Report on municipal finances: Municipal corporations in India are gasping for funds

Source: The post is based on the article “Municipal corporations in India are gasping for funds” published in Business Standard on 10th January 2023

What is the News?

The Reserve Bank of India(RBI) has released a study titled “Report on municipal finances”.

The study reveals how municipal bodies are increasingly dependent on fund transfers from the State and the Centre while their revenue earning capacity is limited. 

What are the key findings from the study?

The combined budget of all the municipal corporations in India is much smaller than that of the Central and State governments.

Inadequate Taxes: Taxes earned by municipal corporations in India are grossly inadequate to meet their expenditure needs.

– In India, the own tax revenue of municipal corporations, comprising property tax, water tax, toll tax and other local taxes, formed 31-34% of the total revenue in the FY18-FY20 period. This share was low compared to many other countries and it also declined over time. 

– Limited funds aside about 70% of it gets spent on salaries, pensions and administrative expenses with the rest left for capital expenditure. Above all, municipal corporations don’t borrow much leaving them gasping for funds.

Variations in Tax revenue: Large variations can be observed if the municipal corporations’ own tax revenue is sliced State-wise.

– The own tax revenue of municipal corporations as a share of the State’s GDP in 2017-18 crossed the 1% mark in Delhi, Gujarat, Chandigarh, Maharashtra and Chhattisgarh, while it was 0.1% or less in Karnataka, Goa, Assam and Sikkim.

Major revenue from property taxes: Municipal corporations’ revenue-raising capabilities are dependent on property taxes. 

– In 2017-18, the property taxes formed over 40% of the municipal corporations’ own tax revenue. Despite such dominance, property tax collection in India was much lower compared to OECD countries due to undervaluation and poor administration.

Dependent on Funds: The ​​municipal bodies are increasingly dependent on fund transfers from the State and the Centre. Property taxes are not efficiently collected. The generated funds are mostly spent on revenue expenditure, leaving a much smaller pie for capacity building.

 

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