4.1 Overview of Municipal Finances

This chapter presents an overview of municipal finances in India. The first section analyses the pattern and trends in municipal finances using all-India fiscal aggregates obtained from secondary sources3 to provide a macro picture across the country . The second, third and fourth sections provide indepth analysis of the structure of municipal finances of select 35 Municipal Corporations (MCs). The analysis is based on data gathered from the budget documents of these selected MCs, covering the period 1999-2000 to 2003-2004.

4.2 Size of the Municipal Sector

As per the Report of the Twelfth Finance Commission, India has 3,723 ULBs, of which 109 are MCs, 1432 are municipalities and 2182 are Nagar Panchayats.

The total revenue of the municipalities grew from Rs.11,515 crore in 1998-99 to Rs.15,149 crore in 2001-02 at a compounded average growth rate (CAGR) of 9.6 per cent. The total expenditure increased from Rs 12,035 crore to Rs 15,914 crore during the same period, registering a CAGR of 9.8 per cent. In spite of the growth of the municipal sector in the country, it accounts for a very small proportion of both Gross Domestic Product (GDP) (at current prices) as well as revenue and expenditure of the upper tiers of Government.

Total revenue of the municipal sector accounts for about 0.75 per cent of GDP of the country. In contrast, the ratio is 4.5% for Poland, 5% for Brazil and 6% for South Africa [Buckley (2005)]. Similiarly, municipal revenue forms a  little more than 2 per cent of

combined revenue of State and Central Governments. Total revenue of ULBs has been growing at a lower rate (9.7 per cent during 1998-99 to 2001-02) than the growth of combined revenue of Central and State Governments (10.8 per cent during 1998-99 to 2001-02). This reflected in a marginal decline in the share of municipal revenue in total government revenues from 2.5 per cent in 1998-99 to 2.3 per cent in 2001-02. Table 13 provides an overview of the relative importance of municipal revenues in relation to revenues of the States and the Centre.

In terms of total expenditure, the municipal sector accounts for about 0.79 per cent of the GDP of the country. While, municipal expenditure accounts for little over 2 per cent of the combined expenditure of State and Central Governments, it declined further between 1999-2000 and 2001-2002. Table 14 provides an overview

of the relative importance of municipal expenditure in relation to the expenditures of the States and Centre.

4.3 Finances of Select Municipal Corporations

This and subsequent sections undertake indepth analysis of municiple finances based on primary data obtained from the budget

documents of 35 major MCs of the country whose population was 1 million and above as per 2001 Census. Table 15 shows the sample of MCs and the States to which they belong.

4.4 Municipal Revenues

4.4.1 Structure of Municipal Revenues

The revenue base of MCs can be broadly categorized into: (a) tax revenues, (b) non-tax revenues, (c) assigned (shared) revenue, (c) grants-in-aid, (d) loans and (e) other receipts. Table16 lists out revenue sources under each major revenue head. It may be mentioned that composition as well as relative importance of revenue sources of MCs varies across the States.
Table 17 sets out the major components of tax revenue of selected MCs in India. While, property tax is the major revenue source in most of the MCs, octroi is the major source in the MCs of Maharashtra and Gujarat. Octroi has been abolished in all other States excepting Maharashtra and Gujarat.

Table 18 illustrates the major user charges and fees levied by the select MCs in India. There is considerable heterogeneity in the levy of user charges by MCs across states.

Apart from their own revenue sources, i.e., tax and non-tax revenue sources, the MCs depend upon grants from State Governments. These grants are primarily intended to compensate for the mismatch of functions and finance. Most of the MCs receive financial support in the form of revenue grants from State Governments to meet current expenses. Similiarly, capital grants are also provided for meeting project related expenditure. Table 20 shows the composition of grants-in-aid in selected MCs.
In addition to own revenues, shared revenues, user charges & fees and grants-in-aid, loans also constitute an important source of municipal revenues in some ULBs.

4.4.2 Composition and Trends of Municipal Revenues

Relative contribution of various components in the total revenue over the years has been presented in Tables 21(a) and 21(b).

Between 1999-00 to 2003-04, while the share of non-tax, assigned revenue, non-plan and plan grants improved, the share of tax revenue in total revenue receipts of MCs declined.

The average shares of major revenue components (average of 2000-04) based on the data of 35 Municipal Corporations are shown

in the Figure 2. Among the various revenue sources, tax revenue assumes greater importance in terms of both size and share. The

aggregate tax revenue of the 35 MCs constituted 45 per cent of average aggregate total revenue (total receipts), which was followed by non-tax revenue constituting 28 per cent of the average aggregate.

4.5 Municipal Expenditure

4.5.1 Structure of Municipal Expenditure

The expenditure incurred by the MCs can be broadly categorized into: (a) revenue expenditure and (b) capital expenditure.

Further, revenue expenditure broadly comprises (i) establishment expenditure, (ii) administrative expenditure, (iii) operations and maintenance expenditure, and (iv) interest payments on loans; the capital expenditure comprises (i) expenditure on capital formation and (ii) principal repayment. The component of these major expenditure categories are shown in table 22.

4.5.2 Composition and Trends of Municipal Expenditure

The composition of aggregate expenditure of the MCs, in terms of the above categories, and trends are shown in Tables 23(a) and 23(b).

The average shares of different components in aggregate expenditure during the period of 2000-04 are shown in Figure 3.
Among all the components of municipal expenditure, the expenditures on capital works, establishment & administration, and operations & maintenance assume importance. The establishment & administrative expenditure constituted 36.25 per cent of the aggregate total expenditure, during 2000-2004. Capital expenditure, which is an important component, constituted less than 13 per cent of the total expenditure, during the same period.

The above expenditure pattern indicates that the MCs’ spending on capital works has been significantly low which is critical for building civic infrastructure for planned urban development.

The under-investment in public works is reflected in inadequate availability of civic amenities such as water supply, sewerage, transportation networks and storm drainage system as discussed in the next chapter.

4.5.3 Expenditure on Public Works

The expenditure on public works is an important component of the expenditure incurred by the Municipal Corporations. It includes both the expenditure on capital formation as well as the current expenditure incurred on public works by the MCs. The current expenditure comprises expenditure on staff, administration and operations & maintenance. The trends and compostion of expenditure on public works are shown in Tables 24(a) and 24(b). The total expenditure on all public works of the MCs accounted for 46.5 per cent of the total expenditure, on an average, during 2000-2004. Among the components, expenditures on health & sanitation and street lighting have grown the fastest, followed by expenditures on roads, education and sewerage. The growth in expenditures

incurred on water supply, parks and play grounds and solid waste management has been relatively modest.

The MCs have been assigned some of the essential service delivery functions as defined under the respective Municipal legislations. It was laid down that they shall give primary attention to providing essential services like water supply, sewerage, street lights, solid waste management and public (only primary) health. A disproportionately high spending on non-discretionary items like

secondary education or secondary health care may not be desirable, unless an MC has already attained satisfactory levels of services on essential services.

The composition of expenditure on various public services in the MCs (shown in Figure 4) clearly indicates that the expenditure incurred on essential municipal functions (obligatory/non-discretionary items) like provision of water supply, drainage, sewerage, health & sanitation and solid waste management has been comparatively lower than the expenditure incurred on non-essential functions (discretionary items) like provision of education and parks. This calls for rationalising the discretionary spending by MCs through suitable guidelines; and to improve public accountability of expenditure through citizen’s charters and social audits which will be discussed in Chapter 6.

Although water supply and sewerage functions are handled by separate boards in some metropolitan cities like Delhi, Hyderabad, Bangalore and Chennai, this fact does not affect the findings on municipal expenditures. In fact, the pattern of expenditure on public works, after deducting the corresponding figures for water supply and sewerage, of the above four metropolitan cities, more or less remains the same.

4.6 Summary Observations

The municipal sector in India has remained small with its total revenue accounting for about 0.75 per cent of GDP. In terms of both revenue and expenditure they account for a little above 2 per cent of the combined revenues and expenditure of Central Government, State Governments and ULBs. Analysis of the data for 35 major MCs indicated higher growth of expenditure (14.3 per cent) during 200-04 compared to the growth of total receipts (11.0 per cent). Component-wise, tax revenue accounted for 45.2 per cent of total revenue, followed by non-tax revenue (28.7 per cent) during 2000-04. Establishment and administration expenditure accounted for about 36 per cent of total expenditure during 2000-04. Expenditure on public works accounted for about 44 per cent of the total expenditure with expenditure on roads and parks and playgrounds accounting for about 19.5 per cent of the total expenditure.