In the recent Report on Municipal finances published by RBI, it was found that municipal bodies are increasingly dependent on fund transfers from the State and the Centre, while their revenue earning capacity is limited. The major revenue source of municipal corporations includes property tax, other local taxes, user fees and charges. It is found that Municipal revenues/ expenditures in India have stagnated at around 1 percent of GDP for over a decade.
Various issues associated with this trend are as follows:

• Inadequate capital expenditure: Municipal Corporation’s committed expenditure in the form of establishment expenses, administrative costs and interest and finance charges is rising, but capital expenditure is minimal. About 70% of its revenue gets spent on salaries, pensions and administrative expenses with very less amount left for capital expenditure.
• Poor service delivery: Indian cities are financially weak and are far from being able to generate the resources required for providing good quality infrastructure and services to their citizens.
• Lack of financial autonomy: It leads to overreach of authority by the States on the urban local body’s (ULBs) decision-making powers and goes against the principle of decentralisation.
  • Further, the funds received from the state are mostly non-discretionary (tied) and can only be used for specific purposes. The ULBs are bound to oblige, even if that is conflicting with their development agendas or resulting in lesser availability of funds for their own schemes.
• Delays in fund devolution: The CAG Report 2016 on Local Self Government institutions observed that there is an immense delay in transfer of funds from states to ULBs, which badly affected the efficiency of the ULBs in executing functions.
• Low share in Total Government Revenue: The introduction of GST has affected some key revenue sources such as entry tax (octroi), local business tax (LBT), advertisement tax, and entertainment tax.

The measures, which can be adopted to improve the finances of the municipal corporations in India, are as follows:

• Municipal Bonds: Local governments can tap the capital market by issuing municipal bonds and similar tools, such as:
  • General obligation bonds, which are repaid with future tax revenues.
  • Revenue bonds, which are backed by earnings/ accruals from a specific project such as highway tolls or lease fees.
  • Finance through special purpose vehicles (SPVs). For example, China’s Local Government Financing Vehicle (LGFV) is an investment company that sells bonds in the bond markets for financing real estate development and other local infrastructure projects.
• Pooled Financing: The smaller ULBs’ access to the capital market can be enhanced through pooled financing, under which a common bond is issued by pooling the resources of several local bodies.
• Priority Sector Lending: All urban infrastructure should be brought under PSL, so that easy loans are available to ULBs.
• Demarcate sources of revenue: A ‘Local Bodies Finance List’ along the lines of the Union and State Lists, can be inserted in the Constitution. ULBs can also impose ‘Profession Tax’ to enhance revenue.

The municipal corporations could further explore innovative financing mechanisms successfully adopted by cities around the world. The RBI can consider making the detailed city-wise information on municipal finances available to researchers and policymakers. This will enable a better understanding of the variations in municipal performance across different states and cities in India and provide directions for strengthening municipal finances.