Tale of 2 cities: After Pune civic body, NDMC to raise funds via muni bonds

Close on the heels of the Pune Municipal Corporation (PMC) tapping the municipal bond market, the New Delhi Municipal Council (NDMC) has announced its intention to follow suit.

The PMC raised Rs 200 crore last month by selling 10-year bonds, becoming the first civic body in 14 years to tap money through this route.

A Business Standard analysis of their budgets reveals that not only do the two civic bodies have different expenditure priorities, but they also rely on different sources of income to fund their expenditure plans. 

Four broad trends emerge from the analysis. 

First, the PMC relies heavily on a local body tax (LBT) to fund its expenditure. But as this tax will now be subsumed under the goods and services tax (GST), the municipal corporation will have to rely on compensation grants from the state government to a much greater extent than before to make up for the shortfall in its revenue. 

Second, income from user charges makes up a much larger portion of NDMC’s revenue receipts than PMC’s.

Third, while both municipalities are able to fund their capital expenditure through internal resources, PMC’s capex far outstrips that of the NDMC.

Fourth, the NDMC spends a much higher proportion of its expenditure on operations and maintenance than the PMC. 

On the revenue front, NDMC’s tax collections are budgeted at 17.6 per cent of total revenue receipts in FY18. The balance is made up by non-tax revenue such as user charges. By comparison, tax collections accounted for a staggering 63 per cent of PMC’s total revenue receipts in FY16. What explains this astounding difference?

For municipalities, tax collections tend to largely accrue from property taxes. But the PMC also levies a local body tax. Now, in its 2017-18 budget, the NDMC budgeted property tax collections at roughly 16 per cent of total revenue receipts. For the PMC, the comparable estimate was 20.5 per cent in FY16. This implies that the difference between aggregate tax numbers of the two municipalities is principally on account of collections from the local body tax (LBT) levied by the PMC.

Now, the LBT was levied by the PMC but was partially abolished by the state government in August 2015. The PMC was compensated for this loss in revenue by way of grants from the state government, though it retained the right to tax traders above an annual turnover of Rs 50 crore.

To put the importance of this tax in perspective, consider that in FY16, the PMC on its own collected Rs 8,88 crore through this tax, while it received compensation grants from the state government amounting to Rs 5,76.7 crore. Together, this accounted for 36 per cent of PMC’s revenue receipts in FY16.  But now this tax will be subsumed under the GST. 

“From July 1 onwards, the Pune Municipal Corporation will not be levying the local body tax as the tax has been subsumed under the GST,” said Anuradha Basumatari, associate director, public finance, India Ratings and Research. 

“But a revenue loss is not expected as the local body will receive compensation as provided in the Maharashtra Goods and Services Tax (Compensation to the Local Authorities) Act, 2017. The compensation amount payable to a local authority will consider FY17 as the base year with 8 per cent growth on the base year revenue. The PMC expects to receive communication from the state government on compensation-related specifics shortly as compensation is likely to commence from August 2017,” she added. 

On Tuesday, the Maharashtra government decided to raise the registration fees on vehicles to compensate for revenue losses of roughly Rs 600-700 crore annually on account local body taxes and octroi being subsumed under the GST. But it’s difficult to say for sure whether this alone will be enough to fully compensate the municipality for its revenue loss. Either way it implies that PMC’s reliance on transfers from the state government will now increase. 

On the non-tax revenue side, NDMC’s income from user charges accounts for a staggering 45 per cent of all revenue receipts. For the PMC, the comparable estimate was 18.9 per cent in FY16, down from 25.7 per cent in FY15. 

On the expenditure side, data reveals a marked difference in the spending pattern of these municipalities. 

PMC’s revenue expenditure as a percentage of total expenditure rose to 58.6 per cent in FY16, up from 52.2 per cent in FY12. By comparison, in 2017-18 the NDMC has budgeted revenue expenditure at 84.5 per cent of total expenditure. Even though this has declined from 89.8 per cent in FY17, the NDMC still spends a significantly higher proportion on revenue expenditure than the PMC. 

A closer look reveals that within the broad rubric of revenue expenditure, the NDMC has budgeted to spend 41 per cent of its revenue expenditure on operations and maintenance in FY18. By comparison, the PMC spent only a fraction of this -- 9.6 per cent in FY16. 

Both municipalities tend to allocate fairly large portions of their budget on salaries. NDMC’s allocation to establishment expenses (salary, benefits and allowances) in total expenditure is budgeted to rise to 42.5 per cent in FY18, up from 39 per cent in FY16, while the PMC spent 59.7 per cent on this in FY16, up from 39.8 per cent in FY12.

And while both are relatively debt-free and rely on internal accruals to fund their capex, PMC’s capex far outstrips that by NDMC.

In FY16, the PMC allocated 41.38 per cent of its total expenditure on capex. While this is down from 47.8 per cent in FY12, it is still higher than NDMC’s capex at 15.5 per cent in FY18. In absolute terms, PMC’s capex was Rs 1,442 crores in FY16, while for the NDMC the same was Rs 337.68 crores in FY17 (RE). It has been budgeted at Rs 559.55 crore in FY18.