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Cities are the starved engines of India’s growth

LiveMint logoLiveMint 06-03-2017 Dipti Jain

In 2015, the Brihanmumbai Municipal Corporation invited volunteers to receive training for killings rats, as its paid rat-killers were not enough to tackle the rodent menace in the teeming metropolis. Sanitation workers of the now-trifurcated Municipal Corporation of Delhi have gone on strike multiple times over non-payment of salaries since the Aam Aadmi Party government took over in 2015, leaving unattended garbage dumps across the national capital. Such examples are the proverbial tip of iceberg of problems facing India’s urban local bodies (ULBs). Most of them are rooted in poor fiscal state of these bodies. And there cannot be a one size-fits-all solution.

A 2016 article in the Economic and Political Weekly (EPW) by Gregory Pierce from the department of urban planning at the University of California, can help understand why this is the case. The paper shows that cities which are further from state capitals have lower revenue generation abilities and hence are more dependent on state governments to take care of their expenses. Similarly, newer cities with lower population densities find it difficult to generate revenues. As of 2001, cities in Uttar Pradesh and West Bengal relied on the state for nearly three-fourths of their revenue. For Punjab and Kerala, it was less than one-fifth. The share of own revenue in total expenditure varies a lot among ULBs of major cities.

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According to the India Habitat III report released by the Union ministry of housing and urban poverty, share of own revenue generated by ULBs is just above 50% of their total revenues. The report shows that the situation has deteriorated between 2007-08 and 2012-13. Who is to blame?

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Political populism plays a part in frittering of revenue generation capabilities. For example, the Shiv Sena in January promised property tax exemption for residential units up to 500 square feet in Mumbai in an apparent bid to retain power in the municipality.

According to the Economic Survey 2016-17, a document released by Union ministry of finance, Bengaluru and Jaipur are currently collecting no more than five to 20% of the property tax potential.

As own revenue continues to decline, state transfers are also drying. A 2014 study by the Administrative Staff College of India (ASCI) shows that state governments have been transferring less and less amount of funds to ULBs against what is being recommended by State Finance Commissions.

The figure was 97.6% in 2007-08, 89.4% in 2012-13 and 84% in 2013-14.

The 14 Finance Commission (FFC) raised the devolution to ULBs by 277% over the 13 Finance Commission’s (TFC) allocations. Data for 2015-16 shows that only nine states received 100% of the basic grant recommended by the FFC in 2015-16. Nine states received less than half of their allocated basic grants.

The FFC made grants available to urban local bodies in two parts—basic grant, and performance grant in the ratio of 80: 20. The performance grant would be given if they fulfilled three conditions—have their accounts audited, improve own revenues, and publish service-level benchmarks.

An EPW paper by Indira Rajaraman, a Mint columnist and noted economist, and Manish Gupta from the National Institute of Public Finance and Policy shows that there was a consolidated shortfall of 8.75% in basic grants and 37.8% in performance grants to ULBs between 2010-11 and 2014-15. This suggests that there is a systemic pattern to under-allocation of funds earmarked for ULBs, rather than just underperformance on part of ULBs.

India already fares poorly compared to cities globally in terms of quality of living, as per Mercer’s Quality of Living rankings 2016. Hyderabad, which ranked as the top city in India in the ranking, stood at a low rank of 139 among the 230 cities surveyed. Mumbai and New Delhi ranked 152 and 161, respectively.

To promote competition among cities for better services, the Union urban development ministry is planning a ‘City Liveability Index’ for all cities based on parameters such as air pollution, open space, student-teacher ratio, etc. Without sound finances, such projects are unlikely to take off.

This year’s Economic Survey has dealt with issues surrounding ULBs in detail. While calling upon ULBs to enhance their revenue generation efforts, the survey has also posed a political economy question: should finance commissions continue to increase share of ULBs through diktat or should the issue be left to state governments in keeping with the spirit of federalism. It is imperative that our political leadership finds an effective answer to this question.

This is the first of a two-part data series on urban governance. The next part will look at urban elections.

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