MUNICIPAL FINANCE IN INDIA
CAN IT BE MADE TO WORK?
24 March 2011
Om Prakash Mathur
National Institute of Public Finance and Policy (NIPFP)
THE 21st Century Indian City: Developing an Agenda for
Urbanization in India
University of California, Berkeley
0
CONTENTS
What is the question?
Municipal Finance: A Reality Check
Challenges and Issues
Making Municipal Finance Work
1
WHAT IS THE QUESTION?
• Is the existing Municipal Finance System adequate for India’s
changing socio-economic realities?
• Can it deal with the contemporary challenges of urbanization,
decentralization as embodied in the Constitution (74th)
Amendment, and of globalization?
• Can the existing Municipal Finance System generate enough
resources to be able to wipe out the huge urban infrastructure
deficits and meet the infrastructure requirements of incremental
urban population?
2
•
Growing concern for municipal finance
i
Report of the Thirteenth Finance Commission (Dec 2009)
ii
The McKinsey Report on India Urban awakening, building inclusive
cities, sustaining economic growth (April 2010)
iii
The World Bank Report on Regulatory Framework for Municipal
Borrowing (August 2010)
iv
Report of the High-Powered Expert Committee on Urban
Infrastructure Investment Requirements (March 2011)
v
Municipal Finance Matters: India Municipal Finance Report (March
2011)
3
MUNICIPAL FINANCE: A REALITY CHECK
• A three-level check Municipal finance data aggregated at National, macro level
Municipal finance data aggregated at the level of states
Indepth examination of the finance data of 31 municipalities of different
population sizes, from six states viz., Andhra Pradesh, Kerala, Madhya Pradesh,
Maharashtra, Rajasthan, and Uttar Pradesh.
4
1. Measured in terms of what the
municipalities raise with their revenueraising powers and what they spend,
municipal sector is tiny.
Own tax revenue
15,277
Rs.
crore
Per capita Rs. 492
0.35% of GDP
• Shrinking own revenue component.
Revenue income
• Level of municipal expenditure
maintained, fuelled by state transfers
and JNNURM grants.
• Signals failure of municipalities to be
able to capture growth; also inability of
growth
to
trickle
down
to
municipalities.
Rs.
44,429 crore
Per capita Rs 1430
1.03% of GDP
Revenue expenditure
Rs.
28,431 crore
Per capita 0.66% of GDP
5
2 Large inter-state differences in the levels of
municipal own revenues and municipal
expenditures.
Range - own tax revenues
i
High of Rs.
& low
of Rs
per capita
ii
Four states accounting for 33% of urban population,
generate 75% of municipal resources; five states
accounting for 26% of urban population are able to
raise just 3.4% of revenues
Fall in “municipal own revenue” across states;
insufficiency of own revenues for meeting revenue
account expenditures.
38
1079
Range -– Revenue
expenditure
1449 &
low of Rs 134 per capita
High of Rs.
iii State transfers maintaining the level of municipal
spending.
iv Central government grants contributing to meet
municipal requirements for asset creation.
6
What do these facts suggesti. Tax reforms of recent decades have’nt reached out to taxes at municipal
levels;
ii. States preferred option has been to increase transfers rather than undertake
tax and user charge reforms;
iii. Reforms undertaken as a part of the JNNURM and states own efforts not
deep enough;
7
iv. A new and extraordinarily significant phenomenon is Central government
financing of urban infrastructure - (a) Transforming inter-governmental relations
(b) Urban development emerging as a multi-tier responsibility, with vastly
important long term ramifications
(c) Recognizing macro level stakes in improving urban infrastructure
8
3. Poor internal management of fiscal powers
i. Property tax – unquestionably a prime revenue source, 19% of total
revenue incomes, but characterized by huge inefficiencies
•
•
•
the problem of free riders – 41% properties not on Municipal house tax
register
exemptions from payment of property taxes wipes out 11% of revenues
from property taxes
high collection inefficiencies – only 46% of tax demanded is collected
ii. Large subsidy on service provision – conservatively estimated at 35
percent of the cost incurred on their operation and maintenance
iii Erratic transfers not conducive for municipal functioning which
require stability in revenue flows
9
4. Small-sized municipalities generate 35 percent of the average “own
revenues”
5. JNNURM impact on municipal finances and functioning not
visible (only two years of experience registered in survey)
6. Revenue-yielding potential is short by 30-80 percent of the
standard municipal expenditure norms, meaning that even if
municipalities use their revenue-raising powers optimally, they will
not be generate enough to reach the norms.
7. Credit rating analysis shows that high revenue-raising capacity is a
pre-requisite to achieving investment grade rating
10
CHALLENGES AND ISSUES
Challenge 1
•
Raising municipal spending to levels necessary for maintaining
services at standardized norms -- formidable in the light of i
ii
iii
iv
v
vi
declining own revenues
limits of a single tax dominated municipal tax system
inefficiency load
low or zero revenue yielding fiscal space, obsolescence has set in
subsidies in service provision
irregular state transfers and grants.
11
Challenge 2
•
Redesigning the recent initiatives to improve municipal finances
(i) Neither the SFCs have brought about any change in municipal fiscal space
nor has the JNNURM reform agenda begun to impact on municipal
finances
(ii) Experiment to engage parastatals in service provision has not produced
efficiency gains
12
Challenge 3
•
Addressing the problems of municipalities in low-income and lowurbanized states which are at high risk
•
Smaller municipalities with poor resource bases which are also in
the same league
Challenge 4
•
Upgrading capacities across municipalities
13
A Key Issue
•
The role of the Central government in municipal infrastructure
financing and municipal finance reform – formalisation – its
impact on the country’s federal structure?
14
THE WAY FORWARD
TOWARDS A MUNICIPAL FISCAL POLICY
Strong evidence that the existing finance system can not generate
enough resources to i
wipe out the deficits estimated at Rs. 12,37,647 lakh crore
(HPEC’s estimate)
ii meet the infrastructure needs of incremental population
iii effectively address the 12th Schedule agenda
iv contribute to infrastructure needs arising out of India’s integration
into global economy
15
EIGHT IMPERATIVES FOR THE WAY FORWARD
1 Restructuring and broad-basing of the existing municipal finance
system
2 GST – piggy backing – A pre-requisite for municipalities to
undertake growth and equity functions as embodied in the 12th
schedule
3 Redesigning state inter-governmental transfers and grant system,
with focus on addressing horizontal imbalances and addressing
issues of smaller municipalities
4 New role for the State Finance Commissions (SFC)
16
5 Central finance commission to look at inter-state variation – the
extent to which variant is not caused by state policies and
inefficiencies
6 Restructure the JNNURM Grant-cum-Reform Facility
7 Data bases, Performance Monitoring, and Fiscal Responsibility
8 Capacity building
17
While the world has changed rapidly, the tax systems that support all
levels of governments have largely been the same. The underlying
taxes that support local governments were designed and implemented
in a different time and for a different economy. With a few exceptions,
these taxes have not changed significantly since their inception. Many
scholars believe that without radical changes, these taxes cannot
continue raising sufficient revenue in the 21st Century.
David Brunori. 2007. Local Tax Policy
A Federalist Perspective. The Urban Institute
Washington D.C.
18
Thank you.
19