Relevance: GS-2: Devolution of Powers and Finances up to Local Levels and Challenges Therein.

Key Phrases: ULBs, IIHS, 74th CAA 1992, Article 243-P to 243-ZG, A 243-W, A 243-Y; IGTs, Own Tax Revenue, Own Non-Tax revenue, User Charges;

Context

• The Financial Empowerment of ULBs (Urban Local Bodies) is necessary for the practical realisation of democracy at the grassroots level.
• Recently, the Indian Institute for Human Settlements (IIHS) analysed data from 80 ULBs across 24 States between 2012-13 and 2016-17 to understand ULB finance and spending, and found some key trends.

Key Highlights

What are ULBs?

• These are the local self-government at the City/ town level.
• 74th Constitutional Amendment Act 1992 provided constitutional status to ULBs. It added Part IX-A to the constitution.
  • Articles 243-P to 243-ZG deal with the ULBs.
  • Article 243-W specifies subjects which have been delegated to ULBs by the constitution, these are explicitly mentioned in Schedule 12.
  • Article 243-Y deals with the provision of the creation of the State Finance Commission to devolve grants.
• The Act provided for the constitution of 3 types of municipalities in every state
  • A Municipal Corporation
    • For a larger urban area.
  • Municipal Council
    • For a smaller urban area.
  • Nagar Panchayat
    • For a transitional area.
• There are 8 types of ULBs
  • Municipal Corporation
  • Municipality
  • Notified Area Committee
  • Town Area Committee
  • Cantonment Board
  • Township
  • Port Trust
  • Special Purpose Agency

Issues/Concerns with Municipal Finances

• Lack of Self-dependency for revenues
  • The ULBs’ own sources of revenue were less than half (47%) of their total revenue.
    • Own Tax revenue is 29%
    • Own non-Tax revenue is 18%
  • ULBs lacked revenue buoyancy as their share in GDP of own revenue was only 0.5% for the five-year period.
  • Property Tax contributed to a meagre 0.15% of the GDP.
    • It is the single largest contributor to ULBs’ Own Revenue.
    • For the developing country and developed countries, it has been observed at around 0.6% and 1% of GDP respectively.
• High dependency on IGTs
  • From 2012-13 to 2016-17, IGTs accounted for about 40% of the ULBs’ total revenue.
  • Despite this, the scale of IGTs in India remained at around 0.5% of GDP, which is far lower than the international average of 2% to 5% of GDP.
• Variation in state of finances depending upon the size of the city
  • Tax revenue is the largest revenue source for larger cities, while smaller cities are more dependent on grants.
  • For Class I-A cities
    • External revenue dependency gradually reduced over time, from around 27% in 2012-13 to about 15% in 2016-17.
  • For Class I-B and Class I-C cities
    • Own Revenues (Tax + Non-tax) remained stagnant, despite the increase in the areas of these cities.
• Operations and Maintenance (O&M) expenses have increased but still remain inadequate
  • The share of O&M expenses in ULBs’ total revenue expenditure increased from about 30% in 2012-13 to about 35% in 2016-17.
  • As per the High-Powered Expert Committee for estimating the investment requirements for urban infrastructure services, O&M Expenses incurred in 2016-17 covered 1/5th of the requirement forecast.
  • The non-tax revenues were short of the O&M expenditure by around 20%
    • this contributed to the increasing revenue deficit in ULBs.

Way Forward

• To increase the Tax revenue
  • The base for collection of property taxes must be increased.
• To increase non-tax revenue
  • Increased availability of land resources to the businesses and extracting user charges will shore up non-tax revenue.
• Meeting O&M Expenses
  • Cost recovery for services such as water supply, solid waste management, transportation and wastewater management must be ensured through user charges to ensure reduced pressure on the revenue budget.
• Stabilizing IGTs and using them as a means to ensure fiscal discipline
  • Revenue assigned to ULBs from the State governments must be increased.
    • Atma Nirbhar Bharat Yojana has a provision for rewarding states for the empowerment of ULBs.
  • A share of the State and Centre’s GST proceeds must be allocated to ULBs
    • This will provide a cushion to ULBs which will be taking steps to decrease their dependency on IGTs.
  • IGTs can also incentivise ULBs to deliver better service quality and maintain fiscal discipline.
    • 15th Finance commission has recommended mandatory submission of audited accounts before disbursing grants.
  • IGTs should also incentivize the ULBs which come up with their own market-based loan instruments.
    • Bangalore MC was the 1st MC in India to launch a municipal bond (1997).
    • In Dec 2020, Lucknow issued a municipal bond.

Conclusion

• Growing fiscal deficits, constraints in tax base expansion, and weakening of institutional mechanisms that enable resource mobilisation are a few challenges to the financial health of the ULBs. But the same can be countered by increasing IGTs, strengthening ULBs to extract User changes and shoring their revenues.

Source: The Hindu

Mains Question:

Q. Comment about the financial condition of ULBs. What are the challenges and what more can be done to financially empower them?