Nothing ‘smart’ about our municipalities

Abhirup Bhunia | Updated on January 24, 2018 Published on May 29, 2015

Squeezed: Not a great idea for development Joe Belanger/shutterstock.com

Urban local bodies are strapped for funds. State governments and finance commissions must address this issue

In a welcome development, the NDA government has acknowledged cooperative federalism as a main plank of economic growth and development.

The hike in States’ share in the total tax pool to 42 per cent announced in the 2015 Budget is significant.

However, another step towards strengthening federalism is going to be necessary in order to achieve local-government empowerment.

This will be particularly relevant at a time when the government is building ‘Smart Cities’ across the country.

Neglected dimension

Urban Local Bodies or ULBs (Municipal Councils, Municipal Corporations and Nagar Panchayats) should be at the forefront of India’s quest to develop smart cities, at a time when the country is urbanising rapidly.

Indian cities fall far behind on basic parameters: transport, utilities (water, electricity), sanitation and waste management.

The 74th amendment to the Constitution of India provides constitutional status to ULBs and allocates specific civic responsibilities to them.

Schedule 12 of the Constitution contains a list of subjects under ULBs including urban planning, regulation of land-use, construction of buildings, roads and bridges, water supply, sanitation and solid waste management, environment, provision of urban public amenities and conveniences.

These are among the most essential parameters to judge any city’s smartness.

However, any empowerment of ULBs would depend on state governments. The Constitution empowers them to lay down functions and powers of ULBs.

The financing needs of ULBs have not been addressed. Consequently, ULBs continue to remain heavily dependent on State governments.

Although most municipal corporations in India retain sound financials by way of under-spending, there are substantial funding gaps for ULBs. Empowerment of ULBs should be two-fold: financial and administrative.

Under-funded local bodies

In financing the city’s needs, ULBs should not just be able to raise funds themselves but also be entitled to a higher devolution of Central funds. The 13th Finance Commission was historic in terms of ULBs because it first recommended a fixed percentage share for ULBs in the divisible tax pool.

That share is still at below 2 per cent and is converted into ‘grant-in-aid’ so as to conform to the Constitution that underscores the primacy of state governments in local matters.

Power to set tariffs and fees are technically often granted, but ULBs routinely fail to exercise them for “political reasons” according to a state finance commission report.

Municipal revenues as a share of GDP in India are below 1 per cent, as against 5-7 per cent in comparable economies such as Brazil and South Africa.

There is great potential for municipal bonds (MBs) to help ULBs attain a degree of self-sufficiency. MBs in India suffer from low ratings and investor reluctance. Tier III and Tier IV cities’ access to the debt market is abysmal if not nil.

In this context, the overall deepening of the bond market in India will help ULBs.

The otherwise progressive Fourteenth Finance Commission has not upped the share of ULBs in the divisible tax pool.

A back-of-the-hand calculation shows that the grant to ULBs is 27.88 per cent of the total devolution to local bodies (panchayats + ULBs). While this grant is for the period 2015-20, one can argue that the ULBs’ share could have at least been 30 per cent of total given that an estimated 35 per cent of India’s population is going to be urban by 2020. Seventy per cent of India’s GDP is also projected to be commanded by cities by 2030.

Unsurprisingly, funds were sought funds for improving basic services including water supply, sewerage, solid waste management, roads and street lighting, transport and maintenance, etc.

Besides easing funding for ULBs, their dependence on upper tiers of government, mainly the State governments, must be curbed. However, the FC-XIV desisted from such reforms because the Constitution doesn’t provide the Central FC with such a power, and designates the same to States. But State finance commissions have shied away from using Constitutional provisions to empower ULBs.

The Smart Cities project as well as India’s overall economic development will benefit from fiscally and administratively empowered ULBs.

The writer is a policy consultant

Published on May 29, 2015
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