Data | Municipal corporations are gasping for funds, depend on State, Centre for grants

The own revenue of Indian municipal corporations was less than 1% of GDP, smaller than Brazil’s 7% and South Africa’s 6%

Workers from the Municipal corporation cleaning the streets

The combined budget of all the municipal corporations in India is much smaller than that of the Central and State governments, an RBI analysis of the finances of urban local bodies concludes. The study titled “Report on municipal finances” reveals how municipal bodies are increasingly dependent on fund transfers from the State and the Centre, while their revenue earning capacity is limited. Their revenue raising powers are curtailed, the study shows. Limited funds aside, about 70% of it gets spent on salaries, pensions and administrative expenses with the rest left for capital expenditure. And above all, municipal corporations don’t borrow much, leaving them gasping for funds. 

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. The share of own revenue (both tax and non-tax) in the total revenue of urban local bodies in India has declined, while that of government transfers has increased as shown in chart 1. 

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Using budgetary data from 201 municipal corporations across India, the RBI report calculated their overall revenue receipts — consisting of own tax revenue, own non-tax revenue and transfers. In 2017-18 (actuals), it was estimated to be 0.61% of the GDP and according to budget estimates for 2019-20, it increased slightly to 0.72% of the GDP. This was much smaller than Brazil’s 7% and South Africa’s 6%. 

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. Chart 2 plots these State-wise variations. 

Another major issue with the municipal corporations’ revenue raising capabilities was their dependence on property taxes. In 2017-18, 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, the report argues. 

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A report published in the Chennai edition of this paper on Monday further highlights the problems plaguing property tax collection. Of the 13.27 lakh assessees in Chennai, only 6.94 lakh paid the property tax, while 6.33 lakh were yet to pay. The shortage of tax collectors has further impacted the revenues. 

Chart 3 shows property tax collected in ₹ crore in FY18, FY19 and FY20 across major cities. The graph shows that most of the major cities have managed to increase their property taxes in the period, though increasing urbanisation rate and rising population density may have played a role. 

Chart 4 shows the percentage of the total expenditure of municipal corporations in India in 2017-18. Over 70% was spent on revenue expenditures such as salaries/wages/bonuses (25%), operational and maintenance charges (16.2%), pensions (7.4%), etc., while less than 30% was capital expenditure.

The corporations are mostly dependent on transfers with their revenue raising potential being limited. Property taxes are not efficiently collected. The generated funds are mostly spent on revenue expenditure, leaving a much smaller pie for capacity building.

Source: RBI’s report on municipal finances