Trends in Urban Local Bodies (ULBs) finance and spending

In Context

Recently, the Indian Institute for Human Settlements (IIHS) analysed data from 80 Urban Local Bodies (ULBs) across 24 States between 2012-13 and 2016-17 to understand ULB finance and spending, and found some key trends.

About Urban Local Bodies (ULBs) 

• They are small local bodies that administers or governs a city or a town of specified population. 
• They are vested with a long list of functions delegated to them by the state governments. 
  • These functions broadly relate to public health, welfare, regulatory functions, public safety, public infrastructure works, and development activities.
• Types 
  • There are several types of Urban Local bodies in India such as Municipal Corporation, Municipality, Notified Area Committee, Town Area Committee, Special Purpose Agency, Township, Port Trust, Cantonment Board etc.

• Beginning of Urban Empowerment: 
  • The 74th Constitution Amendment Act was passed in 1992 mandating the setting up and devolution of powers to urban local bodies (ULBs) as the lowest unit of governance in cities and towns. 
    • Constitutional provisions were made for ULBs’ fiscal empowerment. 
• Key revenue sources
  • The ULBs’ key revenue sources are taxes, fees, fines and charges, and transfers from Central and State governments, which are known as intergovernmental transfers (IGTs). 
  • The share of own revenue (including revenue from taxes on property and advertisements, and non-tax revenue from user charges and fees from building permissions and trade licensing) to total revenue is an important indicator of ULBs’ fiscal health and autonomy. 

• This ratio reflects the ULBs’ ability to use the sources they are entitled to tap, and their dependency on IGTs. 
• Cities with a higher share of own revenue are more financially self-sustaining

Findings of Recent study

• ULBs’ own sources of revenue were less than half of their total revenue, with large untapped potential. 
  • The ULBs’ own revenue was 47% of their total revenue. 
• ULBs still lacked revenue buoyancy as their share in GDP of own revenue was only 0.5% for the five-year period.
• Property tax, the single largest contributor to ULBs’ own revenue, accounted for only about 0.15% of the GDP.
  •  The corresponding figures for developing and developed countries were significantly higher (about 0.6% and 1%, respectively) indicating that this is not being harnessed to potential in India. 
• Stable and predictable IGTs are particularly important since ULBs’ own revenue collection is inadequate. 
  • While dependence on IGTs dipped over the years due to modest increase in own revenue, the scale of IGTs in India remained at around 0.5% of GDP, which is far lower than the international average of 2% to 5% of GDP.
• Operations and maintenance
  • Operations and maintenance (O&M) expenses are on the increase but still inadequate. 
    • O&M expenses are crucial for the upkeep of infrastructure and for maintaining quality of service delivery. The share of O&M expenses in ULBs’ total revenue expenditure increased from about 30% in 2012-13 to about 35% in 2016-17. 

Issues faced by ULBs 

•  ULBs across the country lack autonomy in city management and several city-level functions are managed by parastatals (managed by and accountable to the state).  
• Several taxation powers have also not been devolved to these bodies, leading to stressed municipal finances.  
  • These challenges have led to poor service delivery in cities and also created administrative and governance challenges at the municipal level.
• Indian ULBs are amongst the weakest in the world in terms of fiscal autonomy and have limited effective devolution of revenue. 
•  They also have limited capacity to raise resources through their own sources of revenue such as property tax. 
• Municipal administration in India suffers from staffing issues which leads to a failure in delivering basic urban services.  
  • These include growing fiscal deficits, constraints in tax base expansion, and weakening of institutional mechanisms that enable resource mobilisation remain challenges. 
  • Revenue losses after implementation of the Goods and Services Tax (GST) and the pandemic have exacerbated the situation.
• Other concerns include overstaffing of untrained manpower, shortage of qualified technical staff and managerial supervisors, and unwillingness to innovate in methods for service delivery. 

Conclusion and Way Forward 

• The scale of municipal finances in India is undoubtedly inadequate. A ULB’s own revenue resources are far below the estimated potential. Tapping into property taxes, other land-based resources and user charges are all ways to improve the revenue of a ULB.
•  IGTs assume significance in the fiscal composition of ULBs, and a stable support from Central and State governments is crucial till ULBs improve their own revenues. 
• Measures need to be made to also cover O&M expenses of a ULB for better infrastructure and service.
• The health of municipal finances is a critical element of municipal governance which will determine whether India realises her economic and developmental promise.
  •  It is essential that ULBs leverage their own revenue-raising powers to be fiscally sustainable and empowered and have better amenities and quality of service delivery.

[Q] Urban Local Bodies (ULBs) in India have not proved to be effective instruments of governance”.Critically examine the statement and give your views to improve the situation.