Municipal Corporations in India

Posted 17 Dec 2024

4 min read

Why in the News?

The report titled "Own Sources of Revenue Generation in Municipal Corporations: Opportunities and Challenges" was released by the RBI.

Municipal Institutions in India

India's cities are home to over 400 million people, a number expected to exceed 800 million by 2050. Though cities cover just 3% of the land area, they contribute more than 60% to the country's GDP.

The 74th Constitutional Amendment of 1992 formalized local governance in India, providing a constitutional basis for local governments.
Functions of Local Governments: The 74th Amendment, read with 12th Schedule of the Constitution, outlines 18 functions that state governments can delegate to municipalities, including urban planning, land-use regulation, construction etc.
Revenue and Fiscal Powers:
- Article 243X: Grants State governments the authority to authorize ULBs to impose taxes, duties, and fees and to assign certain revenue sources to ULBs.
- Article 243Y: Assigns the responsibility of reviewing and recommending the devolution of taxes and grants to State Finance Commissions (SFCs).

Revenue Sources of Urban Local Bodies

Own sources	Tax Revenue-Property tax, water benefit tax etc. Non-tax Revenue-User charges, developmental charges etc. Other receipts-lease rent, sale of rubbish etc.
Assigned (Shared) Revenue	Entertainment tax (subsumed under GST, except when levied by the local bodies), professional tax etc.
Grants-in-aid	Central and State Finance Commission (SFC) devolution, Grants under programmes like SBM, AMRUT.
Borrowings	Loans from state and central governments, banks etc.

Key Findings of the RBI Report

Low Revenue Generation: Indian municipalities generate only 0.6% of GDP in 2023-24, much lower than the central government's 9.2% and state governments' 14.6%, limiting urban development funds.
- Tax revenues constitute 30% of Municipal Corporations' income, followed by grants, contributions, and subsidies (24.9%), and fees and user charges (20.2%).
- Additionally, according to the CAG report, MCs in 18 states collect only 56% of their property tax demand.
Reliance on Transfers: Municipalities depend heavily on delayed and insufficient government transfers. In 2022-23, grants from the Central and State governments to municipalities increased by 24.9% and 20.4%, respectively.
Municipal Borrowing: Borrowing rose from ₹2,886 crore in 2019-20 to ₹13,364 crore in 2023-24, increasing from 1.9% to 5.2% of total receipts.
Municipal Bonds: The municipal bond market is underdeveloped, totalling ₹4,204 crore (0.09% of corporate bonds), with most bonds privately placed, limiting investor participation.
- Additionally, the Green Bond market is still in its nascent stage, and the process of issuing a green bond involves additional costs for green audits and monitoring key performance indicators.

Other Issues faced by Municipal Corporations in India

Financial Challenges:
- Ad-hoc Implementation of SFCs: States often delay or inadequately implement State Finance Commission (SFC) recommendations.
  - For ex- Telangana's SFC was formed in 2015 but only constituted in 2018.
- Low Absorptive Capacity in Indian Cities: According to a recent CAG report, Urban Local Self Governments (ULSGs) in 11 out of 18 states have utilized only 61% of the funds allocated to them.
Governance Challenges:
- Limited Devolution of Powers: Despite the 74th Constitutional Amendment, many states haven't fully devolved powers to ULBs, especially in urban planning and land use regulation.
- State Election Commissions: The insufficient strengthening of State Election Commissions affects the timely conduct of municipal elections every five years.
  - For ex- elections to the Bruhat Bengaluru Mahanagara Palike (BBMP) have been delayed since 2020, disrupting local governance.
- Human Resource: High vacancy rates (30-40%) and lack of training limit MCs' ability to provide services.
  - For instance, in 18 states, 37% of positions are vacant, as per the CAG report.
- Urban Planning and Service Delivery: A significant portion of municipal expenditure (29%) is not directed toward urban development, limiting infrastructure investment, as per the CAG report.

Way Forward

Enhance Own-Source Revenue:
- Property Tax: Adopt valuation-based property tax formulas, GIS mapping, and digital payment platforms to improve compliance and reduce leakages.
- Non-Tax Revenue: Adjust user charges for water, sanitation, and waste management to ensure cost recovery. Use technology and public campaigns to improve fee collection.
Timely Transfers:
- Ensure direct, predictable transfers from State governments based on a clear formula that accounts for inflation and city growth.
- Form State Finance Commissions (SFCs) regularly to recommend and implement transfers on time.
Diversify Funding:
- Explore municipal bonds and innovative financing for capital investment. Pool resources for large-scale infrastructure projects to overcome fiscal constraints.
  - Access climate finance for sustainable urban planning, focusing on green infrastructure and renewable energy.
Transparent Financial Management:
- Implement National Municipal Accounting Manual (NMAM, 2004) for standardized accounting practices.
- State governments should mandate compliance, support training, and link intergovernmental transfers to accounting standards.
Human Resources: States should address issues like vacancies and lack of training institutions.
- For ex-Madhya Pradesh has created a Municipal Cadre to improve staffing and skill development.