Municipal finances. To fund local bodies, listing of Muni bonds should be explored, says RBI

Listing of municipal bonds in the stock exchanges can pave the way for developing the much-needed secondary market for municipal bonds in India, according to the Reserve Bank of India’s maiden report on municipal finances.

There has been no appreciable improvement in the functioning of municipal corporations (MCs) despite the institutionalisation of the structure of local governance in India. “With own 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,” the report, which is based on compliation and analysis of budgetary data for 201 municipal corporations (MCs) across all States, the RBI said.

The availability and quality of essential services for the urban population in India have consequently remained poor, per report.

The rapid rise in urban population density, however, calls for better urban infrastructure, and hence, requires greater flow of financial resources to local governments.

The report, put together by RBI’s Department of Economic and Policy Research (DEPR), said bond financing route needs to be explored on a wider scale to meet the needed capex expansion plans of MCs. 

The Department noted that 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.

DEPR opined that 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.

As the demand for infrastructure grows among Indian cities, MCs must further explore ways to reinvigorate and foster alternative and sustainable resource mobilisation through municipal bonds, DEPR suggested.

Going forward, property tax reform and development of a vibrant municipal bond market may provide a boost to the municipal finances, the report said. “Policies to improve the environment for financial investment through sound and efficient regulation, greater transparency, and better governance can help nurture a vibrant municipal bond market. “Listing municipal bonds in the stock exchanges can pave the way for developing the much-needed secondary market for municipal bonds in India,” it added.

DEPR observed that Indian cities are emaciated financially and are far from being able to generate the resources required for providing good quality infrastructure and services to their citizens. 

Accordingly, the availability of basic urban infrastructure in India lags behind the levels achieved in the OECD and other BRICS nations.

DEPR underscored that the rapid growth of urbanisation in India has not been accompanied by a corresponding increase in urban infrastructure, which is reflected in the performance of the urban local bodies, especially MCs.

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, the report said.

MCs’ committed expenditure in the form of establishment expenses, administrative costs and interest and finance charges is rising, but capital expenditure is minimal, it added.

Among own revenue sources, over-reliance on property tax has constrained exploiting other avenues of funding, such as trade licences, entertainment taxes, taxes from mobile towers, solid waste user charges, water charges, and value capture financing, the report said.

Collection efficiencies

DEPR suggested that ULBs (urban local bodies) also need to improve collection efficiencies in respect of property tax, user charges, lease rentals, advertisement tax and parking fees

Out of 18 functions to be performed by municipal bodies in India, less than half have a corresponding financing source. Own taxes and user charges of the ULBs in India are grossly inadequate to meet their expenditure needs, the report said.

DEPR said ULBs in India are amongst the weakest globally in terms of fiscal autonomy with elaborate State government controls on their authority to levy taxes and user charges, setting of rates, granting of exemptions, and borrowing of funds as well as on the design, quantum and timing of inter-governmental transfers

The absence of buoyant revenue handles, excessive reliance on grants from the Central and State governments, and inability to autonomously access capital markets have weakened the ability of ULBs to fulfil their mandated functions, it added.

Municipal revenues/expenditures in India have stagnated at around 1 per cent of GDP for over a decade.

In contrast, municipal revenues/ expenditures account for 7.4 per cent of GDP in Brazil and 6 per cent of GDP in South Africa.

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