Significant inefficiencies: RBI report on municipal corporations

“The availability and quality of essential services for urban populations in India has consequently remained poor,” the RBI said in a report on municipal finances.

“Most municipalities only prepare budgets and review actuals against budgeted plans but do not use their audited financial statements for balance sheet and cash flow management, resulting in significant inefficiencies,” the report said.

The RBI has said municipal corporations should adopt sound and transparent accounting practices with proper monitoring and documentation of various receipt and expenditure items. Central and State governments in India finance their deficits primarily through market borrowings – States and UTs finance around 85 per cent and the Central government finances around 61 per cent of their gross fiscal deficit through market borrowings, it said.

MCs should explore different innovative bond and land-based financing mechanisms to augment their resources, the RBI report said.

While the size of the municipal budgets in India are much smaller than peers in other countries, revenues are dominated by property tax collections and devolution of taxes and grants from upper tiers of government, resulting in lack of financial autonomy, it said.

MCs’ committed expenditure in the form of establishment expenses, administrative costs and interest and finance charges is rising, but capital expenditure is minimal, the report said. “MCs mostly rely on borrowings from banks and financial institutions and loans from centre/ state governments to finance their resource gaps in the absence of a well-developed market for municipal bonds,” it said.

The rapid rise in urban population density, however, calls for better urban infrastructure, and hence, requires greater flow of financial resources to Local governments, the RBI report said. “With own revenue generation capacity of municipal corporations declining over time, dependence on the devolution of taxes and grants from the upper tiers has risen. This calls for innovative financing mechanisms,” it said.

The RBI said state governments have not set up state financial commissions (SFCs) in a regular and timely manner even though they are required to be set up every five years. Accordingly, in most of the States, SFCs have not been effective in ensuring rule-based devolution of funds to Local governments, it said.

There are several reasons for delay in setting up of SFCs: SFCs on an average take around 32 months to submit their reports, resulting in an average delay of about 16 months. State governments take considerable time in tabling the action taken report (ATR) in State legislatures (the average time taken by State governments to table the ATR is around 11 months).

According to the report, municipalities in India need to balance their budgets by law, and any municipal borrowing needs to be approved by the State government. Municipal revenues/expenditures in India have stagnated at around 1 per cent of GDP for over a decade. In contrast, municipal revenues/ expenditures account for 7.4 per cent of GDP in Brazil and 6 per cent of GDP in South Africa. It has been stated that in order to improve the buoyancy of municipal revenue, the Centre and the States may share one-sixth of their GST, the report said.