NSE takes first step towards functional municipal finance

Municipal expenditure is only 1% of GDP in India. According to an RBI report, the corresponding figures for Brazil and South Africa are 7.4% and 6% respectively. This is not just due to the relatively low level of urbanization in India (the World Bank puts it at 35% of the population – although the delayed census means this is an estimate – compared to 87% in Brazil and 68% in South Africa), but also Also because of the relatively low importance given to urban local government in India.

We constantly hear of mayors of big cities becoming heads of their countries’ governments: Indonesia’s Joko Widodo and Turkey’s Recep Tayyip Erdogan are prime examples (and Boris Johnson a sad one). In India, the Chief Minister of Tamil Nadu, MK Stalin, has served as Mayor of Chennai, but this is perhaps an exception, as he is the son of a former Chief Minister who had total dynastic control of his political party. Overall, heads of urban governments in India have almost never risen to high-level office.

This is a reflection of both the relatively low level of administrative responsibility given to urban local bodies, and of stagnant urban governance. While the 74th Constitutional Amendment stipulated the transfer of 18 functions to urban local bodies, it did not give additional fiscal capacity to the third tier of government below the central and state governments.

As a result, the largest and fastest growing portion of urban government revenue comes from devolution from higher levels of government rather than from own tax or non-tax revenue. Without sufficient financial capacity, how are municipalities and corporations supposed to service the bonds they issue? And without a clear revenue stream for the municipal entity that issued the bonds, why would an investor buy those bonds?

Successful municipal bond issuances in India amount to a few hundred crores of rupees. Indore municipality has created a buzz by successfully issuing bonds 228 crores. But the amount of municipal bonds outstanding in the US is $4 trillion, or about 17% of the country’s GDP. According to Oxford Economics, 17 of the 20 cities expected to grow fastest globally are in India. Clearly, India has a lot of work to do in improving its urban finances.

Property taxes are a mainstay of urban local government revenue. Only a few places in the world use this source as well as it can. This is known in public finance jargon as ‘value-capturing finance’ – levies such as betterment tax, development fee and vacant land tax, which capture a portion of the increase in private property value for the local body. Can be extended with. Earned from the expenditure of the urban government on widening of roads or covering of open drains.

Property tax is best collected locally. However, most other taxes are more efficiently collected at higher levels and then shared with lower levels of government. Tax on corporate income will be collected in the major cities where the corporate headquarters are located. But the income on which tax is collected would be generated from the sale across the country. It would be unfair to the local body or the State where the bulk of the tax is collected, to claim a bulk of the same merely on the basis of its location.

This also applies to import duties. Although collected in states having ports, imports are due to generalized demand across the country. Therefore, such taxes should be collected centrally and shared with the lower levels of the government.

The same logic applies to the Goods and Services Tax (GST), which should ideally subsume all indirect taxes. It should be aggregated at state and central levels and shared across levels of government. In theory, municipal bodies should receive funds from state government coffers as per the recommendations of the state-level Finance Commission, just as states receive devolved funds from the Center on the recommendations of the Central Finance Commission, which is convened every five years. is appointed in

Ideally, the functions of governance should be assigned to different levels of government based on each level’s ability to perform a particular function. This is called the principle of subsidiarity. Filling of potholes is done locally. Controlling air pollution and managing water sources and drainage is best done at the level of the airsheds and watersheds involved, and can span regions, states, and even countries. Health and education need to be distributed at different levels with coordination from above. Financial requirements and sources should be identified for each level and the remaining financial requirement should be met through transfer from higher level.

This may require reworking of parts of the constitution and may require political consensus which may be difficult to achieve. While this is a work in progress, the least that the states can do is to appoint State Finance Commissions as scheduled, and get local governments to faithfully implement their recommendations on devolution without any foot-dragging, as It has been the practice till now.

Some progress has been made in developing a national municipal accounting manual. Municipalities and other local governments must keep their books in a uniform manner that is understandable to a potential investor in their bonds. The central government can help with access to software and cloud-based storage and accounts.

Only with each additional mile covered will there be more clarity on the road ahead.