Number Theory: RBI report highlights key fiscal challenges of civic corporations

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Indian cities are growing continuously and almost all of them are in a mess. Going forward, urban governance is going to be crucial for both equality and sustainability. In order to achieve this, the third tier government in cities, the municipal corporations, need to get their act together. Doing this requires that they become financially self-sufficient. The second edition of RBI’s Report on Municipal Finances, which was released on Tuesday, shows that this is still a big challenge India. Here are three key takeaways from the report.

The Reserve Bank of India. (Reuters)

RBI report highlights key fiscal challenges of civic corporations

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  Tax revenues are the least important source of income of municipal corporations

  A well-functioning municipal corporation needs to be fiscally self-sufficient. Doing this requires being able to raise its own revenue. India’s municipal corporations are on the opposite end of this objective. The transfers from state and central governments were a bigger share of the revenue receipts of municipal corporations than their own tax revenues in Budget Estimates for 2023-24. In fact, municipal corporations raise more in non-tax revenue (such as user charges such as parking fees) than tax revenue, which would include things such as property tax and water taxes. A long-term comparison of the break-up of revenue receipts of municipal corporations shows that the share of transfers has increased while that of own tax revenue has increased. “Municipal Corporations that rely more on their own revenues enjoy greater financial autonomy and stability, allowing them to strategically plan and implement urban development projects without relying heavily on unpredictable grants from the upper government tiers,” the report said, underlining the importance of raising the share of own revenues.
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  There is a large variation in sources of raising revenue across states

  An average of 2020-21 to 2022-23 numbers shows that property taxes are the biggest contributor to tax revenue and fees and user charges the biggest contributor to non-tax revenue for municipal corporations. The share of both these items is more than 60% in total tax and non-tax revenue of municipal corporations. The share of how municipal corporations collect revenue, as is to be expected, shows a large variation across states. There are states such as Bihar and Uttar Pradesh where property tax is a much bigger source of revenue than user fees etc. and then there are others such as Maharashtra and Rajasthan where the situation is the opposite. The report attributes these differences to a host of factors, including ability to effectively raise revenues, expansion of municipal services with growing urbanisation or just a large tourist footfall in some municipality. For example, a survey conducted by RBI shows that the property tax coverage ratio (number of properties paying property tax/ estimated number of properties in the jurisdiction) shows significant scope for improvement across most municipal corporations. “Only 9.4% of the respondent municipal corporations have coverage ratios exceeding 80%,” the report says, while adding that in 17% of the cities this number was less than 20%. The report also notes some municipal corporations might be caught in a vicious cycle of low taxes. “GIS-based digital property records can help enhance coverage, although smaller cities may not have the financial capacity to undertake a GIS mapping exercise even once,” it notes.
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  Civic bodies are still insignificant contributors when it comes to capital expenditure

  That most Indian cities are deficient in infrastructure is widely known. However, the report shows that municipal corporations are still lagging in plugging this hole despite having a much higher share of capital spending in their total spending. This is because the overall spending by municipal corporations is much lower than what it spent by central and state governments in India. “The proportion of capital expenditure in total expenditure for the MCs was 61.5% in 2023-24 (BE) as compared to 24.8% and 21.4% for state governments and the central government respectively [2023-24 (BE)]. It may, however, be noted that total expenditure of MCs is modest relative to state governments and the central government. In 2023-24, total expenditure of MCs was 1.3% of GDP as compared with 16.3% for the state governments and 15.1% for the central government,” the report said. To be sure, municipal corporations across states show a large variation in share of capital spending in total spending with Delhi showing among the lowest values. However, experts suggest a note of caution in reading too much into these numbers.