Report on Municipal Finances: RBI

• 11 Nov 2022

For Prelims: Local governance, RBI, Municipal Corporations, GDP, GST.

For Mains: Report on Municipal Finances, RBI.

Why in News?

Recently, the Reserve Bank of India (RBI) has released the Report on Municipal Finances, compiling and analyzing budgetary data for 201 Municipal Corporations (MCs) across all States.

• The RBI Report explores ‘Alternative Sources of Financing for Municipal Corporations’ as its theme.

What is a Municipal Corporation?

• About:
  • In India, the Municipal Corporation is the urban local government that is responsible for the development of any Metropolitan City having a population of more than one million people.
    • Mahanagar Palika, Nagar Palika, Nagar Nigam, City Corporation, and so on are some of the other names for it.
  • The Municipal Corporations are established in the states by the acts of the state legislatures, whereas in the Union Territories through the acts of the Parliament.
  • Municipal governments rely heavily on property tax revenue to fund their operations.
  • The first municipal corporation in India was created in Madras in 1688, followed by municipal corporations in Bombay and Calcutta in 1726.
• Constitutional Provisions:
  • In the Constitution of India, no provision was made for the establishment of local self-government, except the incorporation of Article 40 in the Directive Principles of State Policy.
  • The 74^th Amendment Act, 1992 has inserted a new Part IX-A into the Constitution which deals with the administration of Municipalities and Nagar Palikas.
  • It consists of Article 243P to 243ZG. It also added a new twelfth schedule to the Constitution. The 12^th schedule consists of 18 items.

What are the Findings?

• Poor working of MCs:
  • There have been several lacunae in the working of MCs and no appreciable improvement in their functioning despite institutionalisation of the structure of local governance in India.
  • The availability and quality of essential services for urban populations in India has consequently remained poor.
• Lack of Financial Autonomy:
  • Most municipalities only prepare budgets and review actuals against budget plans but do not use their audited financial statements for balance sheet and cash flow management, resulting in significant inefficiencies.
  • While the size of the municipal budgets in India are much smaller than peers in other countries, revenues are dominated by property tax collections and devolution of taxes and grants from upper tiers of government, resulting in lack of financial autonomy.
• Minimal Capital Expenditure:
  • MCs’ committed expenditure in the form of establishment expenses, administrative costs and interest and finance charges is rising, but capital expenditure is minimal.
  • MCs mostly rely on borrowings from banks and financial institutions and loans from centre/ state governments to finance their resource gaps in the absence of a well-developed market for municipal bonds.
• Stagnant Revenues/Expenditure:
  • Municipal revenues/expenditures in India have stagnated at around 1 % of GDP (Gross Domestic Product) for over a decade.
  • In contrast, municipal revenues/ expenditures account for 7.4 % of GDP in Brazil and 6 % of GDP in South Africa.
• Ineffective State Financial Commissions:
  • Governments have not set up State Financial Commissions (SFCs) in a regular and timely manner even though they are required to be set up every five years. Accordingly, in most of the States, SFCs have not been effective in ensuring rule-based devolution of funds to Local governments.

What are the Suggestions?

• MCs need to adopt sound and transparent accounting practices with proper monitoring and documentation of various receipt and expenditure items, and explore different innovative bond and land-based financing mechanisms to augment their resources.
• The rapid rise in urban population density, however, calls for better urban infrastructure, and hence, requires greater flow of financial resources to Local governments.
• With the revenue generation capacity of municipal corporations declining over time, dependence on the devolution of taxes and grants from the upper tiers has risen. This calls for innovative financing mechanisms.
• Municipalities in India need to balance their budgets by law, and any municipal borrowing needs to be approved by the State government.
• In order to improve the buoyancy of municipal revenue, the Centre and the States may share one-sixth of their GST (Goods and Services Tax).

UPSC Civil Services Examination Previous Year Question (PYQ)

Q. In India, the first Municipal Corporation was set up in which one among the following? (2009)

(a) Calcutta
(b) Madras
(c) Bombay
(d) Delhi

Ans: (b)

Source: IE