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With the country facing the brunt of COVID-19 second wave, the administrative fault lines are once again evident and an efficient grass root level governance seems to be the need of the hour. Amidst the raging daily caseload and the high Test Positivity rate (TPR), the state of Kerala has managed the situation amicably in comparison to many other states where the state’s decentralised polity has played a substantial role. As the LDF government was provided with a second term that too with a thumping mandate, it should be the primary consideration of the new government to further decentralise the structure, especially in financial terms. Examining the finances of the Urban Local Bodies (ULBs) in India indicates that most of the ULBs lack financial autonomy and mobilisation of resources. The total revenue of all ULBs in India is approximately 1 percent of the country’s GDP where it is 5 percent in the case of Brazil and 6 percent for South Africa. This triggers the question if the ULBs (or all local bodies) are truly the third tier of the government.

In 1993, Indian Parliament enacted the 74th Constitutional Amendment Act which insisted the states to amend the existing laws of the Local Self Government (LSG) bodies to conform to the constitutional provisions. This led to the enactment of the Kerala Municipality Act (KMA) and the Kerala Panchayat Raj Act in 1994 by the state legislature, whose aim was to widen the scope of existing financial, administrative and functional authority of the LSGs. The idea of a decentralised polity and the need for people’s participation in governance had its inception in Kerala from the period of the State’s first elected government. The efforts put forward in this direction culminated in the report submitted by the first Administrative Reforms Commission which recommended to constitute Panchayats and Municipalities for effective local governance. Considering those recommendations, the Kerala Panchayat Act, 1960, the Kerala Municipality Act, 1960 and the Kerala Municipal Corporations Act, 1961 were passed and this unified the prevailing laws regarding the local bodies in the Travancore, Cochin and Malabar regions. Even though these Acts called for a wider scope for LSGs, their poor execution did not result in achieving the desired targets and success.

Kerala is one of the states in which the urbanisation process has gathered pace in the last two decades, where 47 per cent of the State’s population lives in urban areas (State Urbanisation Report 2011). With increased urbanisation, the challenges associated with it also get multiplied. Considering this trend, it is high time to bring in reforms to the ULBs and to think about making necessary amendments in the KMA1994 to make them more empowered so as to meet the growing demands. At this juncture, the question whether our ULBs are financially independent enough to effectively carry out their responsibilities becomes crucial.  There is a general belief that the ULBs here are fiscally sovereign with the transfer of around 35 to 40 per cent of the plan fund (development fund) from the State and with a relatively robust tax collection system. But the reality is far from the belief as the taxes assigned to the ULBs are almost the same as the pre-1994 period. There is a declining trend in the share of municipal own revenue, from 0.198 to 0.120 per cent between 2010-11 and 2017-18, to the State’s GDP  (ICRIER 2019). Even after two decades the KMA came into existence, the status of ULBs with respect to fiscal sovereignty is lagging.

The sources of funds for ULBs in Kerala include Own Tax Revenue (OTR) (e.g,. Property tax, profession tax, etc.), Non Tax Revenue (NTR) (e.g., user charges, fees, fines, etc.), State Transfers, Grants-in aid, Centrally Sponsored Schemes and borrowings. A percentage share analysis of the same for Municipal Corporations in Kerala (for the year 2008-09) reveals that Own revenue (OTR & NTR) is just 36 per cent of the total share (Report on 5th Finance Commission of Kerala 2015). This share remains almost unchanged for the year 2013-14 as well (Report on 5th SFC 2015). And the major contributing fund sources for both these years remain the State Transfers (General purpose funds, Maintenance funds and Development funds). Another interesting observation from it reveals that the share of the Centrally Sponsored Schemes has increased from 10 per cent in 2008-09 period to 15 per cent in 2013-14. To add to it, the share of grants from the Centre is also gradually increasing. This financial dependence can also be looked into as the overreach of authority by the State and the Centre on the ULBs’ decision making powers. This is a major concern with respect to the fiscal sovereignty of the ULBs and against the principle of decentralisation. Tied funds are mostly non-discretionary and can only be used for specific purposes. These funds come with terms and conditions which the ULBs are bound to oblige, even if that is conflicting with their development agendas or resulting in lesser availability of funds for their own schemes. Failure to comply with these terms and conditions will result in under utilisation of such funds. Few LSGD officials are of the opinion that the utilisation of tied funds has improved a lot over the years, but these funds which are allotted without any consultation with the local bodies are seriously affecting the developmental prospects.

Delays in the transaction procedures and treasury restrictions further lead to impede the timely fund flow process from the State Government to ULBs. It has been observed by the CAG (Comptroller and Auditor General) that there is an immense delay in transfer of these funds which badly affects the efficiency of the ULBs in executing functions (Report of C&AG on LSG Institutions 2016).

Transferring funds to ULBs based on the recommendations of the State Finance Commissions (SFCs) is another major component of fiscal decentralisation. Even though the State had a history of timely constitution of FCs and successfully implementing their recommendations (Prakash 2020), the financial conditions of the ULBs are not up to the mark. With the introduction of GST, the revenue of ULBs has further reduced.

Fiscal soundness of the local bodies is the necessary precondition for reaping the real benefits of decentralisation. With their ‘own tax’ revenue sources showing no growth and increased dependency on the State or the Centre for meeting their demands, the ULBs are in dire straits with respect to their financial position.

Devolution of more tax sources to ULBs is the need of the hour and to be attended to at the earliest to increase the revenue base which will help them execute their functions effectively and carry out development projects. Property Tax is the major item of tax which accounts for 52 per cent of the total tax revenue of Municipal Corporations in Kerala.[1] Profession tax, entertainment tax, advertisement tax are other major own tax revenue sources of ULBs in decreasing order of contribution. Land being a scarce and pricey resource in Kerala, the role played by the local government in developing it by providing supporting infrastructure cannot be disregarded. Hence, the State Government should consider reallocating a share of the land tax to the local bodies.

The State and the Central Governments should uphold the true spirit of decentralisation. The 15th Finance Commission report for the period of 2021-22 to 2025-26, which was tabled on February 1, 2021, intends to break the status quo of the poor financial situation of the ULBs in the country. It recommends a grant of Rs 4,36,361 crore for local bodies for the five-year period, which is an increase of 52 per cent over the corresponding grant of Rs 2,87,436 crore for the period 2015-20. It also recommends a gradual revision of the rural to urban local bodies share in it from 67.5:32.5 to 65:35 by 2025-26.[2] Even with the increased allocation, the financial freedom of ULBs is limited as the lion’s share of the allocation comes in the form tied funds and outcome-based grants. Nevertheless, this will be an optimistic step taken by the Central Government for strengthening the pillars of financial federalism.

In addition to that, with changing times, there is a need for exploring other opportunities and avenues for generating revenue through taxes and non-taxes. For instance, for internet-based services, revising user charges for solid waste, water supply, parking and so on. Further research is needed in this aspect. In countries like China, the municipal revenue sources include business tax, real estate tax, land appreciation tax, urban construction and maintenance tax, to name a few. With technological interventions such as e-governance initiatives, GIS database, etc. another key issue that the local bodies in India are facing regarding lack of skills and technical capacities, which would eventually result in inefficient tax collection, could be tackled. ULBs could further explore innovative financing mechanisms successfully adopted by cities around the world such as Municipal Bonds, PPPs (Public-Private Partnerships), Venture Capital Financing, etc. for funding their development prospects.

 References

  1. Sanghi, Sunita, Jaya Priyadarshini, and Manshi Singh. “Financially Empowering Municipalities: Way Forward.” NITI Ayog. https://www.niti.gov.in/niti/content/financially-empowering-municipalities-way-forward.
  2. Centre for Public Policy Research. 2017. “Defending Decentralisation of Kerala: Probing the Autonomy of Urban Local bodies.”
  3. Prakash, B. A. 2020. “Fiscal Decentralisation in Kerala: 5th State Finance Commission’s Recommendations on Devolution and Status of Implementation. Presentation available at www.Keralaeconomy.com.
  4. Report of the Comptroller and Auditor General of India on Local Self Government Institutions for the year ended March 2015.
  5. “Flow of Funds and Monitoring Arrangements under Selected Centrally Sponsored and Earmarked State Plan Schemes.” https://niti.gov.in/planningcommission.gov.in/docs/reports/sereport/ser/stdy_flwfnds.pdf.
  6. Ahluwalia, Isher Judge, P. K. Mohanty, Om Mathur, Debarpita Roy, Ayush Khare, and Shreya Mangala. 2019. State of Municipal Finances in India, Study Prepared for the Fifteenth Finance Commission. New Delhi: ICRIER.
  7. https://www.careratings.com/market-segments/public-urban-local-bodies.aspx.

[1]Report on 5th Finance Commission of Kerala, 2015 for the year 2013-14.

[2]15th Finance Commission Report for 2021-26.

This article was written by Goutham KA and Praseeda Mukundan.

Goutham KA is Associate, Project and Praseeda Mukundan is Former Senior Associate, Research at Centre for Public Policy Research.

Views expressed by the authors are personal and need not reflect or represent the views of Centre for Public Policy Research.

Goutham K A
Goutham K A
Goutham K A is Project Associate at CPPR. He is a Computer Science and Engineering graduate from Government Engineering College, Thrissur and currently pursuing post-graduation in Political Science and International Relations from Indira Gandhi National Open University. Goutham is a frequent traveller, photography enthusiast and interested in regional, national and international political developments.
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