Finances of municipalities need overhaul as amenities crumble due to rains

Indivjal Dhasmana looks at finances of major civic bodies to analyse why they are underprepared perennially

As the monsoon sweeps across India, it also brings an annual litany of urban chaos. Cities, in particular, bear the brunt of the fury of rains, though rural areas are far from immune.

Municipal corporations find themselves perennially underprepared for these seasonal crises. The reasons are manifold, but the most glaring is financial inadequacy. Overlapping responsibilities with state authorities further complicate their efforts.
 

Until 2019-20 (the latest year for which aggregate data is available), municipal corporations’ revenue receipts accounted for less than 1 per cent of India’s GDP. A significant portion of these revenues — nearly one-third — comes from their own tax revenue (OTRs), with property taxes constituting almost half of this segment. Transfers from the central and state governments form a slightly larger share in revenue receipts than OTRs. As such, transfers and OTRs make up nearly two-thirds of municipal revenue receipts. 
 

The dependence on state and central transfers underscores a persistent vulnerability. The 15th Finance Commission, in its second report, recommended grants amounting to ₹4.36 trillion for local governments from 2021-22 to 2025-26. However, a substantial portion of this — up to 67 per cent — was earmarked for rural local bodies. Additionally, the actual disbursement has lagged recommendations by about 15 per cent, primarily due to municipalities failing to meet stipulated conditions, as noted in a Reserve Bank of India (RBI) report on municipal finances.

 

State finance commissions (SFCs) are expected to delineate state-specific taxes and non-tax revenues for local bodies. However, the implementation of Goods and Services Tax (GST) has subsumed several taxes, such as Octroi, which were the prerogative of municipal corporations, exacerbating their dependence on state and central transfers. Compounding this issue, many states have not established SFCs in a timely and regular manner.
 

A study by the Indian Council for Research on International Economic Relations (ICRIER), based on data from 37 of the 53 municipal corporations with populations exceeding 1 million, revealed a decline in total municipal revenue as a percentage of GDP — from 0.49 per cent in 2012-13 to 0.45 per cent in 2017-18. Furthermore, municipalities’ ability to raise their own revenues saw a sharper decline — from 0.33 per cent of GDP to 0.23 per cent in the same period.

 

Property taxes contributed just 13-19 per cent of revenue receipts for the Brihanmumbai Municipal Corporation (BMC), India’s wealthiest local body, over the past five years. Yet, these property tax figures (Rs 4,500-Rs 5,200 crore) dwarfed the entire OTRs of municipal corporations in Delhi, Bangalore, Chennai, and Hyderabad. Property tax remains the biggest part of municipal revenue receipts, and was almost half of municipal OTRs at an aggregate level until 2019-20.
 

Capital expenditure, crucial for urban development and disaster preparedness, remains a miniscule portion of the country's economic size.  Various civic projects, essential for withstanding natural calamities like torrential rains, fall under the umbrella of capital expenditure.

 

Currently, capital expenditure constitutes about half of the total expenditure of most municipal corporations, though it still falls short in places like Chennai. In the case of the Municipal Corporation of Delhi, data for exclusive development expenses, part of capital expenditure, is available.
 

For instance, the BMC’s capital expenditure is projected to rise to Rs 31,775 crore for the current financial year from Rs 27,248 crore the previous year, making up 53 per cent of total expenditure. This translates to nearly Rs 60,000 crore of total expenditure,  constituting 1.4 per cent of Maharashtra’s projected GSDP of Rs 42.7 trillion. Elsewhere, conditions are even worse. The Bengaluru Bruhat Mahanagara Palike, the second richest municipality, plans to spend Rs 6,550 crore as capital expenditure in 2024-25, accounting for 57.7 per cent of total expenditure. The total expenditure is a mere 0.4 per cent of Karnataka’s projected GSDP of Rs 28.1 trillion.
 

Notably, there are many municipalities in one state.
 

Given these constraints, there have been calls for municipalities to expand the scope of property tax, enhance non-tax revenues by going for user charges for various services, besides tapping into bond markets to augment their revenues. So far, 12 municipal corporations have ventured into this domain, with the Greater Hyderabad Municipal Corporation raising Rs 495 crore in three phases and the Ahmedabad Municipal Corporation garnering Rs 400 crore in two stages.