadership.
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Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...Read More +