Significant inefficiencies: RBI report on municipal corporations

Source: The post is based on the article “Significant inefficiencies: RBI report on municipal corporations” published in Indian Express on 11th November 2022.

What is the News?

The Reserve Bank of India (RBI) has released a document titled “Report on Municipal Finances”.

What are the key observations made by the report?

On Municipal Corporations (MCs): The rapid growth of urbanization in India has not been accompanied by a corresponding increase in urban infrastructure which is reflected in the performance of urban local bodies especially Municipal Corporations(MCs). For instance,

– The size of municipal budgets in India is much smaller than peers in other countries. 

– The share of MCs own revenues (those they can raise on their own from tax and non-tax sources) has been declining and the share of government transfers has been increasing — which indicates a growing fiscal dependency on such grants from higher levels of government. 

– Municipal revenues/expenditures in India have stagnated at around 1% of GDP for over a decade. In contrast, municipal revenues/ expenditures account for 7.4% of GDP in Brazil and 6% of GDP in South Africa.

– MCs committed expenditure in the form of establishment expenses, administrative costs and interest and finance charges is rising but capital expenditure is minimal.

– MCs mostly rely on borrowings from banks and financial institutions and loans from Centre and State governments to finance their resource gaps in the absence of a well-developed market for municipal bonds.

On State Finance Commission(SFC): State governments have not set up state finance commissions(SFCs) in a regular and timely manner even though they are required to be set up every five years. 

– Accordingly, in most of the States, SFCs have not been effective in ensuring rule-based devolution of funds to Local governments.

What are the suggestions given by the report?

Municipal corporations should adopt sound and transparent accounting practices with proper monitoring and documentation of various receipts and expenditure items. 

MCs should explore different innovative bond and land-based financing mechanisms to augment their resources.

In order to improve the buoyancy of municipal revenue, the Centre and the states may share one-sixth of their GST revenue with them.

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