It is time that India lays emphasis on changing its approach to urban governance and makes pragmatic changes in its policy books to make its cities financially-robust.
While rapid urbanisation has taken over both India and South Africa, it has also put an additional strain on the financial resources of cities and municipal institutions. City governments are being constantly challenged to keep up with the expanding needs of public spending. Cities are expected to be drivers of local and national development, and it is essential that municipal corporations are financially strengthened to keep pace with urbanisation.
While rapid urbanisation has taken over both India and South Africa, it has also put an additional strain on the financial resources of cities and municipal institutions.Six cities in South Africa house over a million people, while India has 40 cities with a population of over a million. According to the World Bank, almost 66 percent of the total population in South Africa is urban, while in India it is 34 percent. The annual growth rate of the urban population in South Africa is two percent, while for India this growth rate is at 2.4 percent. Despite this, the ratio of municipal revenues to gross domestic product (GDP) at factor cost in India is estimated at 1.03 percent for 2012-13, compared to six percent in South Africa.
The above numbers point out a very interesting aspect. While urbanisation is a bigger challenge for India, it seems like South Africa has been able to push more money into its cities. This is reflected through its policies, which show that it has done much better in constitutionally backing local governance and strengthening municipal finance, which in turn, gives an impetus to city development.
While urbanisation is a bigger challenge for India, it seems like South Africa has been able to push more money into its cities.The single most critical factor is the provisions made in the Constitution of Republic of South Africa’ (1996) framed in the post Apartheid regime, and the 1998 ‘White Paper on the local government’, which laid down the foundations for its municipal system.
The South African constitution established a unitary state with three autonomous but inter-dependent spheres of government: national, provincial and local. The local governments are responsible for the provision of basic urban services like water, sewerage, solid waste management, roads and electricity distribution. In order to accomplish this, some clear sources of revenue have been delineated.
In case of India, the Constitution in the 74th Amendment, laid down principles for devolution of powers to local governments under its 12th schedule. The schedule defines 18 functions which an urban local body needs to perform. While the municipal corporation is expected to take care of all functions, only 12 of the 18 functions have a corresponding finance source. This absence of a financial list in the schedule has ensured that much is left to be desired in its implementation.
In case of India, the Constitution in the 74th Amendment, laid down principles for devolution of powers to local governments under its 12th schedule. The schedule defines 18 functions which an urban local body needs to perform.The South African constitution also specified that the local government is responsible for the provision of basic services like water, sanitation, electricity, sewerage, solid waste management and roads. And for this, they are able to avail the user charges and an ‘equitable share’ of the national revenue. This share is given in the form of ‘equalisation grants’ which municipal corporations can access for any development works that they wish to carry out.
The South African constitution also specified that the local government is responsible for the provision of basic services like water, sanitation, electricity, sewerage, solid waste management and roads.However, these grants are provisioned through a planning process that takes place at the municipal level. The municipal corporations are supposed to come up with a plan every 8-10 years, which includes a financial strategy that will be required to develop, operate, improve and maintain the basic infrastructure projects. With a view to promote participatory budgeting processes, such plans also include participation of the community.
This unconditional grant, which is a share of national revenues, goes directly into the operating budgets of local governments. It is a unconditional, multi-year and formula-driven grant available to municipalities to finance all their functional and infrastructure needs. This is part of the grants and subsidies which make up for 29 percent of municipal revenues in the country.
This unconditional grant, which is a share of national revenues, goes directly into the operating budgets of local governments. It is a conditional, multi-year and formula-driven grant available to municipalities to finance all their functional and infrastructure needs.In contrast, municipal corporations in India do not get any such grants. To make matters worse, the introduction of the Goods and Services Tax (GST) has subsumed local taxes like octroi and local body tax (LBT), that provided daily liquidity, buoyancy and flexibility in revenue. Although the GST provides for the state to transfer the subsumed money to corporations, the states are not constitutionally mandated to do so. Octroi, in case of municipal corporations like Mumbai, made up for up to 28 percent of its revenues, which is now being compensated for by the state government under an amendment to the Mumbai Municipal Corporation Act.
In contrast, municipal corporations in India do not get any such grants. To make matters worse, the introduction of the Goods and Services Tax (GST) has subsumed local taxes like octroi and local body tax (LBT), that provided daily liquidity, buoyancy and flexibility in revenue.Even funds that come directly from the central government, such as for schemes related to city regeneration like JNNURM in the past, and the more recent Smart Cities and AMRUT schemes, usually come with several conditions and require minimum delivery standards for municipal corporations to qualify for the said money transfers.
Another pioneering step taken by South Africa has been by passing the Municipal Property Rates Act 2004 where they reformed the property tax policies. The property tax collection levels in South African cities are very high, generally exceeding 90 percent, particularly in the metropolitan municipalities. The act allows municipalities to set their own tax rates and revise them every year, which cannot go beyond national economic policies. A limitation is placed between the ratios incorporated for different types of properties. On the other hand, as highlighted by a government study, the average collection of property tax in 36 of the largest municipal corporations in India was merely 37 percent
All these steps taken by South Africa are globally recognised as good practices in governance and have been identified as policy frameworks for local governments in terms of financial planning and subsequent service delivery. It is time that India lays emphasis on changing its approach to urban governance and makes pragmatic changes in its policy books to make its cities financially-robust. Only financially-robust cities will ultimately determine the way ahead for India’s economy.
Prasanna K. Mohanty, Financing Cities in India: Municipal Reforms, Fiscal Accountability and Urban Infrastructure (Sage Publications, 2016), 21.
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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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