Cities are growth engines for any country. Therefore, cities must be empowered and supported in this journey. But do you know what a municipal corporation (MC) of your city does, in general? Are you aware of how much money it earns and how it spends?

Challenges involved in Accounting and Consolidating the Municipal Data

The information regarding municipal finances in India is in a pathetic condition. Many balance sheets, audited or otherwise, are not available in the public domain. Many MCs do not follow the double-entry book-keeping system yet even after releasing National Municipal Accounts Manual in 2004. The manual itself has not been approved in many states.

Accounting becomes essential because without knowing how MCs earn and spend we cannot take measures to strengthen our cities.

RBI released a report, the first of its kind in India, on municipal finances. It collated data from around 200 MCs whose data was available. I believe this is a mammoth task and we must thank RBI for making these efforts and bringing out interesting facts and figures from one of the unexplored big-data treasures of India.

This article is my attempt to summarise RBI’s observations and analysis through a few charts and comments.

Snapshot

Below, you can see a snapshot of the receipts and expenditures of all municipal bodies in India. The data for FY18 is closed and finalised while the data for FY19 is presented in two forms viz. Budgeted Estimates (BE) and Revised Estimates (RE). Actual data for FY19 is pending. For FY20, RBI could collate only BE data.

Indian municipal bodies earned close to a trillion rupees in FY18 while estimates suggest that in FY20 their revenue receipts would cross Rs. 1.4 trillion. They are expected to touch 0.7% of India’s GDP. Municipal revenues/expenditures in India have stagnated at around 1 per cent of GDP for over a decade which is much lower compared to 7.4% in Brazil and 6% in South Africa.

If we drill down into the sources of revenue, you would see that it is almost equally distributed among Own Tax Revenue (OTR), Own Non-Tax Revenue (ONTR) and transfers from central and state governments.

On the expenditure side, salaries, pensions, operational expenses and finance costs contribute to more than half of their expenditure.

MCs’ budgets, by law, cannot be in deficit.

Spending

Municipal expenditure declined between FY13 and FY18, but the share of revenue expenditure was constant at around 70% during that period. However, it declined to 58% in FY20 (BE).

That means, there is more room for capital expenditure. Share of capex has jumped from 30% in FY18 to 42% in FY20 (BE) with inter-state variations. Thus, we see an improvement in quality expenditure. The ratio of revenue expenditure to capital expenditure of MCs was 2.4 which is much better compared to 7.1 in the case of the Central Government and 5.9 for State Governments (FY18).

Municipal bodies are at the forefront of servicing citizens and making their lives easier. They should be spending more on quality expenditure i.e. capex so that we get better roads, sanitation and other important services.

How do Indian local bodies earn?

Although OTR, ONTR and Transfers have equal shares currently, this was not the case earlier. In the 1960s, when India had only 20 MCs, the local bodies were more self-reliant due to a higher share of OTR. By FY08, this share dropped to 46% while there was a significant increase in transfers (from 11% to 32%).

Over the years, municipal bodies have been more dependent on transfers, especially from the state governments to carry out their functions.

RBI studied the expenditure quality of municipal bodies and found that the quality improves if more funds get transferred from state and central governments. Lately, these transfers come with certain conditions. For example, if the municipal bodies publish their accounts in the public domain extra funds would get transferred.

MCs in Delhi, Gujarat, Maharashtra, Chandigarh and Chhattisgarh earned OTR more than 1% of their GSDPs. But performance in other states has remained poor.

However, Indian municipal bodies aren’t the only ones that rely on state or central government transfers. Austria, Estonia, Greece, Ireland, Lithuania, Luxembourg, Mexico, Netherlands, Slovakia, Turkey and the United Kingdom, Russia and Brazil rely heavily on such transfers.

Property Tax

Property tax gained prominence post-GST when Octroi, the main source of revenue for local bodies, got subsumed into GST. But there is a wide variation in collection across corporations.

It amounts to less than 0.5% of GDP. Compared to other countries, property tax collections are low in India due to several factors, viz., property undervaluation, incomplete registers, policy inadequacy, ineffective administration, pending litigations, inadequate staffing, poor enforcement mechanisms, lack of updated data, etc.

Maharashtra has the highest property tax collections as per cent of its GSDP.

The Economic Survey of India 2016-17 also argued that a lot of revenue potential through property tax is yet untapped in India. It recommended, “Municipalities also need to make the most of their existing tax bases. There is a need to adopt the latest satellite based techniques to map urban properties. The Government should leverage the Indian Space Research Organization (ISRO)/ National Remote Sensing Agency (NRSA) to assist ULBs in implementing GIS mapping of all properties in the area of a ULB. Property tax potential is large and can be tapped to generate additional revenue at city level.”

Borrowings

In case MCs need funds for any work, they can borrow from different sources but they avoid doing so. Barring two states viz Bihar and Odisha, municipal laws do not explicitly allow borrowing through bond issuances. MCs have to take approval from the respective state government. That has stagnated municipal borrowings in India to less than 0.05% of GDP. Based on per capita municipal borrowings, Telangana ranks first with more than Rs.1700, followed by Bihar and Maharashtra.

Currently, the borrowing structure is mainly traditional. Around half of all debt comes from banks, financial institutions and state or central government.

Municipal bond issuances halted during the JnNURM scheme (2006-14) where total investments into municipal corporations under the scheme amounted to the tune of Rs. 1 lakh crore. However, over the last few years, bond issuances have improved.

However, the situation is changing, but at a snail’s speed. MCs have started borrowing from the capital markets. Bengaluru MC floated municipal bonds for the first time in India in 1997. The Indore MC became the first one to list its bonds on the NSE in 2018. Ghaziabad MC is the first to issue green bonds in India in 2021.

Approaching the capital market route is easier for larger MCs. Smaller MCs cannot mobilise funds at that scale and have to incur higher issuance costs, on the other hand. To ease this situation, the central government launched Pooled Finance Development Fund in 2006 to boost bond issuances. The total sum received gets distributed across multiple MCs. State governments, too have such schemes/funds for MCs to borrow through bonds.

Recommendations

• Implementing a double entry-based accounting system at all MCs.
• Ensuring easy (i.e. online) access to accounts.
• Bringing uniformity in methods, presentation and disclosure of accounts.
• Making systems efficient and, at the same time, upskilling staff to undertake complicated tasks.
• The Centre and the States may share one-sixth of their GST revenue with the local governments (Kelkar and Shah, 2019).
• Strengthening property tax collection mechanisms. (This is actually happening in a lot of cities. Brace yourself for higher property taxes soon.)
• Ease of borrowing through bonds as well as listing those bonds on exchanges.
• Exploring land-based financing – vacant land tax; sharing stamp duty collections with local govt; land monetisation, etc
• Including local governments in general government fiscal data. For example, the fiscal deficit of India should include fiscal deficits of the central government, state governments and local governments. Currently, local government data is not consolidated. Such inclusion would bring India on par with international standards.

– Swapnil Karkare

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