FINANCES OF URBAN LOCAL BODIES IN INDIA

Transcription

1 CHAPTER - III FINANCES OF URBAN LOCAL BODIES IN INDIA 3.1 Introduction Public finance is a specialized subject concerning public policy wherein principle of finance, policy and economics are often applied with respect to the finances of governments- primarily central (or federal) and provincial (or state) governments given the importance of these two tiers of governments, in terms of both power and finances, the enquiry of public finance has primarily confined to finance of these governments and interflows together with institutional aspect and so is the research on theory and practice. Local government finance, a sub stream of public finance pertains to the finances of local government in both rural and urban areas in relation to the upper tiers of governments i.e. federal and state governments (Nallathiga, 2008). The finances of urban local bodies (ULBs) have been assuming much greater importance with the urban areas increasingly becoming important in terms of not only population share but also economic growth. With the municipalities/ Municipal Corporations acting as centres of government of urban areas, urban local government finance is also referred to, sometimes, as municipal finance in India. However, the performance (both physical and financial) of urban local government may vary between the municipalities (of cities) and Municipal Corporation of larger urban agglomerations as well as amongst themselves (Nallathiga, 2008). Thus, municipal finance is about the revenue and expenditure decision of municipal governments. It covers the sources of revenue that are used by municipal 77

2 government such as taxes (property, income, sales, and excise taxes), user fees and intergovernmental transfers. It includes ways of financing infrastructure through the use of operating revenues and borrowing as well as charges on developers and public private partnership. Municipal finance also addresses issues around expenditure at the local level and accountability for expenditure and revenue decisions including the municipal budgetary process and financial management (UN Habitat, 2009). Finances of ULBs or urban public finance broadly relates to the evolution and structure of finance of local governments, and the array of fiscal relations of local governments. However, given the existence of ULBs in the tiered structure of government and there interface with the citizens, the inquiry of urban public finance also includes the dimensions like institutional arrangement and decision making and fiscal management, reform and accountability, transparency and gap financing. The state of ULBs in India is slightly better as a whole compared to the Panchayti Raj institutions (PRIs). Here too, there is a great deal of heterogeneity with some doing rather well (specially the municipal corporation) whilst other smaller municipal councils increasing their dependency on the higher government even to deliver the local public goods and services. This is explained by the fact the the Indian economic growth in recent times has been driven by urban areas and with reforms some of the ULBs have been able to help themselves improve their situation (Pethe, Mishra and Rakhi, 2004). The constitution of India ordains that India is a federation of states and union territories, with residual legislative powers vesting in the central government. The constitution, in its 7 th schedule, assigns the powers and functions of the centre and states. The schedule specifies the exclusives powers of the centre in the union list, 78

3 exclusive powers of the states in the state list, and those falling under the joint jurisdiction in the concurrent lists. The constitutional assignment of the tax powers in India follows the principal of separation i.e.; the tax handles are exclusively assigned either to the centre or to the states. Most of the broad based and the productive tax handles have been assigned to the centre, including income taxes, wealth taxes from non agriculture sources, corporation tax, taxes on production (excluding those on alcoholic liquor, opium, hemp and other narcotics) and custom duties. States taxes include taxes on agriculture income and wealth, taxes on the transfer of properties (Stamp duties and registration fees) Taxes on motor vehicles, taxes on the transportation of goods and passengers, sales tax on goods, excises on alcoholic beverages, entertainment tax, taxes on professions, trades, callings and employment, properties tax and taxes on the entry of goods in to a local area for consumption, use or sale (Octroi). The centre has also been assigned all residual powers of taxation (Venkatachalam, 2007). The constitution of India specifies the taxes to be divided between the central and state governments but it does not specifies the revenue base for ULBs. Further the constitutional amendment act (CAA) is not specific about the types of taxes that ULBs should have but on the other hand the power for determining the revenue base of ULBs typically consists of their own resources (Tax and non tax revenues), shared revenues, state grants and loans from state governments and market borrowing. In spite of the variation in the figures compiled by different agencies, for want of a uniform accounting and reporting framework, it is evident that municipal revenues has generally had limited buoyancy (Vaidya, 2009). 79

4 th Constitutional Amendment Act Municipal institution in India has a history of over three hundred years. These refer ULBs comprising Municipal Corporations, municipalities and nagar panchayats. However, the constitution did not make local self government in urban areas a clear cut constitutional obligation. As consequence of inadequate constitutional provision for local self government, democracy in municipal governance was not stable. As a result, many urban local bodies become weak and were not able to perform effectively. In this context, 74 th CAA came in to force in June, The main provision include constitution and composition of of ward committees, reservation of seats, duration of municipally, powers and functions, finances, finance commission, elections, district metropolitan planning committees etc. The 74 th CAA expect that ULBs will assume responsibilities for urban planning, water supply, social and economic planning, slum up gradation, public health etc. However, the CAA did not lay down revenue base for ULBs and power to determine the revenue base continue to remain with state government. Study of implementation of 74 th CAA in various states showed that some states have performed better than others. An important observation is that while there has been full compliance in respect of provision, such as constitution of three types of ULBs, reservation of seats, and constitution of SFC, the same cannot be said for other provisions, namely constitution of the ward committees, district planning committees and metropolitan planning committees. Many states have not transferred functions, funds and functionaries. Revenue powers of ULBs are often not in consonance. There is also no consistency about term, powers and methods of election of Mayors. In most of the states, mayors do not have executive powers as they are vested with commissioners (Vaidya, 2009). 80

5 Recent years following the constitution s 74 th amendment have witnessed extraordinary interest in the role of municipal government in financing urban infrastructure and services and enhancing the quality of India s socio-economic ethos. Much of the interest owes itself to the provision in the amendment act, which point towards a larger role for municipalities in the country s developmental affairs and a corresponding provision that suggests larger fiscal space for them. The former is incorporated in schedule 12 of the constitution, which lists out 18 subjects and functions considered appropriate for municipalities. According to the schedule 12, municipalities in India are an appropriate tier for such subjects such as urban planning including town planning, planning for economic and social development, urban forestry and protection of the environment and promotion of the ecological aspects, slum improvement and up gradation, and urban poverty alleviation. Upon fuller implementation, schedule 12 will exercise a major impact on the functional profile of municipalities and their role in the counties in the socio-economic development. Issue relating to the fiscal space are embodied in article 243 Y of the constitution under which the state governments are required to constitute, once every five years a finance commission. The finance commission of states are required to review the financial position of the municipalities and make recommendation to the governor as to- 1. The principal which should govern. (a) The distribution between the state and the municipalities of the net proceeds of the taxes, duties, tolls and fees leviable by the state, which may be divided between them under this Act and the allocation between the municipalities at all levels of their respective share of such proceeds 81

6 (b) The determination of the taxes, duties, tolls and fees which may be assigned to, or appropriated by the municipalities. (c) The grants-in-aid to the municipalities from the consolidated fund of the state. 2. The measures needed to improve the financial position of the municipalities, and 3. Any other matter referred to the finance commission by the governor in the interest of sound finance of the municipalities. The provision of the constitution which has been incorporated in to the state municipal statute alters the fiscal relation between the municipalities and state governments. The three features of this provision are worth noting (a) it provide a review of financial provision of municipalities once every five years (b) it recognizes the need for and provides for a revenue sharing arrangement between the municipalities and state government (c) it gives option to municipalities to explore and experiment with measures that would improve their finances. Yet another change which impact on the fiscal profile of municipalities lies in the amendment of article 280 and the insertion of a sub-clause (3) (c), which requires the finance commission set up under the provisions of article 280, to recommend measures needed to augment the consolidated fund of a state to supplement resources of the municipalities in the state on the basis of the recommendation made by the finance commission of the state. The significance of this provision lies in the fact that the central government which has thus for channelled assistance to municipalities only via the centrally sponsored scheme and related development programme and which had 82

7 rarely made any direct assessment of the finances of municipalities has, under the constitution, been permitted to provide supplementary assistance for municipalities over and above what the finance commission of a state might recommend. Pursuant to this provision, the tenth finance commission recommended for the period , a sum of 1000 crores for municipalities, the 11 th finance commission covering a five year period beginning from 2001 recommended an amount of Rs crore, and allocated the same between states on the basis of a fivefold criteria. The 12 th finance commission has a provided a sum of Rs5000 crore for municipalities for a period of five years beginning from 2005 ( Mathur, 2006). 3.3 Urban Local Bodies in India The urban local bodies (ULBs) in India were firmly conferred the status of democratic institution of self government only in 1992, with the passing of 74 th constitutional amendment act (CAA), although their existence predated the British colonial era (Venkatachalan, 2007). The structure of the urban government is different from that of rural bodies, in that there is no tier system. There are three types of urban local bodies with different sizes. From municipal corporation (which do have smaller units such as wards within them) down to municipalities and then town and notified area communities, but the latter are not component of municipal corporations (Singh, 1997). However, urban areas with population over five lakhs and last three year s average annual incomes over Rs 300 million are classified as Municipal Corporation, and those with population over and income over Rs 5 million as municipalities. This land mark 74 th CAA provide for direct election to the general bodies of their local bodies headed by a mayor and consisting of elected councillors (Venkatachalan, 2007). 83

8 As per the TFC reports, India has as many as 3842 ULBs, of which 139 are municipal corporations 1595 are municipalities and 2108 are nagar panchayats (THFC, 2009). Others includes smaller ULBs such as nagar panchayats, town panchayats, notified areas committees municipal councils, town areas committies, city and town municipal councils, town committees, notified area councils, municipal boards, notified area authorities (Pradhan, 2002). 3.4 Urbanization in India With increasing attention being paid to India s economy after the impressive surge of the country s top industrial corporate on the global economic scene, a new perspective has emerged on the urbanization in the sub-continent. It now focuses on the metropolitization process associated with the opening up of the economy and the concomitant high economic growth (Denis and Kamla, 2011). Thus, urbanisation is an index of transformation from traditional economies to modern industrial one. It is progressive concentration of population in urban unit. Quantification of urbanisation is very difficult. It is a long term process. Urbanisation is a process of switch from spread out pattern of human settlements to one of concentration in urban centres (Dutta, 2009). The onset of modern and universal process of urbanisation is relatively a recent phenomenon and is closely related with industrial revolution and associated economic development. Historical evidence suggests that urbanisation process is inititable and universal. Currently, developed countries are characterized by high level of urbanisation and some of them are in five stage of urbanisation process and experiencing slowing down of urbanisation due to host of factors. A majority of the 84

9 developing countries, on the other hand started experiencing urbanisation only since the middle of 20 th century. Thus, urbanisation is both a driver and consequence of economic growth. Expansion of economic activities and industrialisation lead to evolution of cities as growth centre. This urban centre facilitate sustained economic growth in three major ways- through the real estate sector, by raising productivity of output and employment, through the financial sector, by mobilising and channelling saving and allowing accumulation of wealth in the form of urban real estate, and through fiscal flows, providing major share of government tax revenue. The development of an urban area is also closely linked with the rural economy for exchange of goods, services, labour, capital, information-technology and social transaction. If properly managed, the process of urban development provides the key to overall and national regional development (Prem and Govil, 2008). In India, about 285 million people who are living in urban areas of India which is the second largest urban population in the world (Census, 2001). The urban population is expected to rise to around 38 % by India has to improve its urban areas to achieve objectives of economic development. Huge investment is required in India s urban sector. Since public fund for these services are inadequate, ULBs have to look for innovative approaches for financing and management of urban services however most critical factor for introducing these innovation are a healthy municipal revenue base and good urban governance. In response to urban problems, the government of India launched a reform-linked urban infrastructure investment project, jawahar lal Nehru Urban Renewal Mission (JNNURM) (Vaidya, 2009). The increase in 85

10 urban population has been due to natural population increase, reclassification of new town, and rural- urban migration (Pradhan, 2002). Table 3.1 Trends in Urbanization Year Urban population (in millions) Urban population to total population (%) Growth over previous decade (%) Source: The level of urbanisation is widely diverse across states. As of 2001, India has 4378 towns and cities, with 3393 class one towns with a population of one lakh or more (table-2) 401 class second town with a population of between to and subsequently. Table -3.2 Town and Urban Agglomeration by Class Class Population size Number Class i and above 393 Class ii Class iii Class iv Class v Class iv Less than Unclassified 10 All classed 4378 Source: Census 2001, Government of India 86

11 Projected Urban Population The registrar general of India has projected total urban population in India and states. It is interesting to know that 67 percent of total population growth in India in next 25 years is expected to take place in urban areas. Urban population expected to increase from 285 million in 2001 to 534 in 2026 (table-3) Table-3.3 Projected Urban Population Items Total population (mllions) Urban population (millions) Urban (%) Total AEGR(%) Urban AEGR(%) Source: Population Projection for India , Registrar General of India, 2006 AEGR- Annual Exponential Growth Rate Table-3.3 presents the projected urban and total population in India during 2011, 2021 and 2026, the total increase in population; fifty per cent during the period is likely to occur in seven less developed states namely UP, MP, Rajasthan, Bihar, Chhattisgarh, and Jharkhand. On the other hand the major increase in urban population during above mentioned period is to take place in states of UP, Maharashtra, Tamilnadu, and Gujarat and these will contribute over 45 % of urban population over next 25 years (Vaidya, 2009). 87

12 3.5 Functional Domain of Municipalities In our constitution, matters of local public sphere are enumerated in the state list because the unit states were expected to constitute local bodies and assign them the tasks, functions and responsibilities and empower them with adequate resources so that the local bodies could look after the task assigned to them. Since the unit states fail to perform these jobs adequately, the state of India stepped in. The amendment involved a uniform pattern of local bodies across the country with little spoke in details, suggested some of the functions/ responsibilities/ task for devolution/delegation. If already not devolved/ delegated, and exhorted that state legislature to endow the local bodies with such power, authority and recourses as may be necessary for carrying out such functions. In respect of schedule 5 th and 6 th areas the parliament has yet extend the provision to urban local bodies (Chaubey, 2005). The 74 th amendment provides for a schedule of functions (schedule 12) i.e., considered appropriate for the ULBs. The list reproduced else-were, envisage the ULBs should assume responsibilities for such functions as planning for social and economic development, urban poverty alleviation, urban planning and regulation of land use, slum improvement and urban forestry, in addition to their additional role as entities for supplying basic infrastructure and services. The list is discretionary. It is the discretionary nature of the list that led many to interpret that the reallocation of schedule 12 responsibilities between state and municipalities is a matter for the state to be determined, given that the states in India are at different stages of development and given the uneven capacities and under take additional responsibilities, the incorporation of schedule 12 function and their defacto transfer is an evolutionary and incremental process (Mathur and Petersone, 2006). 88

13 Present Status of Functional Domain All major states have assigned to their urban local bodies the responsibilities of 1. Public health, sanitation, conservancy and solid waste management(item 6 of schedule 12, item 6 of state list of schedule 7). 2. Provision of urban amenities and facilities such as parks, gardens, and play ground (item 12 of schedule 12, item 18 of state list and item 20 of concurrent list in schedule 7). 3. Burials and burial grounds, cremation and cremation ground and electric cremations (item 14 of schedule 12, item 30 of concurrent list in schedule 7). 4. Vital statistics including registration of birth and deaths (item 16 of schedule 12, item 30 of concurrent list in schedule 7). 5. Regulation of slaughter houses and tanneries (item 18 of schedule 12, item 15 of state list in schedule 7). While the last two regulatory in nature, the middle on is a serious problems only in metropolis. All most all the state have assigned to their urban local bodies, the responsibilities of 6. Urban forestry, protection of environment and promotion of ecological aspect (item 8 of schedule 12, item 6 of state list in schedule 12) major exception being Delhi. 7. Water supply for domestic, industrial and commercial purposes (item 5 of schedule 12and 17 of state list schedule 12). 89

14 8. Roads and bridges (item 4 of schedule 12 and item 13 of state list in schedule in 7). 9. Cattle ponds and prevention of cruelty to animals (item 15 of schedule 12 and item 15 of state list of schedule 12). 10. Public amenities including street lighting, bus stops and public conveniences (item 17 of schedule 12 and item 5 of state list and item 20 of concurrent list in schedule 7). With few exceptions, the states have assigned 11. Safe-guarding of the interest of the weaker section of the society including the handicapped and mentally retarded (item 9 of schedule 12 and item 9 of state list and item 16 of concurrent list of schedule 7), and 12. Promotion of cultural, educational and aesthetic aspect (item 13 of schedule 12 and item 12/ 33 of state list and item 25 of concurrent list in schedule 7). It should be noted that matters that need to be locally dispensed with are all part of the state list. As there could hardly be a uniform division of functions and powers- both listed in the same list, they were advisedly enumerated in the state list so that a given state could take a contextual decision (Chaubey, 2005) In practice, therefore, it is unrealistic to simply transfer their functions to ULBs by a stroke of the pen. At the same time, it is fundamental to decentralisation for ULBs to participate in the planning decision that effect their future development and future services responsibilities (Mathur and Peterson, 2006) 90

15 Fiscal Powers of Urban Local Bodies The fiscal powers of ULBs have typically comprised property taxes (49), a tax on the entry of goods in to local areas for consumption, use and sell known as octori (52), advertisement taxes (55), taxes on non motorised vehicles (57), entertainment taxes (55), taxes on animals and boats (58), and taxes on profession, trades, calling and employment (60). The general postulates underline the assignment of the fiscal power is that the revenue from these taxes should be adequate to meet the operational expenditure of ULBs, however, given the relative inflexibility and low buoyancy of many of these taxes and the defaulting in adjusting in local tax rate, state governments have traditionally used a system of grants-in-aid and tax sharing arrangements for bridging the revenue gap faced by the ULBs. In addition to grant and tax sharing the state government utilises the instrument of specific purpose grant, often extensively, for advancing state level goals and mandates. It is important to note that unlike in centre state fiscal relations which are clearly set out, the state municipal acts do not provide for transfer to ULBs or do so under specific circumstances. Transfers are thus determined in an ad-hoc manner (Mathur and Peterson, 2006). 3.6 Growth of Expenditure In order to comprehend the fiscal pressures generated by demographic, economic and physical growth of the metropolitan cities of India, the trend in, and the patterns of, both revenue and capital expenditures need to be studied in detail. A cursory look at the data presented in many tables ostensibly reveals manifold increase in expenditure over the years. In the following pages trends in expenditure and its growth rate are analysed for understanding the actual growth in relation to population and price changes. 91

16 Table-3.4 Expenditure of Urban Local Bodies (ULBs) in India Year Total Expenditure (Rs in Crore) Revenue Expenditure (Rs in Crore) Capital Expenditure (Rs in Crore) % Growth Rate of Total Expenditure % Growth Rate of Revenue Expenditure % Growth Rate of Capital Expenditure % Share of Rev.Exp.to Total Expenditure % Share of Capital Exp. Total Expenditure Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India, The above table 3.4 shows that total expenditure of ULBs has two components i.e., revenue expenditure and capital expenditure. Table shows the yearly data of total expenditure, revenue expenditure, capital expenditure and its percentage growth rate in different years. During the entire period of the study ( to ), total expenditure has increased from Rs crore in to Rs crore in , revenue and capital expenditure have increased from Rs crore in to Rs crore and from Rs to crore respectively during the referred period. Table also highlights the huge ups and downs in the volume of expenditure as well as in the percentage change over the previous year. For instance, 92

17 total expenditure of ULBs has increased by 42.29% in over the previous year and 91.01% in over the previous year. The very next year there was a dramatic fall in the expenditure of ULBs by 92.04%. Out of the two components of expenditure of ULBs, revenue expenditure experienced major decline and fluctuations may be due to overemphasis of the government on capital expenditure. The expenditure trend in ULBs indicates towards the reliance of ULBs for funds on upper tier governments. The analysis of table also indicates that on the one hand, the volume of revenue expenditure of ULBs is increasing continuously, but on the other hand, the share of revenue expenditure to total expenditure of ULBs is decreasing in comparison to capital expenditure where both total capital expenditure and its share are increasing. The increment in share of capital expenditure in total expenditure of ULBs is due to the hike in the allocation of funds on developmental works such as construction of new roads, water project etc. by government. The percentage growth rate in many years should imply a rising level of services. It cannot be denied that the levels of services have increased over the years. However, a deeper analysis of factors behind a high percentage increase reveals that the major proportion of increase in expenditure because of enormous growth in expenditure on establishment and payment to the water supply and sewerage disposal undertaking as water charges as well as arrears for consumption of water by the general wing and the disposal of sewerage Per Capita Expenditure of ULBs in India Public expenditure is inevitably related with population for whom it is incurred. Total expenditure does not give an indication of actual level of services being provided per 93

18 person. Per capita expenditure provides very close figure of an exact analysis of service levels. Table-3.5 Per Capita Expenditure of ULBs in India Year Population (Crore) Per Capita Total Expenditure ( in Rupees) Per Capita Revenue Expenditure ( in Rupees) Per Capita Capital Expenditure ( in Rupees) Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India The above table 3.5 shows the trend of per capita expenditure of total expenditure, revenue expenditure, and capital expenditure of ULBs during to For the purpose of calculating the per capita expenditure, the census data on population under ULBs has been used for the years 1991 and For the years between the census counts, the estimated population has been intrapolated on the basis of census data. The table 3.5 shows a higher per capita expenditure during to After , the per capita expenditure recorded a heavy fall in all types of expenditures of ULBs. During to , the revenue expenditure of ULBs shows an increasing trend. The higher per capita revenue expenditure as compared to 94

19 capital expenditure of ULBs is mainly due to a heavy expenditure on establishment expenditure i.e. salary, pension etc. The information on the extent of availability of resources for ULBs in major states has been presented in table 3.5.It can be seen from the table that per capita expenditure of ULBs at all India level was Rs in which rose to Rs in The table 3.6 shows that out of the ten selected states, six states shows a highest per capita expenditure above the national level namely, Maharashtra( ) followed by up ( ), Gujarat (1865), AP ( ) Karnataka ( ), and MP ( ), remaining four states shows a PCE less than the national level in Table also indicate that during to , the PCE of Maharashtra and AP was very high in comparison to other states. It is evident that among all the ULBs of selected states for which data could be available, the ULBs of Andhra Pradesh and Maharashtra has continued to have the highest per capita expenditure between to

20 Table 3.6 Per Capita Expenditure of Urban Local Bodies of Selected States 96 AP GUJRAT HARYANA KARNATKA MP MAHARASHTRA RAJASTHAN TAMIL NADU UP WEST BENGAL Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India, Census Report 2001, Government of India ALL INDIA 97

21 The analysis of per capita expenditure indicates that the growth in expenditure in relation to population increases has not been adequate. Even though there is positive growth in per capita expenditure, to a great extent, it is because of the greater increase in the volume of non-development expenditure like the establishment expenditure. 3.7 Growth in Revenue Growth in expenditure and hence the augmentation of civic services is inevitably dependent upon the growth in revenue income of a civic authority. An elastic and buoyant source of revenue provides the much needed funds at an increasing rate for financing the provision of services. Having analysed the trends in expenditure, the growth in revenue receipts is analysed for comprehending the relationship between expenditure and revenue and the nature of revenue base and financial mobilisation of the ULBs in India, Table 3.7 presents the yearly data on total revenue of ULBs in India and its internal sources of revenue, and it also indicates the percentage growth rate over the years. During the entire period of study from to , total revenue of ULBs and their internal source of revenue i.e. own tax, non-tax, own revenue, and other revenue are continuously increasing. During to , total revenue, own tax revenue, own non-tax revenue, own revenue and other revenue have increased from Rs , , , , and crore to Rs , , , , and crore respectively. The table also indicate that there are some ups and downs in total revenue as well as percentage growth over the years. For instance, in the total revenue of ULBs shows a percentage growth rate of 17.95% over the previous years, and the very next year in , it declined by %. Out of the components of internal sources of revenue of ULBs, the own revenue 97

22 and other revenues shows a major contribution to total revenue as compared to tax and non-tax revenue of ULBs. The lower contribution of tax and non-tax is mainly because of the weak levy and collection of taxes. Table -3.7 Total Revenue Receipts of Urban Local Bodies in India Year Total revenue (Rs in Crore) Own tax (Rs in Crore) Own non tax (Rs in Crore) Own revenue (Rs in Crore) Other revenue (Rs in Crore) (17.37) (20.33) (21.80) (21.12) (9.69) (26.85) (22.83) (12.88) (29.29) (20.06) (13.61) (14.19) (12.75) (13.70) (13.63) (18.23) (14.50) (17.66) (15.13) (27.12) (17.95) (15.50) (21.79) (3.05) (21.10) (-5.45) (-19.28) (-0.43) (-9.55) (28.63) (14.40) (8.31) (5.23) (7.36) (24.81) (10.68) (9.05) (18.57) (11.93) (9.10) (3.89) (4.77) (8.75) (6.04) (1.08) (-16.85) (-16.04) (-15.83) (-15.98) (-18.04) (83.47) (96.40) (95.73) (96.19) (65.59) (15.76) (11.91) (14.56) (12.77) (20.74) (18.34) (11.89) (12.12) (11.96) (28.25) (18.18) (16.83) (9.02) (14.22) (23.56) (18.72) (7.60) (24.30) (12.96) (26) Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India Note: figure in the parenthesis bracket indicate percentage growth rate over the previous years. 98

23 The uneven growth in revenue is chiefly because of the fact that in certain years share of the ULBs in assigned taxes and the grants to it are not released in time. Hence, when these are released in the next year or a couple of years after, the revenue receipts of the ULBs increases suddenly. The internal sources consist of taxes and rates, fees, rents, and other sundry municipal revenues. The analysis of internal sources of revenue of the ULBs has revealed that the ULBs has been overwhelmingly depending up on the external sources (grants, assigned taxes, transfer from central governments) of income which is not welcome trend either for local autonomy or for ensuring an effective fiscal planning at the local level. This is chiefly due to the fact that the nature and type of the sources of internal revenues vary at great deal between the ULBs and other civic authorities. Apart from their own revenue sources, i.e., tax and non-tax revenue sources, the municipal corporations depend upon funds from central governments. These funds are primarily intended to compensate for the mismatch of functions and finance. Most of the ULBs receive financial support in the form of revenue grants from state governments, transfer from finance commission, and assignment and devolution from central government to meet current expenses. Similarly, capital grants are also provided for meeting project related expenditure. Table 3.8 shows the external source of revenue or transfer of funds from central government to ULBs which comprises assignment plus devolution, transfer of funds from EFC/TFC and grants-in-aid. Table shows that the all three components are increasing from to During to , assignment plus devolution increases from Rs crore to Rs crore where grants-in-aid increases from Rs to Rs crore, the TFC/THFC grants also increases 99

24 Table-3.8 Transfer from Central Government to ULBs in India Year A+D (Rs in Crore) Transfer from TFC/THFC Grants-in -Aid (Rs in Crore) (Rs in Crore) (19.84) (24.52) (12.66) (-0.53) (-7.95) (19.31) (-18.79) (-22.29) (87.18) (36.86) (4.26) (9.77) (16.91) (41.50) (33.01) (73.34) (34.00) (20.46) (33.71) (9.99) (24.96) (-15.25) (25.73) Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India Note: A+D= Assignment + Devolution from Rs crore to Rs crore. The table also indicate that there is some increasing and decreasing trend in revenue as well as percentage growth rate over the previous years. For example, in , the assignment plus devolution shows a higher growth rate of 87.18% over the previous years and it suddenly decline in very next year with a lower percentage growth of 9.77%. Like this, TFC/THFC also shows a 100

25 lower percentage growth rate of 16.91% in , and the next year it increases of 73.34%. The sudden increase or decrease of these sources of revenue of ULBs is due to the change in policy regarding the ULBs. An analysis of these external sources of revenue indicate that after ,there has been an increase in external sources because of heavy allocation of funds to the ULBs and the dependency of ULBs on external sources has also been growing. Table 3.9 provides some basic information relating to own revenue receipts as percentage of total expenditure in selected states during to The table pointed out that expenditure of Maharashtra s ULBs met from own sources is highest(72.75 percent) followed by Gujarat(56.14 percent), Rajasthan (46.99 percent), West Bengal(41.29 percent), Haryana (35.04 percent), Tamil Nadu (34.25 percent), and Karnataka (31.93 percent).on the other hand the lowest financing from own sources was recorded in Uttar Pradesh (4.71 percent) and Madhya Pradesh (9.21 percent). The functional domain of the ULBs consists of a mix of activities which involve different quantum and types of expenditure. In terms of the statutory provisions, ULBs are expected to perform functions which broadly be divided in to civic functions.the civic functions comprise in the main provision of drinking water, drainage and sanitation, solid waste management, preventive health care etc. Maintenance functions include maintenance of building and common property resources. Table 3.10 pointed out that own revenue as percentage of total revenue was recorded highest in Maharashtra (76.07 percent) followed by Gujarat(61.54 percent), 101

26 Table3.9 State-Wise Own Revenue of ULBs as Percentage of Total Expenditure ( in percentage) AP GUJRAT HARYANA KARNATKA KERALA MP MAHARASHTRA RAJASTHAN TAMIL NADU UP WEST BENGAL Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India 97

27 Table3.10 State-Wise Own Revenue of ULBs as Percentage of Total Revenue ( in percentage) AP GUJRAT HARYANA KARNATKA KERALA MP MAHARASHTRA RAJASTHAN TAMIL NADU UP WEST BENGAL Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India 97

28 Table3.11 Per Capita Revenue of Urban Local Bodies of Selected State during to (In rupees) 104 AP GUJRAT HARYANA KARNATKA MP MAHARASHTRA RAJASTHAN TAMIL NADU UP WEST BENGAL Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India, Census Report 2001, Government of India ALL INDIA 97

29 Andhra Pradesh (58.45 percent),west Bengal (51.70 percent), Rajasthan (39.46 percent), Tamil Nadu (38.41 percent), Karnataka (34.10 percent), and Haryana (33.52 percent). The lowest percentage recorded in Madhya Pradesh (11.56), and Uttar Pradesh (14.18 percent). Table 3.11 presents an analysis of per capita revenue of all the ULBs in the ten selected states shows that it ranged from Maharashtra rupees to Uttar Pradesh rupees,where as all India per capita revenue was It may be observed from the table that out of ten states only five states have recorded the per capita revenue more than the per capita revenue at national level and in the remaining states, it is lower than the national average in The lower per capita revenue of ULBs is due to the weak collection of taxes and lower allocation of funds by central government which is insufficient to meet the demand services by citizen in urban areas. 3.8 Fiscal Mismatch The analysis of fiscal mismatch between own revenue and total expenditure of ULBs present very interesting picture and shows that ULBs are facing a huge deficit and their own resources are very low to meet out the emerging fiscal needs. Table 3.12 shows that the fiscal mismatch between own revenue and total expenditure of ULBs at all tiers in Andhra Pradesh and Maharashtra is high during to Both states show a heavy decline in fiscal mismatch because of increase in central fund and their own resources. Later it increased in almost all the selected states.table indicates that in , the highest fiscal mismatch recorded in UP with Rs crore followed by Maharashtra Rs crore, Tamil Nadu Rs crore, Karnataka 105

30 Table3.12 Fiscal Mismatch of Selected States during to (Rs in Crore) AP GUJRAT HARYANA KARNATKA KERALA MP MAHARASHTRA RAJASTHAN TAMIL NADU UP WEST BENGAL Source: Reports of 11 th, 12 th and 13 th Central Finance Commission, Government of India 97

31 Rs crore,mp Rs crore, AP Rs crore and in Gujarat Rs crore. On the other hand,the lowest fiscal mismatch recorded in Haryana Rs crore followed by Rajasthan Rs crore,west Bengal Rs crore.table also shows an interesting fact that during to ULBs in Rajasthan shows a surplus status. The above analysis shows that there is a huge fiscal mismatch between own revenue and total expenditure at all tiers of the ULBs.It means that the own financial resources of ULBs are highly inadequate to meet out the fiscal needs. Even though the financial devolution has been ensured to the local bodies, these bodies face fiscal deficit. The reason behind this fiscal deficit is that the revenue of ULBs is not increasing the same proportion as to increase in expenditure. Another reason is that the functions which are performed by ULBs are more and the funds and revenue from internal sources are not sufficient to meet these functions. Thus, there is a need to reconsider the devolution criteria and transfer of resources to the ULBs for their fiscal needs. Borrowing plays an important role in development finance. In India, the development expenditures of both central and states governments are largely met from borrowed funds. Many states government intended to provide this facility to their ULBs. 107