Copyright infringement not intended

Picture Courtesy: https://www.thehindu.com/opinion/op-ed/indias-urban-infrastructure-financing-needs-and-reality/article68906499.ece

Context:

Urban population of India is expected to double over the next three decades, which raises a challenge for infrastructure financing. According to the World Bank, India needs 70 lakh crore in infrastructure by 2036. However, the government investment is only about Rs 1.3 lakh crore, which is only 25% of the required amount. Addressing the financial gap is important for long-term urban development.

Financial challenges faced by Urban Local Bodies

Municipalities account for about 45% of urban infrastructure investments, with the remainder managed by parastatal agencies (partially or fully owned and managed by the government).

Municipal finance has remained flat since 2002, accounting for only 1% of GDP.  They depend heavily on transfers from the central and state governments, which account for 44% of their revenue.

Municipal financial health remains unstable, with tax revenue growth limited to 8% between 2010 and 2018. Property tax collection in India is low, accounting for only Rs 25,000 crore, or 0.15% of GDP.

Tax collection inefficiencies, with cities such as Bengaluru and Jaipur collecting only 5% to 20% of their potential tax revenue. Municipal revenue has fallen from 51% to 43%, which decreases financial autonomy.

Municipalities struggle to recover the costs of basic urban services like water supply and waste management, which ranges between 20% and 50%, which highlights that the revenue generated is insufficient to cover the costs of providing these services.

Factors contributing to the underutilisation of funds by Municipalities

Organisational inefficiencies

Inefficiencies within municipal systems are one of the most common causes of underutilisation. Delays in project approvals and bureaucratic hurdles hamper the implementation of planned projects.

Lack of skilled labor and insufficient project management also contribute to poor fund utilization, and make it difficult for municipalities to complete projects on time, resulting in allocated funds remaining unspent.

Underutilized Revenue

According to the Fifteenth Finance Commission, about 23% of municipal revenue goes unspent each year. This underutilisation is a serious issue because it indicates that municipalities are unable to effectively use the funds they receive for development and infrastructure projects.

Even in major cities such as Hyderabad and Chennai, only half of capital expenditure budgets were utilized in 2018-19, which reflects poor financial management and ineffective planning and execution of development projects.

Weak implementation of Central Schemes

Many central urban development schemes, including the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and the Smart Cities Mission, faced implementation challenges. While AMRUT used 80% of the funds and the Smart Cities Mission used 70%, the numbers fell short of their full potential.

Poor project execution, approval delays, and coordination issues have hampered the full use of available funds under these schemes.

Recommendations to improve the financial health of Municipal Corporations (MCs)

Own-Source Revenue

They should prioritize increasing their own-source revenues through improved property tax collections. The adoption of Geographic Information System (GIS)--based property tax mapping and digital tax collection platforms can boost compliance and reduce revenue leakages.

Rationalising user charges and strengthening collection mechanisms can help to recover costs for services, thus enhancing their financial stability.

Property Tax Revenue

The elasticity of property tax revenues should be improved by modifying property tax formulas to reflect actual property valuations for more realistic revenue generation.

Digitalization and Automation

Streamlining municipal expenditures through digitalisation and process automation could save resources for capital expenditure, which will allow municipalities to invest more in infrastructure development.

Strengthening tax collection mechanisms, such as using digital platforms for property taxes and user fees, can help to reduce inefficiencies and increase compliance. Regular monitoring and technological advancements can help to reduce fraud.

Public-Private Partnerships (PPPs)

Urban local bodies should utilize the potential of PPPs, especially in infrastructure sectors such as urban transportation, waste management, and renewable energy. These collaborations can help to attract private investment and improve the municipalities' ability to deliver infrastructure projects.

Municipal Bonds

Municipalities should consider issuing municipal bonds to diversify their funding sources and encourage capital investment to fund infrastructure projects.

Pooling Resources

Developing mechanisms that allow multiple local bodies to pool resources for large-scale infrastructure projects can release financial pressure from municipalities and result in better infrastructure outcomes.

Way Forward

India's urban future depends on its ability to address the financial and structural challenges. By following both immediate and long-term strategies, India can create urban infrastructure that meets the needs of its growing cities, ensuring long-term, inclusive development.

Must Read Articles:

CHALLENGES IN URBAN LOCAL GOVERNANCE

EMPOWERING RURAL LOCAL BODIES

STRENGTHENING LOCAL GOVERNMENT

Source:

The Hindu

Indian Express