India needs to increase the accountability of its cities in order to increase their financial independence.
In his description of India’s accountability and Governance at London School of Economics publication, Charles Correa, a famous architect and urban planner says:
“India has many growth options. It is not dominated by any single primate city, which pre-empts all investment – like Lagos and Nigeria”
The wide range of tier one and tier two cities in the country are the symbolic of India’s progress and ambition. However, these growth engines are still dependent on the Union and State governments for its fuel. For instance, the largest revenue source for a city currently is the property tax collected by the state and then passed on to the municipalities. Last year, India’s financial capital, Mumbai got mere Rs 3,000 crore as revenue through property tax. Hence, for an economy to match up to the rate of growth in the cities, it is important that the urban infrastructure and services are financed in the best possible manner.
M G Rao and Richard Bird have tried to look at this exact problem in their paper “Urban governance and Finance in India”. The primary objective of the paper is to find solutions for urban governance and finance in India in the context of lessons drawn from fiscal federalism theory and experiences of governance institutions. The paper points out the inadequacy of the resources with the urban government and suggests three major requirements for efficient provision of public services: efficient assignment of function, strengthen local accountability and making the user pay for the benefits. Out of these, strengthening the local accountability is an vital aspect for any municipal body to attain financial independence.
As of now, the primary reasons for financing options available with the cities being limited are- the inability to comprehend the flow of funds, and the lack of institutions to handle bankruptcy. Rao and Bird talk about this in detail as they point out the lack of debt market in India and the necessity to strengthen and deepen markets, particularly land and capital markets. In order to increase the local accountability, some of the steps essential for the cities include maintaining and publishing a detailed financial statement such that the flow of funds can be tracked. The Fourteenth Finance Commission (FFC) in their recommendation gives high importance to this specific criteria by making it an important factor in deciding the Performance Grant. The Performance Grant constitutes 20% of the total grants given to the Urban Local Bodies (ULBs) by the Commission. In their recommendation, the FFC acknowledges the purpose of the Performance Grants to ensure reliable audited accounts and data of receipts and expenditure, and improvement in own revenue.
With regard to the lack of institutions to handle municipal bankruptcy, Securities Exchange Board of India (SEBI) has suggested a chapter on bankruptcy of municipalities be introduced in the proposed bankruptcy Bill by the finance ministry.
It is important to understand that we can only hope for a vibrant capital market at the city level if we have our basic process for accountability and bankruptcy in place. In simple words, we need to fix the books within the municipalities before we ask for a bond market.
Image source: Andreas Praefcke, Wikipedia
Devika Kher is the Program Manger of Takshashila’s Graduate Certificate in Public Policy course and a policy analyst at Takshashila Institution. Her twitter handle is @DevikaKher.