What are the financial limitations of a Municipality? State ways to get rid of them.
Answers
It is well known that urbanization and economic growth are interlinked as cities provide economies of agglomeration, and, in India, too the impetus for growth is envisaged to come from the urban sector. Currently, cities accommodate 377 million i.e. 31% of India's current population and contribute 63% of the GDP and are expected to accommodate 800 million in 2050, when one out of every two Indians would be living in urban areas. However, this rapid urbanization is putting pressure on available infrastructure facilities like water, sanitation, housing, schools, hospitals, colleges and mobility etc. in the urban areas. The provisioning of adequate infrastructure requires huge finances. A look at the urban local finances in India indicates that most of the ULBs are lacking in mobilization of resources and financial autonomy. The total revenues of all Urban Local Bodies (ULBs) in India amount to less than Rs. 1, 50,000 crores, approximately, 1% of India’s GDP. The deficiency of infrastructure affects the city’s ability to attract investment. The urban local bodies (ULBs) are the principal catalysts and efficacy of urbanization and economic growth would be impacted in the manner the functions are carried out and finances are mobilized.
While the Constitution of India envisaged a two-tier system of federation, the 74th Constitutional Amendment Act, 1992 added third tier of government viz. urban local bodies. The amendment aimed at devolution of functions, finances and functionaries to ULBs. Enormous responsibilities like preparation and implementation of plans for economic developments and social justice, etc., have been identified for ULBs in the Act, besides the 18 items of responsibilities envisaged in 12th Schedule of the constitution as legitimate functions of Urban Local Bodies.
While the Constitution of India specified the taxes to be divided between the Centre and State Governments, it does not specify the revenue base for urban local bodies. Even the 74th Amendment Act does not make specific recommendations about the type of taxes that urban local bodies should have. It simply states that the Legislature of a State may, by law, i) authorize a municipality to levy, collect and appropriate such taxes, duties, tolls and fees, ii) assign to a municipality such taxes, duties, tolls and fees levied and collected by the State Government, iii) provide for making such grants-in-aid to the municipality from the consolidated fund of the state and iv) provide for the constitution of such funds for crediting all cash received. Hence, the power for determining the revenue base of Urban Local Bodies rests with the State Governments. Further, it is recommended to set up States Finance Commission once in five years to decide the distribution of taxes between State and local bodies.
The resource base of ULBs typically consists of their own sources, state revenue, government grant, loans from state governments, and market borrowings. The urban local bodies are sometimes not even aware of the opportunities and avenues of generating revenues through taxes and non-tax charges. Even if they are aware, they do not have the skill to optimize tax collection. ULBs in India, therefore, have a minimal revenue base and largely dependent on Central and State grants, which constrained the ability of ULBs to invest adequately in capital expenditure like creating infrastructure and, thereby, improve quality of life in the city.