The Reserve Bank of India (RBI) has recently unveiled its Report on Municipal Finances which presents a comprehensive compilation and analysis of budget data from 201 Municipal Corporations across all states. The report’s central theme is ‘Alternative Sources of Financing for Municipal Corporations’.
Understanding Municipal Corporations
Municipal Corporation, also known as Mahanagar Palika, Nagar Palika, Nagar Nigam, or City Corporation, is the urban local government responsible for the development in metropolitan cities with a population of more than one million. The existence of Municipal Corporations is due to the acts of state legislatures in the states, and the acts of Parliament in the Union Territories. The first Municipal Corporation in India was established in Madras in 1688, followed by Bombay and Calcutta in 1726.
Despite no specific provision in the Constitution of India for local self-government, the 74th Amendment Act of 1992 introduced a new section dealing with Municipalities and Nagar Palikas’ administration. It also included a new twelfth schedule containing 18 items.
Key Findings of the RBI Report
The RBI Report highlighted several key findings on the operations and performance of Municipal Corporations in India.
1.
Poor efficiency
: Several gaps were identified in the functioning of Municipal Corporations, leading to poor quality and availability of essential services for urban populations in India.
2.
Lack of Financial Autonomy
: Most municipalities only prepare budgets rather than using audited financial statements for balance sheet management, leading to significant inefficiencies.
3.
Minimal Capital Expenditure
: Rising expenses are contrasted with minimal capital expenditure, highlighting a need for better fiscal management.
4.
Stagnant Revenues/Expenditures
: Municipal revenues/expenditures have remained at around 1% of GDP for over a decade, significantly lower than in other countries like Brazil and South Africa.
5.
Ineffective State Financial Commissions
: Many State Financial Commissions (SFCs), which ensure rule-based devolution of funds to local governments, are not regularly set up and consequently, lack effectiveness.
Recommendations for Improvement
The RBI report suggests adopting sound and transparent accounting practices, exploring innovative financing mechanisms, and improving the flow of financial resources to local governments. It also recommends balancing budgets by law and obtaining approval from the State government for any municipal borrowing.
Furthermore, it has been recommended that the Centre and the States may share one-sixth of their Goods and Services Tax (GST) to improve the buoyancy of municipal revenue. This will help counter declining revenue generation capacity over time while reducing dependency on devolution of taxes and grants from upper tiers.
The report serves as an important resource for stakeholders and policymakers working towards enhanced urban governance and effective public service delivery. It also provides academic researchers with useful insights on urban fiscal management and local governance.
