Time to strengthen Urban Local Body revenues

Errol D Souza/Astha Agarwalla | Updated on June 18, 2020

The pandemic is an opportunity to design long-term strategies that will boost ULBs’ revenue base. This will help them meet the growing demands of an increasing urban population

History tells us that diseases have shaped cities. Cholera outbreak in London led to development of better sanitation systems. Surat fought back plague to come out as a public health leader. Covid-19 joins the list of diseases with higher incidence in urban areas. Despite lack of robust statistical evidence it is safe to assume that higher density leads to more contacts, and higher reproduction rate, i.e., the number of secondary cases produced by each primary case is expected to be higher in cities.

The World Health Organization and other international agencies have warned that the virus is going to stay with no cure in immediate sight, and that our working and living conditions are required to be readjusted to its presence.

Cities require to address challenges of isolation and social distancing in densely populated informal settlements while simultaneously exploring new urban designs to ensure lower densities and lesser commuting requirements, along with better planned and distributed health services.

Short of resources

These are daunting challenges, requiring significant financial resources at the disposal of city governments. Urban Local Bodies (ULBs) in India have never had enough resources to satisfactorily fulfil the functions devolved to them in the decentralisation process triggered by the 74th Constitutional Amendment Act. Own revenues constitute only a third of ULBs’ total receipts.

After the abolition of octroi, property tax is the single largest source of own revenue for ULBs. However, the tax collections are low, due to wide exemptions, undervaluation of property and incomplete land registers. According to a study by ICRIER, property tax contributes to around 20 per cent on an average to total revenues of ULBs in India, and the average per capita property tax collection was ₹421 in 2017-18.

User charges for services such as water supply, sewerage and solid waste management are the other sources of own revenue. These contribute insignificantly. The collection efficiency of user charges is very low, and a large part of these services are non-billed and non-accounted for. Under many State laws, State governments decide the user charges, cities do not have discretionary powers.

The ULBs depend largely on transfers from the Centre and State governments, exposing them to high political risks. The central transfers are tied to specific scheme and programmes and do not add to the discretionary fiscal space available to the ULBs. The anti-urban bias in policy and planning led to absence of programmes specifically designed for urban areas for a long time.

Programme-based approach

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM), launched in 2005, was the first massive urban development programme, covering only 63 cities. There has been a recent enthusiasm towards programme-based approach for urban development. However, the coverage has been limited. The Smart City mission covers 100 cities, AMRUT mission another 500, and HRIDAY covers 12.

There are around 7935 ULBs in India. The smaller ULBs rely mainly on transfers from higher tiers of governments. The share of divisible pool devolved to the third tier of government as recommended by successive Finance Commissions has been limited to 1.5-2.5 per cent. Here too, the share of ULBs has remained low, at around 30 per cent of the funds devolved, with rural bodies getting a higher share.

The stimulus package announced by the Finance Minister identifies the need for better health and sanitation services in cities and provides funds for the same. These temporary transfers will support specific immediate challenges. However, the basic resource gap of ULBs remains unaddressed. The stimulus package provides for conditional extension in the borrowing limits of States subject to fulfilment of reform targets in four suggested areas, one of them being ULB revenues.

Time for reforms

While the Department of Expenditure is working on the details, it is time for reforms which recognise that ULBs need permanent, buoyant sources of own revenue to be able to match the growing demands of an increasing urban population. The Fifteenth Finance Commission recognises this need, and identifies notification of floor rates of property tax and timely availability of audited accounts as the two immediate reforms. These need to be furthered as the principle of fiscal federalism requires devolution of sufficient fiscal powers to the third tier, matching up the functional responsibilities.

A dynamic approach, where some of the current income-based taxes such as professional tax, entertainment tax, or land resource based taxes such as stamp duty can be devolved to ULBs, will increase the buoyancy of the revenue base. The devolution is justifiable, since cities take measures that contribute significantly to the generation of these revenues by providing infrastructure and generating agglomeration economies.

This devolution will especially help the smaller ULBs, which do not have professional capabilities to utilise project based revenue enhancing methods such as land value capture or public private partnerships. For services such as water supply and sewerage, standard norms for O&M and reasonable capital recovery costs can be worked out, and standard user charges covering these can be imposed uniformly across cities. Any discrepancies can be adjusted against transfers from State/Central finance commissions. This can also push the cities for efficiency gains in service delivery.

With increased own revenues and improved financial accountability, the ULBs can access the capital markets through bond issuance and fund the creation of infrastructure.

The pandemic is an opportunity to design long term response strategies to garner resources to enable cities to deliver better public health systems and distributed service management supported by devolution of fiscal powers to local bodies through appropriate reforms.


D’Souza is Professor at IIM Ahmedabad, and Agarwalla is Associate Professor at Adani Institute of Infrastructure Management

Published on June 18, 2020

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