Modest means: Time to strengthen and reimagine India's local bodies

The Reserve Bank of India (RBI) has done well to initiate studies on the fiscal position of local bodies and publish the findings. The first such report on municipal corporation (MC) finances was published in November 2022. This was followed by a study of the finances of panchayati raj institutions. The RBI has now published a report on the fiscal position of MCs from 2019-20 to 2023-24 (Budget estimates, or BE). The study covers 232 MCs across the country. Local bodies in India often receive limited policy attention, partly due to the lack of data in a comparable format. It is to be hoped that accessible studies by the RBI will help bring the necessary policy attention and enrich public debate.

 

The need for strengthening local bodies cannot be overemphasised. In the context of MCs, it is worth noting that India is rapidly urbanising and needs to develop civic capacity. As things stand, about 60 per cent of India’s gross domestic product (GDP) is generated in urban areas and over 50 per cent of its population is expected to live in urban areas by 2050. However, most MCs are not geared to handle the transition, largely because of a lack of resources. As the RBI report shows, MCs’ revenue receipts are just about 0.6 per cent of GDP. Even this modest number is skewed in favour of a handful of MCs — 10 MCs account for nearly 60 per cent of revenue receipts. The MCs’ expenditure, revenue and capital, was only about 1.3 per cent of GDP in 2023-24 (BE). Their own revenues include levies such as property tax, fees, and user charges. Property tax accounts for about 60 per cent of their revenue receipts.

 

However, MCs depend significantly on grants from the Union and state governments. Transfers by the state government, State Finance Commission grants, and flows under other heads constituted about 30 per cent of revenue receipts from 2019-20 to 2022-23. Transfers by the Union government were worth about 2.5 per cent of revenue receipts. MCs are also borrowing from the market, though the amount remains small, at just about 0.05 per cent of GDP. There is a strong case for strengthening the state of MC finances and enabling them to perform better. In most developed and developing countries, the share of local bodies in general government revenue and expenditure is much higher. Increased delegation of fiscal powers and social responsibility will help improve both economic and social outcomes. It is always easier for voters in democratic systems to hold their local political leaders to account.

 

To improve MC finances, interventions will be required at various levels. Most importantly, MCs will have to work on boosting their revenues. Property tax, for instance, needs to be reformed to reflect the rising valuations. It will also be necessary to use technology to improve the scale and scope of taxation. Besides, MCs will need to charge realistic levels of user fees. Overall, it will be vital to reduce dependence on higher levels of government. That will create predictability in revenue. One possibility is to give local bodies a share in goods and services tax after legal changes. This will not only help MCs plan development projects better but also enable them to raise debt on more favourable terms. Some MCs have approached the bond market. It is time India reimagined the role and state of local bodies.