M Govinda Rao & Nirmal Mohanty: Urbanisation and its discontents

Urban agglomerations and not municipal boundaries must be taken as units for providing public services.

Recent events in a number of metropolitan cities have convincingly demonstrated the utter incompetence of the urban local bodies to cope with the pressures of urbanisation. Poor governance systems, lack of capacity of the urban local bodies to plan and implement orderly development, and their inability to provide acceptable standards of public services have led to severe dissatisfaction among the people. While the problem is multi-faceted, in this article we deal with some aspects of delivery and financing of urban public services.

The expansion of economic activities in manufacturing and tertiary sectors, on the one hand, and stagnancy in agriculture, on the other, have led to a steady influx of population to urban agglomerations. The proportion of urban population reached 29 per cent in 2001 and by 2030 it is estimated to reach 40 per cent. With incomes increasing to the levels in the developed world, providing reasonable standards of services in a sustainable manner for about half a billion people will be a truly daunting task.

By all accounts, the existing record of planning, financing and implementing service delivery systems by urban local bodies is appalling. In most cases, housing colonies are created first and the requirements of water supply, sanitation, electricity, roads, garbage removal and street lighting systems are thought of only after people move in. Facilities like parks, schools, hospitals, shopping centres, and even parking places remain only on paper, if at all. Thus, as people are forced to adjust to sub-optimal living conditions, private unorganised markets for everything (including security) naturally come up and sustainable systems of service provision take the back seat.

There is a serious gap between the supply of and demand for urban infrastructure and this will only result in more chaos and discontent, unorganised markets, and forced privatisation for many of the urban public services in the years to come. As of now, as against the annual investment requirement of about Rs 27,000 crore, the outlay for urban infrastructure by the central, state and local governments is about Rs 9,000 crore, of which an overwhelming proportion is for maintenance. The poor fiscal health of the state governments has constrained the devolution of resources to urban governments and the spending from their own resources does not exceed another Rs 1,000 crore. The overlapping jurisdictions of states with urban local bodies and the need for the latter to respond to the requirements have left them with large unfunded mandates. The revenue sources of urban local bodies are totally inadequate and as they increasingly resort to obsolete and inefficient means of mobilising revenues, significant distortions are created.

Any system of urban planning will have to take urban agglomerations and not municipal boundaries as units for providing public services. People living in urban fringes are an inherent part of the urbanisation process and they too place a demand on urban public services. The next stage is to assess the resource requirements for reasonable standards of various public services, which urban local bodies have to provide. Clarity in the assignment of responsibilities between the state and local bodies will be necessary to strengthen accountability. Thus, assessments of spending requirements for each of the services will have to be done, and a clear distinction will have to be made between those capital and recurrent expenditures, which will have to be supported by the budgets of urban local governments and those that can be financed by the private sector with public participation and regulation.

Equally important is to have a clear perspective and fiscal models of investment and financing of urban infrastructure. The investment in urban infrastructure will have to come from multiple sources. Given the concurrency and scale economies in the case of some services such as building new roads, water supply systems and electricity, investments in them may have to be made by state governments, special purpose vehicles or private-public partnerships. Yet, provisions of many urban services will have to be done by the urban local bodies. Apart from a poor capacity to plan and implement services delivery, the urban local bodies are severely constrained in their capacity to generate resources. Although many of the urban services are of a quasi-public nature and can in principle be priced, political compulsions of populism do not allow economic pricing of services and, in many cases, there is a vicious cycle of poor service delivery, causing low-cost recovery, leading to further deterioration in service delivery.

The world over, municipal services are financed mainly by property taxes because this is the least distorting local tax. However, property tax systems in India are in urgent need of reform. There is a need to evolve simple presumptive systems of determining the tax base, responsive to market values. Financing urban services in future will critically depend on the ability of urban local bodies to mobilise resources from property taxes.

One of the important sources of revenue of urban local bodies in some states, notably Maharashtra, Gujarat and Punjab, is octroi""the tax on the entry of goods for consumption, use, and sale. The distortions caused by the tax and the scope it creates for corruption make it the most undesirable tax in any civilised society. Yet in some states, urban local bodies have preferred to continue with this for revenue reasons, and in the event the reform of property tax systems has taken the back seat. Perhaps, one viable and less distorting substitute is to allow the local bodies to piggyback a small additional rate on the state VAT collected within urban local body jurisdictions. In most states, VAT Acts mandate issues of separate invoices for resale and retail sale and in those that do not, this can be easily done. The local bodies can levy an additional rate of 1 per cent on retail sales turnover in urban local body jurisdiction. The state VAT department can collect the revenue on behalf of the local governments. The advantage with such a levy is that as the tax is collected at the final point of sale, there is no cascading and as it is collected from urban consumers, this virtually becomes a benefit tax. The major metropolitan centres and big cities could initiate reform in this direction and this could find a way of partially solving the problem of financing urban services.

Comments at mgr@nipfp.org.in