2 Status & Issues - Municipal Finance- For Cept Students

Municipal Finance in India – Status, Issues and Way Forward Municipal Finance in India – Introduction Municipal Finance in India – Status & Issues Municipal Finance – Way Forward

Municipal Finances In India • In combined revenues of three tiers of governments, share of municipal finance is only 2.75 percent • MORR as % of state own revenue receipts is around 8.24 percent • MORR as % of GSDP is only 0.66 percent • Per capita MORR is just around Rs. 450 • Transfers and devolutions amount 35 % but in some cases it was more than 80 percent

Local bodies rely too heavily on Government support at present Punjab Maharashtra Gujarat Assam Goa Haryana Orissa Kerala Tamil Nadu Andhra Pradesh Karnataka Chattisgarh Madhya Pradesh Himachal Pradesh Uttaranchal West Bengal

Transfers as a % of total revenues of local bodies

Jharkhand Bihar Uttar Pradesh Rajasthan Jammu & Kashmir

0 Source - NIPFP

20

40 60 %Reliance on State Transfers

80

10

Municipal Finances In India • In case of municipal corporations dependence is 20 to 25 % • Municipalities – 41%, Nagar Panchayats 60 % • Per capita revenue expenditure is Rs. 525 • Gap between normative & actual expenditure is 60 & in Maharashtra, 70 % Gujarat, TN Haryana, 90 % in case of AP, Kerala, Karnataka • Esta. Expenditure constitutes 56 %, O & M 40% • Except Maharashtra and Punjab all other states show municipal revenue account deficit

Recent Data on Municipal Finance • Only 38 JNNURM cities with per capita operative surplus above Rs. 25 and only 23 cities with per capita surplus of Rs. 100 and above • No AAA rated ULB, highest rating so far AA+ (SO) • 35 JNNURM cities have operative loss even after receiving sizeable government grants

Flow of Funds did not match the need

Municipal Finances In India • Inferior nature of local taxes • Inadequate local resources • Inroads by state governments on local resources • Absence of autonomy with local bodies in respect of tax rate setting, rate revision and other spheres of working • Inadequate borrowing powers and options • Failure of SFC to revamp municipal finances

Municipal Finances In India • Inadequate devolutions, transfers, grant-in-aids • Poor administration in all respect of tax and other powers • Non-augmentation of non-tax resource • Inefficient management of municipal resources, cost inefficiency • Rudimentary and weak financial administration • Lack of professional capabilities

Municipal (Urban) Finance

Issues/reasons for Today’s Sorry State • Continued dominance of government – How? – Urban services are considered as basic or essential (public/social goods, natural monopolies) – Provision through market operations may marginalise a large number of urban population – Political non-exclusivity – Long term, capital intensive investment – Long gestation and payback periods – Externality induced pricing – Inelastic demand

Municipal (Urban) Finance Issues/reasons for Sorry State

• Inadequacies of Conventional Sources – Not updated with passage of time – Same as per Charter of Lord Rippon 1882. – Inroads by state government on local sources – Based on Wealth or Property and not on income or expenditure of a person. – Proximity to people. – Lack inherent buoyancy, inelastic.

Municipal (Urban) Finance Issues/reasons for Sorry State • Poor financial status of ULBs – Inadequate resources – tax, non-tax – Inferior Nature of Local Taxes – Un-augmentation of all available resources – Inefficient recovery administration – Inefficient management of municipal resources, cost inefficiency, wasteful expenditure – No linkage between cost of production & price of consumption due to political decisions – Absence of financial management – Absence of qualified and professional personnel

Municipal (Urban) Finance Issues/reasons for Sorry State • Lack of Institutional Framework – Absence of legal framework for PPP. – Absence of concept of regulatory authority – Absence of enough financial institutions catering specific needs of municipal bodies

• Lack of Demand Management – Over emphasis of supply side of urban infrastructure

First and Foremost Solution to poor state of Municipal Finance is adopting sound principles of finance and municipal (public) finance