Reforming India's Municipal Finance Architecture
UPSC Relevance
Prelims: Indian Polity and Governance (74th Constitutional Amendment, Local Self-Government, State Finance Commissions); Indian Economy (Goods and Services Tax - GST, Municipal Bonds, Fiscal Federalism).
Mains:
General Studies Paper 1 (Society): Urbanization, their problems and their remedies. The financial starvation of cities is a core problem affecting urban infrastructure and quality of life.
General Studies Paper 2 (Polity & Governance): Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein. This is a quintessential topic for this section.
General Studies Paper 3 (Economy): Indian Economy and issues relating to mobilization of resources; Government Budgeting.
Key Highlights from the News
Although cities generate two-thirds of India's GDP, municipalities control less than 1% of the country's total tax revenue. This is a major paradox.
The centralization of taxation powers is the main reason for this crisis.
With the implementation of Goods and Services Tax (GST), traditional revenue sources for municipalities like Octroi ceased to exist.
Consequently, municipalities lack both fiscal autonomy and predictable revenue streams, and are completely dependent on grants from state and central governments.
Municipal bonds are proposed as a solution, but they lack credibility due to flaws in determining the credit rating of cities.
Solution:
As envisioned by the 74th Amendment, treat municipalities as an equal tier of government and ensure them adequate and predictable revenue sources.
Give municipalities more power to collect taxes, similar to Scandinavian countries.
Consider government grants as a permanent income when rating municipal bonds.
COMMENTS