Urban Governance and Finance in India
Summary (3 min read)
Introduction
- Over 330 million people live in India’s cities; 35 cities have a population of over a million and three (Mumbai, Delhi, and Kolkata) of the 10 largest metropolises in the world are in India.
- Neither urban infrastructure nor the level of urban public services is adequate for current needs, let alone to meet growing demands.
- The paper identifies some key reforms required to realise both the constitutional intent to encourage citizen participation in urban governance and the economic and politically desirable goal of ensuring greater accountability of urban governments.
- With respect to financing urban infrastructure, development charges should be used more effectively.
- JEL Codes: R51, H70 Keywords: India, urban public finance, urban governance, intergovernmental fiscal relations, property tax, metropolitan areas, infrastructure finance Urban Governance and Finance in India.
I. Cities as Centres of Economic Dynamism: Role of Governance and Finance
- Urbanisation and development are inseparably linked in part because cities are the leading edge of economic dynamism in every country.
- Financing urban infrastructure and services adequately is thus a formidable challenge.
- Nonetheless, this examination of Indian reality in the context of both theory and international experience with local governance and finance suggests, the authors think, some clear directions for possible reforms to increase the dynamism of India’s cities and realise more fully their potential as engines of national growth.
- The traditional theory of fiscal federalism demonstrates the welfare gains from fiscal decentralisation by matching public service provision with the varied preferences of the people living in different jurisdictions.
III. Models of Urban Governance and Governance Systems in India
- As the theories of fiscal federalism reviewed in the previous section demonstrate, to be economically dynamic, cities need the right governmental structure.
- At the same time, economies of scale and minimising coordination costs in providing such services often require a larger governmental jurisdiction, as does efficient raising of revenue.
- If India’s larger cities are to have effective urban governance structures, similar steps need to be taken by all State governments to make the Commissioners in municipal corporations and municipalities primarily responsible and accountable to the respective municipal bodies.
- In general, State governments are reluctant to devolve functions to the local governments on the grounds that they do not have the capacity to undertake them.
- Municipalities across the country have been vested with a long list of functions by the State governments under their respective municipal legislations relating to public health, welfare, safety, regulation and developmental activities.
V. Financing Urban Services: User Charges and Local Taxation
- As emphasised earlier, an important rule of sound fiscal decentralisation is that finances should follow functions (Bahl, 2002).
- Municipal spending is so low both because of problems in mobilising own revenues and the inadequacy of transfers from central and State governments.
- Some important lessons from the Bangalore experiment in the reform of property tax must be noted.
VI. Financing Urban Services: Intergovernmental Transfers
- In principle, municipal governments should raise revenues to finance local public services from their residents.
- In many cases, the SFCs appointed did not have the expertise to undertake the technical exercises required to estimate the requirements of the municipalities.
- As mentioned earlier, this ambitious programme is designed to augment urban infrastructure and services and is linked to a reform agenda that includes doing away with urban land ceiling act and rent control act as well as reforms in property tax etc.
- As mentioned earlier, the grants under the scheme are linked to reforms both at the State and at municipal level.
- In any case, not that much has yet happened since states have so far been reluctant to undertake reforms and avail the assistance.
VII. Financing Urban Infrastructure
- As mentioned above, reforms in user charges, property tax, and the transfer system as well as perhaps additional funding through a ‘local’ surcharge on the GST can do much to bring about significant improvement in the resources required for basic urban public services and maintenance expenditures.
- States are reluctant to guarantee municipal bonds because their fiscal responsibility legislation requires them to limit their committed liabilities to half a per cent of Gross State Domestic Product (GSDP) and their fiscal deficit at 3 per cent of GSDP.7.
- When the development of infrastructure by the municipal body increases the capital value of such land, any gains realised through sale should be shared with the municipal body that has increased the urban infrastructure and services in the area.
- There are many services such as water supply sewerage, solid waste management, recreational facilities, rain water harvesting, and urban transportation where public-private partnerships are eminently feasible, in principle.
- Privatising the design, construction, and operation of urban infrastructure may have many merits if done properly, but it is neither a panacea, nor free.
VIII. Concluding Remarks
- World over, cities are the central drivers of growth: they are the leading edge of economic dynamism.
- Thus, good policies, efficient and responsive local governance systems and sound arrangements to finance public services are critical elements in sustainable urban development.
- Lack of clarity in the assignment system is not only between the states and urban local bodies; there are also confusing areas of concurrence between urban local bodies and independent agencies delivering various services.
- The paper discusses a variety of ways for augmenting the resources of the municipal bodies in the country including essential reforms in the property tax system and adequate exploitation of user charges and fees for various services delivered.
- Reform of urban governance and finance are critical not only to improving the quality of life of the people living in urban areas but also to ensure that cities, and especially the large metropolitan areas, become the drivers of economic growth in the country.
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References
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...In one formulation, people ’vote with their feet’ by moving to localities providing public service- tax mixes that closely matches their preferences (Tiebout, 1956)....
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Q2. What have the authors stated for future works in "Urban governance and finance in india" ?
It also suggests that one possibility that should be considered is for the largest cities to be accorded independent status similar to the States in part to insulate them from localised and parochial biases. The paper also suggests that consideration should be given to the possibility of empowering metropolitan governments to piggyback on the GST when it comes into existence: even a 1 per cent surcharge on this base could generate one and a half to twice the amount of revenue that is being collected from the property tax at present. In addition, to a considerable extent capital expenditure requirements will have to be financed through borrowing.