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Chapter 5 - Assessment Of Municipal Finances

The macro overview of municipal finance in India, attempted in the preceding chapter, brought out the significance of municipal finance for the overall financial well-being of the economy and provided an insight into the sources, structure, composition and trends of aggregate revenue and expenditure of the MCs in metropolitan cities in India. It should be noted that many of the conclusions drawn at aggregate level above may not hold good for individual ULBs and may not throw enough light on the constraints faced by individual local bodies and the need for requisite policy initiatives to address them. Therefore, the present chapter examines the financial parameters of individual municipal bodies, to assess their ability to provide the required civic amenities and to identify the constraints faced by them.

5.2 Analytical Framework

Fiscal assessment of any entity is generally based on revenue and fiscal balance. Similarly, to assess qualitative aspects, the ratio of revenue expenditure to total expenditure is considered. Any entity generating surplus in revenue account (and if possible, in capital account) and maintaining low proportion of revenue expenditure to total expenditure, is considered to have sound financial health. However, this “standard approach” for making assessment may not hold for the ULBs. Municipal authorities are constrained by statutory mandates of balanced budgets4 and they are also notgranted liberal permission by State Governments to incur debt [Mathur and Thakur (2004)] . However, revenue expenditure is not undesirable, if a good proportion of this goes for operation and maintenance of civic amenities provided by the ULBs.

With the above in the background, the assessment of ULBs needs to proceed on a different track, making use of an alternate set of parameters. These parameters are normative benchmarks which define the minimum level of expenditure that the ULBs are required to incur, in order to ensure a minimum standard of living to the inhabitants. A set of expenditure benchmarks, both for creating new assets, and for their maintenance were derived by the Zakaria Committee in 1964 for core urban services. These expenditure norms for service provision (capital) as well as operation & maintenance (O&M) are for the cities that are divided into categories AA, A, B, C, D and E, based on the population size. The expenditure norms for 5 core civic activities viz., water supply, roads, storm water drainage, sewerage and street lighting for 3 major city classes covered by this study (at the 1996-97 prices) are shown in Table 25.
A comparison of municipal spending with these norms, after revising them to the current period, would reveal the level of underspending by the ULBs. There are a host of factors which could be responsible for the level of under-spending, which can be divided into two broad categories. - exogenous and endogenous. As the terms


Table 25: Zakaria Committee Norms of Expenditure on Services

(Rupees per capita at 1996-97 prices)

City Class

Water Supply

Sewerage

Storm Drainage

Roads

Street Lights

Capital

O & M

Capital

O & M

Capital

O & M

Capital

O & M

Capital

O & M

AA

968

161

1117

182

611

-

1207

37

447

45

A

700

152

968

177

432

-

1043

33

372

42

B

699

146

819

161

387

-

611

27

328

37

AA -More than 20 Lakhs population; A - 5-20 Lakhs population; B – 1-5 Lakhs population
Source: Mathur and Singh (1998)


suggest, exogenous factors are those that are not within the control of concerned ULB whereas endogenous factors refer to those that have to do with the ULBs’ own operation

Exogenous factors include: delegation of revenue powers (decentralization) and dependency of ULB for resources on upper tier of government (dependency ratio). Endogenous factors include: revenue (tax) administration, cost recovery and quality of expenditure.
The framework of analysis proposed to be followed for assessment of ULB performance is set out in Figure 5.
Thus the assessment of finances of ULBs is proposed to proceed as follows:

• First, the ULBs have been assessed in terms of “standard approach” using revenue     balance, fiscal balance and the ratio of revenue expenditure to total expenditure.

• Secondly, ULBs were assessed in terms of “normative approach” by using Zakaria Committee norms. The Zakaria Committee norms for civic amenities are adjusted to the current prices of the period of 1999-2000 to 2003-2004, using an appropriate inflation index, i.e. WPI. The performance of individual MCs is compared against the respective norms, and, the level of under-spending is worked out. This is followed by the identification of the factors responsible for the level of under-spending.

• Next section, deals with ‘use of debt’ and ‘debt sustainability’ of the MCs and ascertain the capacity of the MCs to borrow for augmenting spending on provision of services.

• The subsequent section summarises the performance of individual MCs in terms of different parameters and attempts to rank them.

• In the last section, estimates of resource requirements of the urban sector and the potential of revenues of the ULBs in India have been attempted.

5.3 Major Inferences from Analysis

5.3.1 Standard Approach

i) Revenue Balance

Revenue balance, measured as revenue receipts net of revenue or current expenditure, indicates whether a municipal corporation (MC) is able to meet its revenue expenditure from its own resources including grants from the upper tiers of Government. Table 26 reveals that all the MCs, barring Pune and Patna, were able to generate revenue surplus5.

Table 26: Balance of Municipal Revenues and Expenditure

(Average of 1999-2000 to 2003-2004)

Sl.
No.

Municipal
Corporation

Revenue
Income
(Rs Crore)

Per
capita
Revenue
Income
(Rs)

Revenue
Expenditure
(Rs Crore)
(Rs)

Per capita
Revenue
Expenditure
Deficit

Total
Revenue
Surplus/
deficit
(Rs Crore)

Per capita
Revenue
surplus/

1

Hyderabad

338.8

964.5

273.4

779.1

65.4

185.4

2

Visakhapatnam

110.1

1093.3

74.6

742.5

35.5

350.8

3

Vijayawada

61.7

705.6

44.5

509.8

17.2

195.7

4

Patna

21.8

150.4

29.6

205.1

-7.8

-54.7

5

Delhi

880.3

872.3

361.1

341.1

519.2

531.2

6

Ahmedabad

599.4

1668.5

556.7

1551.6

42.7

116.9

7

Surat

662.3

2577.0

208.7

816.5

453.5

1760.4

8

Vadodara

159.3

1233.4

141.8

1099.1

17.4

134.3

9

Rajkot

NA

NA

NA

NA

NA

NA

10

Jamshedpur

NA

NA

NA

NA

NA

NA

11

Dhanbad

NA

NA

NA

NA

NA

NA

12

Bangalore

369.5

810.4

296.4

643.5

73.2

166.8

13

Kochi

51.7

858.8

25.8

430.4

25.8

428.4

14

Indore

180.0

1029.6

81.4

464.9

98.6

564.7

15

Bhopal

80.4

545.4

27.8

189.2

52.5

356.2

16

Jabalpur

54.0

551.0

33.7

344.4

20.2

206.6

17

Greater Mumbai

4162.0

3417.1

1560.2

1283.8

2601.8

2133.3

18

Pune

507.2

1890.3

697.9

2582.0

-190.7

-691.7

19

Nagpur

249.6

1197.8

204.0

979.4

45.6

218.4

20

Nashik

268.3

2344.7

138.7

1221.2

129.6

1123.5

21

Amritsar

NA

NA

NA

NA

NA

NA

22

Ludhiana

194.7

1333.2

109.4

749.6

85.2

583.6

23

Jaipur

122.9

493.7

49.7

198.9

73.2

294.8

24

Chennai

591.0

1385.5

242.7

570.1

348.3

815.5

25

Coimbatore

72.1

763.0

47.1

498.7

25.0

264.3

26

Madurai

56.6

610.7

45.4

489.3

11.2

121.4

27

Lucknow

84.6

369.0

62.8

274.8

21.8

94.2

28

Kanpur

100.3

382.9

86.2

330.4

14.1

52.5

29

Allahabad

36.4

365.0

25.8

259.0

10.5

106.0

30

Agra

39.7

303.5

24.7

189.2

15.1

114.3

31

Varanasi

36.5

325.4

21.8

195.8

14.7

129.6

32

Meerut

40.9

365.3

31.6

283.0

9.4

82.3

33

Faridabad

78.1

697.4

75.1

671.3

3.0

26.1

34

Kolkata

542.4

1178.5

387.1

841.4

155.3

337.1

35

Asansol

11.1

218.2

7.4

145.8

3.7

72.4

 

Total for35 MCs

10228

1271

5456

678

4772

593

Source: Budgets of Municipal Corporations.

ii) Fiscal Balance

This measure reveals the overall resource gap, after meeting both revenue and capital expenditure, that needs to be met through borrowings.
It can be observed from the above table that except 7 municipal corporations, viz. Mumbai, Chennai, Visakhapatnam, Surat, Delhi, Coimbatore and Faridabad, all other MCs had their revenue falling short of expenditure (having a negative surplus). This is significant in that for maintaining the present level of expenditure, revenues are inadequate and borrowed funds are used. Hence MCs are constrained to raise the expenditure to the desired level for ensuring minimum level of civic amenities. The level of shortfall ranges from Rs.3 per capita for Jabalpur MC to Rs.1,411 per capita for Pune MC. However, the 7 MCs which are enjoying surplus have the fiscal space and clear scope for improving the civic amenities in the immediate future. There was a surplus of more than Rs.750 and Rs.500 per capita in case of Surat and Mumbai, respectively6 (Table 27) .

iii) Expenditure Performance

A proportion of revenue expenditure to total expenditure reveals the quantum of funds spent for maintaining the current assets and that available for creating new capital assets.

Table 28 shows categorisation of the MCs on this parameter. It indicates that many of them have very high proportion of revenue expenditure as compared to the group average of 56 per cent. Faridabad, Vishakhapatnam, Kolkata, Kanpur and Pune have shown revenue expenditure constituting more than 70 per cent of their total expenditure, while Kochi, Indore, Greater Mumbai, Jaipur and Chennai have shown it at less than 40 per cent of total expenditure. The MCs with very a high proportion of revenue expenditure need to prioritise their expenditure in favour of capital expenditure.

Table 27: Resource Gap of the Municipal Corporations

Sl. No.

Municipal Corporation

Resource Gap in Rupees per-Capita
(Average of 1999-2000 to 2003-2004)

Revenue Receipts

Total Expenditure

Resource Gap

1

Greater Mumbai

3417

2912

-505

2

Delhi

739

721

-18

3

Kolkata

1178

1224

46

4

Chennai

1386

1216

-170

5

Hyderabad

964

984

19

6

Ahmedabad

1668

2040

372

7

Kanpur

383

395

12

8

Pune

1890

3301

1411

9

Surat

2577

1818

-759

10

Jaipur

471

508

37

11

Lucknow

369

449

80

12

Vadodara

1434

1678

244

13

Agra

304

345

41

14

Nashik

2345

2711

366

15

Meerut

365

398

32

16

Faridabad

697

671

-26

17

Visakhapatnam

1093

941

-152

18

Allahabad

365

370

5

19

Rajkot

1020

1325

305

20

Jabalpur

551

554

3

21

Coimbatore

763

700

-63

22

Madurai

624

874

249

23

Vijayawada

706

772

66

24

Kochi

813

1133

320

25

Asansol

218

367

149

 

Total for 25 MCs

843

910

67

*: ‘-’ indicates fiscal surplus.
Source: Budgets of Municipal Corporations.

5.3.2 Normative Approach

i) Availability of Civic Amenities
The Municipal Corporations are expected to provide certain minimum level of civic services to the citizens, in accordance with their obligatory functions and mandates. The availability of civic amenities in a MC could be approximated by the per capita


Table 28: Categorization of Municipal Corporations as per Revenue
Expenditure to Total Expenditure Ratio (2003-04)

Parameter

Municipalities

Top 5 Municipalities

At or Above Average

Hyderabad

Faridabad (100%)

Vishakhapatnam

 

Vishakhapatnam (83.69%)

Patna

 

Kolkata (73.36%)

Ahmedabad

 

Kanpur (72.85%)

Jabalpur

 

Pune (72.65%)

Pune

 

 

Ludhiana

 

 

Coimbatore

 

 

Lucknow

 

 

Kanpur

 

 

Allahabad

 

 

Meerut

 

 

Faridabad

 

 

Kolkata

 

 

 

 

Bottom 5 Municipalities

Below Average

Asansol

Kochi (26.65%)

 

Agra

Indore (37.68%)

 

Chennai

Greater Mumbai (38.03%)

 

Greater Mumbai

Jaipur (38.09%)

 

Indore

Chennai (39.06%)

 

Jaipur

 

 

Bhopal

 

 

Madurai

 

 

Nasik

 

 

Kochi

 

 

Bangalore

 

 

Surat

 

 

Vijayawada

 

Source: Budgets of Municipal Corporations.


expenditure made by the MC on various services. The adequacy of services provided by the MCs is assessed by comparing the expenditure incurred by them on core services, namely, water supply, sewerage, roads and street lighting with Zakaria Committee expenditure norms7. Zakaria Committee norms were evolved in 1964. They were adjusted for inflation to arrive at norms for the period of 1999-2000 to 2003-2004. Since service-wise data for all the years have been available only for 11 MCs, average proportion of service-wise expenditure to total expenditure for these MCs was used to arrive at the expenditure incurred by remaining MCs on these services.

The results shown in Table 29 indicate that spending on civic services of all the MCs has been lower than the Zakaria Committee norms. The extent of under-spending varied between 30.78 per cent in the case of Pune to 94.43 per cent in the case of Patna. The average level of under-spending for the 30 MCs under the study works out to 76 per cent.


Table 29: Zakaria Committee Norms and Under-spending of the Municipal
Corporations (Averages of 1999-2000 to 2003-2004)

Sl. No.

Municipal Corporation

Average Zakaria
Norm
(Rupees per capita)

Average Expenditure
of the MC on Core
Services capita)

Average Under
Spending of the MC
(As Percentage
of Zakaria Norm)

1

Hyderabad

861.71

207.41

-76.01

2

Visakhapatnam

786.21

198.76

-74.73

3

Vijayawada

791.06

147.67

-81.40

4

Patna

856.56

47.56

-94.43

5

Delhi

920.78

137.35

-85.38

6

Surat

986.12

370.61

-62.24

7

Vadodara

804.18

384.21

-50.43

8

Bangalore

983.77

249.24

-74.92

9

Kochi

747.95

277.34

-63.65

10

Indore

843.88

210.63

-75.54

11

Bhopal

823.74

127.53

-84.50

12

Jabalpur

808.08

115.18

-85.79

13

Greater Mumbai

873.37

597.17

-31.64

14

Pune

985.55

684.89

-30.78

15

Nagpur

892.33

289.08

-67.50

16

Nashik

883.52

571.11

-35.52

17

Ludhiana

744.84

281.92

-62.77

18

Jaipur

979.17

114.32

-88.48

19

Chennai

839.69

250.84

-70.11

20

Coimbatore

771.71

146.19

-81.06

21

Madurai

726.77

187.30

-74.75

22

Lucknow

921.07

93.38

-89.88

23

Kanpur

917.65

82.45

-91.01

24

Allahabad

795.23

78.08

-90.17

25

Agra

837.94

72.70

-91.31

26

Varanasi

783.51

76.58

-90.17

27

Meerut

840.60

82.84

-90.15

28

Faridabad

896.00

141.14

-84.25

29

Kolkata

819.73

255.82

-68.75

30

Asansol

788.63

77.26

-90.21

ii) Factors influencing Under-spending
There are a host of factors which influence the level of underspending by local bodies. These could broadly be categorized as ‘exogenous’ or ‘endogenous’ in nature.

Exogenous Factors
The exogenous factors are essentially those factors over which the MCs do not have any control. Since the level of spending depends upon the level of resources available with the MC, the delegation of revenue powers (fiscal decentralization) and grants (intergovernmental transfers), which determine the resources of the local bodies, would be the key exogenous factors influencing the ability of the MC to spend and provide these services. These factors could be captured in the form of ‘dependency ratio’ and ‘decentralization ratio’, defined as below:

Dependency ratio refers to the share of grants a MC receives to its total expenditure.
Decentralisation ratio refers to the delegation of autonomy in decision-making with respect to the finances of the MC. Revenue decentralization ratio is measured by ratio of MC’s per capita revenue to State per capita revenue receipt.

(a) Dependency and Under-spending
Table 30 juxtaposes the extent of under-spending with the dependency ratio of the MCs. The rank correlation coefficient between these two series works out to 0.61. The coefficient is statistically significant at 1 per cent level of significance. Figure 6 presents the scatter diagram between under-spending and dependency on grants from higher level of governments. This indicates a significant positive relationship, implying that higher dependency would lead to higher under-spending.

Table 30: Dependency ratio and Under-spending of the
Municipal Corporations

Sl. No.

Municipal Corporation

Under Spending (%)

Dependency Ratio (%)

1

Greater Mumbai

31.64

0.69

2

Delhi

85.38

2.35

3

Kolkata

68.75

46.50

4

Chennai

70.11

3.97

5

Hyderabad

76.01

16.42

6

Kanpur

91.01

72.28

7

Pune

30.78

22.45

8

Surat

62.24

7.69

9

Jaipur

88.48

14.53

10

Lucknow

89.88

61.50

11

Agra

91.31

67.18

12

Nashik

35.52

8.98

13

Meerut

90.15

67.46

14

Faridabad

84.25

7.58

15

Visakhapatnam

74.73

4.03

16

Allahabad

90.17

72.67

17

Jabalpur

85.79

60.43

18

Coimbatore

81.06

8.01

19

Madurai

74.75

9.31

20

Vijayawada

81.40

4.80

21

Kochi

63.65

43.03

22

Asansol

90.21

62.07


Table 31: Categorization of Municipal Corporations as per Dependency Ratio
(Average of 1999-00 to 2003-04)

Parameter

Municipal Corporations

Top 5 Municipal Corporations

At or Above Average

Kolkata

Kanpur (0.72)

(High dependency)

Kanpur

Allahabad (0.72)

 

Pune

Agra (0.67)

 

Lucknow

Meerut (0.67)

 

Agra

Asansol (0.62)

 

Meerut

 

 

Jabalpur

 

 

Kochi

 

 

Ahmedabad

 

 

Allahabad

 

 

Asansol

 

 

 

Bottom 5 Municipal Corporations

Below Average

Greater Mumbai

Greater Mumbai (0.069)

(Low dependency)

Delhi

Delhi (0.023)

 

Chennai

Chennai (0.004)

 

Hyderabad

Vishakhapatnam (0.04)

 

Surat

Vijayawada (0.05)

 

Jaipur

 

 

Vadodara

 

 

Nashik

 

 

Faridabad

 

 

Vishakhapatnam

 

 

Rajkot

 

 

Coimbatore

 

 

Madurai

 

 

Vijayawada

 

The MCs falling above and below the group average of the average dependency ratio (over the period 1999-2000 to 2003-2004) are shown in Table 31.

(b) Decentralisation and Under-spending
Table 32 compares the extent of under-spending and decentralization, a measure of delegation of tax powers to the MCs. Here, decentralization ratio has been measured as proportion of the MC’s per capita revenue to State per capita revenue, over the time period of 1999-2000 to 2003-2004.


Table 32: Decentralisation and Under-Spending of the Municipal Corporations
(Average of 1999-2000 to 2003-2004)

Sl. No.

Municipal Corporation

Under Spending (%)

Revenue Decentralisation Ratio (%)

1

Greater Mumbai

31.64

110.61

2

Delhi

85.38

18.03

3

Kolkata

68.75

67.65

4

Chennai

70.11

45.07

5

Hyderabad

76.01

34.43

6

Kanpur

91.01

24.67

7

Pune

30.78

61.19

8

Surat

62.24

79.92

9

Jaipur

88.48

21.69

10

Lucknow

89.88

23.77

11

Agra

91.31

19.55

12

Nashik

35.52

75.90

13

Meerut

90.15

23.53

14

Faridabad

84.25

19.82

15

Visakhapatnam

74.73

39.02

16

Allahabad

90.17

23.52

17

Jabalpur

85.79

25.67

18

Coimbatore

81.06

24.82

19

Madurai

74.75

20.31

20

Vijayawada

81.40

25.18

21

Kochi

63.65

26.76

22

Asansol

90.21

12.53


The results shown in Table 31 and the scatter diagram in Figure 7 confirm our a priori view that higher the revenue

Table 33: Categorization of Municipal Corporations as per Revenue
Decentralisation Ratio (Average of 1999-00 to 2003-04)

Parameter

Municipal Corporations

Top 5 Municipal Corporations

At or Above Average

Greater Mumbai

Greater Mumbai (110.61%)

(Highly decentralized)

Surat

Surat (79.92%)

 

Nashik

Nashik (75.9%)

 

Pune

Kolkata (67.65 %)

 

Kolkata

Pune (61.19%)

 

Chennai

Surat (38.99%)

 

Visakhapatnam

 

 

 

Bottom 5 Municipal Corporations

Below Average

Hyderabad

Asansol (12.53%)

(Lowly decentralized)

Kanpur

Delhi (18.03%)

 

Jaipur

Agra (19.55%)

 

Lucknow

Faridabad (19.82%)

 

Agra

Madurai (20.31%)

 

Delhi

 

 

Kochi

 

 

Madurai

 

 

Vijayawada

 

 

Jabalpur

 

 

Meerut

 

 

Coimbatore

 

 

Faridabad

 

 

Allahabad

 

 

Asansol

 


decentralization, lower the level of under-spending. The rank correlation computed as per Spearman’s rank correlation works out to be - 0.81 and has a desired negative sign. It is highly significant at 1 per cent level of significance.
Table 33 provides the list of MCs that fall above or below the group average decentralization ratio.

Endogenous Factors

(a) Revenue Administration

This parameter refers to local body’s efficiency in levying and collecting revenues which falls in its jurisdiction i.e, own sources of revenue of the MC. Although not a very accurate measure, it aims at measuring MC’s performance with regard to own revenue.

The ratio of per capita own revenue of MC to State GDP (GSDP) per capita could be taken as a close approximation of the efficiency of revenue administration8. Table 34 provides a comparative scenario of under-spending and efficiency of revenue administration.
With efficient revenue administration reflected by own revenue as a proportion to GSDP, the availability of resources with the MC improves and level of under-spending is accordingly lower. Rank correlation among the two parameters works out to -0.913, which is statisticallysignificant at 1 per cent level.
The scatter diagram in Figure 8 clearly reveals a negative relationship between efficiency of revenue administration and level of under-spending.

Table 34: Efficiency of Revenue Administration and Under-Spending of the
Municipal Corporations

Sl. No.

Name of the Municipal Corporation

Under Spending (%)

Ratio of Per capita Own Revenue to GSDP per capita (%)

1

Greater Mumbai

31.64

18.45

2

Delhi

85.38

2.30

3

Kolkata

68.75

5.36

4

Chennai

70.11

6.61

5

Hyderabad

76.01

5.75

6

Kanpur

91.01

1.44

7

Pune

30.78

6.66

8

Surat

62.24

9.69

9

Jaipur

88.48

4.43

10

Lucknow

89.88

1.90

11

Agra

91.31

1.50

12

Nashik

35.52

12.26

13

Meerut

90.15

1.55

14

Faridabad

84.25

3.82

15

Visakhapatnam

74.73

7.25

16

Allahabad

90.17

1.27

17

Jabalpur

85.79

2.50

18

Coimbatore

81.06

3.80

19

Madurai

74.75

3.19

20

Vijayawada

81.40

3.91

21

Kochi

63.65

4.81

22

Asansol

90.21

0.73

A comparison of the own revenue with performance on individual taxes that are levied and collected by the Municipal Corporations would provide further insight into tax efficiency of the urban local bodies. Table 35 provides a comparative position of


Table 35: Own Revenue-GSDP Ratio and Performance on Individual Taxes

Sl.
No.

Municipal
Corporation

Own
Revenue to GSDP

Property
tax

Profession
tax

Advertisement
tax

Octroi
Ratio

High Own Tax

1

Greater Mumbai

8.63

×

 

×

v

2

Surat

9.93

v

 

 

v

3

Chennai

3.41

v

v

×

 

4

Visakhapatnam

8.24

v

v

×

 

5

Vijayawada

4.45

v

v

 

 

6

Hyderabad

6.53

v

v

v

 

Lower Own Tax

7

Kochi

1.55

v

v

 

 

8

Jabalpur

1.02

×

×

 

×

9

Nashik

1.30

×

 

 

v

10

Coimbatore

1.38

×

×

 

 

11

Jaipur

.50

×

 

v

×

12

Madurai

.93

×

 

 

 

13

Faridabad

1.11

×

 

×

 

Notes :
v : represents equal or above average performance,
× : represents lower than average performance. In the case of blank cells, no information is available.


different tax sources in order to identify the corporations with potential for improving tax administration
It is pertinent to note that all MCs, barring Mumbai, with above average own tax revenue have performed well in case of property tax and/or profession tax. In case of Mumbai, it has done well in case of Octroi. On the other hand, except Kochi, all MCs falling in the below average category have not done well in either of the major taxes.

(b) Recovery of Cost
Cost recovery of services is an important measure, which is used to assess the health of municipal finances. It can be broadly measured as a ratio of municipal fees and user charges to revenue expenditure incurred by an MC for the provision of respective services viz., water supply, sanitation, health services, education and street lighting. As detailed data on service-wise user charges and fees are not available, the broad indicator of ratio of municipal fees and user charges to aggregate revenue expenditure has been used as a proxy. Table 36 makes a comparison of under-spending and cost recovery of the MCs. None of the MCs, barring Delhi, Visakhapatnam and Bhopal show a high proportion of cost recovery. It is less than 10 per cent in the MCs of Kerala and Tamil Nadu. Cost recovery has to be an integral part of service provision, especially when services can be measured and beneficiaries identified, as in case of water supply, education and health.

The scattered diagram in Figure 9 indicates a negative but relatively weak relationship between under-spending and cost recovery. In case of MCs such as Kanpur, Allahabad and Lucknow, despite higher cost recovery, under-spending has not been lower. Rank correlation for these two series is -0.39, which is significant at 10 per cent level.

(c) Quality of Expenditure
The expenditure structure of Municipal Corporations throws some light on the relative importance assigned to each component in the total expenditure and it also has a bearing on the financial position and service delivery.

Table 36: Under-spending and Cost recovery of the Municipal Corporations

Sl. No.

Municipal Corporation

Under Spending
 of the MC (%)

Average Cost
recovery (%)

1

Hyderabad

76.01

38.88

2

Visakhapatnam

74.73

81.91

3

Vijayawada

81.40

37.48

4

Delhi

85.38

94.13

5

Surat

62.24

11.11

6

Bangalore

74.92

14.41

7

Kochi

63.65

7.76

8

Indore

75.54

31.83

9

Bhopal

84.50

62.85

10

Jabalpur

85.79

7.20

11

Greater Mumbai

31.64

11.16

12

Ludhiana

62.77

9.18

13

Jaipur

88.48

33.61

14

Chennai

70.11

7.74

15

Coimbatore

81.06

4.47

16

Madurai

74.75

4.79

17

Lucknow

89.88

9.82

18

Kanpur

91.01

3.90

19

Allahabad

90.17

6.06

20

Agra

91.31

23.25

21

Varanasi

90.17

9.34

22

Meerut

90.15

12.39

23

Faridabad

84.25

28.15

24

Kolkata

68.75

15.17

25

Asansol

90.21

13.08

.

Relative shares of Capital, Maintenance and Establishment Expenditures
While a low proportion of spending on establishment is desirable, too low a proportion may hamper the capacity for service delivery. Likewise, expenditure on capital works is important as it provides future sources of revenue; but very high proportion on it would have a bearing on the finances available for provision of services and even necessitate external support, in the form of either grants or borrowings. Table 37 presents the relative shares of various expenditure components of the MCs. It indicates that some of the MCs have an unsustainably high proportion of (more than 50 per cent) total expenditure on establishment and administration, which affects the future of their finance and their service delivery capacity. Likewise, some MCs have an abysmally low capital expenditure (less than 10 per cent to almost zero), which is equally detrimental to the health of civic finance and its long-term sustainability. It is, therefore, desirable to develop certain guidelines/norms for the municipal corporations towards spending on capital and its maintenance works, as well for rationalizing the staffing pattern so as to ensure that excessive amounts are not spent on staff.

Establishment & Administration Expenditure and Under-spending
The revenue expenditure, which comprises expenditures on (i) establishment and administration and (ii) operations and maintenance, assumes critical importance, as it relates to the provision of civic services to the people and their maintenance. However, a very high proportion of expenditure on establishment and administration can be detrimental to both the expansion of capital assets and maintenance of existing facilities. Thus, with a relatively lower proportion of expenditure devoted to establishment and administration, the MCs would be better equipped to provide

Table 37: Relative Share of Expenditure Components of the MCs
(Average of the Shares during 1999-2003)

Sl.
No.

Municipal
Corporation

Share of Establishment
& Administration
Expenditure in Total
Expenditure (%)

Share of Operations & Maintenance
Expenditure in Total
Expenditure (%)

Share of Capital
Expenditure in Total
Expenditure (%)

1

Hyderabad

56.95

22.19

19.82

2

Visakhapatnam

46.55

32.38

18.74

3

Vijaywada

46.55

32.38

18.74

4

Patna

53.09

26.46

N.A.

5

Delhi

43.71

2.18

6.08

6

Ahmedabad

0.00

0.00

23.82

7

Surat

37.61

8.01

39.47

8

Vadodara

41.53

20.03

13.48

9

Bangalore

49.00

4.72

N.A.

10

Kochi

16.01

32.94

1.25

11

Indore

28.61

12.15

25.96

12

Bhopal

20.64

11.06

2.85

13

Jabalpur

55.34

7.52

N.A.

14

Greater Mumbai

36.79

8.30

0.06

15

Pune

20.06

58.62

21.32

16

Nagpur

37.98

36.72

25.30

17

Nashik

25.03

20.56

42.29

18

Ludhiana

42.75

13.19

1.37

19

Jaipur

31.53

5.17

36.03

20

Chennai

42.77

4.76

21.61

21

Coimbatore

55.91

15.53

28.56

22

Madurai

53.21

2.34

29.98

23

Lucknow

48.83

14.12

23.96

24

Kanpur

66.89

17.15

1.50

25

Allahabad

51.03

18.89

0.24

26

Agra

50.72

4.16

12.41

27

Varanasi

50.93

6.05

0.11

28

Meerut

58.45

13.03

21.34

29

Faridabad

46.84

53.16

N.A.

30

Kolkata

61.30

7.39

8.72

31

Asansol

32.07

7.92

40.12

 

Total

36.25

14.43

12.37

Source: Budgets of Municipal Corporations.


civic amenities. Table 38 compares the establishment and administration expenditure and under-spending of the MCs. The relationship of under-spending with the proportion of expenditure on establishment and administration is shown in the scatter diagram in Figure 10. It indicates a positive relationship conforming to a priori expectations. Rank correlation for these two series is 0.44 which is significant at 5 per cent level

Table 38: Average Establishment and Administration Expenditure of
the Municipal Corporations (1999-2000 to 2003-2004)

Sl. No.

Municipal Corporation

Under Spending (%)

Expenditure on Establishment and Administration to Total
Expenditure (%)

1

Greater Mumbai

31.64

36.79

2

Delhi

85.38

43.71

3

Kolkata

68.75

61.30

4

Chennai

70.11

42.77

5

Hyderabad

76.01

56.95

6

Kanpur

91.01

66.89

7

Pune

30.78

20.06

8

Surat

62.24

37.61

9

Jaipur

88.48

31.53

10

Lucknow

89.88

48.83

11

Agra

91.31

50.71

12

Nashik

35.52

25.03

13

Meerut

90.15

58.45

14

Faridabad

84.25

46.84

15

Visakhapatnam

74.73

46.55

16

Allahabad

90.17

51.03

17

Jabalpur

85.79

55.34

18

Coimbatore

81.06

55.91

19

Madurai

74.75

53.21

20

Vijayawada

81.40

51.03

21

Kochi

63.65

16.01

22

Asansol

90.21

32.05


Table 39 provides a summary position on relationship of underspending with other major variables as discussed above. Under-

Table 39: Summary of the Assessment of Finances of Municipal Corporations

Sl.
No.

Municipal
Corporation

Under-
Spending %

Depend-
ency

Decentra-
lisation

Revenue
(Tax)
Adminis-
tration

Quality of
Expendi-
ture

Cost
Recovery

1

Pune

30.78

v

v

v

v

 

2

Greater Mumbai

31.64

v

v

v

v

×

3

Nazi

35.52

v

v

v

v

 

4

Vadodara

50.43

v

v

 

 

 

5

Surat

62.24

v

v

v

v

×

6

Ludhiana

62.77

 

 

 

 

×

7

Kochi

63.65

×

×

×

 

×

8

Nagpur

67.50

 

 

 

 

 

9

Kolkata

68.75

×

v

v

×

×

10

Chennai

70.11

v

v

v

v

×

11

Visakhapatnam

74.73

v

×

v

v

v

12

Madurai

74.75

v

×

×

 

×

13

Bangalore

74.92

 

 

 

 

×

14

Indore

75.54

 

 

 

 

v

15

Hyderabad

76.01

v

×

v

×

v

16

Coimbatore

81.06

v

×

×

×

×

17

Vijayawada

81.40

v

×

×

×

v

18

Faridabad

84.25

v

×

×

×

v

19

Bhopal

84.50

 

 

 

 

v

20

Jabalpur

85.79

×

×

×

×

×

21

Jaipur

88.48

v

×

×

 

v

22

Lucknow

89.88

×

×

×

×

×

23

Meerut

90.15

×

×

×

×

×

24

Allahabad

90.17

 

×

×

×

×

25

Varanasi

90.17

 

 

 

 

×

26

Asansol

90.21

×

×

×

v

×

27

Kanpur

91.01

×

×

×

×

×

28

Agra

91.31

×

×

×

×

v

29

Patna

94.43

 

 

 

 

 

v : Above average performance.   × : Below average performance.


spending has been shown in the ascending order with the MC on the top being the best performer (with highest per capita spending on core services). Subsequent columns indicate status of individual MCs against various parameters that are expected to influence the level of under-spending. With a majority of the tick marks being concentrated towards the top, the influence of various factors on the level of underspending is quite apparent.

(d) Debt Position
The debt position of MCs can be assessed in terms of the followings: a) use of debt and b) debt sustainability. The former has been examined by computing debt to capital expenditure ratio and the latter has been ascertained by computing interest coverage and debt coverage ratios.

Use of Debt
Borrowed funds are intended for creation/development of infrastructure by a MC, resulting in asset creation so that the returns generated from the assets can be utilized for servicing the debt (here, it is implicitly assumed that either returns are designed to be adequate or facilities are subsidized by upper tiers). The ratio of borrowings to capital expenditure of the municipalities provides an indication of the extent to which borrowed funds are spent on capital formation. A value of the ratio above one (a proportion greater than 100 per cent) will indicate that a portion of the borrowed funds is utilized for current consumption.
Table 40 indicates that except three MCs belonging to Kochi, Ludhiana & Allahabad no other MC have a borrowing to capital expenditure ratio of more than one, suggesting that the borrowed funds have been utilized for capital expenditure only.

Table 40: Borrowings to Capital Expenditure Ratio of the MCs
(Average of 1999-2003)

Municipal Corporation

Loans
(Rs. Lakhs)

Capital Expenditure
(Rs. Lakhs)

Borrowings/Capital
Expenditure ratio’ (%)

Vijaywada

520

1495

34.74

Delhi

1253

4807

26.06

Ahmedabad

12205

17564

69.49

Surat

5653

18169

31.11

Kochi

1562

148

1053.03

Indore

1643

5323

30.86

Bhopal

16

283

5.66

Nagpur

2737

5620

48.69

Ludhiana

715

268

266.92

Jaipur

375

4875

7.69

Chennai

4244

11314

37.51

Coimbatore

763

1898

40.18

Madurai

1118

2666

41.92

Lucknow

2026

2595

78.09

Allahabad

124

37

333.78

Meerut

405

924

43.85

Asansol

26

755

3.38

Source: Budget documents of Municipal Corporations.

 

Debt Sustainability
Apart from the use of borrowings, debt sustainability of the MCs needs to be assessed, and this can be done in terms of two indicators: ratio of outstanding debt to total revenues and ratio of debt servicing to revenue receipts. As the outstanding debt details of the MCs are not available in the budget documents, the second measure is used in the study. It may be noted that debt repayments include both principal and interest components.
Table 41 sets out the information relating to debt repayment to revenue receipt ratio of the MCs. It reflects that the debt repayment of 18 MCs has not been very high. Excepting the cases of MCs of Chennai, Madurai and Vijayawada, wherein the debt repayment is over and above 10 per cent of their revenue receipts, there is a potential for using debt wisely, by the MCs for capital formation.

Table 41: Debt Repayment to Revenue receipts ratio of the MCs
(Average of 1999-2003)

Municipal Corporation

Debt Repayment
Rs. Lakhs)

Revenue Receipts(Rs. Lakhs)

Debt Repayment to Revenue receipts (%)

Hyderabad

307

33882

0.91

Visakhapatnam

217

11007

1.97

Vijaywada

935

6165

15.17

Delhi

309

88030

0.35

Bangalore

2805

36954

7.59

Kochi

60

5168

1.16

Indore

304

17997

1.69

Greater Mumbai

29549

416203

7.10

Pune

216

50716

0.43

Nagpur

1574

24961

6.31

Nashik

2231

26830

8.32

Ludhiana

328

19467

1.68

Jaipur

301

12286

2.45

Chennai

6762

59103

11.44

Coimbatore

124

7210

1.72

Madurai

962

5660

17.00

Kanpur

68

10033

0.68

Kolkata

655

54239

1.21

Source: Budget documents of Municipal Corporations.

However, apart from the measure of debt service in relation to the revenue receipts, debt sustainability should be examined from the point of view of an MC’s capacity to service debt. The capacity to service the debt refers to how easily and readily the MC will be able to meet its commitment in respect of the contractual interest payment and the repayment of debt. The MC’s ability to service the liabilities can be measured with the help of coverage ratios. The coverage ratios establish relationship between committed liabilities, and the MC’s surplus out of which these claims are to be paid. These measures try to relate the MC’s surplus to the level of debt repayments with a view to assessing the degree of comfort with which the MC can meet these repayments. The following coverage ratios may used to analyze a MC’s ability to service committed liabilities.

Interest Coverage Ratio
This ratio is also called the “times interest earned” ratio and it measures the ability of an MC to pay the interest liability on debts. This is calculated as the ratio of operating surplus to interest payment*.  The Interest Coverage (IC) Ratio, therefore, measures how many times the interest liability of the MC is covered with the MC’s operating surplus. The ratio gives an idea of how much fall in surplus the MC can sustain, before it defaults or borrows to meet the interest liability. Table 42 shows the performance of the MCs on this measure.

For the MCs whose interest payment details exist, the measure shows that they are on the higher side. The higher the IC ratio, the better it is both for the MC and for the lenders. For the MC, the probability of committing default is reduced and for the lenders, the

Table 42: Interest Coverage Ratio of the Municipal Corporations
(Average of 1999 – 2003)

Sl.
No.

Municipal
Corporation

Interest repayment
(Rs Lakhs)

Operating Surplus
(Rs Lakhs)

Times Interest
Earned Ratio (%)

1.

Hyderabad

307

6852

22.32

2.

Kochi

20

2604

130.18

3.

Indore

202

10064

49.82

4.

Nagpur

593

5155

8.69

5.

Nashik

1607

14565

9.06

6.

Jaipur

172

7489

43.54

7.

Chennai

1798

36629

20.37

Source : Budgets of Municipal Corporations.

 

 

MC is considered to be less risky. A lower IC ratio indicates a low surplus or a deficit of the MC in relation to its interest payment commitments.

Mathur and Ray (2003) provide criteria based on IC ratio as follows: a ratio less than 1.5 is poor, 1.5 to 3 is moderate, 3 to 6 is good and greater than 6 is favourable. Therefore, all the above MCs are on a favourable side of the measure.

Debt Coverage Ratio

The debt coverage ratio shows the relationship between the operating surplus of the MCs and the committed liability in respect of interest and principal. It is calculated as the ratio of operating surplus and debt repayment (interest and principal repayments). Table 43 provides the performance of the MCs on this measure.

A high debt coverage ratio is indicative of the MC’s ability to meet its committed payment obligations easily, while a low ratio indicates its difficulty to meet the obligations.

According to Mathur and Ray (2003), the criteria laid down for this measure are as follows: a ratio less than 1 is poor, 1 to 2 is moderate, 2 to 4 is good and greater than 4 is favourable. For the MCs under study whose debt repayment details exist, the measure shows that all MCs except 4 fall in category of ‘favourable’. Vijaywada and Madurai fall in ‘moderate’ category whereas Bangalore and Nagpur could be termed as ‘good’.


Table 43: Debt Coverage Ratio to Operating Surplus of the MCs
(Average of 1999-2003)

Sl.
No.

Municipal
Corporation

Debt Payment
(Rs Lakhs)

Operating Surplus
(Rs Lakhs)

Times Debt Covered
(Operating surplus/
Debt payment)

1.

Hyderabad

307

6852

22.3

2.

Visakhapatnam

217

3551

16.4

3.

Vijaywada

935

1715

1.8

4.

Delhi

309

51917

168

5.

Bangalore

2805

7317

2.6

6.

Kochi

60

2604

43.4

7.

Indore

304

10064

33.1

8.

Greater Mumbai

29549

260181

8.8

9.

Pune

216

-19072

Negative

10.

Nagpur

1574

5155

3.3

11.

Nashik

2231

14565

6.5

12.

Ludhiana

328

8524

26

13.

Jaipur

301

7489

24.9

14.

Chennai

6762

36629

5.4

15.

Coimbatore

124

2500

20.2

16.

Madurai

962

1125

1.2

17.

Kanpur

68

1408

20.7

18.

Kolkata

655

15531

23.7

Source : Budgets of Municipal Corporations.

5.4 Projection of Investment Requirement in Urban Areas
This section attempts to project resource requirement for basic civic amenities via, water supply, sewerage, roads, solid waste management and street lighting and for the provision of mass urban transport systems as well as road infrastructure. For making these projections, various norms have been used: Zakaria Committee Norms (Basic amenities), Service cost Norms (Rail/ Road based mass transport) and the Expected Service cost (Inner and Outer ring roads). The details of methodology used for projections are provided below.

5.4.1 Basic Amenities
There would be need for resources for creating new infrastructure for the growing population (including backlog) and for maintenance of current and future assets. Thus, funds would be needed for: i) New infrastructure for backlog, ii) New infrastructure for incremental population and iii) Operation and Maintenance expenditure.

(i) The investment needs for creating new assets for civic amenities viz., water supply, sewerage, roads and street lighting were worked out using Zakaria Committee norms. In the case of solid waste management, the norms were worked out from the estimates made in Arabi (2006). These norms were adjusted for inflation assuming head line inflation of 5 per cent per annum during the projection period.

(ii) It was assumed that there was a service backlog of 33 per cent i.e. one third of the population did not have service coverage9 .

(iii) Zakaria Committee norms were used for working out the operation and maintenance expenditure requirement for all the services mentioned at (i) except solid waste management10.

Thus, the resource requirement for incremental investment and O&M worked out for each year as:
Incremental Investment Need = Zakaria Norm (adj)* Incremental Population
O&M expenditure Needs = Zakaria Norm (adj) * Population
Resource requirement for backlog population worked out as:
Backlog Investment Needs = Zakaria Norm (adj)* Backlog Population
The total resource needs for the provision of major civic services can be estimated by adding up:
Incremental Investment Needs + O&M Investment Needs + Backlog Investment Needs
Using the above estimates of total investment needs for the 35 MCs, the corresponding figure for the entire urban population is estimated.

5.4.2 Urban Mass Transport Systems
Urban areas require not only the basic civic amenities but also other services like urban transport and similar public goods and services. An attempt is made to estimate the investment needs of providing (i) mass urban transport systems and (ii) major road infrastructure in the form of inner and outer ring roads for providing faster movement of vehicles. As these services are meant to be provided in metropolitan cities/agglomerations, the 35 MCs with urban agglomeration population more than one million population are considered and categorized into Class AA, A and B based on the prevalent city (MC) population as on 2001.

(i) The mass urban transport systems considered include: elevated metro system for class AA and A cities (with service length of 100 and 50 km respectively) and bus rapid transit system for Class B cities (with a service length of 100 km). Therefore, for all the cities, according to their city class, the mass urban transport investment needs are estimated using the capital investment norms provided in Bandai and Coppice (2004) together with the assumed service length.
Mass Rapid Transport System Investment Needs = Norm * Service length

(ii) The major road infrastructure needs include: Outer and Inner ring roads for all class AA cities (with a service length of 100 km), Inner ring roads for class A cities (with a service length of 100 km) and Inner ring roads for class B cities (with service length of 50 km). The norms for Outer and Inner investment needs of the roads / expressways per km length in urban areas are formed using the actual cost estimates of their provision in Hyderabad11 . Using these norms and coverage length, the investment needs of the cities for the provision of road infrastructure/ expressways is estimated.

Table 44: Projection of Investment Requirement in Urban Areas

Sl. No.

Infrastructure Component

Investment Need for Ten Years (2004-05 to 2013-14) (Rs Crore)*

1

Urban basic services

Rs 3,25,010

2

Mass urban transport services

Rs 2,53,700

3

Road infrastructure services

Rs 49,500

4

Total urban services

Rs 6,28,210

*: At 2004-05 prices.

Road infrastructure Investment Needs = Norm * Service length
Therefore, the total investment needs of providing urban infrastructure services can be expressed as:
Total Urban Investment Needs =Basic Amenities Investment Needs + Mass Rapid Transport System Investment Needs + Major Road Infrastructure Investment Needs
The estimate given in Table 44 shows that on an average investment requirement is around Rs 62,821 crore per annum at constant prices of 2004-05, which comes to 2.2 per cent of GDP in year 2004-05. Here, it may be noted that total revenues of ULBs remained stable at around 0.75 per cent of GDP, which is much less than the requirement.

5.5 Estimate of Potential for Revenue Mobilisation by ULBs
As mentioned earlier, shortfall in resources is on account of the vertical imbalance as well as the nature of ULBs’ own operations. The present section attempts to estimate the potential growth in ULB revenues assuming a status quo in fiscal federal relationship. Thus, it would indicate the size of revenue gap which would necessarily have to be met through major structural reforms in the nature of altering fiscal federal relationship.

i) For working out potential revenue, separate estimates were made for tax and non-tax revenues and grants were assumed

to grow at historical growth rate. For working out tax revenue, estimates were made for major taxes viz., property, advertisement and professional tax. For each tax, best performer among the 35 MCs was taken as the benchmark12 and potential revenue was worked out assuming all ULBs are able to catch up with the benchmark13,14 .
ii) For working non-tax revenue, the optimal performer in terms of proportion of cost recovery was chosen as benchmark15 . In the previous chapter, cost recovery has been defined as the ratio of user charges to revenue expenditure. Thus, to work out the potential non-tax collections, the proportion of cost recovery of the optimal performer was applied to aggregate revenue expenditures of ULBs in the country.

The sum of all above estimates provides the potential resource mobilization. However, the entire resources cannot be assumed exclusively available for the provision of core urban services or basic infrastructure services. Therefore, we use the proportion of these resources that would reach to these services16 that give us utilisable


Table 45: Projection of Potential Revenues of ULBs (2004-05)

Sl. No.

Revenue Source

Projected Revenues (Rs Crores)

1

Property Tax

10,577

2

Profession Tax

2,389

3

Advertisement Tax

510

4

All Major Taxes (1+2+3)

13,476

5

Non Tax (User charges & fees)

9,746

6

Grants in Aid

4,064

7

Total Potential Revenue (4+5+6)

27,285

8

Total Utilisable revenue for Core Service provision(best case – 65%)

17,736

9

Total Utilisable revenue for Core Service provision(conservative case – 35%)

9,550

resources for service provision in the best case and in the average case senerios. The estimates that have been made as per the procedures delineated above for the year 2004-05 are set out in Table 45.
The above Table shows that if current status in fiscal federal relationship continues, ULBs in India together have the potential to raise revenues only up to Rs.27,285 crore in 2004-05. This amounts to about 1.0 per cent of the GDP. Of these funds, in a best case scenario, only 2/3rd would be available for asset creation after meeting the current expenditure. Thus, the utilizable resources of the ULBs only for core service provision even after attaining the benchmark figures of resource mobilization fall short of investment needs (Rs.28,000 crore) to the tune of Rs.10,000 crore in the best scenario and Rs.18,000 crore in the conservative (average) scenario for the year 2004-05, which are substantial amounts that cannot be raised by ULBs assuming status quo in all respects. There is, therefore, urgent need for reforms to mobilize the funds needed for investment in urban infrastructure as estimated in the previous section. Given the magnitude of the problem, it is necessary to have a Centre-State-Local-Private Partnership (CSLPP) for development of urban infrastructure.

5.6 Some Observations
The key conclusions that emerge from the foregoing aggregative and Municipal Corporation-wise analysis of municipal finances are:

• Analysis of the revenue and expenditure of the MCs reveals that most of them are generating revenue surplus and overall resource gaps are not very large. At the same time, assessment of municipal finance reveals that spending by all the municipal bodies is lower than that required for providing a minimum level of civic amenities. The study observes that this apparent contradiction of sound fiscal health and high level of underspending is due to statutory obligations, whereby ULBs are generally bound to restrict their expenditure to the resources available to them and also are not granted liberal permission by State Governments to incur debt [Mathur and Thakur (2004)].

• In view of the above observation, the study has undertaken an assessment of municipal finance in “normative terms”, besides the “standard approach” of revenue or fiscal balance.

• A comparison of per capita spending on core services by MCs in terms of the Zakaria Committee norms indicates that the level of under-spending on an average works out to be about 76 percent. Significantly, MCs belonging to Bihar and Uttar Pradesh are the ones that have highest level of under-spending whereas those belonging to Maharashtra, Gujarat are among the best performers.

• Reasons for under-spending could be traced to MCs’ own operations (endogenous) as well as to policy issues related to the upper tiers of Governments (exogenous). Exogenous factors include dependency for resources on upper tiers of the Government and inadequate delegation of revenue powers. Endogenous factors include inefficient revenue (tax) administration, low cost recovery and poor quality of expenditure.

• MCs which have lower level of under-spending levels or better performance have fared well on 4 out of 5 criteria viz.,dependency, decentralization, tax administration and expenditure quality. On the other hand, MCs with ranking “below average” on these 4 parameters are also the ones which have been spending less on core civic amenities. Thus, the analysis suggests that restructuring of revenue powers may be given top priority by State Governments if urban amenities are to be improved.

• Though delegation of revenue powers is a key factor, need for efficient revenue (tax) administration cannot be underplayed. Examination of various taxes across the local bodies reveals that property and profession taxes are important sources. (Octroi is the most important source of revenue in municipal corporations belonging to Maharashtra and Gujarat). The local bodies need to adequately tap the existing avenues. Unit area system of computation, based on self-assessment principle, with respect to property tax needs to be extended to all MCs and in the case of MCs where Octroi has been a major source they should be adequately compensated when Octroi is abolished. Other sources like entertainment tax, development charges, betterment levies etc. need to be tapped.

• Quality of expenditure, measured as establishment and administrative expenditure as a proportion of total expenditure also turns out to be a major factor in determining the ability of MCs to provide core services. Lower spending on administrative purposes would leave more resources with the MCs to provide for civic amenities. This calls for rationalization of the work force and reduction in spending on establishment and administration.

• There is a very weak link between under-spending and cost recovery. Interestingly, MCs such as Mumbai, Surat and Pune which are among the best performers in terms of other financial parameters, have below average user charges. This is because

the municipalities are resorting to lower use of user charges than would be desirable. In fact, on an average the cost recovery is below 1/4th of the expenditure incurred by the MCs. Considering the benefit principle17, there is a large scope for improvement in levying User Charges.

• It is apparent from the analysis that there is a need to substantially increase the spending by local bodies. Given the constraints faced by State Governments, it is essential that the MCs be granted access to borrowed funds. At least there are two convincing arguments in favour of MCs going for borrowed funds. First, there is a scope for MCs to go in for borrowed funds as their current level of indebtedness is not very large. Secondly, there is a scope to raise the user charges which are abysmally low across the States. Enhancement of user charges would make the new projects undertaken with borrowed funds economically viable and ensure that MCs are debt-sustainable.

• Investment requirement for urban infrastructure has been estimated at about Rs.63,000 crore per annum for the next ten year period (2004-05 to 2013-14), which forms about 2.2 per cent of GDP. Assuming the current status quo in fiscal federal relationship, the study has projected that ULBs together have the potential to raise revenues only up to about 1.0 per cent of the GDP.

• Given the magnitude of the resource gap of the municipal sector as a whole, it is necessary to have a Centre-State-Local-Private Partnership (CSLPP) for development of urban infrastructure. Revisiting revenue assignment is the first task of a partnership.
*   Operating surplus is defined as current revenue - operating expenditure (operation & maintenance including material as well as staff salaries). Given that the accounts are not segregated in a manner required to measure operating surplus, current expenditure net of interest payments has been used as operating expenditure for computation.

4 Statutorily, municipal bodies cannot run deficit and their revenue receipts must exceed revenue expenditure while presenting budgets. It is quite possible that MCs might be compressing its expenditure in order to meet the statutory requirement. Therefore, the surplus cannot be termed as a genuine surplus.

5 It has been pointed out that since a part of Municipal body expenditure is absorbed directly by the state government, particularly relating to deputed employees, expenditure shown by them (municipal bodies) is an underestimate. But this issue is not relevant for the bigger MCs considered in the study. For instance, proportion of deputed employees is miniscule in the case of Bangalore, Chennai and Hyderabad. 6 Budget documents for the year 2002-03 and 2004-05 of Brihat Mumbai MC state that surplus has resulted on account of efforts made by various economy measures to control the expenditure and augment the revenue.7 Here, the expenditure norm for storm water drainage has not been included, which is not shown in the expenditure on services of the MCs. 8 The ability of the local body to collect taxes also depends upon delegation of revenue powers.

9 NIUA study (1998) states a 30 per cent backlog in the year 1997-98. Given that the availability of civic amenities has not improved since then and backlog would have increased, a conservative estimate of 33 per cent backlog has been assumed.

10 Norms were worked out from Arabi (2006).

11 The Hyderabad Urban Development Authority (HUDA) has undertaken this major project in Hyderabad city and it shared the unit costs information, which form the norms used here.

12 The average of top performer MCs of class AA and A cities has been taken as benchmark.

13 Computation of potential revenue would, however, be quite an involved exercise which needs to take into account myriad number of factors such as tax rate, tax base and tax exemption. Ignoring the tax rate factor, there could be many ways to enhance the tax base and reduce the exemptions granted. There are possibilities such as changing the base of the property tax, trade licensing fee, advertisement fee etc., imposing vacant land tax, premium on Floor Space Index (FSI), rationalization of user charges, formulae for inter-governmental transfers etc. Exploring those is beyond the scope of the present study.

14 In an emerging global scenario, sunrise industries such as IT are contributing towards employment and income generation in cities. While income, turnover and services generated through these activities do not fall within the revenue powers of the municipal bodies, there could be some indirect positive contributions in terms of profession and property tax. But these aspects could not be quantified in this study due to lack of detailed data.

15 It may be noted that cost recovery to the tune of 90 per cent of revenue expenditure, as is found in the case of best performer MC (Vijayawada) is ridden with difficulties as it leaves little room for revenue expenditure on establishment and administration for service provision.  An optimal performer MC (Bhopal) with a cost recovery of 60 per cent of revenue expenditure is, therefore, taken as an appropriate benchmark.

16 Here, the average proportions of spending on core urban services to total expenditure of average and best performer MC (Kolkata) of the 11 MCs, for which continuous data were available, stood at 35% and 65% respectively. These have been used as proxies.17 Benefit principle imply that services that local governments provide should be paid for by those who benefit from them (Bird, 1976).

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