Dr. Mohd. Azam Khan Department of Economics Assistant Professor Aligarh Muslim University Aligarh-202002, U.P. (India) Phone: +91-571-2700920 Ext. 1411

Dated : ………………………..

Certificate

This is to certify that the Ph.D. thesis on ‘Finances of Urban Local

Bodies in Uttar Pradesh: A Study of Selected Urban Local Bodies since

1992-93’ submitted by Mr. Iqbal Zafar Ansari under my supervision is his

own original contribution and suitable for submission for the award of the

degree of Ph.D. in Economics.

(Dr. Mohd. Azam Khan)

Abstract

Introduction

Local Self-Government Institutions (LSGIs) or Local Bodies in India, being at the cutting edge level of administration, directly influence the well-being of the people by providing civic services and socio-economic infrastructure facilities. The Constitution

(73 rd and 74 th ) Amendment Acts, 1992 (for rural and urban local bodies, respectively) have accorded a constitutional status to these institutions as the third-tier of

Government. The Constitution (74 th Amendment) Act, 1992 has mandated grass root level democracy in urban areas by assigning the task of preparation and implementation of plans for economic development and social justice to elected municipal councils and wards committees. It has incorporated the Twelfth Schedule into the Constitution of

India containing a list of 18 functions as the legitimate functional domain of Urban

Local Bodies (ULBs) in the country. In view of this position, the demands placed by the public on municipal authorities for the provision of various civic services have increased considerably. Further, with globalization, liberalization, the rise of the service economy and revolution in information and communication technologies, cities are being increasingly required to compete as centres of domestic and foreign investment and hubs of business process outsourcing. Civic infrastructure and services are critical inputs for the competitive edge of cities in a fast-globalizing world. However, without a commensurate enhancement of their resource-raising powers, cities are faced with fiscal stress as a result of which their capacity to contribute to national development as engines of economic growth is severely constrained.

While the Twelfth Schedule of the 74 th Constitutional Amendment Act, 1992 demarcates the functional domain of municipal authorities, the Amendment Act has not provided for a corresponding ‘municipal finance list’ in the Constitution of India. The assignment of finances has been completely left to the discretion of the State

Governments, excepting in that such assignment shall be ‘by law’. This has resulted in patterns of municipal finances varying widely across States and in a gross mismatch between the functions assigned to the ULBs and the resources made available to them to discharge the mandated functions. The ULBs depend on the respective State

Governments for assignment of revenue sources, provision of inter-governmental transfers and allocation for borrowing with or without State guarantees.

Constitutionally built-in imbalances in the functions and finances eventually reflect in the high dependency of urban local bodies on State Governments and of the State

Governments on the Central Government.

Under the constitutional scheme of fiscal federalism, funds from the Central

Government are devolved to the State Governments. Following the recommendations of the State Finance Commissions (SFCs) and taking into account the devolutions made by the Central Finance Commission (CFC), the State Governments are required to devolve resources to their local bodies. However, due to endemic resource constraints, they have not been in a position to allocate adequate resources to their ULBs. This is further compounded by the fact that even the existing sources of revenues are not adequately exploited by many of the ULBs. The above factors have led to rising fiscal gaps in these institutions, with resources drastically falling short of the requirements to meet the backlog, current and growth needs of infrastructure and services in cities, and, thereby, failing to meet with the expectations of citizens and business. To address the fiscal stress, some ULBs began to resorting to borrowings in recent years, often with

State Government guarantees, from Housing and Urban Development Corporation

(HUDCO), financial institutions, banks, open market, external lending agencies like the

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World Bank and the Asian Development Bank. This has implications for both Central and State finances, as it reflects the dependency of the ULBs and consequently, the provision of local public services on the policies and programmes of Central and State

Governments. The launching of the Jawaharlal National Urban Renewal Mission

(JNNURM) by the Government of India on 3rd December 2005 reflects the recognition, at the Government of India level, of the need to support ULBs to improve infrastructure facilities and basic services to the poor in cities and towns. The rising fiscal gaps of ULBs have led to a search for best practices of local government reforms at national level as well as state level. A study of national practice and experience on such reforms suggests the following key lessons for the conduct of effective local-self government in a federal structure:

• Functions of local bodies – expenditure assignment – must be clear;

• Finances of local bodies – revenue assignment – must be clear;

• Finances must be commensurate with the functions assigned;

• Functionaries must be aligned to functions and finances meant for discharging

the functions;

• Functions performed or services delivered must be commensurate with the

funds provided;

• Performance measurement framework, accountability channels, and reporting

lines of functionaries must be clear;

• Professional civic management, committed civic leadership and informed public

participation are critically important for the efficient and effective delivery of

civic services to the people

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Scope of the Study

For a better understanding of the subject chapter 1 provides an introduction, conceptual background of the urban local bodies in India. This section of the study also deals the introduction and implications of 74 th Constitutional Amendment Act, 1992. This part of the study also deals with the objectives of the study, hypothesis, methodology, database and analytical framework of the study.

Chapter 2 reviews the literature in an exhaustive manner to explore the available update literature on the subject on fiscal decentralization and finances of urban local bodies dealing with both theory and practice. Studies in Indian context have traced the progress of fiscal decentralization since the 73rd and 74th Constitutional Amendments.

The record of fiscal decentralization to the sub-state level governments through revenue assignment and transfers has been poor. Fiscal decentralization has not made any significant progress in terms of revenues raised and expenditures incurred by a large numbers of local bodies. The dictum that functions, finance and functionaries should be devolved down is observed almost in breach. Decentralisation has resulted in improving the tax generating capacity of some urban local bodies, mainly corporations.

However, there has not been much impact on non-tax revenues. The size of the municipal fiscal sector is small compared to any conceivable standard, whether in terms of international comparison or normative considerations. It is evident that the fiscal domain of urban local bodies in India is far narrower than that in most developed countries and several developing countries, mandated to discharge similar responsibilities.

Chapter 3 looks at legal and institutional framework to bring out the in-built asymmetry in the functions and revenue sources of urban local bodies in India. There is

4 also an attempt to show the revenue and expenditure scenario of urban local bodies of some states of India. The revenue expenditure balance shows the fiscal gap of revenue and expenditure of these urban local bodies.

Chapter 4 presents the state level (Uttar Pradesh) trends in municipal finances based on the data drawn from secondary sources. Thereafter, it reviews the trend and composition of municipal finances, based on five-year period of state finance commission report data for the municipal corporations of Uttar Pradesh. It also deals the financial aspects of core services of municipal corporations of Uttar Pradesh.

Chapter 5 makes an assessment of finances of the selected municipal corporations of Uttar Pradesh, in term of both standard approach and normative approach and present a financial position of selected municipal corporations. The chapter also analyse the quality and quantity of major civic service of municipal corporations in terms of per capita expenditure. The quality of civic services in the selected municipal corporations is not satisfactory because as a comparison to Zakaria

Committee norms, the quality of services is very low and it not cover the whole population of municipal corporations. The study also deals the expenditure and revenue pattern of selected municipal corporations of Utter Pradesh.

Chapter 6 makes concluding observation wherein the key findings are reiterated and broad directions for municipal reforms are spelt out.

Objectives of the study

Even after a constitutional status was accorded to the local bodies in 1992, the finances of these authorities are yet to be recognized as an integral part of the public finance system in India.

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It is only recently that some attempts were made to analyse their fiscal situation as discussed in the subsequent chapter. Paucity of data and the consequent absence of authoritative literature have made the subject of local public finance in India a black box. The entire discussion in Chapter 8 of the Twelfth Finance Commission’s report brings out the fact that, despite several attempts, there is no source of reliable data on finances of all local bodies in India to estimate their resource gaps. Hence, the

Commission was constrained to fix the total amount of grants-in-aid to local bodies on an ad hoc basis.

Availability of firm and comparable data on municipal finances in India is conspicuous for its absence. There have been a very few comprehensive studies of municipal revenues and expenditure in India till date. In this context, this study sets the following objectives:

1. To examine the provisions relating to revenues and expenditure of municipalities

and bring out the mismatch between their revenue authority and expenditure

responsibilities.

2. To examine the trends in major revenue sources and expenditures of

municipalities and assess their fiscal position.

3. Analyse performance of ULBs in the provision of civic infrastructure.

Hypothesis of the Study:

Keeping in view the above objectives for the present study, we have taken the following hypothesis:

Null hypothesis (Ho): Expenditure and revenue of municipal corporations does

not increases over the period of study.

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Alternative hypothesis (H1): Expenditure and revenue of municipal

corporations exerts an increment over the period of study.

Database and Methodology

Our study is based exclusively on secondary data which are published mainly by the

Ministry of Finance, Government of India, other departments/offices of the government of India and RBI. Thus, most of the relevant data have been taken from various issues of Indian Public Finance Statistics, Central finance Commission Reports, State Finance

Commission Reports, Economic Survey, Annual Reports published by the Ministry of

Urban Development.

In terms of the methodology, the study have applied appropriate statistical tools which involve calculation of percentage, arithmetical average, simple growth rates and compound average growth rate.

Conclusion

There is widespread acceptance of the view that decentralization of expenditure responsibilities to lower tier governments is efficiency augmenting sub-national governments are better informed and can more readily respond to the needs and preferences of the citizens living in their jurisdictions. Decentralized governance require active participation of people in development planning ,implementation and monitoring of development programmes .therefore the development administration particularly urban development programmes and schemes call for re-orientation and re- thinking in the changed environment of governance .the imperatives of decentralized planning in India have been emphasized during the plan periods, however the progress in this direction remained slow despite repeated change in policy prescriptions

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Local Self-Government Institutions or Local Bodies directly influence the welfare of the people by providing civic, social and economic infrastructure services and facilities in both urban and rural areas. Given their strategic position in delivering services in the hierarchy of Government set up, following the Constitutional (73 rd &

74 th ) Amendment Acts, more functions, powers and resources have been provided to them. However, over a period of time, the functions and responsibilities of ULBs have increased considerably without commensurate enhancement of their resource base.

Constitutionally built-in imbalances in functions and finances assigned to various levels of government eventually reflect in the high dependency of local bodies on State

Governments and the latter, in turn, on Central Government for funds. Moreover, in the absence of financial support coming from the upper tiers of Government, these bodies may have to resort to borrowings from financial institutions and the capital market.

Urbanisation is an important ingredient of economic development. The trend towards greater urbanisation is observed across the developing world. Going by this trend, India is slated to have 50 per cent of its population living in cities and towns in the next few decades, up from the current proportion of about 30 per cent. Although

India’s urban population has been growing, the level and pace of urbanisation have been low in comparison with other developed and developing countries. After liberalisation of the economy, India made strides in economic growth; a large part of it has been through the contribution of urban areas.

In the case of ULBs in India, the 74 th Amendment to the Constitution of India,

1992 identified enormous responsibilities for the urban local governments. Besides the

18 items listed as municipal responsibilities in the Twelfth Schedule of the

Constitution, the Legislature of a State, by law, can assign any tasks relating to: (i) the preparation of plans for economic development and social justice; and (ii) the

8 implementation of schemes as may be entrusted to them. For strengthening the finances of urban local governments, two positive features were provided in the 73 rd and 74 th

Amendments to the Constitution: (a) provision for the constitution of State Finance

Commissions (SFCs) every five years (Article 243-I as per the 73 rd Amendment) and

(b) amendment of Article 280 of the Indian Constitution by inserting section 3(C) which requires the Central Finance Commission (CFC) to suggest measures needed to augment the consolidated fund of the states to supplement the resources of municipalities devolved on the basis of the respective SFC recommendations.

However, the progress in the implementation of SFC recommendations in several states has not been very encouraging. The CFC has also grappled in making recommendations of resource transfer to local governments in states. However, in the absence of authentic data, successive CFCs have made recommendations for the transfers of funds for local bodies on ad hoc basis.

With the 73 rd and 74 th Constitutional Amendments Acts, The democratic base of decentralized governance has widened and the scope for functional and financial devolution to urban local bodies has been ensured through mandatory provisions. The urban local bodies have been empowered to raise their resources in order to enable them to discharge the functions assigned to them. It has been observed that the powers and functions which have been assigned to urban local bodies are overlapping in areas, functions and responsibilities between the three tiers of urban local bodies. The type of functions assigned to any tier of urban local bodies is ambiguous. Often the same function is performed by two or three different tiers of urban local bodies. There is no principle or criteria adopted for the assignment of responsibilities to the different tiers of urban local bodies. Functions have not always been fully transferred. Even where the functions have been transferred, functionaries and functions have remained under the

9 control of higher level of government. Notwithstanding the constitional amendments and the relevant statutory provisions, there is neither political will nor administrative will to strengthen the urban local bodies.

Our analysis of the revenues and expenditure of ULBs in general and municipal corporations in particular reveals that most MCs are generating revenue surplus and overall resource gaps are not very large. At the same time, it could be observed that spending by all the municipal bodies is lower than that required for providing a minimum level of civic amenities. This apparent contradiction of sound fiscal health and high level of under-spending is due to statutory obligations, whereby ULBs are generally bound to restrict their expenditure to the resources available and are also not granted liberal permission by State Governments to incur debt. In view of the above factors, the study has undertaken the assessment of municipal finance in “normative terms”, besides the “standard approach” of revenue or fiscal balance. A comparison of per capita spending on core services by the MCs in terms of the Zakaria Committee norms indicates the level of under-spending on core services. Reasons for under- spending are traced to MCs’ own operations (endogenous) as well as to policy issues related to the upper tiers of Government (exogenous). Exogenous factors include dependency for resources on the upper tiers of Government and inadequate delegation of revenue-raising powers. Endogenous factors include inefficient revenue (tax) administration, low cost recovery and poor quality of expenditure.

While analysing the finances of selected municipal corporations, it has been observed that the financial situation of all four municipal corporations namely; Agra,

Aligarh, Allahabad and Meerut is not satisfactory. The per capita expenditure on core services is much lower than the Zakaria Committee norms. Lower per capita

10 expenditure on civic services is an indicator of poor quality of civic services rendered by these MCs.

Decentralisation increases efficiency of the lower levels of Government in the provision of various local services due to their limited jurisdiction and better matching of resources, services and preferences. An increase in decentralisation is expected to delegate more powers to local government authorities and augment their capacity to mobilise resources. Dependency of local government on the upper tiers of Government arises from the support extended to them in the form of grants, which arise largely out of vertical mismatches between functions and finance, as well as out of the compulsions necessitated by horizontal disparities between different jurisdictions.

However, greater dependency on the upper tiers renders the local governments vulnerable regarding spending on the provision of basic infrastructure and services.

This adversely affects the performance of the local governments.

Quality of expenditure, measured as establishment and administrative expenditure as a proportion of total expenditure also turns out to be a major factor in determining the ability of MCs to provide basic services. Some of the MCs have an unsustainably high proportion (more than 50 per cent) of total expenditure on establishment and administration, which affects the sustainability of their finances and their service delivery capacity. Lower spending on administrative and establishment purposes would leave more resources with the MCs to provide civic amenities.

Accordingly, the study suggests that guidelines/norms may be framed for the ULBs towards spending on capital and maintenance works as well for rationalizing the staffing pattern. It is apparent from the analysis that there is a need to substantially increase the spending by urban local bodies. Given the constraints faced by State

Governments, it is essential that the MCs be granted access to borrowed funds. At least

11 there are two convincing arguments in favour of MCs going for borrowed funds. First, there is a scope for MCs to go in for borrowed funds as their current level of indebtedness is not very large. Secondly, there is a scope to raise user charges which are abysmally low in the State. Enhancement of user charges would make the new projects undertaken with borrowed funds economically viable and ensure that MCs are debt-sustainable. MCs which have lower levels of under-spending or better performance have fared well on 4 out of 5 criteria viz., dependency, decentralization, tax administration and expenditure quality. On the other hand, MCs with ranking

“below average” on these 4 parameters are also the ones which have been spending less on core civic amenities. Notably, those MCs which had better delegation of revenue powers and less dependency on the upper tiers of Government were the best performers, in terms of provision of core services (lower under-spending). Thus, the analysis suggests that restructuring of revenue powers may be given top priority by the

State Government if urban amenities are to be improved significantly.

Though the delegation of revenue powers is a key factor, the need for efficient revenue (tax) administration cannot be underplayed. Examination of various taxes across the local bodies reveals that property and profession taxes are important sources.

Octroi, however, is the most important source of revenue in municipal corporations belonging to Maharashtra and Gujarat. The local bodies need to adequately tap the existing avenues. Unit area system of computation, based on self-assessment principle, with respect to property tax needs to be extended to all ULBs. ULBs, where Octroi has been a major source of revenue, should be adequately compensated when Octroi is abolished. Other sources like entertainment tax, development charges, betterment levies, etc need to be tapped. The 12th Schedule introduced in the Constitution by 74 th

Amendment Act envisages that functions like ‘safeguarding the interests of weaker

12 sections of society, including the handicapped and the mentally retarded’, ‘slum improvement and upgradation’ and ‘urban poverty alleviation’ belong to the legitimate functional domain of urban local bodies. However, there are no commensurate resources with these institutions to discharge these functions. This is a case of expenditure assignment without a corresponding revenue assignment. An implicit assumption may be that these functions will be discharged by ULBs, but financed by higher levels of government which have access to buoyant and redistributive taxes. The mix of municipal revenues in India - taxes, user charges and fees, transfers and loans - is narrow compared to international benchmarks with regard to the financing of local public services. The revenue instruments assigned to urban local bodies by State

Government at present are grossly inadequate and not commensurate with the functions expected to be performed by them in accordance with the 74th Amendment Act.

The study concludes that there is a need for certain lines of reforms to restructure the system of municipal finances in the country by revisiting expenditure assignment and revenue assignment, finding an alternative to Octroi, developing national consensus on a Municipal Finance Schedule, raising local revenue efforts, reforming property tax, using urban land as a resource, adopting ‘users pay’,

‘beneficiaries pay’ and ‘polluters pay’ principles, linking individual services with user charges and collective services with benefit taxes, restructuring inter-governmental transfers with a simple distributive formula that gives due weights to needs, rights to minimum basic services, incentives to performance and inter-jurisdictional equity, easing borrowing restrictions on ULBs, financing urban infrastructure through exploring the options of i) specialized banks for municipal lending, ii) municipal bond markets, and iii) specialized municipal funds and strengthening the creditworthiness of

ULBs, developing public-private partnerships, addressing poverty alleviation through

13 linkage to buoyant redistributive taxes, improving expenditure management and disclosure, promoting fiscal responsibility and professionalizing municipal management. A ‘Municipal Finance Schedule’ for assignment to the ULBs to match the list of functions included in the 12th Schedule may comprise property tax including vacant land tax and taxation of Central and State Government properties (or service charges in lieu thereof), professional tax, entertainment tax, advertisement tax, business licensing fee or tax, motor vehicle tax or a share from the same, planning permission fee, development impact fee, betterment levy, a surcharge on stamp duty on registration deeds or a share from it and a proportion of the Value Added Tax. State Governments may provide freedom to ULBs in matters relating fixation of tax base and tax rate.

Restrictions, if any, may only be by stipulation of ceilings or maximum rates of levy and limiting the power to grant exemptions. As regards SFCs, the study suggests that they may follow the suggestions made by the Twelfth Finance Commission regarding approach to be adopted to study the finances of local bodies, identifying problems and making recommendations. SFCs may accord priority to ‘measures’ for improving municipal finances and financial management to address the fundamental factors leading to vertical imbalance rather than adopting a gap-filling approach.

The study has extensively used the Zakaria Committee norms for working out under-spending by the urban local bodies. In this context, it could be indicated that the

Zakaria Committee norms, developed during the early 1960s, pertain to only five core services. Moreover, the costs of services may be subject to convexity due to technological changes and lack of natural advantages (e.g. on account of over-growth of cities). Therefore, there is a strong case for developing new benchmarks for estimating the costs of municipal services in India by constituting new groups and by undertaking more primary studies.

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One serious difficulty encountered while studying the municipal finances U.P. related to the lack of availability of comprehensive and consistent data. There is no source of reliable data on finances of all local bodies in U.P. to estimate their resource gaps. There is also a lack of uniformity in classification and reporting of financial data, which do not allow precise comparison on various parameters.

The major finding of the study which are as follows: a. There is mismatch between functions and finances of ULBs, which primarily

explains the vertical imbalance. b. Own taxes and user charges of ULBs in U.P. is grossly inadequate to meet the

expenditure needs of ULBs. c. In addition to ‘own’ and ‘shared’ revenues, grants-in-aid received from the State

Government constitute a major resource of ULBs. d. The study highlights deficiencies in the conventional method for assessing

municipal finances in terms of analysis of revenue and expenditures of

municipalities.

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ACKNOWLEDGEMENT

I owe a special debt of gratitude to my supervisor Dr. Mohd. Azam Khan , Department of Economics, Aligarh Muslim University, Aligarh for his guidance and continued interest for the completion of this research work. He always spared his precious time for the correction of the draft from time to time and making valuable suggestions for improvement. Without his kind co-operation this work could have never taken the present shape.

I express my deep sense of gratitude to Prof. Abdul Wahab (Chairman), Prof.

Ashok Mittal, Prof. Nisar A. Khan, Prof.(mrs.) Nighat Ahmad, Dr. Shehroz A. Rizvi, and Dr. Mohd. Sayeed Khan , Department of Economics, A.M.U., Aligarh. For their support and good deal of interest in my research pursuits.

I must register my sincere thanks to all other teachers in the department for their useful comments and encouragement.

I am also grateful to my colleagues and friends for their moral support and help at various stages of this work, without which the task was impossible.

My special thanks are due to the officials of the municipal corporations of Agra,

Aligarh, Allahabad, and Meerut for their generosity in giving me an access to budget documents and audit reports. I would be failing in my duty if I do not acknowledge the assistance rendered by the staff members of Maulana Azad Library,A.M.U., Aligarh,

Seminar Library, Department of Economics, A.M.U., NIPFP, New Delhi for their valuable co-operation and help whenever needed. Also, the award of Maulana Azad

National Fellowship for Minority Students by University Grants Commission, New

Delhi is greatly acknowledged.

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Mere words fail to express my appreciation to my mother Mrs. Sabera Parveen, father Mr. Zafruddin Ansari and my sisters Nikhat, Tabassum, Gulshan, Raushan,

Shama, and Afshan who were the real source of motivation, inspiration and patience for me to be at this stage.

I could not have been able to complete this study without the encouragement and inspiration abundantly coming from my wife Afsana. It was tough task for me to complete the study in time without her indomitable zeal to bear with my preoccupation with it.

Lastly, I would like to thank Messrs Sohail Akhter and Gulfam Shahanshah for their excellent typographical skill, which helped me to get my thesis neatly typed in a desired period of time.

Iqbal Zafar Ansari

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CONTENTS

Page No.

Acknowledgment i - ii Preface iii - iv Abbreviations v - vi List of Tables vii - viii

CHAPTER I: INTRODUCTION 1 - 52 1.1 Introduction 1 1.2 Local Self-Government in India 5 1.3 Urbanisation and Demand for Civic Services 6 1.4 A Theory of Local Finance 9 1.5 Local Finance: Theoretical Framework of local finance 10 1.5.1 Importance of Local Finance 11 1.5.2 Problems of Local Finance 12 1.6 Urban Local Finance and Economic Development 17 1.7 Municipal Fiscal Problems 18 1.8 Decentralisation and Devolutions of Functions of Urban Local Bodies 19 1.9 The Constitutional 74 th Amendment Act, 1992 21 1.10 Functional Domain of Municipalities 25 1.11 Financial Domain 28 1.12 State Finance Commission (SFC) and Urban Local Bodies 29 1.13 Central Finance Commission (CFC) and Urban Local Bodies 31 1.14 Local Expenditure 33 1.15 Resources of Local Bodies 35 1.16 Structure of Municipal Finance 40 1.17 Local Revenue and Borrowing 41 1.18 Objectives of the Study 46 1.19 Database and Methodology 47 1.20 Hypothesis of the Study 50 1.21 Limitations of the Study 50 1.22 Outline of the Study 52 CHAPTER-II: REVIEW OF LITERATURE 53 - 76

CHAPTER-III: FINANCES OF URBAN LOCAL BODIES IN INDIA 77 - 107 3.1 Introduction 77 3.2 74 th Constitutional Amendment Act 80 3.3 Urban Local Bodies in India 83 3.4 Urbanisation in India 84 3.5 Functional Domain of Municipalities 88 3.6 Growth of Expenditure 91 3.7 Growth in Revenue 97 3.8 Fiscal Mismatch 105

CHAPTER IV: FINANCES OF URBAN LOCAL BODIES IN UTTAR PRADESH 108 - 140 4.1 Introduction 108 4.2 Urban Local Government in Uttar Pradesh 110 4.3 Municipal Expenditure in Uttar Pradesh 117 4.4 Growth in Expenditure 122 4.5 Municipal Revenue 130 4.6 Trends and Pattern of Receipts of Municipal Corporations of Uttar Pradesh 133 4.7 Revenue-Expenditure Balance 138

CHAPTER V: ANALYSIS OF FINANCES OF THE SELECTED MUNICIPAL CORPORATIONS OF UTTAR PRADESH 141 - 188 5.1 Agra municipal Corporation 142 5.2 Aligarh Municipal Corporation 145 5.3 Meerut Municipal Corporation 149 5.4 Allahabad Municipal Corporation 150 5.5 Expenditure Pattern of Selected Municipal Corporations 154 5.6 Trends in Receipts of Selected Municipal Corporations 172 5.7 Financial Mismatch in Selected Municipal Corporations 186

CHAPTER VI: CONCLUSIONS AND SUMMARY 189-208 BIBLIOGRAPHY 209-217 ANNEXURES I - VIII LIST OF TABLES

Table No. Title Page No. 3.1 Trends in Urbanisation 86 3.2 Town and Urban Agglomeration by Class 86 3.3 Projected Urban Population 87 3.4 Expenditure of Urban Local Bodies (ULBs) in India 92 3.5 Per Capita Expenditure of ULBs in India 94 3.6 Per Capita Expenditure of Urban Local Bodies of 96 Selected States 3.7 Total Revenue Receipts of U rban Local Bodies in India 98 3.8 Transfer From Central Government to ULBs in India 100 3.9 State-Wise Own Revenue of Selected States as 102 Percentage of Total expenditure Urban Local Bodies 3.10 State-Wise Own Revenue of Selected States as 103 Percentage of Total Revenue of Urban Local Bodies 3.11 Per Capita Revenue of Urban Local Bodies of Selected 104 State during 1993-94 to 2007-08 3.12 Fiscal Mismatch of Selected States during 1993-94to 106 2007-08 4.1 Trends and Patterns of Expenditure of MCs in UP 123 4.2 Percentage Share of Revenue Expenditure (RE) and 126 Capital Expenditure (CE) to Total Expenditure (TE) 4.3 Per Capita Expenditure (PCE) of Municipal 127 Corporations of UP 4.4 Per Capita of Municipal Expenditure on Core Services 129 4.5 Revenue Receipts of MCs of UP 134 4.6 Share of Own Tax and Non-Tax Revenue to Total 136 Receipts of MCs of UP 4.7 Transfer from Central Finance Commission to MCs of 137 UP 4.8 Per Capita Revenue and Expenditure of Municipal 139 Corporations of UP 5.1 Growth Trends in the Expenditure of Selected 155 Municipal Corporation

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5.2 Percentage Change in Revenue and Capital 157 Expenditure of Agra, Aligarh, Allahabad, and Meerut MCs 5.3 Share of Revenue and Capital Expenditure in the 158 Total Expenditure of Selected MCs 5.4 Per Capita Expenditure of Selected MCs 159 5.5 Per Capita Revenue and Capital Expenditure of 161 Selected MCs 5.6 Per Capita Expenditure of Water Supply 163 5.7 Per Capita Expenditure of Road 164 5.8 Per Capital Expenditure on Street Light 166 5.9 Per Capita Expenditure on Sanitation and 168 Sewerage 5.10 Per Capita Expenditure on Drainage 169 5.11 Per Capita Expenditure of Waste Disposal 170 5.12 PCE on other Services of MCs of Agra, Aligarh, 171 Allahabad, and Meerut 5.13 Growth Trends in Total Receipts of Selected 173 Municipal Corporations 5.14 Trends in Own Tax and Non-Tax Revenue 175 5.15 Growth and Share of Grants in the Receipts of 178 Selected MCs 5.16 Growth and Share of Central Transfers in the 180 Receipts of Selected MCs 5.17 Growth and Share of Transfers from State 183 Government in the Selected MCs 5.18 Per capita Total Receipts of Selected MCs 184 5.19 Fiscal Mismatch in the Selected MCs 186

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ABBREVIATIONS

AEGR Average Exponential Growth Rate

AICM All India Council of Mayors

AJS Agra Jal Sansthan

AJS Aligarh Jal Sansthan

AMC Ahmadabad Municipal Corporation

CAA Constitutional Amendment Act

CAGR Compound Aggregate Growth Rate

CFC Central Finance Commission

DDA Delhi Development Authority

EFC Eleventh Finance Commission

FSFC First State Finance Commission

GDA Ghaziabad Development Authority

JN Jal Nigam

JNNURM Jawahar Lal Nehru Urban Renewal Mission

LIC Life Insurance Corporation

LSG Local Self-Government

LSGIs Local Self-Government Institutions

MCA Municipal Corporations Act

MCs Municipal Corporations

MFD Municipal Development Fund

MLAs Members of Legislative Assembly

MMI Model Municipal Law

MPs Members of Parliament

NGOs Non-Governmental Organisations

PCDA Principle Controller of Defence Accounts

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PCE Per Capita Expenditure

PPP Public-Private Partnership

RBI Reserve Bank of India

SDO Structured Debt Obligations

SFC State Finance Commission

SSFC Second State Finance Commission

SWM Solid Waste Management

TFC Tenth Finance Commission

TFC Twelve Finance Commission

THFC Thirteen Finance Commission

UA Urban Agglomeration

ULBs Urban Local Bodies

UP Uttar Pradesh

USA United States of America

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CHAPTER-I

INTRODUCTION

1.1 Introduction

Local government, whether under a unitary or multi level arrangement, is the lowest in the scheme and also the smallest in jurisdiction. Often the terms local government and local self-government are used without any distinction. In India, the term local self government is more widely used and in other countries local government is more often employed. India uses it’s due to the British context of the development of local- government. In contrast with the alien authority at the centre, the association of

Indians in Municipal government came to be styled as local self government. Today, the term may not be technically acceptable. It is said that the term self government has lost its significance as the country has self government both at the centre and states.

The constitution mentions only of local government and has dropped the prefix self but not altogether. In further explanation of what a local government is, the term self government is used. As such, both the terms are used interchangeably. Further, local self government has a normative ring around it, and expresses its nature more eloquently than local government. Local government is the last preserve of people’s near direct participation in their civic affair management (Rao, 1986).

Local self government is an integral and inalienable part of a democratic government. It completes the three-tier system of a country’s federal government structure, that is sovereign national government, quasi-sovereign state governments, and intra-sovereign local government, all three working as partners in the great enterprise of securing a decent of existence for all the nation’s citizens. Local self government, created by a national or state enactment, acts as an agent of development and provides certain services of immense importance to the people living under its jurisdiction, with a strong emphasis on popular initiative and participation.

In modern society, the concern of a government has broadened to cover not only the maintenance of law and order but also the promotion of the welfare of the whole community. This has enormously increased the scope of the functions and activities of the government. A large number of such functions are of a local nature and can be performed by local governments only, as they cannot be successfully undertaken at a state or national level. Local governments are assigned the task of performing these functions and providing a large number of social services from “womb to tomb”. These local authorities supervise, direct and control our lives, awake and asleep at work and at play, they provide for all citizens a common minimum health, education welfare services, roads, peace and security and beauty of environment. The local government relieves the overworked higher-tier government of many responsibilities. Besides, a local government is found to be the most economical means of managing affairs at that level.

Local government is described as that under which the people of the locality possess a certain responsibility and choice in the administration of local public affairs and in the raising of the required finance to meet their expenses. Local self government connotes government by the local bodies. Freely elected, which, while subject to the supremacy of the national government, are endowed in some respects with some power, discretion and responsibility and which they can exercise without control over their decisions by the higher authority (Rao, 1986).

Corporate civic life in modern civilization cannot be conceived without a variety of public services to its members by the local authority. These services are those

2 that go to make up the quality of life in its physical, aesthetical and environmental aspects. Local services and functions are highly particularized and quite often either person or group targeted with every advancement in technology, the community life style also undergoes a change. The service and function patterns have to adopt themselves to new demands. These are better planned and executed by the local community without much of the emotional strains so evident in national policy formulations (Rao, 1986).

Thus, local self government encourages local initiatives and drives the citizen’s energies into constructive channels. The benefit of active participation is more immediate and something tangible in the case of local government. In the words of

H.J.Laski “we cannot realize the full benefit of democratic government unless we begin by the admission that all problems in their incidence require decision at the place and by the person by whom the incidence most deeply felt. Hence, in any scheme of democratic government, a system of local self government entrusted with the local functions is an inescapable necessity, especially when the functions of the state are increasing and also becoming more complex (Rao, 1986).

Benefits and Limitations of Local Government

A vigorous local government benefits the nation in a number of ways. Some of

them may be enumarised as under:-

1. Values of freedom and democracy are promoted and defended.

2. Healthy local government acts as a stabilizer of the national government. The

nation can withstand convulsions and swift changes and maintain tradition as it

happened in India’s history.

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3. Local governments are often described as schools of democracy. Political and

civic education is provided at the grass-root level and the process of compromise

and persuasion at the national level is nourished.

4. As administrative units, they serve as agencies of state government in a nation-

wise service delivery system.

5. Local, communal or civic needs are better attended by the local leadership and

citizen participation. Primary services of the community are performed

continuously by people’s representatives who knows their problem intimately.

6. Local resource management secures economy and conservation.

7. Variety of culture results from strong local self administration. Each town

develops its own independent personality.

In short, local self government is an educative process, an administrative necessity, a political compulsion and generally an economic gain.

The other side of local government’s medal should not be missed.

1. The most common defect is that it may degenerate into an inefficient and petty

institution. The jurisdiction not extending a few kilometers does not offer any

opportunity for a municipal career or leadership.

2. Continuous confinement to the local issues makes one develop narrow-

mindedness.

3. Petty squabbles, dodging of municipal laws and party partnership haunt the local

institutions.

4. Local government cannot provide economies of scale. The production of any

service by it is costly, insufficient and wasteful. In these days of high technology,

municipal units cannot be the most efficient units of management.

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5. One chief defect is that they look to the central government constantly for

assistance and thus steadily lose their native independence. The observation of

J.S.Mill on local government is still true. The greatest imperfection of popular

local institutions, and the chief cause of the failure which has often attended them,

is the low caliber of the men by whom they are almost always carried on (Rao,

1986)

1.2 Local Self-Government in India

The institution of local self-government, both rural and urban, has a very long history in

India dating back to the Dravidian civilization which had well-managed urban centers.

The present form of these governments, however, is a British legacy more recently their role has been extended to include activities of Public Welfare rather than the mere management of certain locality provided services.

Modern history of Urban Local Bodies (ULBs) in India can be traced as far as the year 1687 with the formation of the Municipal Corporation of the port of the city

Madras. The seeds of independent local finance were sown with Mayo’s Resolution

(1870). But major reforms leading to further decentralization of functions were the results of Lord Rippon’s Resolution on Local government (1882). This Resolution provided some autonomy to the elected committee of the local bodies in the preparation of budgets. Subsequently, a Royal Commission on Decentralization (1909) suggested a provision of grants from provincial governments for large municipal works.

The government of India Resolution (1918) provided a scheme of taxation for these governments while making them the subject to the provinces. This was called the diarchal system of government. The government of India Act (1935) ended this system

5 by bringing the federal constitution whereby provinces were made autonomous and local self governments were assigned to them.

The constitution of India (1950) followed this act closely in the matter of functional distribution among the states and the union. Since the local government is a subject of states, the state holds all the legislative and executive powers with regard to assignment of duties and allocation of resources to finance them. The states have enacted their respective Municipal Acts without any intervention of the central government (Gautam, 1998).

Local self-government institutions (LSGIs) or Local bodies in India, being at the cutting edge level of administration, directly influence the well-being of the people by providing civic services and Socio-Economic infrastructure facilities. The constitution’s (73 rd and 74 th ) amendment Acts, 1992 (for rural and urban local bodies respectively) have accorded a constitutional status to these institutions as the third tier of Government. The 74 th amendment Act has mandated grass root level democracy in urban areas by assigning the task of preparation and implementation of plans for economic development and social justice to elected municipal councils and wards committees. It has incorporated the twelfth schedule into the constitution of India containing a list of 18 functions as the legitimate functional domain of urban local bodies in the country. In view of this position the demands placed by the public on municipal authorities for the provision of various civic services have increased considerably (Mohanty, Mishra, Goyal, and Geromi, 2007).

1.3 Urbanization and Demand for Civic Services

Urbanization may be broadly defined as the societal process that creates the dynamic system that we call a city. It is complex process. In this process the population of a

6 country is transformed from its rural and geographically well spread nature to an urban and highly concentrated one. From being individualistic in character, the society begins to depend more and more on public services apart from becoming more interdependent amongst themselves. This process is self-augmentative in character. As the city governments provide better and more efficient services, they attract more people within their folds creating additional demands on urban services. Many a time, beyond a certain peak, the quality of urban services ultimately begins to decline due to such continued additional pressures. Direct impact of urbanization is, thus, a growth in local public expenditure due to rise in demand for local public goods both in quantity and quality. Associated determinants of level of expenditure would be rapid population growth Per capita incomes, rise in productivity due to production specialization and division of labour leading to rising wage rates, greater ability to collect taxes because of better “tax handles” and even displacements caused by war or civil strife are all to some extent associated with the process of urbanization in developing countries (Naresh,

1998).

Urbanization of India’s population has been rather slow and unimpressive.

This may be indicated by the degree of urbanization which is defined as the ratio of urban population to total population. The growth of urbanization in India since the turn of the century can be traced and also appropriate comparisons at selected points of time with contemporary world and regional figure can be made (Naresh, 1998).

In India out of the population of 1027 million in 2001, about 285 million persons lived in urban areas. The proportion of urban population has increased from 19.9per cent in the year 1971 to 27.8per cent in the year 2001. The decadal growth of urban population was 31.2per cent in 1991-2001. At the country level, natural increase has

7 been principal source of urban population growth. The contribution of rural-urban migration ranges between 19 to 21 percent of the net increase in urban population.

Increasing concentration of urban population in large cities is one of the key features of urban India. The number of cities over 1.0 million population in 2001, was

35 and population share was over 37 percent. The salient aspects of urbanization in

India in recent decades are:

• The trend of concentration of urban population in large cities and agglomerations

is getting stronger,

• Slowing down of urbanization during 1981-1991 and 1991-2001 as compared to

1971-1981 and 1961-1971 and

• Large variations in patterns of urbanization in various states and cities (Vaidya,

2009).

Even though overall urbanization in India is somewhat low, the urban agglomerations in the country have been growing in size and pressure of population on the urban agglomerations has increased substantially thereby increasing the pressure on urban public services and increasing the pressure on urban public services and causing deterioration in the quality of life in the urban units. It would appear that the primary reason for this sluggish change towards urbanization as indicated by the low figures of the degree of urbanization has been the substantial growth in total population of the country. Some of the elevating figures indicating the increased pressure of population of the urban centres. Another point to be noted is that while earlier less than a quarter of urban population was residing in big cities, now more than 65 percent of urban population lives in these cities.

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1.4 Theory of Local Finance

Till recently a theoretical study of local public economics and local finance did not receive much attention of economists. As an academic discipline, it was hardly a fashionable subject till the rise of developmental economics. Economists were concerned more with the national and international economics in a framework of immutable market mechanism and factor market specialization consideration of spatial dimension hardly took note of the local economy. The development of geo-economic theories of regional and sub-regional economics, however, enabled the students to explore the local public economy more consistently. Local fiscal management has emerged as a major academic concern in the developing countries in the context of base line development. In the western democracies, however, the increasing importance of municipal finance is altogether for different reasons. First is the burgeoning public resistance to any kind of tax increase in these countries. New political parties are founded on tax opposition or limitation programmes. Second is the growing fiscal incapacity of local governments in these countries. Much of the municipal fiscal writing in these countries centres around the urban fiscal crisis situations.

Local government has been treated more generously by the political scientists and public administrators. The political and the administrative overtones of local bodies partly explain the neglect of their economic study. Even today, there is a curious lack of the general principles governing it. A precise conception of local fiscal economies is all the more important in multi-level government as in a federation.

One of the primary tasks in the study of local finance is to place the local governmental functions and finance in the perspective of national and state finances

9 and to clearly define their role in national economic development. A pluralist society is unattainable without some degree of economic pluralism (Rao, 1986).

1.5 Theoretical Framework of Local Finance

Sound government depends upon sound finances and sound finances depend upon sound government. This applies to governments at all levels including local self- governments. Local self-governments can work smoothly only when the resources at their disposal are adequate and they are effectively and efficiently utilized. This is the crux of the problem of local finance. The relation between local functions and local finance is inseparably intertwined. They are concomitant to each other and, in fact, one exists for the other. Local functions can not be performed without local finance, and without functions the need for finance does not arise.

Public finance primarily deals with the income and expenditure of public authorities and with the adjustment of one to the other. Accordingly, local finance which is a branch of public finance, deals with the income and expenditure of local governments and with the process and principles of raising and spending money essential for the support of the local government in satisfying the collective wants of the people under its jurisdiction (Bhagwan, 1983).

Municipal finance is about the revenue and expenditure decisions of municipal government. It covers sources of revenue that are used by municipal government’s taxes (Property, income, sales, and excise taxes) user fees and inter-governmental transfers. It includes ways of financing infrastructure through the use of operating revenues and borrowing as well as charges on developers and Public-Private

Partnership (PPP). Municipal finance also addresses issues around expenditure at the

10 local level and the accountability for expenditure and revenue decisions, including the municipal budgetary process and financial management (UN Habitat, 2009).

1.5.1 Importance of Local Finance

Any analysis of finances of state and central governments in isolation (excluding that of the local bodies) will not provide a holistic picture of the public finances of the country.

Recognizing the fact that India is increasingly urbanizing, and the estimate that of more than 50 Per cent of India’s population will live in urban areas in another 3 to 4 decades, one cannot afford to ignore the fiscal situation of ULBs. Civic infrastructure and services in most cities and towns are in a poor state. They are grossly inadequate even for the existing population; leave alone the need for planned urbanization and peripheral development to accommodate migrants and in situ population growth.

The floods in Mumbai, Chennai, Hyderabad and Bangalore in the recent past have exposed the vulnerability of cities, their fragile ecology, weak infrastructure systems, faulty planning, long records of under-investment and fiscal imbalances with rising expectations from the public, the financing of civic infrastructure and services has assumed critical importance socially, economically and politically.

The importance of local public finance also emanates from another critically important factor i.e., increase in poverty in cities and towns seen to be accompanying urbanization – a phenomenon that is described as urbanization of rural poverty. Urban poverty alleviation and slum development are regarded as legitimate functions of urban local bodies according to the 74th Amendment Act. However, neither the ULBs have any well-defined “own” sources of finance to address urban poverty nor do they have recourse to a system of adequate and predictable inter-governmental transfers to undertake poverty alleviation.

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Theoretically, the three main functions of the public sector are: stabilization, redistribution and allocation with growing number of urban poor, the redistribution function, in addition to allocation is emerging as a critical issue for urban India. This needs to be addressed through the public finance system-Central, State and local.

Although the theory of public finance suggests that redistribution issue are best tackled by higher levels of government through the provisioning of inter-governmental transfers, there is no appropriate model of inter-governmental finance for local bodies in India to tackle the colossal problem of urban poverty. The 12 th Schedule envisages that functions like safeguarding the interests of weaker sections of society, including the handicapped and the mentally retarded, slum improvement and up gradation and urban poverty alleviation belong to the legitimate functional domain of urban local bodies. However, there are no commensurate resources with these institutions to discharge these functions effectively. This represents a case of expenditure assignment without a corresponding revenue assignment (Mohanty, Mishra, Goyal, Jeromi, 2007).

1.5.2 Problems of Local Finance

The wide range of problems that face municipal authorities in financing the urban development as they respond to the challenges of major shifts in their economic base resulting from falling trade barriers and a globalizing economy. Concurrently, the devolution of administrative and financial responsibility from central governments has forced municipal authorities to finance a growing proportion of their recurring and capital expenditures at a time when, in most countries, migrants constitute a growing proportion of their population. Local authorities have had to:-

i) Enhance their economic competitiveness

ii) Meet the demands for public services.

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iii) Expand and diversify the local tax base, and

iv) Generate funding for capital investments.

Municipalities are but one actor in the financing of urban development, but in many ways they are the pivotal one because of their statutory powers and their ability to act on all sectors within a defined geographic space. Households and private enterprises are the developers and builders of urban communities and the owners and operators of economic activities. But unless the municipality can deliver the supportive infrastructure and services they need, orderly development will be impaired. In developing countries, the rapid pace of urbanization and large migratory flows have increased the pressure on local government spending for urban development. In most of these countries, decentralization laws were enacted in the 1980s and 1990s amid fiscal deficits, financial crises and political unrest, eroding local revenue and disrupting access to funds for capital investment.

In advanced countries, the combination of strong local tax bases, structured central/local fiscal relations and well targeted transfers give local governments the means to drive their own economic, social and physical development, partner with private sector entities on development initiatives and work with Non-Governmental

Organizations (NGOs) on social programmes. Their fiscal resources allow them to access a range of financing sources, ranging from specialized municipal credit institutions and privately managed local development funds to commercial banks and international capital markets. Through strategic capital investments, they are able to manage growth patterns and improve the urban environment.

In transitional economies, the evolution of municipal finance for urban development reflects the path followed by each country as it integrates into the global

13 economy. The sequencing of the reforms affecting legal and institutional frameworks and economic sectors is of paramount’s importance. Political, administrative and fiscal decentralization, changes in public and private roles and responsibilities, devolution of functional responsibilities, adjustments in central ownership, all affect the capacity of municipalities to deliver services and manage urban development, work with local communities and enter into partnership with the private sector. In general, they have managed their finances responsibly and launched jointly funded programmes with residents and developers to improve infrastructure and housing.

Major cities seek to compete in the regional and global economy. They strive to manage their finances responsibly in order to attract private investors, obtain investment-grade credit ratings and access capital markets where local authorities are not empowered to borrow, as in China, they have found off-budget methods and instruments to obtain the financing needed to drive and implement urban development strategies and major projects.

In developing countries like India, municipal finance suffers from the fiscally destabilizing effects of asymmetrical decentralization where devolution is proceeding according to a planned legal, institutional and regulatory framework, local authorities benefit from more predictable finances and, in many ways, greater discretion.

Successive ad hoc adjustments to correct imbalances tend to disrupt municipal financial management. In all cases, local authorities in developing countries lack the supportive framework enjoyed by their counterparts in advanced countries. They must be creative and experiment with innovative approaches if they are to meet their economic and social objectives, particularly in generating employment, expanding service delivery, upgrading the urban environment and improving living conditions for proper

14 communities. Government sponsored Municipal Development Fund (MDF) have provided some municipal authorities with resources for specific categories of projects, including revenue producing services and infrastructure. Social programmes continue to rely on central funding and on support from bilateral and multilateral organizations.

Lack of access to long-term financing hampers their ability to fund urban development.

The best managed municipalities have been able to launch and sustain remarkable initiatives working with higher levels of government, private businesses, NGOs and

CBOs as well as bilateral and multilateral organizations.

In poorer countries, local authorities are heavily dependent on central government transfers to plung any deficits in their operating expenditures, and on grants from donors to address their most pressing environmental and social problems.

External funds are the main source of financing to upgrade and expand infrastructure and urban services. Decentralization policies have developed functional responsibilities without the fiscal resources needed to discharge this mandate. The general poverty of the population erodes local revenue, which relies on a multiplicity of low-yield taxes and fees that are cumbersome to manage and difficult to collect. Their performance is further depressed by chaotic urbanization and the proliferation of informal activities.

Despite the above problems, there are two major emerging issues are affecting the performance of local authorities in both industrialized and developing countries.

The first is the gradual devolution of the responsibilities for infrastructure investment and the delivery of services to local government, a trend that has increased their fiscal burden. In some countries such as Brazil and Indonesia, municipalities have taken advantages of their autonomy to develop innovative approaches-particularly budgeting in Porto Alegre and other Brazilian municipalities and the matching grants provided by the central government to Indonesian municipalities that showed good fiscal capacities

15 as well as met specified need criteria. In other parts of the world, overcoming a tradition of centralized administration is proving difficult, particularly in many African,

Asian and former CIS countries. The other major issue affecting the performance of local government is the rapidly evolving relationship between local and regional fiscal authorities while there is a relatively smooth transition to a complementary role between regional and local authorities in the European Union, the situation is far less clear in developing countries, with the exception of India and Russia where state/provincial government exercises a high degree of control over municipal finance.

Worldwide, there are substantial variations in both the sources of local revenues and the autonomy of local government to determine the scope and rate of local taxes, central transfers are still the main source of revenue for municipalities although their contribution is diminishing in North America and the European Union. With the exception of advanced countries, most local sources of revenue are still determined and collected by the central government, leaving little opportunity for local authorities to assess often significant local economic activities in order to fund improvements in social services or invest in the infrastructure required for sustainable urban development (Serageldin, Jones, Rigier, Solloso, Basset, Menon, 2008).

In India, despite 73 rd and 74 th constitutional Amendments, all the state governments have not passed the necessary legislations and held elections to the local bodies. Further, though a number of states appointed the state finance commissions to make recommendations on the financial transfers, many of them have not yet submitted their reports and in the case of those state finance commissions which have submitted their reports, no tangible action has been taken on their recommendations. This would mean that some state governments have continued to remain as indifferent to the financial needs of the newly created ULBs as they used to be, the ULBs have been

16 functioning more often under the state government appointed administrators. Their economic and hence revenue base has been much stronger because of the concentration of non-agricultural economic activity in urban centres. But most of the state governments and even the central government tapped the revenue potential available in urban areas and used that money for large-scale investment in public sector and welfare and poverty alleviation programmes in rural areas. Both the central and the state governments hardly gave sufficient money to the ULBs to provide even the basic minimum urban civic services to the people living there. There is a feeling that ULBs can raise their own resources as they have rich potential tax base. But unfortunately the constitutional division of sources of revenue has left very little for the ULBs. The three direct taxes which were historically recognized as local sources of revenue, namely, property tax, entertainment tax and motor vehicle tax are no longer with them

(Thimmaih, 1998).

1.6 Urban Local Finance and Economic Development

Local finance deals with the economic development aspect of public finance quite intimately. It has been widely accepted that like the natural growth of a tree the process of development must start from below. Local finance at the bottom of the public finance pyramid can serve as the engine of economic development. It provides the foundation of development by making foundation investments that is by the formation of human capital and physical capital. Health services, educational facilities, social security schemes and better living and working conditions certainly help in the formation of human capital. Roads, markets, electricity, water supply, public transportation etc form physical capital. Because of these two types of capitals earnings of inhabitants go up, saving take place, private capital investments increase, and the

17 wheels of development get the necessary momentum. Moreover economic development cannot be achieved in the absence of local initiative and resources. Local finance sparks enthusiasm among local people (Bhagwan, 1983).

1.7 Municipal Fiscal Problem

An analytical approach to study the municipal fiscal problem is to consider the following simplistic expressions which broadly apply to individual as well as total municipal services:

Required Expenditure = Unit Cost × Quantity of service required to be

Provided per capita as per Norms × Population.

Municipal Revenues = Own taxes + User charges and Fees + Transfers (shared

revenues & grants) + Loans.

Own taxes = Collection Rate x Legal Tax Rate x Base-to-income Ratio

x Per capita income x population.

Legal Tax Rate = Legal liability of Tax/Base of Tax

User Charges = Unit user charge for service x Quantity of service

provided per capita x Population.

Shared Revenues = Rate of Sharing x States Taxes

Grants = Per Capita Grant available x Population

Municipal Fiscal Gap = Required Expenditure - Municipal Revenues.

Budget deficit is the difference between budgeted expenditures and budget revenues. The ratio: actual revenues potential revenues represents municipal collection efficiency. A measure of municipal autonomy can be defined as: Municipal own revenues | total municipal expenditures. A measure of inter-governmental control is:

18 total municipal revenues |total government expenditures (in case of India, the appropriate denominator is Municipal + State expenditures)

As may be seen from the above, the expenditures required to be met by a

Municipality depend on service cost, norm and population parameters. This applies to all categories of services. Revenue raised depends on the size of revenue base, extent of access to base, rates and collection efficiency. This is true for all collectible resources

(Mohanty, 1995).

1.8 Decentralization and Devolution of Functions to Urban Local

Bodies (ULBs)

In recent years the subject of fiscal decentralization has received enthusiastic attention from academic analysts and policy markers alike. Most analysts find inherent merit in decentralization. Often it is considered to be a component of human well being and therefore an end in itself. In decentralization, the policy makers see a panacea for many ills afflicting the society. It is expected to achieve many things such as enable efficient allocation of resources, improve governance, accelerate economic growth, reduce poverty, achieve a gender balance and empower weaker sections of society. This enthusiasm is seen in countries with federal constitutions as with unitary systems, it has spanned across countries with different ideological spectrum and varying level of development of course, there have been a variety of reasons and motivations for decentralization in different countries. These include democratization of polity, advent of multi-party system, transition from planned to market economy and accommodating diverse ethnic, linguistic and religious identities.

Decentralization will necessarily result in more efficient delivery of public services irrespective of the institutional setting, capacity of the institutions and

19 economic environment in which they are rooted. Empirical evidence points towards important preconditions for decentralization to achieve efficient and equitable delivery of public services. The experiences in developing countries in particular, underline the fact that there is much to be done to create appropriate conditions for fiscal decentralization to be successful in achieving its objectives.

The coordination requirements between different governmental levels are even more stringent in regard to achieving effective macroeconomic stabilization and desired state of redistribution. The problems are particularly served in developing and transitional countries.

Among developing countries, India with a federal constitution is a case with relatively greater degree of fiscal decentralization. However, in terms of delivering public services, mobilizing physical and human resources, harnessing the synergies and unleashing incentives to exploit the developmental potential, regional and local fiscal autonomy has worked with varying degrees of successes even within the country. In some regions, fiscal decentralization has been more successful than in others. The experience of decentralization in India should help us to gain better understanding of the preconditions and institutional requirements and capacity development necessary for fiscal decentralization to achieve sufficient and equitable delivery of public services.

There are a number of additional reasons for the analysis of fiscal decentralization in India. The adoption of market oriented reforms since 1991 has redefined the role of the state and this has necessitated an examination of fiscal arrangements between different levels of governments. In fact, there have been opposing forces at work which on the one hand, the transition from centralized

20 planning and market based resource allocation has enhanced the role of sub-national governments in delivering social and physical infrastructure, increasing trend in regional inequalities has necessitated greater central role. Inter-regional distribution of incomes has shown increasing inequality during the 1990s. There is also considerable debate on the trends in poverty interventions warrant a solution within the co-operative federalism framework. It must be noted that despite a decade of fiscal adjustment, fiscal imbalances at the both central and state levels continue to pose serious threat to macroeconomic stability in the country (Rao, 2000).

India is a federation with constitutional demarcation of functions and sources of finance between union, state and local governments. However, statutory introduction of the third tier is a recent phenomena – after the 73 rd and 74 th amendments of the constitution in 1992 gave the rural and urban local governments the constitutional status. Until this development, India had devolved a two-tier federal structure with the powers and functions demarcated between the union and the states. Of course, informally some degree of decentralization below the state-level existed for a long time

(Rao, 2000).

1.9 The Constitutional 74 th Amendment Act, 1992

It is a beginning of a historic reform to decentralize power. The Act provides a constitutional form to the structure and mandate of municipal bodies to enable them to function as effective democratic institutions of local self government (Mohanty, 1995).

Each state legislated separate municipal Acts assigned the entire civic functions and sources of revenue. In general the assignment of revenues was adequate. Though all municipal bodies could levy property taxes, revenue productivity from the tax was low.

Most of the states were allowed to levy “octroi” a tax on the entry of goods into a local

21 area for consumption, use or sale. In general, the standards of services provided by the municipal bodies were poor and the state governments had to create a number of independent agencies such as housing, water supply authorities, and various improvement trusts to ensure minimum services. The amendment of the constitution also assigned 37 activities to urban local governments. The new arrangement in addition to those functions that were already assigned, also gave the functions of secondary and adult education, housing and land use, promotion and development of industrial and commercial estates, and electricity distribution to the urban local bodies concurrently with the state governments (Rao, 2000).

The constitution (74 th Amendment) Act, 1992 introduces some fundamental changes in the system of Municipal governance. First, it mandates that a municipality if

“dissolved” by the state government must be reconstituted within six months. This is to ensure to continuity of civic affairs by “elected” representative of the people. Second, a framework is provided for the assignment of appropriate governmental functions to civic bodies through the Twelfth Schedule of the constitution. Third, the states are statutorily required to constitute finance commissions, once in every five years to recommend to their legislators measures to improve municipal finances including

i. Assignment of taxes, duties, tolls and fees

ii. Sharing of state revenues and

iii. Provision of grants-in-aid.

Fourthly, the central finance commission is obligated to recommend measures need to augment the consolidated funds of state governments on the basis of the recommendations made by the state finance commissions. Lastly, it is mandatory to constitute Metropolitan and District Planning Committees, with predominant role

22 assigned to elected representatives in the preparation and consolidation of development plans (Mohanty, 1995).

Some Important Measures Prescribed by the Constitution (74 th

Amendment) Act to Facilitate Responsive and Responsible Municipal

Government includes

• Regular and fair conduct of municipal elections by statutorily constituted State

Election Commissions.

• Restricting the power of the state governments to do away with democratically

elected municipal governments.

• Reservation of seats for adequate representation to weaker sections and women in

municipal bodies.

• Constitution of wards committees in cities with population of 3 lakhs or more

with enabling provision for such committees in cities/towns having lesser

population.

• Specifying by law the powers and responsibilities entrusted to the municipalities

and wards committees.

• Placing state-local fiscal relationship on a firm footing by specifying the sources

of municipal finance and their periodic review by statutorily constituted state

finance commissions and by making it obligatory on part of the central finance

commission to recommend measures needed to augment state resources to assist

the municipal governments.

• Integration of spatial and socio-economic planning to the sharing of physical and

financial resources and

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• Assignment of critical role to elected local representatives in civic affairs

including town, district, and metropolitan planning.

The constitution (74 th Amendment) Act provides tremendous opportunities for municipal reforms. State municipal laws have been amended to ensure conformity with the constitutional provisions. Inter-state comparisons, however, reveal the need for clarity in municipal functions and finances in almost all the State Municipal Acts, keeping in view the objective of an efficient public service delivery. Empirical research suggests three elements of a reform strategy in this regards:

i. Clarification of functional responsibilities between different levels of

government,

ii. Assignment of revenues to the municipalities corresponding to their

functions

iii. Institution of system of municipal accountability – to higher-levels of

government as well as the electorate (Mohanty, 1995).

Implications of 74 th Amendment for Municipal Finances

Article 243 W of the constitution envisages the role of urban local bodies as institutions of self-government. Article 243 X provides that a state legislature may by law,

(a). Authorize a municipality to levy, collect and appropriate such taxes, duties, tolls

and fees in accordance with such procedure and subject to such limit.

(b). Assign to a municipality such taxes, duties ,tolls and fees levied and collected by

the state government for such purposes and subject to such conditions and limits.

(c). Provide for making such grants-in-aid to the municipalities from the consolidated

fund of the state.

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(d). Provide for the constitution of such funds for crediting all moneys received,

respectively, by or on behalf of the municipalities and also for the withdrawal of

such moneys there from.

• Under Article 243 Y, it is mandatory for the state finance commission to

review:

(a) The principles which should govern

(i) The distribution between the state and the municipalities of the net

proceeds of the taxes, duties, tolls and fees leviable by the state, which

may be divided between them and the allocation between the

municipalities at all the levels of their respective shares of such

proceeds.

(ii) The determination of the taxes, duties, tolls and fees which may be

assigned to or appropriated by the municipalities.

(iii) The grants-in-aid to the municipalities from the consolidated fund of the

state.

(b) The measures needed to improve the financial position of municipalities and

(c) Any other matter referred to the finance commission by the governor in the

interest of sound finance of the municipalities (Mohanty, 1995).

1.10 Functional Domain of Municipalities

The functional domain basically relates to the function that has been assigned to the municipalities to perform. During the pre-independence era, almost all the functions in the city such as water supply drainage, sanitation, building control, municipal road, street lighting, and municipal markets etc were performed by the municipality.

25

In the period after independence, however, there has been a steady diversion of municipal functions to other looks like development authorities such as Delhi

Development Authority, Ghaziabad Development Authority etc and Para-statal organizations such as Jal Nigam in Uttar Pradesh. The phenomenon of frequent supersession of elected municipalities added to the problems. State level water and sanitation boards as in Uttar Pradesh, Tamil Nadu, Maharashtra, Gujarat, and Andhra

Pradesh had come into existence city development and special authorities were also established in most large cities of the country. The municipalities were only left to performing functions like sanitation and garbage remover.

Article 243 G and 243 W of the constitution provide for the state laws to endow the panchayats and municipalities with such powers and authority as may be necessary to enable them to functions as institutions of self-government. The 11 th and

12 th Schedule listing 29 and 18 items respectively were added to the constitution. They are broad headings signifying a whole variety of functions. It was left to the state governments to assign functions and also commensurate finance and human resource.

Since these functions are not mandatory and it is not incumbed on the states to entrust the functions and responsibilities under these schedules to the local bodies.

The 11 th and 12 th schedules are an integral part of the constitution and have the same status and force as other schedules. As part of the 73 rd and 74 th Amendments they have also been ratified by the required number of states. The country need not have gone through the elaborate process of amending the constitution and ratifying the same if the schedules are regarded as decorative elements to be observed only as per convenience.

The Twelfth Schedule (Article 243 W) provides an illustrative list of functions that may be entrusted to the municipalities:

26

• Urban planning including town planning

• Regulation of land-use and construction of buildings

• Regulation for economic and social development

• Roads and bridges

• Water supply for domestic, industrial and commercial purposes.

• Public health, sanitation, conservancy and solid waste management

• Free services

• Urban forestry, protection of the environment and promotion of ecological

aspects

• Safeguarding the interests of weaker sections of society, including the

handicapped and the mentally retarded

• Slum improvement and up gradation

• Urban poverty alleviation

• Provision of urban amenities and facilities such as parks, gardens, playgrounds

• Promotion of cultural, educational and aesthetic aspects

• Burials and burial grounds, cremation ghats/grounds and electric crematoria

• Cattle ponds, prevention of cruelty to animals

• Vital statistics including registration of births and deaths

• Public amenities including street lighting, parking lots, bus stops and public

conveniences

• Regulation of slaughter houses and tanneries

The assignment and satisfactory discharge of functions is totally depending on the intentions of the state governments once functions are assigned to the local bodies through an act of the legislature. It is impossible for the municipality to discharge the

27 function satisfactorily since the state governments have not transferred the requisite manpower and finances require for performing the functions.

It has also been felt that just as the constitution has a union list, there is need to have a municipal or local body list in which both the 11 th and 12 th Schedules of the constitution find place.

1.11 Financial Domain

The dismal state of finance in municipalities across the country is a very common feature. The constitution, even after the 74 th Amendment does not provide for an independent set of taxes that the municipalities can raise. They continue to be determined and regulated by the state governments. Article 243 X states that a state may by law authorize a municipality to levy and collect property taxes, duties, tolls and fees and also that the state may lay down the procedure and ceiling for the same. Even with regards to finances, adequate accounting systems are not in place.

The constitution has made it mandatory for every state to constitute a state finance commission (SFC). The SFC is to review the financial position of the municipalities and make recommendations regarding distribution of taxes between the states and the municipalities. It is also expected to look into the criteria for grants-in-aid and suggest measures needed to improve the financial position of the municipalities.

But the SFC has to function strictly according to the terms of reference provided to it by the state.

After the 74 th Amendment between 1994 and 1997 a total of 22 SFCs were set- up. The terms of reference of the SFCs were basically a repetition of article 243 Y of the constitution that elucidates the functions of SFCs. Since funds required and the functions to be performed and interrelated the SFCs could review the existing situation

28 and recommend a functional domain that would serve public interest and also be financially viable. But most of the SFCs did not touch on the subject at all very few

SFCs have taken a total view of development needs and financial requirements.

Regarding revenue assignments, the SFCs have generally supported more autonomy for the local body in determining the rates.

1.12 State Finance Commission (SFC) and Urban Local Bodies

The state finance commission (SFCs) are established pursuant to the 73 rd and 74 th constitutional Amendments. Each state government provides the Terms of Reference

(ToR) for its SFC.

Under the constitution, SFCs are mandated to recommend the principles for:

• The distribution between the state and local bodies of the net proceeds of taxes,

duties, tolls and fees leviable by the state, and the inter se allocation among

different panchayats and urban local bodies.

• The determination of the taxes, duties tolls and fees that may be assigned to or

appropriated by the local bodies.

• The grants-in-aid from the state constituted fund to local bodies.

• The measures needed to improve the financial position of the panchayats and

Urban Local Bodies (ULBs).

The state finance commissions are to be constituted every five years, and their recommendations are to cover the subsequent five year period (Mathur & Peterson,

2006). The finance commissions constituted in various states of India have attempted a detailed review of the financial position of ULBs. The findings on the local level issues of governance (including those related to financial aspects) and recommendations to

29 overcome the prevailing constraints confronting ULBs have been documented in the reports prepared by the SFCs of most states.

The first SFCs were constituted during the period 1994-95. It is further observed that in the states of Jammu & Kashmir and Arunachal Pradesh, the first SFC was constituted in the year 2001 and 2003 respectively. In the newly formed states of

Chhattisgarh, Jharkhand and Uttarakhand, the first SFCs were constituted during 2003,

2004 and 2005 respectively. In so far as the submission of first SFC report is concerned it may be stated that in the states of Punjab, Rajasthan and West Bengal, the report was submitted in the year 1995. Although most reports were submitted during the period

1996-99. Bihar is an exception, where the report could not be submitted due to various reasons.

It is noted that the state governments of Andhra Pradesh and Himachal Pradesh were the first to constitute the second SFC in the year 1998. In other states, the second

SFCs were constituted during the period 1999-2004. It is also observed that in the states of Arunachal Pradesh, Chhattisgarh, Jammu and Kashmir, Jharkhand and Uttarakhand, the second SFC has not been constituted due to the fact that the period of the first SFC is not yet complete. Regarding the status of second SFC reports, it is learnt that most reports were submitted during the period 2001-2002. Therefore, however, a number of states where the second reports are in the process of being approved by the state government. States falling in this category include Assam, Goa, Gujarat, Haryana,

Maharashtra, and Orissa (Mathur, 2007). The third state finance commissions are completing reports, most of which were due in 2006. In the majority of cases, their recommendations are to take effect for the fiscal year commencing April 2006 (Mathur

& Peterson, 2006).

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In practice, SFC reports have devoted most of their attention to the first mandate, i.e. the distribution of state revenue among local bodies, along with the analysis meant to provide an objective basis for this allocation. The SFC design as commonly interpreted provides a rather rigid framework for recommending revenue- sharing formulas. SFC reports are expected to come up with specific recommendations to the total quantum of revenue that should be distributed from the state to local bodies over each year of the five year period and how this amount should be allocated among different local bodies. SFC recommendations generally have not tied revenue sharing amounts to decisions about developing additional services to the local level, leaving the linkage between ULB functions and ULB revenues poorly defined (Mathur & Peterson,

2006).

1.13 Central Finance Commission (CFC) and Urban Local Bodies

In addition to the incorporation of section IX A on municipalities into the constitution.

Article 280 concerning the mandate of the Central Finance Commission (CFC) was also amended, requiring the central finance commission to make recommendations on the measure needed to augment the consolidated fund of a state to supplement the resources of the municipalities in the state on the basis of the recommendations made by the finance commission of the state. Pursuant to this provision, the eleventh central finance commission recommended a sum of Rs 2000 crores for the ULBs, while the

Twelfth Central Finance Commission (TFC) raised the share of ULBs to Rs 5000 crores. The three successive commissions made important observations on two aspects:

i. Composition of the SFCs and

ii. The approach and methodology adopted by the SFCs in assessing the revenue

gap.

31

The three CFCs developed and applied detailed criteria for allocating the recommended amounts for ULBs. Several points concerning the approach of the two

CFCs deserve to be underlined.

Non-Use of the Reports of the SFCs

The central finance commissions were not able to make use of the reports of the SFCs in the framing of their recommendations. The stated reasons were the non-availability of the reports and incompatibility of methodologies. What is important to note is that the CFCs made no attempt to comment on the adequacy of the methodology adopted by the SFCs in assessing the revenue gap even when reports were in public domain on a general plane, however, the CFCs have noted that better results would have been obtained if the SFCs, had followed the methodology that is used by them. The following quotes from the report of the Twelfth Finance Commission are relevant here.

If the SFCs follow the procedure adopted by the central finance commission for transfer of resources from the centre to the states, their reports would contain an estimation and analysis of the finances of the state government as well as the local bodies at the pre and post transfer stages along with a quantification of the revenues that could be generated additionally by the local bodies by adopting the measures recommended therein. The gaps that may still remains would then constitute the basis for the measures to be recommended by the central finance commission while estimating the resource gap; the SFCs should follow a normative approach in the assessment of revenues and expenditures rather than make forecasts based on historical trends. Per capita norms for revenue generation must take into account the data relating to the tax bases and the avenues for raising non-tax income by the municipalities and the Panchayats, assuming reasonable buoyancies and the scope for additional resource

32 mobilization. Per capita expenditure norms could be evolved on the basis of the average expenditure incurred by some of the best performing municipalities and panchayats in the provision of core services. The gap between the aggregate revenue and the aggregate expenditure calculated in this manner, after adjusting for the resource transfers recommended by the SFCs, will provide the basis for the approach of the central finance commission (Mathur &Peterson, 2006).

The subject matter of local finance may be divided into two parts

i. Local Expenditure

ii. Local Revenue and Borrowing

1.14 Local Expenditure

Local governments perform a large number of functions for the welfare and development of local communities. These functions tend to increase steadily. Local expenditure is a necessary counterpart of these functions. The term local expenditure refers to all expenditure incurred by local governments for providing directly or indirectly on public health, education, public works, public safety, conveniences etc. directly provide the civic amenities and social services, the expenditure on administration, revenue collection, repayment of debt, etc indirectly helps in their provision (Bhagwan, 1983).

Local expenditure has certain values; first it achieves greater good for a number of people at minimum cost. Second it generates local interest and co-operation in local administration. A road, a school building and a dispensary create not only a feeling of pride but also atmosphere of co-operation for further development. Finally local expenditure incurred in providing services such as education, library, etc tend to equalize material welfare and social opportunities. Local expenditure makes good the

33 deficiencies of modern civic life and equips local citizens with the means of achieving economic and social welfare. To provide the maximum benefit to the citizens, local expenditure should satisfy the canons of public expenditure (Bhagwan, 1983).

Classification of Local Expenditure

Local expenditure is generally divided, for accounting purposes, into two broad groups, namely revenue expenditure and capital expenditure. The expenditure which is met from current resources and is often of an annually recurring nature is termed as revenue expenditure. Outlay on administration, maintenance of services, loan charges, etc fall into this category. Local governments during the course of their development undertake the provision of services which necessitate large initial outlays of expenditure and it may not be practible to finance such projects from current revenues. Consequently, loan finance may have to be resorted to in order to meet the cost involved. Such expenditure is termed as capital expenditure. Local expenditure may also be classified into developmental and non-developmental. The expenditure which directly contributes to social services and civic amenities is known as developmental expenditure.

Expenditure on public health, sanitation, education, public works, safety, convenience, etc. is included in the first category while expenditure on administration, revenue collection, repayment of loans, etc is included in the second category. Local governments should try to keep the non-developmental expenditures at a low level as it does not directly contribute to the welfare of the citizens who generally regard it wasteful, on the other hand, development expenditure should be increased, as it directly results in the welfare of the people. Moreover, development expenditure reduces the unpopularity of taxes and increases the taxable capacity of the local people. The result of increased taxable capacity is increased tax revenue resulting in increased

34 development expenditure. Development expenditure gives a momentum to the process of the development and welfare of the inhabitants (Bhagwan, 1983).

1.15 Resources of Local Bodies

A basic question in fiscal decentralization, with regard to resources is who should tax, where and what. Several authors have advanced principles underlying revenue assignment. They range from broad principles to the rationale of specific taxes. There is a broad consensus among the experts that the taxes dealing with redistribution or stabilization, taxes on mobile factors, and taxes requiring national level information and involving significant economies of scale in tax administration should be levied by the federal government. The revenue instruments assigned to a tier of government should match as far as possible, the expenditure requirements to induce fiscal responsibility.

However, in reality the mismatch in functions and finance is the major issue in fiscal decentralization.

The literature on public finance addresses the issue of the suitability of types of taxes for various levels of government. Though there is no ideal assignment of taxes between central and lower levels of government, one can find a set of tax-assignment rules in the traditional theory of fiscal federalism. These principles are in accordance with the respective responsibilities of central and lower tier of governments. Thus, taxes on international transactions and a considerable share of income and excise taxes should be assigned to central government. To perform the function of income redistribution, it is appropriate for the central government to collect corporate income and wealth taxes. Local bodies require relatively stable sources of revenue.

The six principles of tax assignment in a federation are:

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i) Taxes suitable for economic stabilization should be levied by the central

government.

ii) Progressive re-distributional taxes should be assigned to central government.

iii) Personal taxes with progressive rates should be levied by the jurisdictions most

capable of implementing a tax on global bases.

iv) Lower-level governments should have tax revenue bases with low mobility

between jurisdictions.

v) Tax bases distributed highly unequally between jurisdictions should be

centralized, and

vi) Benefit taxes and user charges may be appropriately used at all levels

(Mohanty, Misra, Goyal, & Jeroni, 2007)

The sources of revenue for municipal governments vary across countries but generally include taxes, user fees, and inter-governmental transfers. Other revenues may include investment income, property sales, and licenses and permits, for example, in terms of taxes, the property tax levied by local governments in many countries. Other local taxes can include income taxes, general sales taxes, and selective sales taxes (For example- taxes on fuel, liquor, tobacco, hotel occupancy, vehicle registration) and land transfer taxes. To meet capital expenditure requirements some municipalities charge developers for growth related capital costs. In some countries, particularly in South

America, a land value capture tax is sometimes levied to pay for infrastructure (UN

Habitat, 2009).

The constitution of India does not lay down the revenue base for municipalities.

The power to determine their revenue base – be it the tax authority, tax base, tax rate settings, local tax autonomy, or even the grants in aid and other forms of transfers rests with the state government. Within this framework, the state governments have specified

36 the taxes that the municipalities can levy and collect, which historically have comprised taxes on land and buildings (Eutry, 49), taxes on the entry of goods into a local area for consumption, use or sale therein (Entry, 52); taxes on advertisements other than advertisements published in newspapers (Entry 55), taxes on animals and boats (Entry

58), tolls (Entry 59), taxes on professions, trades callings and employment (Entry 60), and taxes on entertainment (Entry 62). In addition there are charges, fees and fines forming the non-tax base of municipalities (Entry 66).

Taxes on property and taxes on the entry of goods into a local area for consumption, use or sale therein (octroi) from the backbone of municipal tax base in

India. Between the two, municipal governments have shown a performance for indirect taxes and levies like octroi compared to direct taxes such as property taxation, even when the latter is rated to be a suitable form of taxation on account of its incidence being localized. At one time property taxation was so important that scholars theorized that the expenses of government could be funded from its rents. Henry George who worked on this subject, his work later come to known as Henry George Theorem

(HGT)- concluded that at an optimal population size, the site rents should equal the cost of collective goods. Taxes on the entry of goods into a local area (octroi) are among the more buoyant and elastic of the local taxes and are currently levied in parts of Gujarat and Maharashtra and Punjab (Mathur, 2006).

Research suggests that the urban local bodies need to have a good number of local taxes so as to become financially bound and match the range of assigned functions effectively. A local tax is one where the local authority:- a) Determine the tax revenue by setting the tax rate and/or defining the tax base and b) Retains the revenue collected for its own purpose (Mohanty, Misra, Goyal, Jeroni,

2007).

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Though the basic principle of local taxation is derived from the general principles of taxation in public finance; the following criteria are particularly relevant for making choice among local taxes:

• Equity: - The notions of vertical and horizontal equity should apply as far as

possible.

• Efficiency: - Local taxes should promote allocative efficiency. This requires

local voters to pay local taxes so that the use of service reflects the willingness

to pay.

• Transparency: - The accountability of service providers to tax payers depends

on voters knowing exactly how much they are paying in taxes.

• Local autonomy: - Local governments and their voters are free to determine the

rates at which local rates are set.

• Economy: - Local taxes should be collected with least expenses.

• Adequacy: - The tax yield should be, as far as possible, adequate to finance the

levels of services for which people vote. The local tax should, therefore, have an

easily adjustable and/or an elastic tax base, expanding as fast as expenditure.

• Revenue stability: There should not be undue fluctuations in the flow of local

revenue.

• Immobile tax base:- Local taxes may do well to confine to immobile tax bases

such as land, buildings, etc. besides levying user charges wherever relevant.

This does not rule out imposing fees or other levies on business, trade and taxes

on profession and so on.

Several researchers regards land-based taxes as the most appropriate sources of local body finances where the local authorities, as in India, are required to provide the basic civic infrastructure facilities. A key argument is that local government spending

38 translates into rising land values and the land-owners benefit proportionately more than what they pay as taxes due to urbanization and infrastructure development leading to agglomeration economics.

The literature recognizes ‘user pay’ beneficiaries pay and polluters pay as desirable principles of financing local infrastructure and services like water supply, sewerage, roads etc when beneficiaries are identifiable and benefits can be measured, user charges are regarded as the first best instruments of financing public services.

They promote efficiency by providing information on demand to the providers of public services and also ensure that what the public sector supplies is valued (at the margin) by citizens. They act as instruments to ensure the accountability of public functionaries. The theory of local public finance suggests the following guiding principles for levying user charges and benefit taxes.

i) Wherever possible, user charges may be levied for the services provided as the

first resort.

ii) For achieving efficiency, user charges should be levied on the direct recipients

of benefits.

iii) The poor may be subsidized directly, if needed, rather than through reduced

prices and distortions in the entire market for services.

iv) Where charging is impractible, specific benefit taxes should be levied on local

residents, and

v) Inter – governmental transfers may be used to finance services only if user

charges and benefit taxes are not adequate (Mohanty, Misra, Goyal, Geroni,

2007).

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1.16 Structure of Municipal Finances

The structure of Municipal revenue: Mix of taxes, user charges and fees, transfers and loans varies considerably between countries. Differences are particularly significant between three-tier (central, state/provincial and local) and two-tier (central and local) federations. Cross – country comparisons, however, indicates some broad patterns in municipal finance.

1. Vertical imbalance: - Urban local governments almost invariably suffer from

inadequate own resources which make them heavily dependent on transfers from

the higher levels of government. Inter-governmental transfers often constitute the

largest source of municipal revenues.

2. Horizontal Imbalance:- Municipalities suffer from uneven access to resources.

This gives rise to imbalances between municipalities of different population sizes

and even within the same population size with similar tax base/rates, big and

small cities, high and low urbanized municipalities, etc.

3. Control of higher governments: generally, the higher levels of government control

the municipal authority to levy taxes/user charges, set rates, grant exemptions and

determine the flow of transfers. High yielding and buoyant sources of revenue are

seldom assigned to local governments. Grants-in-aid are often discretionary or

“negotiated”.

4. Municipal Revenue Mix: - Taxes and transfers constitute the predominant sources

of municipal revenues. Property tax is the most common and often the single most

important municipal tax. However, its relative importance has declined over time

in many countries. User charges, though becoming increasingly popular, are yet

40

to dominate the municipal scene. Borrowing constitutes a far more important

source in developed than developing countries (Mohanty, 1995).

1.17 Local Revenue and Borrowing

In the performance of their functions governments incur expenditure. Whether national

or local, expenditure cannot be incurred unless resources are available or the power

exits to raise them by taxation or other means. People’s clamour for services and

amenities, however, is more evident than their readiness to pay for them. It is easier to

spend public money than to raise it. Local governments raise their resources in two

ways by i. Local revenue : Local revenue refers to the ordinary incomes of governments. It

can be classified into two categories based on their sources i.e. (a.) tax revenue

and (b) non-tax revenue. The latter consist of grants-in-aid and miscellaneous

revenue such as rent, fees, surplus from municipal enterprises etc.

Tax Revenue: Tax revenue comprises a significant component of local revenue. It is

derived from the taxes levied and collected by local governments which include

property tax, education cess, professional tax, betterment levy, duty on transfer of

property, tax on advertisements other than in newspaper, octroi, etc. it is also derived

from the share of local bodies in the taxes levied by higher – tier governments, for

example motor vehicles tax, entertainment tax etc. (Bhagwan, 1983).

The existing base of revenue taxes in India is extremely narrow and generally

limited to property tax in the non-octroi states and octroi – levying states. The vacant

land tax which is variant of the property tax is levied only by some of the states.

However, the potential of this tax is only marginally exploited, Octroi, which is

regarded as an obnoxious tax, is the most important source of municipal revenues in

41

Maharashta, Gujarat, Punjab, Haryana, Rajasthan and Orissa. In states which abolished octroi, compensations for the loss of octroi revenues over time are found to be at precariously low levels. Other municipal taxes comprise professional tax (taxes on profession, trade and calling), entertainment tax, advertisement tax and vehicle tax.

These taxes too are under-exploited. In some states, one or more of these taxes have been taken over by the state governments on the ground of inefficient collection by the local bodies. However, devolution as revenues by way of compensation or sharing on this account has not kept pace over the years. In all the states, the municipal Acts provide for levying a number of minor taxes, many of which have lost economic relevance over the years (Mohanty, 1995).

Some states in India share the motor vehicles tax, profession tax, entertainment tax and stamp duty/registration tax with the municipalities. In most states, tax sharing is in terms of a fixed amount, decided long time back, and which has progressively declined in real terms (Mohanty, 1995).

Non-Tax Revenue: Grants-in-Aid

Grants-in-Aid are contributions from a higher government authority to a subordinate authority. They form an important part of the income of local governments. They are extensively used as a device for rendering financial assistance to local authorities.

Grants-in-Aid are necessary for the following reasons; First, Grants-in-Aid assume a balanced growth among local units by producing a uniform minimum standard of services to all people regardless of the resources of the local government.

Second, local governments perform essential services which are national or regional in character, e.g. roads, health services, education etc. It is reasonable, therefore, that such services should be financed wholly or in part by national rather than local exchequer.

42

Third, as a consequence of general economic growth, rapid urbanization and change in the concept of social values, local authorities are compelled to expand social services which are considered necessary for decent human existence. Since the financial resources at the disposal of local bodies tend to lag behind their expenditure liabilities, grants-in-aid becomes the important factor in restoring equilibrium between the ends and the means. Finally, grants also serve the very important purpose of shifting the burden of equality rising costs from regressive local taxation to the more progressive state and national taxes.

The basic purpose of providing grants-in-aid would be defeated if, because of grants-in-aid lead to extravagant expenditure. The system of grants-in-aid in fact should encourage them to raise their own resources. For example, grants-in-aid may be provided on the condition of raising own resources or the higher government may meet a part of expenditure on same project or programme (Bhagwan, 1983).

Non-Tax Revenue: Miscellaneous Sources

While a sound system of local finance rests on a sound foundation of taxation, the non- tax revenue resources also have an important place in the revenue structure of local governments. The sphere of operation of local governments is ever-expanding, resulting in a fast increase in local expenditure. To meet the increasing expenditure, local governments explore non-tax revenue such as rents, fees, surplus from municipal enterprises, etc. instead of squeezing the pockets of tax payers. By raising revenue from these sources, local governments are able to spend more than what they can collect by way of taxation, and the social welfares maximized.

Local governments construct houses for the poor and also build markets. Rent from these houses and markets, and also from roadside land, forms an important source

43 of revenue. Some local governments develop urban land and sell the sites for various purposes. This ensures planned development and is also a valuable source of income to local governments.

The municipal Acts make extensive provisions for the levy of license fees on hotels, restaurants, dairies, workshops and factories. These provisions also prove helpful in ensuring compliance with the health, safety and general welfare requirements of the community and assist in raising revenue. Fees for educational and medical services etc. from those who can afford to pay add to the revenue.

Local governments operate some enterprises with the basic objective of promoting the welfare of the people. Water supply, city transportation, cinemas, hotels, etc are a few examples of such enterprises. In view of huge financial investment in these enterprises and also in view of lack of substantial resources at the disposal of local bodies, these enterprises are expected to contribute only some surplus to the general fund. These enterprises should follow a price discrimination policy so that basic services may be provided to the poor at very reasonable prices while the rich are made to pay high prices for them thus making available some surplus (Bhagwan, 1983). ii) Municipal Borrowing

Borrowing at the municipal level is quite different from borrowing by senior levels of government. Unlike central and state/provincial governments (such as to pay wages and salaries, purchase materials, etc.), municipalities can generally only borrow to make capital expenditures. In most countries, municipalities are not allowed to run a deficit in their operating budgets (UN habitat, 2009). .

Local governments borrow money to finance works of development such as water supply and sewerage, construction of markets slum improvement programmes,

44 etc. the expenditure on these works cannot be met out of current revenue. These developmental works involve large capital outlays and provide benefits to the citizens for many years. Sound finance and equity demand that the outlay incurred on an improvement which serves the community for a number of years should be spread over the period of time during which it renders service. This can be done by borrowing the money necessary to pay for the construction of the improvement, and then distributing the payment of interest and redemption of loan over the period of usefulness of the improvements.

The developmental works financed through borrowing may be classified as remunerative and non-remunerative works which increase the revenue of local governments sufficiently enough to meet the loan and interest installments are remunerative, for example, construction of markets. Works such as street improvement, storm water drainage, parks etc do not increase the revenue of these governments and so are non-remunerative. Borrowings for the remunerative projects do not increase the burden of tax payers and are justified to the extent that these can be properly utilized and managed. Borrowings for non-remunerative purpose should be limited by the economic resources of local governments that are by the ability to meet the loan and interest installments (Bhagwan, 1983).

Thus, local public finances provide broad guidance for matching revenues with expenditure responsibilities. The following general principles for identifying the revenue sources appropriate to financing particular types of local expenditure:

• Where the benefits of public services are measurable and accrue to readily

identified individuals in a jurisdiction, user charges are the appropriate financing

instruments.

45

• Local public services such as administration, traffic control, street lighting and

security, which are services to the general public in the sense that identification of

beneficiaries and measurement of benefits and costs to individuals are difficult,

are most appropriately financed by taxes on local residents.

• The cost of services for which significant spillovers to neighbouring jurisdictions

occur (e.g. health, education and welfare) should be financed substantially by

state or national inter-governmental transfers and

• Borrowing is an appropriate source to finance capital outlays on infrastructure

services, particularly, public utilities and roads ( (Mohanty, Misra, Goyal, Geroni,

2007).

1.18 Objectives of the Study

Even after a constitutional status was accorded to the local bodies in 1992, the finances of these authorities are yet to be recognized as an integral part of the public finance system in India.

It is only recently that some attempts were made to analyse their fiscal situation as discussed in the subsequent chapter. Paucity of data and the consequent absence of authoritative literature have made the subject of local public finance in India a black box. The entire discussion in Chapter 8 of the Twelfth Finance Commission’s report brings out the fact that, despite several attempts, there is no source of reliable data on finances of all local bodies in India to estimate their resource gaps. Hence, the

Commission was constrained to fix the total amount of grants-in-aid to local bodies on an ad hoc basis.

46

Availability of firm and comparable data on municipal finances in India is conspicuous for its absence. There have been a very few comprehensive studies of municipal revenues and expenditure in India till date. In this context, this study sets the following objectives:

1. To examine the provisions relating to revenues and expenditure of municipalities

and bring out the mismatch between their revenue authority and expenditure

responsibilities.

2. To examine the trends in major revenue sources and expenditures of

municipalities and assess their fiscal position.

3. Analyse the performance of ULBs in the provision of civic infrastructure.

1.19 Database and Methodology

Our study is based exclusively on secondary data which are published mainly by the

Ministry of Finance, Government of India, other departments/offices of the government of India and RBI. Thus, most of the relevant data have been taken from various issues of Indian Public Finance Statistics, Central finance Commission Reports, State Finance

Commission Reports, Economic Survey, Annual Reports published by the Ministry of

Urban Development, and data collected from municipal corporations selected for the study.

In terms of the methodology, the study have applied appropriate statistical tools which involve calculation of percentage, arithmetical average, simple growth rates and compound average growth rates.

47

CAGR

Compound Annual Growth Rate (CAGR) measures an annual growth rate over a period of time. This measure is a constant percentage rate at which a variable grows or contracts year on year to reach its current value. The CAGR is more representative measure of annual growth rate over a number of years. One of the commonly used formulations for estimating compound growth rate is as follows.

t Yt = a (1 + r)

Where,

Y = Number of units of income, expenditure, r = Compound growth rate t = time.

Taking logarithms of both sides the above equation becomes.

Log Y t = log a + t log (1 + r).

Putting 1 + r = b the above equation becomes as

Log Y t = log a + t log b

This equation can be estimated using Ordinary Least Square (OLS) as under

∗ ∑ . Log b = ∑ ∗

Where, log y t = log Y t – log

t* = t - ̅

Thus

∗ ∑ . Log 1+ r = ∑ ∗

Or

∗ ∑ . 1 + r = antilog of ∑ ∗

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Therefore,

∗ ∑ . r = − 1 ∑ ∗

This r gives the rate of annual average growth over period t when converted in percentage terms

∗ ∑ . r = − 1 × 100 . ∑ ∗

Extrapolation

Following procedures used in the first step to obtain the total projected urban population in the selected states and municipal corporations in the years 1993-94 to

2010-11.

The average annual rate of change 'r' in the population proportion (ratio) between the 1991 and 2001 censuses is calculated using the following formula:

Pp = Po (1+r) n

Pp = projected population,

Po = initial population, r = compound/ geometric growth rate of population per annum, n = number of years,

Pp in our case is equal to population as per 2001 census, Po as per 1991 census, n = 10 r =?

Converted the above equation in to log linear form we open

r = [1/10] * Ln [R 2001/R 1991]

Where,

R 2001 = Proportion of population of the development region to the national

population in the 2001 census.

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R 1991 = Proportion of population of the development region to the national

population in the 1991 census.

Ln = Natural log.

1.20 Hypothesis of the Study

Keeping in view the above objectives for the present study, we have taken the following hypothesis:

Null hypothesis (Ho): Expenditure and revenue of municipal corporations does

not increases over the period of study.

Alternative hypothesis (H1): Expenditure and revenue of municipal

corporations exerts an increment over the period of study.

1.21 Limitations of the Study

For analyzing the fiscal position of municipalities, reliable secondary data on fiscal variables are not available from a single source. The report of the Twelfth Finance

Commission provides some broad data, which will not enable any detailed disaggregated analysis. In view of their large number (numbering more than 3,700), it is rather difficult to obtain data individually from all the ULBs. Hence, for the present study we have selected 04 major municipal corporations (MCs), situated in cities with population of more than one million according to 2001 Census. Budget documents from MCs were obtained and then data on major revenue and expenditure heads for a sixteen year period from 1995- 1996 to 2010-2011 (all actual figures) were compiled.

The broad conclusions drawn from the analysis, however, apply to other municipalities in the country as well.

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It may be stated upfront that there are several limitations to the data used in this study. First, budget documents of urban local bodies are not standardized and hence classification of many of the items is not uniform across the municipal corporations.

The limited data provided in the budget documents of the municipal corporations lacks consistency and comparability. Second, some corporations have not provided data in respect of certain variables for the years considered for the study. Third, even the actual data given in the budget documents might undergo changes, after the statutory audits take place.

Besides the accuracy of the data, the study has some other limitations. First, since local bodies are statutorily not allowed to have deficits in their budgets, their resource gaps cannot be assessed from the budget documents. Due to this statutory provision, they are living within their own means, without resorting to deficit financing as adopted by State and Central Governments. Hence, unlike State and Central

Governments, their fiscal constraints are not evident in the budget documents. Deficits and debts are not the issues of finances of ULBs. Their main problem is the inadequacy of resources to provide the needed urban services and infrastructure. This is not getting reflected in their budget documents. Hence, the data available from the municipal budgets can be used only for deciphering the trends in revenues and expenditure and their composition. Second, the benchmark used in the study (Zakaria Committee norm) with regard to minimum spending for urban services for estimating the resource gap for the ULBs is very old (developed in 1960-61). With technological changes and also changes on account of the nature of services required by the urban population, the benchmark used in the study may not be appropriate. In the absence of a better benchmark, Zakaria Committee norm has been used in this study suitably adjusted for inflation.

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For the study of finances of selected ULBs of Uttar Pradesh, we have selected only four municipal corporations on the basis of non-random sampling. Uttar Pradesh is a very large state and it is not possible for us that we go every municipal corporation and collect data. Despite regular visits of many municipal corporations we could collect data only for four municipal corporations of the state for the study.

1.22 Outline of the Study

The study is divided into the six chapters: Chapter 1 outlines the concepts of local self- government and history of local self-government in India. In chapter 2 survey of relevant literature has been undertaken. Chapter 3 and chapter 4 examine the finances of these local bodies at India level as well as at state (Uttar Pradesh) level. The core of the study lies in chapter 5 which studies the pattern of and trends in the expenditure and revenue of the selected municipal corporations. The chapter analyses the different heads of expenditure to assess the impact of expenditure on the quantity and quality of social services and civic amenities available to the people. Chapter 6 reviews the important findings and outlines some suggestions and recommendations for putting the finances of the corporations on an even kneel.

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CHAPTER -II

REVIEW OF LITERATURE

Before embarking upon a research project it is absolutely essential to review the literature on the same or similar subject. Keeping this in mind an effort has been made here to review some of the existing literature on fiscal decentralization.

Thimmaih, G., (1998) in his article “Local Government Finances: Some

Issues” discuss that the specific practical scheme of property taxation for urban local bodies that can become an important sources of revenue in years to come. The study also describes the identification of specific user charges for the urban local bodies and also explained the water supply management and its distribution. In his article he encourages to raise loans for creating income earning assets. He encourages big urban centres i.e., state capital cities, to become financially viable and raise fund through municipal bonds. He also find out that municipal corporation have big power regarding taxation. The paper suggest that urban local bodies should have an important indirect tax to meet there financial requirement. The state government should provide legal support by amending the existing laws. The government of India should treat any additional borrowing by the municipalities through bonds as additionality. He also suggest that fragmentation of municipal functions should be avoided and all urban development programme functioning should be under elected municipal bodies.

Mathur, P. Mukesh, (1998) in his article “Municipal Finances in India:

Present Status and Future Prospects” discusses the relationship between the performance of the present municipal civic services and the growing urbanization. He also describes the week and dissatisfactory function of the urban local bodies. In his article he has discussed, resource structure and expenditure structure, in resource structure octroi is a very important source of municipal revenue, and it contributes a significant part of this total revenue. The paper also describes the importance of property tax. He find out the key resource generation areas in which he shows the refurbishing of property tax and increasing devolution. On the expenditure side, he explained that the majority of the states spend their total revenue on public health and public works. The expenditure is high in octroi levied states than non octroi states.

In his article, he suggests that municipal finance should be reformed time to time. He also suggests that the system of fiscal transfer from the state to the urban local bodies needs to be rationalized by the state finance commission. He also suggests Ahmadabad municipal corporation model service tax on low income properties.

Dutta, Abhijeet, (1998) in his article “Rent Control and Municipal Property

Tax Base: Reform Attempt in India” discusses the present situation of property tax and different alternative taxes. He also discusses the reforms in the property taxation.

The paper explain, the Indian experience of reforming the property tax base, and shows a consistent trend in court decisions to accord privacy to rent control laws in determining rental value.

He suggest that recent policy changes under India’s new economic policy since 1991 hold the prospect of a phased withdrawal of urban rent control that would restore the effective operation of the rental base of the urban property tax.

Jha, Gangadhar, (1998) in his article “Enhancing Municipal Fiscal

Capability: Issues in Local Resource Mobilisation” analyse the overall trends in

54 resource generation from local tax and non tax sources. He emphasized that much is required to be done to enhance the institutional capabilities of municipal government.

There are needs to inject huge investment in municipal sector for the performing of better civic services. His paper highlights the weak trend in municipal finance particularly in terms of the own source revenue of the several states and advocates for the effective municipal administration for the levy of the tax and collection of those taxes. Jha regarded urban land as a healthy source of revenue for the municipal corporations.

He stressed on strengthening of fiscal capacity for enhancing the institutional capacity of municipal corporations. He also suggested a number of fiscal instruments which can be used for resource generation. Finally, Jha recommended the exit of traditional taxation and introduction of a new innovative tax instrument which is related to development of urban economies.

Naresh Gautam, (1998) in his study on “Municipal Expenditure in India: A

Cross Sectional and Time Consistence Analysis” discusses the inequalities between the mega cities and middle cities for providing civic services. The study shows that there is a no clear cut relationship between the level of local services in a state and its level of development measure in terms of its per capita income. The paper analyses the pattern of expenditure which shows that higher priority in terms of their relative shares’ in total expenditure has shifted in favour of social services after independence.

In his study he pointed out that per capita income and geographical features of the state have an important role in explaining differences in the per capita aggregate municipal expenditure. He found that separate estimates of income elasticity coefficient shows that aggregate level of expenditure are income –elastic but at

55 disaggregate level no relationship is discernible. He suggested that municipalities can make adequate provision of civic services, and it is necessary to insure that civic bodies are equipped with some fiscal base with a degree of autonomy that make the civic bodies both respectable and also responsible to handle local problems with efficiency.

Mohanty, Bijoyini, (1998) in his article “Non Tax Revenue Generation by

Local Government: Ideology and Prospect after the Constitutional Provision”

discussed the financial position of the municipalities before constitutional amendment

and after it. The paper shows that the share of non tax revenue in the total revenue is

dissatisfactory and the process of collecting the non tax revenue is also not good. The

paper also tells that after the constitutional amendment the freedom and autonomy of

local governments in India cannot be maintained by political decentralization without

simultaneously economic autonomy with clear cut devolution of resources by state

government. He also stressed that the municipalities can raise their revenue by various

methods such as appraisal of project with in local government’s jurisdiction, prevalent

market facilities, cost benefit estimation specially financing to remunerative projects.

Municipal Corporation can also raise its funds from loans to banks, life insurance

corporation (LIC), financial institution etc.

He suggests that local governments should be empowered with the

responsibilities of resource mobilization with the right to receive fund through

transfer of resources from upper tiers. He also suggests that in the state as a whole, the

regional disparities can be minimised by variation of the grant among to different

localities.

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Sarma, KSRN (1998) in his article “Municipal Service Charges: Some Issues for Reforms” discusses the service charges, whatever services provided by the municipal corporation to the clients. His paper explains the cost estimation of services. He argues that the service charges are also a revenue generative field. The paper studies social equity and rationalization in civic services and the week municipal administration and their function. The study explains the optimal composition of service charges that create a welfare society and equity in civic services.

He suggests that adoption of performance budgeting, commercial accounting at municipal level would help good deal to keep a close watch on expenditure on services. In the case of water supply a combination of service tax and meter charges be implied for the revenue raising purpose. He also suggests that to meet capital expenditure needs separate development tax be levied. He further suggests that there should be reform in present civic services style that also fulfils the needs of poor and weaker section of the society.

Rao, M. Govinda (2000) in his article “Fiscal Decentralization in Indian

Federalism’ describes the fiscal decentralization in a three tier federal framework in

India. The paper highlights the anomalies in assignment both between centre and state and local bodies. His study shows that there has been an increasing trend in infrastructure deficit and both centre and states are guilty of fiscal profligacy. He further explained that transfer system form the centre to the state has inherent moral hazard problems. The paper also shows that initiative for decentralization at the third level has come from the centre and not the states. In raising revenues, their role is negligible.

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Finally he suggested that the only way states could play a meaning full role is to resort to heavy borrowings as seems to have happened in ULBs in Andhra Pradesh and Maharashtra. He tells that there is considerable need to rationalize the assignment system to enable the decentralized government to raise revenues and incur expenditure according to the preferences of their citizens.

Vaidya, C. and Johnson, B. (2001) in their article “Ahmadabad Municipal

Bond: Lessons and Pointers” gives a vivid account of how the Ahmedabad Municipal

Corporation (AMC) issued municipal bonds worth Rs.1,000 million in early 1998, the first such instrument issued in India without a State guarantee and it marked the first step towards a market-based system of local government finance. Before the issue of the bonds, AMC introduced reforms to improve revenue collection so as to make up for the loss it had been incurring. Other preparatory steps taken by the AMC included preparing a five-year capital investment or corporate plan and credit rating by the

CRISIL. For debt servicing, revenues from 10 octroi collection centres were placed in an escrow account-structured debt obligation (SDO). Other credit enhancing measures adopted by the AMC were fixing minimum average debt service coverage ratio of 1:5 and having a sinking fund for repayment of principal and mortgage equal to 1.2 times the par value of the bonds. The authors suggested that the technical framework developed for the AMC bonds can act as a blueprint for future development initiatives in this area.

Pradhan, H.K. (2002) in his article “Local Government Finance and Bond

Market Finance: India” describes the fiscal and financial situation of the local governments in India. His article focussed on developing of local bond market facilitating sub national borrowing, with the necessary regulatory and institutional

58 infrastructure in place. He identified the areas of policy reform and technical assistance to support local bond market development and sub national financing in

India. The paper also discusses the powers and functions of municipalities, the existence of wide difference among the local bodies in their tax jurisdiction, the degree of control exercised by the state government in term of the fixation of tax base, tax rate and tax exemptions and the level of efficiency with which the taxes are administered and enforced. The paper explains that capital market is yet to make a strong input on financing urban infrastructure , but the trends and initiatives in most instances show a great deal of enthusiasm, potential and dynamism with which the stake holders such as financial community, city government and the central government are involved. He suggest that there is need to spread in to the both progressive and reform minded states as well as states that have great potential for reform and decentralization. He also suggest that there should be a necessary institutional and supporting mechanism so that an active local bond market develop, and enhance the attractiveness of the local securities, by reducing transaction cost and risk for investors.

Karnikar, A. Pethe, A. Karmarkar, D. (2002) in their article, “Developing a

Quantitative Framework for Determining of Funds from the State Government to

Local Bodies” explore the criteria for allocation of funds as per the state finance

commission recommendation from the state to urban local bodies to strengthen

decentralization efforts by urban local bodies. The paper discusses the implementation

of the recommendations of the 10 th finance commission and criteria developed by the first state finance commission for devolution of funds and their application. He also focusses on the pattern of general revenue and expenditure of urban local bodies in

Maharashtra and the level of services provided in cities. The paper suggests a formula

59 based devolution procedure to urban local bodies. He suggests that state should constitute permanent data collection machinery that will provide continuous inputs for the operationalization of the proposed procedure.

Pethe, A. and Manju, G. (2002) in their article “Funding Urban

Infrastructure: From Government to Markets” examine the status of Indian

infrastructure, including urban infrastructure, and argue for accessing capital market

funds to bridge the resource gap, in view of the changing role of Governments. The

paper argued for newer financial instruments like ‘Municipal bonds’ for financing

urban infrastructure. To impart liquidity and create an incentive for individual agents

to invest in the bonds, a thick and efficient secondary market for debt instruments is

needed.

Pethe, Abhay, Karnik, A, and Karmarker, Dilip (2003) in their article

“Assessment of Revenue and Expenditure Patterns in Urban Local Bodies of

Maharashtra” assess the revenue and expenditure in the various urban local bodies in

Maharashtra. The paper provides a fairly comprehensive status report on the different

aspect related to the revenue expenditure pattern of ULBs in Maharashtra. They also

describe the purpose of accountability as well as evaluation; such an exercise is useful

as a foundational building block that needs to be replicated across states.

They have suggested that substantively greater resources must be devolved to the urban sector than has been the case in the past. They further suggested that it is necessary that ULBs come out with a serious and innovative action plan to increase their resources. They argued that getting the ULBs rated and floating of municipal bonds is another modern method of raising resources. Efficiency and accountability as well as transparency in terms of maintaining accounts (in conformity with uniform

60 and best established practices) are essential. For this to be successful, there is also need for macro level policy initiative by way of facilitating existence of deep, thick and hence vibrant secondary market in municipal bonds.

Vaidya H. and Vaidya C. (2004) in their article “The Recent Financial

Initiative among Urban Local Bodies: A Report” discusses that municipal corporations have raised funds outside their usual sources (grant and devolutions from the state government and through the capital markets and from banks). The paper focussed on the tax free municipal bond, and found that municipalities applying these tools are performing well. They have also suggested for the pooled financing for small and medium Municipal Corporations who are not able to issue tax free municipal bonds, and the objective of this pool is to provide a cost effective and efficient approach for smaller and medium size urban local bodies and to reduce the cost of borrowing. The paper emphasised on Public-Private-Partnership (PPP) in the development and maintenance of municipal infrastructure.

Finally, paper suggested that municipal corporations can also raise their revenue through borrowings from commercial banks and financial institutions. They also support the Ahmadabad municipal corporation model for other municipal corporations.

Mathur, M.P. (2004) in his article “Reforming Property Tax in Patna

Municipal Corporation: Critical Analysis” discusses the importance and position of property tax in India. The property tax is the most important source of revenue of municipal corporations. After abolition of octroi, the main source of revenue of the municipalities is the property tax. The tax collection in property levy states is greater than the non octroi states. The paper analyse that there is a big variation in the

61 collection and on an average only 30 to 40 % potential tax is realized, and taxes on property continued to be plagued by problems of narrow base, persistence under valuation, high rates, poor collection efficiency etc. He suggested that there is a need to reform the property tax to raise its potential.

He suggested that the new method attempted by Patna municipal corporation of property tax should have been simple and transparent. He further suggested that there should be a CEO for a specific time period.

Hussain, Anwar (2004) in his article “The Missing Link: Sustainable

Municipal Finance Strategies and Emergence of Bangladesh Municipal Fund” explore that urban local bodies in developing countries are in dire need of resources not only for investment to meet the increasing demand of growing urban population but also for the maintenance of the existing services. The paper shows the poor situation of the urban local bodies in developing countries like Bangladesh. The paper discusses that the resources of urban local bodies is inadequate, infrastructure is poorly constructed and services maintenance is neither enough nor would cover the new expansions. The abilities of the urban local bodies in Bangladesh to raise revenue are for too short because of the fact of the overall poverty of the population.

He suggests that political commitment to achieve targeted success within a specified time may facilitate the process. The urban local bodies should have a master plan for development with updated land used map to have effectively planned ULBs.

It should reflect the future growth and need of the population and maintain proper functioning of the ULBs, it may be concluded that governance of ULBs need extensive uplift to put the whole system in to track.

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Mathur, O.P. and Thakur, S. (2004) in their article “India’s Municipal

Sector: A Study for the Twelfth Finance Commission” examined the fiscal

performance of municipalities and assessed the load on state finances on account of

the implementation of the State Finance Commission recommendations. The study

found that the size of the municipal sector, in terms of revenues, was only 3.07 per

cent of publicly raised resources (by municipalities, States and Central Government

taken together). The study further found that the expenditure levels on services

provided by municipalities across states were low when compared to the norms

established by the Zakaria Committee. Another finding of the study was that per

capita expenditure-revenue gap declined over the period of 1997-98 to 2001-02.

Fiscal transfers to municipalities formed 3.85 per cent of the combined own resources

of states.

Bagchi, S. and Chattopadhyay, S. (2004) in their article “Decentralised

Urban Governance in India” analyses the impact of decentralization on the

mechanism for financing urban basic services in India. The study finds that developed

states and larger cities/towns are the major destinations for domestic institutional

funds and external assistance. The emphasis made on full cost recovery and

imposition of strict financial discipline on state governments by the Reserve Bank of

India are likely to result in further concentration of funds in developed states or

regions. The paper further examined the impact of decentralization – on the financial

health of urban local bodies through an empirical study of the aggregates of three

states in the post-74 th Constitutional Amendment Act era. The study observes that decentralization improved the revenue structure of the municipal corporations and positively affected their tax and non-tax revenue generation. However, the large urban local bodies benefited most from the decentralisation initiatives.

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Dirie, Iliyas (2005) in his article “Municipal Finance : Innovative Resourcing for Municipal Infrastructure and Service Provision” discusses the number of challenges facing local governments in the field of resourcing and has share several examples of how local government has been able to raise finance, lever- in extra resources and make the most of their limited financial capacity. While raising the issue of local fiscal autonomy, he also recognises that a level of financial redistribution is critical, particularly in those countries where development has been quite uneven. However, this may be implemented- grant, redistribution of the national income, formula based mechanism, predictability is vital in order to make planning possible and effective. The paper also highlights that control such as auditing can exert control without imposing development limitations.

Rao, M. Nageswara (2005) in his article “Power and Functional

Responsibilities of Urban Local Bodies: Potential for Tax and Non Tax Revenues

Commensurate with Services Expected” presents a descriptive analysis of the silent revolution that is going on in Tamil Nadu to break away from the traditional approach to more meaning full, scientific and innovative strategy that are resulting in significant result in urban sector. The paper explains that there is a huge gap between the total revenue received and total expenditure. It also shows that the non tax revenue does not contribute a satisfactory part in total revenue receipts, and performance of

ULBs is dissatisfactory in the collection of tax.

He suggests that centre and state should come to their rescue by way of appropriate transfers which should be transparent. Better performance should be rewarded. Share from some of the buoyant central income to urban local bodies

64 should be given due consideration as the economy of the country depends more and more on urban sector.

Venkatachalan, Pritha (2005) in his entitle “Innovative Approaches to

Municipal Infrastructure Financing: A Case Study of Tamil Nadu, India” describes that many local governments have resorted to private financing of public infrastructure under the pressure of urbanization and fiscal straight. The paper shows that the efforts of Tamil Nadu towards municipal bond development has been lauded as the most progressive step in India for capital market borrowing. The paper emphasised that the Tamil Nadu has accomplished a series of financial innovation despite the World Bank binding interest rate constraints. Its shores up nearly Rs 3000

Million within five years through a series of pioneering issues such as India’s first bond by a joint private- public municipal fund, India’s first revenue bond, and the world’s first pooled financing bond outside the USA. The paper also shows that the most urban local bodies in Tamilnadu do not possess in- house skills to develop commercially viable projects. The state’s establishment of parastatus to construct needed infrastructure and then handover to local bodies for operation and maintenance, has pushed the urban local bodies further away from developing and owning their capital investment programme.

Lall, S.V. and Deichmann, U. (2006) in their article “Fiscal and

Distributional Implications of Property Tax Reforms in Indian Cities” report that while reforms in property tax administration have taken off and become quite popular, associated reform efforts focussed on assessment and valuation are less evident. In most ULBs, property rental values are used as the base for assessing property taxes.

However, in the face of rent control laws, this approach is limiting the growth of

65 revenues. Based on their study of the assessment systems in Bangalore and Pune, the authors find that structural reforms that link tax assessments to market rental or capital values have the potential to significantly increase aggregate tax revenues. They found that in Pune Municipal Corporation, the use of market values also played a redistributive role by reducing the tax burden in areas with poor services and amenities. In case of Bangalore, a one-time move from the previously used rental value based assessment to an area-based system increased revenues by around 62 per cent. The authors opine that a capital value system which requires the valuation of individual properties is difficult to implement in the present Indian context, especially because property records are in shambles and most local governments do not have a cadre of trained assessors to evaluate property values and update them regularly.

Hence, they suggest that while the introduction of true capital value assessment system should be a longer term objective, local governments must implement other simpler and less costly reforms.

Pethe, A. and Lalvani, M. (2005) in their article “A Comparative Study of

Municipal Finances in Maharashtra: Patterns, Problems and Prospects” examined the

finances of ULBs in Maharashtra and drew attention to the significance of sub-

national governments accessing the financial markets in general, and debt market in

particular. The paper finds that the powers of ULBs in Maharashtra are highly

restricted with respect to both tax and non-tax sources of revenues, as there has been

no sufficient devolution of taxation powers. The paper noted that the growth of

revenue of the ULBs has been constrained by inherent structural bottlenecks like

limited autonomy regarding taxation, small bandwidth for non-tax revenues and the

unpredictable nature of funds flowing from the State. For accessing the capital

market, the paper extended the concept of ‘pooled funds’ and classified the ULBs in

66 the state into three categories, namely, ‘Cherries’ (financially better off),

‘Salvageables’ (potentially better off) and ‘Duds’ (financially very poor). While the self-help group amongst the Cherries and Salvageables will be able to access the capital markets, infrastructure needs of Duds have to be taken care of by the state directly. The paper made two other suggestions. First, the existing infrastructure fund could be used to facilitate under-writing of the projects to be undertaken by coalition of ULBs coming together as virtual entities. Second, banks should look at the coalition formation of ULBs and encourage them by making more exposure a matter of policy mandate or guided by their profit motives.

Srinivasan (2006) in his article “Public, Private and Voluntary Agencies in

Solid Waste Management: A Study of Chennai City” examined the equity, accountability and environmental concerns in Solid Waste Management (SWM) practices of a public body, a private body and non-profit organization in Chennai city.

The study finds that private sector and civil society participation pose several challenges in terms of equity and accountability. The study shows that while a crucial role exists for the private sector, the intervention of the state and public policy is imperative to safeguard ecological and equity interests and to enable greater accountability on part of both the public and private actors.

Chattopadhyay, S. (2006) in his article “Municipal Bond Market for

Financial Urban Infrastructure” documented the problems and prospects of the municipal bond market in India. The paper finds that several policies and legal frameworks to facilitate the access of ULBs to capital market are already in place.

These include: preparation of a Model Municipal Law (MML) to assist ULBs in the areas of accounting reforms, resource mobilization and the entry of private sector

67 partnerships, tax exemptions in the case of bonds issued by ULBs and other local authorities, trading of municipal bonds in the National Stock Exchange, measures taken by RBI to deepen secondary market activities, etc. The paper notes that without the financial empowerment, it is difficult to make the municipalities more market oriented and capable of mobilizing resources from the capital market. The paper concludes that local capacity building, financial empowerment, rationalization of the state-local fiscal relationship and further legislative changes are critical in developing a viable and vibrant municipal bond system in the country.

Mathur O.P. (2006) in his article “Urban Finance” opines that the finances of

municipalities are in a unsatisfactory state, with little impact over all of the 74 th

Constitutional Amendment Act. The paper shows that the spending level of

municipalities is too low as compared with the established norms and standards. The

accounting system is also low and do not permit a proper assessment of their finances.

The paper also focuses on the way in which the functional role of municipalities has

changed in recent years. He also discusses the fiscal and non fiscal initiatives that

have been taken by municipalities to improve their finances, functioning and resource

mobilization. The paper shows that the recent reform measures that have taken by the

central government called the Jawaharlal Lal Nehru National Urban Renewal Mission

(JNNURM). This scheme provides fund to sixty urban local bodies for sectors such as

water supply, waste water disposal, road, bridge etc. He has also discussed the

revenue base of municipalities and the abolition of octroi. The paper appreciated

reform of property tax and adoption of accrual- based accounting system.

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He suggested that the distribution between the state and the municipalities of the net proceeds of the taxes, duties, toll and fees leviable by the state may be divided between them.

1. The determination of the taxes, duty tolls and fees may be assigned to, or

appropriated by the municipalities.

2. The measures needed to improve the financial position of the municipalities.

Chandrashekara, P., Kotayana R. (2006), in their article “Municipal Bond:

Is India Ready for More?” describe the actual process of municipal bond process using the example of corporation of Chennai and the desalination water project. The paper discusses how tax incentives, transfers and private saving tie in to the municipal bond framework. They also describe four key dimensions of the expansions of the municipal bond market, first, analysis of the driving forces for the evolution of a municipal bond market. Secondly, development of an economic framework to value a municipal debt instrument and to estimate the optimal debt for the municipality to issue. Thirdly, analysis of the threats and benefits of municipal bond issuance for the stakeholders. Finally, they suggest a framework for expansion of the municipal bond market while minimising the potential for fiscal responsibilities and uncontrolled growth of sub-national debt. They also suggest the creation of special municipal zones based on strong credit rating , accrual based accounting system, optimal debt to revenue collection ratios and a strong financial need of the municipalities. To support such a special municipal zones, they recommend several changes in the institutional framework including creation of the municipal securities board of India.

Aiyaz, Rumi (2006) in his article “Challenges for Urban Local Government in

India” discusses the basic objectives of the establishment of urban local bodies in

69

India. He explains the major issues of government at the local level and to identify some important challenges for urban local government institutions in India in the light of recent urban sector reforms. The paper highlights the key urban local government characteristics- constitution and government, duties, composition, management and finances practice, state/ local level initiative and problems based on data collected from six urban centres. The paper find out that the urban local governments in India continue to remain plagued by numerous problems which affect their performance in the efficient discharge of their duties.

The paper enquired that what steps should be taken to build the capacity of

municipal? Is it possible for the trainers to impart training with in the premises of the

local government rather than the other way round for greater participation?

It may be stated that such questions are applicable to most municipalities of

India and hence there exist an urgent need to find appropriate solutions. Finally Runi conclude that fresh thinking is necessary to resolve the problems confronting urban local governments in India.

Chattopadhyay, B. Singh, S. Chandra, R. and Mathur, M. P, (2007) in their study on “norms and standards of municipal basic services in India” present a review of the norm and standard for five basic services namely water supply, sewerage, solid waste management, primary education and preventive health care both in physical and in financial terms and examines their implications on municipal bodies of the country. They discusses that a number of national level committees such as Zakaria committee or COPP have suggested norms, which present the most desirable levels of services. The poverty elimination programmes such as EIUS has proposed service standards at the community level, set down decades ago and has no

70 relevance in the present socio-economic environment. The paper also analyses the norms and standards of the four municipal services for urban settlement including slums, additional investment needs, O&M requirement for the provision of maintaining of urban basic services, and estimation of resource gap for the better quality of the core municipal services.

They suggested that a fresh study may be under taken to suggest new norms and standards keeping in view the prevailing financial, legal and institutional constraints of the municipalities. They also suggest that a revolving fund would be created to meet the O&M requirement of assets created, over the planning horizon.

The services should be maintained on regular basis. If the maintenance of services is contracted out to private sector, the local bodies should strictly monitor the maintenance part.

Mathur, M. P. (2007) in his article “Impact of the Constitution (74 th )

Amendment Act on the Urban Local Bodies: A Review” discusses the status of urban local bodies after the constitutional (74 th ) amendment act 1992. The paper also attempts to review the implementation status of selected mandatory discretionary provision of the constitutional amendment act. The paper shows the performance of different states on the compliance/ implementation of the act provision. The paper stressed that urban local government now comprise of persons with diverce background, namely, the elected members (such as the mayor , president and councillors, who are representatives of citizens), the nominated members and the ex- officio members (such as MPs and MLAs) who are responsible for spending funds received from the government on various development works within their constituency.

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Finally, Mathur suggested that seats in urban local government should be reserved for persons belonging to the schedule caste/ schedule tribe, backward class and women categories. He also tells that by introducing these changes, the main purpose of the government is to create a representative government at the local level, which is capable of addressing the needs of all sections of the society.

Serageldin, M. Jones, D. Vigier, F. and Solloso, E. (2008) in their work on

“Municipal Financing and Urban Development ” describe the wide range of difficulties in financing urban development and the response of the authorities to the challenges of major shift in the economic base resulting from falling trade barriers and globalization of the economy. The paper focus on the challenges faced, local financial management and performance, partnership to address pressing urban issues, and emerging trends in the financing of capital investment. The paper also discusses the emergence of several important new trends: the broadening of locally generated revenue sources, the strengthening of local financial management, the growing reliance on the partnership to finance capital investment and enhancement to promote to access to long term credit for municipalities.

They make suggestion that municipalities are hard pressed to find the resources needed to fund urban development policies that foster poverty alleviation and social inclusion. They also suggest that municipalities must learn to tap in to private resources and access capital markets in order to finance the delivery of urban services and urban development programmes.

Nallathiga, R (2008) in his article entitled “Trends and Perspectives of Urban

Public Finance in Selected Countries and India” provide an outline of urban public finances in selected countries of the west in comparison to that in India. He explains

72 that in advanced countries the system of public finances are well structured and the roots of the same are well lay down within the administrative structures. In India, the local governmental finances of cities both on revenue and expenditure side will present a week base and loose foundation in comparison to those that of other countries and, therefore, point to reforms in these institutions. The paper also shows that municipal revenue and expenditure are very small in India when compared to that of western countries.

He suggests that there is need for designing and implementing fiscal

devolution in effective manner. He further suggests that the transfer system needs to

be streamlined and rationalized, particularly at the level of transfer between state and

local government. Inter-governmental transfers may also be pegged to a better fiscal

performance of urban local government, such as making them recover the costs of

services (commercially) to the extent possible, so they will find an incentive in

reforming the systems.

Pangotra P and Govil A (2008) in their article “Urban Development Strategy for Bihar: A Management Perspective” describe the urban status of Bihar. Paper observed that the weak position of urban local bodies in Bihar contributed to the low yield of revenue sources and low level of grant, the performance of services of urban local bodies is poor in comparison to standard bench mark and other selected cities in

India. The paper suggested that the four parameters of the development strategy for the state of Bihar. Greater fiscal autonomy is essential for urban local bodies to effectively discharge wider functional responsibility on them. Augmenting revenues of the urban local bodies is a major requirement for the state. Adequate charges for the services by the urban local bodies to increases the fiscal independence of the

73 urban local bodies. The quality of services is badly affected by the lack of sufficient revenue. In future, the requirement of the urban local bodies would further increase, with the increase in services demanded and upward movement in the level of urbanization, therefore, it is essential for the state government to think of ways and means of dispensing urban local bodies with sufficient funds.

Ramphelle, W. Chuene (2008) in his article “Municipal Financial Viability”

describe the financing viability in relation to other concepts such as municipal

viability and financial management. The paper shows a specific analysis which is

made on the common denominators to analyse the financial viability environment for

local governments and the associated trends and challenges. The paper explains that

financial viability has a relationship with powers and functions as well as the socio-

economic factors impacting from the macro to micro level. He also describe that

financial viability of municipality is critical, the realisation of financial sustainability

by many municipalities will be the greatest challenge. The paper shows that there is

great opportunity to improve financial viability and financial management by

municipalities. Mainstreaming hands on support to local government to improve

municipal governance, performance and accountability has been encapsulated as a

key focus through the local government’s five year strategic agenda. He suggests that

there is still great need for a multi-faceted approach to address the debt crisis faced by

municipalities. The approach should be under pinned by the continued debt analyses

and focus on the credibility of billing data.

Asher, G Mukul and Vashudewan, Deepa (2008) in their study on

“Unconventional Methods of Financing Urban Development: The Role of Public

Private Partnership (PPP)” discusses the common PPP model in municipalities and

74 the risk and challenges in implementing them. They explained that the introduction of public private capital or managerial expertise through PPP does not granting success in itself. It has to be supported by transparent and equitable risk allocation between partners. Paper also shows that as India urbanizes providing adequate urban infrastructure and amenities has become an important national priority. This requires not only reforming conventional municipal revenue sources such as property tax and user charges, but also significantly enhancing capacities of urban local bodies to obtain financing from unconventional sources. These, however, requires the urban local bodies to become more adapt at initiating and sustaining PPPs.

They suggest that the key element of successful PPPs is accountability of participating authorities and continuity of policy stance. Policy makers and leaders need to adopt a CEO mind set by visualizing themselves as chiefs of town and cities, and being accountable for target. They also suggest that effective risk allocation and ambiguous specification of responsibilities will lead to better delivery of services. The governance structure of urban local bodies needs to be made more accountable and performance- oriented.

Annez C, Patricia and Zuelgaray, Thomas (2009) in their article “High Cost

Carbon and Local Government Finance” discusses the impact of high cost carbon on

municipal finance. In their paper they have compared Maharashtra municipal

corporations and municipality in Spain and find that raising energy prices will create

an adverse fiscal shock for local governments. They also examined the rate of the

unitary government to examine the impact for different levels of government with

different taxation powers and different spending profiles. The paper shows that how

adverse this shock will be, and how the structure of spending affects the magnitude of

75 the fiscal shock. They further describe that smaller, less diversified government currently operating at a low level of service and with a very small operating deficit will be harder hit, precisely because the most basic services tend to be energy intensive , and these energy will be high in relation to their current deficit financing envelop. However, all municipalities would appear to be quite hard hit. Whether the shock is absorbed in deficit spending or in fiscal restraint, there will be substantial shock.

UN Habitat Report (2009) on “Guide to Municipal Finance” emphasises the

important role that municipal finance play in local service delivery, particularity in the

context of globalization, decentralization, and focus on sustainable development. The

report highlights some of the new trends in financial services that are being used in

different countries such as increased reliance on the private sector to invest in

infrastructure and services. The report also made some suggestions, such as; a solid

financial structure is essential for the success of cities in meeting the challenges of

urbanization, decentralization and globalization. The choice of revenue will also have

an impact on the ability of local government to deliver services and attract business.

Finally report suggests that wherever possible, local government services should be

paid for on the basis of the benefit received.

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CHAPTER - III

FINANCES OF URBAN LOCAL BODIES IN INDIA

3.1 Introduction

Public finance is a specialized subject concerning public policy wherein principle of finance, policy and economics are often applied with respect to the finances of governments- primarily central (or federal) and provincial (or state) governments given the importance of these two tiers of governments, in terms of both power and finances, the enquiry of public finance has primarily confined to finance of these governments and interflows together with institutional aspect and so is the research on theory and practice. Local government finance, a sub stream of public finance pertains to the finances of local government in both rural and urban areas in relation to the upper tiers of governments i.e. federal and state governments (Nallathiga, 2008).

The finances of urban local bodies (ULBs) have been assuming much greater importance with the urban areas increasingly becoming important in terms of not only population share but also economic growth. With the municipalities/ Municipal

Corporations acting as centres of government of urban areas, urban local government finance is also referred to, sometimes, as municipal finance in India. However, the performance (both physical and financial) of urban local government may vary between the municipalities (of cities) and Municipal Corporation of larger urban agglomerations as well as amongst themselves (Nallathiga, 2008).

Thus, municipal finance is about the revenue and expenditure decision of municipal governments. It covers the sources of revenue that are used by municipal

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government such as taxes (property, income, sales, and excise taxes), user fees and intergovernmental transfers. It includes ways of financing infrastructure through the use of operating revenues and borrowing as well as charges on developers and public private partnership. Municipal finance also addresses issues around expenditure at the local level and accountability for expenditure and revenue decisions including the municipal budgetary process and financial management (UN Habitat, 2009).

Finances of ULBs or urban public finance broadly relates to the evolution and structure of finance of local governments, and the array of fiscal relations of local governments. However, given the existence of ULBs in the tiered structure of government and there interface with the citizens, the inquiry of urban public finance also includes the dimensions like institutional arrangement and decision making and fiscal management, reform and accountability, transparency and gap financing . The state of ULBs in India is slightly better as a whole compared to the Panchayti Raj institutions (PRIs). Here too, there is a great deal of heterogeneity with some doing rather well (specially the municipal corporation) whilst other smaller municipal councils increasing their dependency on the higher government even to deliver the local public goods and services. This is explained by the fact the the Indian economic growth in recent times has been driven by urban areas and with reforms some of the

ULBs have been able to help themselves improve their situation (Pethe, Mishra and

Rakhi, 2004).

The constitution of India ordains that India is a federation of states and union territories, with residual legislative powers vesting in the central government. The constitution, in its 7 th schedule, assigns the powers and functions of the centre and states. The schedule specifies the exclusives powers of the centre in the union list,

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exclusive powers of the states in the state list, and those falling under the joint jurisdiction in the concurrent lists. The constitutional assignment of the tax powers in

India follows the principal of separation i.e.; the tax handles are exclusively assigned either to the centre or to the states. Most of the broad based and the productive tax handles have been assigned to the centre, including income taxes, wealth taxes from non agriculture sources, corporation tax, taxes on production (excluding those on alcoholic liquor, opium, hemp and other narcotics) and custom duties. States taxes include taxes on agriculture income and wealth, taxes on the transfer of properties

(Stamp duties and registration fees) Taxes on motor vehicles, taxes on the transportation of goods and passengers, sales tax on goods, excises on alcoholic beverages, entertainment tax, taxes on professions, trades, callings and employment, properties tax and taxes on the entry of goods in to a local area for consumption, use or sale (Octroi). The centre has also been assigned all residual powers of taxation

(Venkatachalam, 2007).

The constitution of India specifies the taxes to be divided between the central and state governments but it does not specifies the revenue base for ULBs. Further the constitutional amendment act (CAA) is not specific about the types of taxes that ULBs should have but on the other hand the power for determining the revenue base of ULBs typically consists of their own resources (Tax and non tax revenues), shared revenues, state grants and loans from state governments and market borrowing. In spite of the variation in the figures compiled by different agencies, for want of a uniform accounting and reporting framework, it is evident that municipal revenues has generally had limited buoyancy (Vaidya, 2009).

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3.2 74 th Constitutional Amendment Act

Municipal institution in India has a history of over three hundred years. These refer

ULBs comprising Municipal Corporations, municipalities and nagar panchayats.

However, the constitution did not make local self government in urban areas a clear cut constitutional obligation. As consequence of inadequate constitutional provision for local self government, democracy in municipal governance was not stable. As a result, many urban local bodies become weak and were not able to perform effectively. In this context, 74 th CAA came in to force in June, 1993. The main provision include constitution and composition of of ward committees, reservation of seats, duration of municipally, powers and functions, finances, finance commission, elections, district metropolitan planning committees etc. The 74 th CAA expect that ULBs will assume responsibilities for urban planning, water supply, social and economic planning, slum up gradation, public health etc. However, the CAA did not lay down revenue base for

ULBs and power to determine the revenue base continue to remain with state government. Study of implementation of 74 th CAA in various states showed that some states have performed better than others. An important observation is that while there has been full compliance in respect of provision, such as constitution of three types of

ULBs, reservation of seats, and constitution of SFC, the same cannot be said for other provisions, namely constitution of the ward committees, district planning committees and metropolitan planning committees. Many states have not transferred functions, funds and functionaries. Revenue powers of ULBs are often not in consonance. There is also no consistency about term, powers and methods of election of Mayors. In most of the states, mayors do not have executive powers as they are vested with commissioners (Vaidya, 2009).

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Recent years following the constitution’s 74 th amendment have witnessed extraordinary interest in the role of municipal government in financing urban infrastructure and services and enhancing the quality of India’s socio-economic ethos.

Much of the interest owes itself to the provision in the amendment act, which point towards a larger role for municipalities in the country’s developmental affairs and a corresponding provision that suggests larger fiscal space for them. The former is incorporated in schedule 12 of the constitution, which lists out 18 subjects and functions considered appropriate for municipalities. According to the schedule 12, municipalities in India are an appropriate tier for such subjects such as urban planning including town planning, planning for economic and social development, urban forestry and protection of the environment and promotion of the ecological aspects, slum improvement and up gradation, and urban poverty alleviation. Upon fuller implementation, schedule 12 will exercise a major impact on the functional profile of municipalities and their role in the counties in the socio-economic development.

Issue relating to the fiscal space are embodied in article 243 Y of the constitution under which the state governments are required to constitute, once every five years a finance commission. The finance commission of states are required to review the financial position of the municipalities and make recommendation to the governor as to-

1. The principal which should govern.

(a) The distribution between the state and the municipalities of the net proceeds

of the taxes, duties, tolls and fees leviable by the state, which may be

divided between them under this Act and the allocation between the

municipalities at all levels of their respective share of such proceeds

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(b) The determination of the taxes, duties, tolls and fees which may be assigned

to, or appropriated by the municipalities.

(c) The grants-in-aid to the municipalities from the consolidated fund of the

state.

2. The measures needed to improve the financial position of the municipalities,

and

3. Any other matter referred to the finance commission by the governor in the

interest of sound finance of the municipalities.

The provision of the constitution which has been incorporated in to the state municipal statute alters the fiscal relation between the municipalities and state governments. The three features of this provision are worth noting (a) it provide a review of financial provision of municipalities once every five years (b) it recognizes the need for and provides for a revenue sharing arrangement between the municipalities and state government (c) it gives option to municipalities to explore and experiment with measures that would improve their finances.

Yet another change which impact on the fiscal profile of municipalities lies in the amendment of article 280 and the insertion of a sub-clause (3) (c), which requires the finance commission set up under the provisions of article 280, to recommend measures needed to augment the consolidated fund of a state to supplement resources of the municipalities in the state on the basis of the recommendation made by the finance commission of the state. The significance of this provision lies in the fact that the central government which has thus for channelled assistance to municipalities only via the centrally sponsored scheme and related development programme and which had

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rarely made any direct assessment of the finances of municipalities has, under the constitution, been permitted to provide supplementary assistance for municipalities over and above what the finance commission of a state might recommend. Pursuant to this provision, the tenth finance commission recommended for the period 1996-2001, a sum of 1000 crores for municipalities, the 11 th finance commission covering a five year period beginning from 2001 recommended an amount of Rs. 2000 crore, and allocated the same between states on the basis of a fivefold criteria. The 12 th finance commission has a provided a sum of Rs5000 crore for municipalities for a period of five years beginning from 2005 ( Mathur, 2006).

3.3 Urban Local Bodies in India

The urban local bodies (ULBs) in India were firmly conferred the status of democratic institution of self government only in 1992, with the passing of 74 th constitutional amendment act (CAA), although their existence predated the British colonial era

(Venkatachalan, 2007). The structure of the urban government is different from that of rural bodies, in that there is no tier system. There are three types of urban local bodies with different sizes. From municipal corporation (which do have smaller units such as wards within them) down to municipalities and then town and notified area communities, but the latter are not component of municipal corporations (Singh, 1997).

However, urban areas with population over five lakhs and last three year’s average annual incomes over Rs 300 million are classified as Municipal Corporation, and those with population over 30000 and income over Rs 5 million as municipalities. This land mark 74 th CAA provide for direct election to the general bodies of their local bodies headed by a mayor and consisting of elected councillors (Venkatachalan, 2007).

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As per the TFC reports, India has as many as 3842 ULBs, of which 139 are municipal corporations 1595 are municipalities and 2108 are nagar panchayats (THFC,

2009). Others includes smaller ULBs such as nagar panchayats, town panchayats, notified areas committees municipal councils, town areas committies, city and town municipal councils, town committees, notified area councils, municipal boards, notified area authorities (Pradhan, 2002).

3.4 Urbanization in India

With increasing attention being paid to India’s economy after the impressive surge of the country’s top industrial corporate on the global economic scene, a new perspective has emerged on the urbanization in the sub-continent. It now focuses on the metropolitization process associated with the opening up of the economy and the concomitant high economic growth (Denis and Kamla, 2011).

Thus, urbanisation is an index of transformation from traditional economies to modern industrial one. It is progressive concentration of population in urban unit.

Quantification of urbanisation is very difficult. It is a long term process. Urbanisation is a process of switch from spread out pattern of human settlements to one of concentration in urban centres (Dutta, 2009).

The onset of modern and universal process of urbanisation is relatively a recent phenomenon and is closely related with industrial revolution and associated economic development. Historical evidence suggests that urbanisation process is inititable and universal. Currently, developed countries are characterized by high level of urbanisation and some of them are in five stage of urbanisation process and experiencing slowing down of urbanisation due to host of factors. A majority of the

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developing countries, on the other hand started experiencing urbanisation only since the middle of 20 th century.

Thus, urbanisation is both a driver and consequence of economic growth.

Expansion of economic activities and industrialisation lead to evolution of cities as growth centre. This urban centre facilitate sustained economic growth in three major ways- through the real estate sector, by raising productivity of output and employment, through the financial sector, by mobilising and channelling saving and allowing accumulation of wealth in the form of urban real estate, and through fiscal flows, providing major share of government tax revenue. The development of an urban area is also closely linked with the rural economy for exchange of goods, services, labour, capital, information-technology and social transaction. If properly managed, the process of urban development provides the key to overall and national regional development (Prem and Govil, 2008).

In India, about 285 million people who are living in urban areas of India which is the second largest urban population in the world (Census, 2001). The urban population is expected to rise to around 38 % by 2026. India has to improve its urban areas to achieve objectives of economic development. Huge investment is required in

India’s urban sector. Since public fund for these services are inadequate, ULBs have to look for innovative approaches for financing and management of urban services however most critical factor for introducing these innovation are a healthy municipal revenue base and good urban governance. In response to urban problems, the government of India launched a reform-linked urban infrastructure investment project, jawahar lal Nehru Urban Renewal Mission (JNNURM) (Vaidya, 2009). The increase in

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urban population has been due to natural population increase, reclassification of new town, and rural- urban migration (Pradhan, 2002).

Table 3.1

Trends in Urbanization

Year Urban population Urban population to Growth over (in millions) total population (%) previous decade (%)

1981 159.5 23.3 46.1

1991 217.6 25.7 36.4

2001 285.4 27.8 31.2 Source: http://urbanindia.nic.in.

The level of urbanisation is widely diverse across states. As of 2001, India has

4378 towns and cities, with 3393 class one towns with a population of one lakh or more

(table-2) 401 class second town with a population of between 99999 to 250000 and subsequently.

Table -3.2

Town and Urban Agglomeration by Class

Class Population size Number Class i 100000 and above 393 Class ii 50000-99999 401 Class iii 20000-49999 1151 Class iv 10000-19999 1344 Class v 5000-9999 888 Class iv Less than 5000 191 Unclassified 10 All classed 4378 Source: Census 2001, Government of India

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Projected Urban Population

The registrar general of India has projected total urban population in India and states. It is interesting to know that 67 percent of total population growth in India in next 25 years is expected to take place in urban areas. Urban population expected to increase from 285 million in 2001 to 534 in 2026 (table-3)

Table-3.3 Projected Urban Population

Items 2001 2011 2021 2026 Total population 1028.61 1192.50 1339.74 1399.83 (mllions) Urban population 285.4 357.94 432.61 534.80 (millions) Urban (%) 27.82 30.02 32.29 38.21 Total AEGR(%) 1.48 1.32 1.23 1.16 Urban AEGR(%) 2.24 2.07 2.50 1.89 Source: Population Projection for India 2001-26, Registrar General of India, 2006 AEGR- Annual Exponential Growth Rate Table-3.3 presents the projected urban and total population in India during

2011, 2021 and 2026, the total increase in population; fifty per cent during the period is likely to occur in seven less developed states namely UP, MP, Rajasthan, Bihar,

Chhattisgarh, and Jharkhand. On the other hand the major increase in urban population during above mentioned period is to take place in states of UP, Maharashtra,

Tamilnadu, and Gujarat and these will contribute over 45 % of urban population over next 25 years (Vaidya, 2009).

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3.5 Functional Domain of Municipalitie s

In our constitution, matters of local public sphere are enumerated in the state list because the unit states were expected to constitute local bodies and assign them the tasks, functions and responsibilities and empower them with adequate resources so that the local bodies could look after the task assigned to them. Since the unit states fail to perform these jobs adequately, the state of India stepped in. The amendment involved a uniform pattern of local bodies across the country with little spoke in details, suggested some of the functions/ responsibilities/ task for devolution/delegation. If already not devolved/ delegated, and exhorted that state legislature to endow the local bodies with such power, authority and recourses as may be necessary for carrying out such functions. In respect of schedule 5 th and 6 th areas the parliament has yet extend the provision to urban local bodies (Chaubey, 2005).

The 74 th amendment provides for a schedule of functions (schedule 12) i.e., considered appropriate for the ULBs. The list reproduced else-were, envisage the ULBs should assume responsibilities for such functions as planning for social and economic development, urban poverty alleviation, urban planning and regulation of land use, slum improvement and urban forestry, in addition to their additional role as entities for supplying basic infrastructure and services. The list is discretionary. It is the discretionary nature of the list that led many to interpret that the reallocation of schedule 12 responsibilities between state and municipalities is a matter for the state to be determined, given that the states in India are at different stages of development and given the uneven capacities and under take additional responsibilities, the incorporation of schedule 12 function and their defacto transfer is an evolutionary and incremental process (Mathur and Petersone, 2006).

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Present Status of Functional Domain

All major states have assigned to their urban local bodies the responsibilities of

1. Public health, sanitation, conservancy and solid waste management(item 6 of

schedule 12, item 6 of state list of schedule 7).

2. Provision of urban amenities and facilities such as parks, gardens, and play

ground (item 12 of schedule 12, item 18 of state list and item 20 of concurrent list

in schedule 7).

3. Burials and burial grounds, cremation and cremation ground and electric

cremations (item 14 of schedule 12, item 30 of concurrent list in schedule 7).

4. Vital statistics including registration of birth and deaths (item 16 of schedule 12,

item 30 of concurrent list in schedule 7).

5. Regulation of slaughter houses and tanneries (item 18 of schedule 12, item 15 of

state list in schedule 7).

While the last two regulatory in nature, the middle on is a serious problems only in metropolis.

All most all the state have assigned to their urban local bodies, the responsibilities of

6. Urban forestry, protection of environment and promotion of ecological aspect

(item 8 of schedule 12, item 6 of state list in schedule 12) major exception being

Delhi.

7. Water supply for domestic, industrial and commercial purposes (item 5 of

schedule 12and 17 of state list schedule 12).

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8. Roads and bridges (item 4 of schedule 12 and item 13 of state list in schedule

in 7).

9. Cattle ponds and prevention of cruelty to animals (item 15 of schedule 12 and

item 15 of state list of schedule 12).

10. Public amenities including street lighting, bus stops and public conveniences

(item 17 of schedule 12 and item 5 of state list and item 20 of concurrent list in

schedule 7).

With few exceptions, the states have assigned

11. Safe-guarding of the interest of the weaker section of the society including the

handicapped and mentally retarded (item 9 of schedule 12 and item 9 of state

list and item 16 of concurrent list of schedule 7), and

12. Promotion of cultural, educational and aesthetic aspect (item 13 of schedule 12

and item 12/ 33 of state list and item 25 of concurrent list in schedule 7).

It should be noted that matters that need to be locally dispensed with are all part of the state list. As there could hardly be a uniform division of functions and powers- both listed in the same list, they were advisedly enumerated in the state list so that a given state could take a contextual decision (Chaubey, 2005)

In practice, therefore, it is unrealistic to simply transfer their functions to ULBs by a stroke of the pen. At the same time, it is fundamental to decentralisation for ULBs to participate in the planning decision that effect their future development and future services responsibilities (Mathur and Peterson, 2006)

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Fiscal Powers of Urban Local Bodies

The fiscal powers of ULBs have typically comprised property taxes (49), a tax on the entry of goods in to local areas for consumption, use and sell known as octori (52), advertisement taxes (55), taxes on non motorised vehicles (57), entertainment taxes

(55), taxes on animals and boats (58), and taxes on profession, trades, calling and employment (60). The general postulates underline the assignment of the fiscal power is that the revenue from these taxes should be adequate to meet the operational expenditure of ULBs, however, given the relative inflexibility and low buoyancy of many of these taxes and the defaulting in adjusting in local tax rate, state governments have traditionally used a system of grants-in-aid and tax sharing arrangements for bridging the revenue gap faced by the ULBs. In addition to grant and tax sharing the state government utilises the instrument of specific purpose grant, often extensively, for advancing state level goals and mandates. It is important to note that unlike in centre state fiscal relations which are clearly set out, the state municipal acts do not provide for transfer to ULBs or do so under specific circumstances. Transfers are thus determined in an ad-hoc manner (Mathur and Peterson, 2006).

3.6 Growth of Expenditure

In order to comprehend the fiscal pressures generated by demographic, economic and physical growth of the metropolitan cities of India, the trend in, and the patterns of, both revenue and capital expenditures need to be studied in detail. A cursory look at the data presented in many tables ostensibly reveals manifold increase in expenditure over the years. In the following pages trends in expenditure and its growth rate are analysed for understanding the actual growth in relation to population and price changes.

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Table-3.4

Expenditure of Urban Local Bodies (ULBs) in India

Year Total Revenue Capital % Growth % Growth % Growth % Share of % Share of Expenditure Expenditure Expenditure Rate of Total Rate of Rate of Rev.Exp.to Capital Exp. (Rs in (Rs in (Rs in Expenditure Revenue Capital Total Total Crore) Crore) Crore) Expenditure Expenditure Expenditure Expenditure

1992-93 25070.51 17160.55 7909.55 - - 68.45 31.54 1993-94 35673.16 23955.72 11717.44 42.29 39.59 48.14 67.15 32.84 1994-95 40857.08 28774.34 12082.73 14.53 20.11 3.11 70.42 29.57 1995-96 47143.47 31373.8 15769.66 15.38 9.03 30.51 66.54 33.45 1996-97 79212.05 35823.78 43388.27 68.02 14.18 175.13 45.22 54.774 1997-98 151308.42 50084.81 101223.6 91.01 39.80 133.29 33.10 66.89 1998-99- 12034.95 9059.47 2975.47 -92.04 -81.91 -97.06 75.27 24.72 1999- 14451.67 10690.3 3761.36 20.08 18 26.41 73.97 26.02 2000 2000-01 15743.05 11665.88 4077.17 8.93 9.12 8.39 74.10 25.89 2001-02 15914.29 12204.78 3709.51 1.08 4.61 -9.01 76.69 23.30 2002-03 13997.02 10671.63 3325.4 -12.04 -12.56 -10.35 76.24 23.75 2003-04 23317.17 16627.95 6689.22 66.58 55.81 101.15 71.31 28.68 2004-05 27590.69 19074.88 8515.81 18.32 14.71 27.30 69.13 30.86 2005-06 30407.23 19776.03 10631.20 10.20 3.67 24.84 65.03 34.96 2006-07 36789.71 23513.68 13276.04 20.99 18.89 24.87 63.91 36.08 2007-08 47025.53 28431.45 18594.08 27.82 20.91 40.05 60.45 39.54 Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India,

The above table 3.4 shows that total expenditure of ULBs has two components

i.e., revenue expenditure and capital expenditure. Table shows the yearly data of total

expenditure, revenue expenditure, capital expenditure and its percentage growth rate in

different years. During the entire period of the study (1992-93 to 2007-08), total

expenditure has increased from Rs25070.51 crore in 1992-93 to Rs47025.53 crore in

2007-08, revenue and capital expenditure have increased from Rs17160.95 crore in

1992-93 to Rs28431.45 crore and from Rs 7909.55 to 18594.08 crore respectively

during the referred period. Table also highlights the huge ups and downs in the volume

of expenditure as well as in the percentage change over the previous year. For instance,

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total expenditure of ULBs has increased by 42.29% in 1993-94 over the previous year and 91.01% in 1997-98 over the previous year. The very next year there was a dramatic fall in the expenditure of ULBs by 92.04%. Out of the two components of expenditure of ULBs, revenue expenditure experienced major decline and fluctuations may be due to overemphasis of the government on capital expenditure. The expenditure trend in

ULBs indicates towards the reliance of ULBs for funds on upper tier governments.

The analysis of table also indicates that on the one hand, the volume of revenue expenditure of ULBs is increasing continuously, but on the other hand, the share of revenue expenditure to total expenditure of ULBs is decreasing in comparison to capital expenditure where both total capital expenditure and its share are increasing.

The increment in share of capital expenditure in total expenditure of ULBs is due to the hike in the allocation of funds on developmental works such as construction of new roads, water project etc. by government.

The percentage growth rate in many years should imply a rising level of services. It cannot be denied that the levels of services have increased over the years.

However, a deeper analysis of factors behind a high percentage increase reveals that the major proportion of increase in expenditure because of enormous growth in expenditure on establishment and payment to the water supply and sewerage disposal undertaking as water charges as well as arrears for consumption of water by the general wing and the disposal of sewerage

Per Capita Expenditure of ULBs in India

Public expenditure is inevitably related with population for whom it is incurred. Total expenditure does not give an indication of actual level of services being provided per

93

person. Per capita expenditure provides very close figure of an exact analysis of service levels.

Table-3.5

Per Capita Expenditure of ULBs in India

Year Population Per Capita Total Per Capita Per Capita (Crore) Expenditure Revenue Capital ( in Rupees) Expenditure Expenditure ( in Rupees) ( in Rupees) 1992-93 22.96 1091.92 747.42 344.49 1993-94 23.59 1512.21 1015.50 496.71 1994-95 24.24 1685.52 1187.06 598.46 1995-96 24.9 1893.31 1259.99 633.31 1996-97 25.58 3096.63 1400.46 1696.17 1997-98 26.28 5757.55 1905.81 3851.73 1998-99- 27 445.73 335.53 110.20 1999-2000 27.74 520.96 385.37 135.59 2000-01 28.5 552.38 409.32 143.05 2001-02 29.27 543.70 416.97 126.73 2002-03 30.08 465.32 354.77 110.55 2003-04 30.9 754.60 538.12 216.47 2004-05 31.74 869.27 600.97 268.29 2005-06 32.61 932.45 606.44 326.01 2006-07 33.5 1098.20 701.90 396.29 2007-08 34.42 1366.22 826.01 540.21 Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India The above table 3.5 shows the trend of per capita expenditure of total expenditure, revenue expenditure, and capital expenditure of ULBs during 1992-93 to

2007-08. For the purpose of calculating the per capita expenditure, the census data on population under ULBs has been used for the years 1991 and 2001. For the years between the census counts, the estimated population has been intrapolated on the basis of census data.

The table 3.5 shows a higher per capita expenditure during 1992-93 to 1997-98.

After 1997-98, the per capita expenditure recorded a heavy fall in all types of expenditures of ULBs. During 1998-99 to 2007-08, the revenue expenditure of ULBs shows an increasing trend. The higher per capita revenue expenditure as compared to 94

capital expenditure of ULBs is mainly due to a heavy expenditure on establishment expenditure i.e. salary, pension etc.

The information on the extent of availability of resources for ULBs in major states has been presented in table 3.5 .It can be seen from the table that per capita expenditure of ULBs at all India level was Rs 552.38 in 2000-01 which rose to Rs

1366.22 in 2007-08.

The table 3.6 shows that out of the ten selected states , six states shows a highest per capita expenditure above the national level namely, Maharashtra(3451.54) followed by up (2027.63), Gujarat (1865), AP (1702.55) Karnataka (1670.74), and MP

(1479.21), remaining four states shows a PCE less than the national level in 2007-08.

Table also indicate that during 1993-94 to 1997-98, the PCE of Maharashtra and AP was very high in comparison to other states. It is evident that among all the ULBs of selected states for which data could be available, the ULBs of Andhra Pradesh and

Maharashtra has continued to have the highest per capita expenditure between 1993-94 to 1997-98.

95

Table 3.6

Per Capita Expenditure of Urban Local Bodies of Selected States

AP GUJRAT HARYANA KARNATKA MP MAHARASHTRA RAJASTHAN TAMIL UP WEST ALL NADU BENGAL INDIA 1993-94 11681.28 336.87 705.62 164.25 227.56 3146.71 148.09 286.95 147.87 152.58 1512.21 1994-95 13961.99 376.06 600.23 164.04 252.24 3136.35 158.81 313.15 151.65 152.38 1685.52 1995-96 13807.88 420.90 579.97 198.81 283.07 4665.90 203.94 328.96 145.93 170.49 1893.31 1996-97 20129.61 464.10 897.74 243.55 358.70 9594.32 253.64 414.66 211.94 203.81 3096.63 1997-98 21217.85 549.64 649.52 268.57 393.30 27642.60 273.88 513.07 188.15 179.76 5757.55 1998-99 378.63 921.32 314.30 445.06 729.42 664.50 433.79 572.49 221.78 350.82 445.73

96 1999-2000 485.33 1192.55 322.77 542.94 905.01 734.72 400.20 639.01 253.57 441.84 520.96 2000-01 476.38 1114.04 331.32 550.53 928.60 903.05 468.03 660.69 272.46 430.40 552.38 2001-02 568.71 984.85 348.87 519.33 691.47 976.31 510.15 598.46 293.74 368.18 543.70 2002-03 671.14 654.1 150.12 330.46 756.94 490.64 524.82 736.09 315.94 424.84 465.32 2003-04 796.78 1076.75 316.65 700.11 454.92 1862.03 506.08 829.47 470.11 556.41 754.60 2004-05 1066.27 1136.90 395.55 1158.30 797.40 2037.40 562.62 852.71 468.90 625.07 869.27 2005-06 1064.18 1310.05 555.06 1149.19 900.49 2150.71 635.78 873.22 467.74 756.32 932.45 2006-07 1241.036 1552.464 639.53846 1333.1208 1202.242 2618.71 697.47 947.47 465.44 829.90 1098.20 2007-08 1702.553 1865.517 760.97561 1670.7465 1479.217 3451.54 787.84 1119.82 2027.63 922.76 1366.22 Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India, Census Report 2001, Government of India

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The analysis of per capita expenditure indicates that the growth in expenditure in relation to population increases has not been adequate. Even though there is positive growth in per capita expenditure, to a great extent, it is because of the greater increase in the volume of non-development expenditure like the establishment expenditure.

3.7 Growth in Revenue

Growth in expenditure and hence the augmentation of civic services is inevitably dependent upon the growth in revenue income of a civic authority. An elastic and buoyant source of revenue provides the much needed funds at an increasing rate for financing the provision of services. Having analysed the trends in expenditure, the growth in revenue receipts is analysed for comprehending the relationship between expenditure and revenue and the nature of revenue base and financial mobilisation of the ULBs in India,

Table 3.7 presents the yearly data on total revenue of ULBs in India and its internal sources of revenue, and it also indicates the percentage growth rate over the years. During the entire period of study from 1992-93 to 2007-08, total revenue of

ULBs and their internal source of revenue i.e. own tax, non-tax, own revenue, and other revenue are continuously increasing. During 1992-93 to 2007-08, total revenue, own tax revenue, own non-tax revenue, own revenue and other revenue have increased from

Rs5162.53, 2638.90, 957.50, 3596.41, and 1566.11 crore to Rs44429.05, 15277.72,

8243.66, 23521.38, and 20907.67 crore respectively. The table also indicate that there are some ups and downs in total revenue as well as percentage growth over the years.

For instance, in 1997-98 the total revenue of ULBs shows a percentage growth rate of

17.95% over the previous years, and the very next year in 1998-99, it declined by -

5.45%. Out of the components of internal sources of revenue of ULBs, the own revenue 97

and other revenues shows a major contribution to total revenue as compared to tax and

non-tax revenue of ULBs. The lower contribution of tax and non-tax is mainly because

of the weak levy and collection of taxes.

Table -3.7

Total Revenue Receipts of Urban Local Bodies in India

Year Total Own tax (Rs Own non tax Own Other revenue (Rs in Crore) (Rs in Crore) revenue (Rs revenue (Rs in Crore) in Crore) in Crore) 1992 -93 5162.53 2638.9 957.5 3596.41 1566.11 1993 -94 6059.68 3175.49 1166.32 4356.16 1717.87 (17.37) (20.33) (21.80) (21.12) (9.69) 1994 -95 7686.9 3900.65 1316.57 5632.34 2062.52 (26.85) (22.83) (12.88) (29.29) (20.06) 1995 -96 8733.17 4454.5 1484.45 6404.25 2343.73 (13.61) (14.19) (12.75) (13.70) (13.63) 1996 -97 10325.25 5100.84 1746.63 7373.75 2979.36 (18.23) (14.50) (17.66) (15.13) (27.12) 1997 -98 12178.78 5891.69 2127.25 7599.37 3608.13 (17.95) (15.50) (21.79) (3.05) (21.10) 1998 -99 - 11514.64 4755.52 2117.9 6873.42 4641.22 (-5.45) (-19.28) (-0.43) (-9.55) (28.63) 1999 -2000 13172.96 5151.01 2228.84 7379.86 5793.1 (14.40) (8.31) (5.23) (7.36) (24.81) 2000 -01 14581.04 5617.57 2642.95 8260.52 6320.52 (10.68) (9.05) (18.57) (11.93) (9.10) 2001 -02 15149.2 5885.81 2874.35 8760.16 6389.04 (3.89) (4.77) (8.75) (6.04) (1.08) 2002 -03 12596.5 4941.18 2419.11 7360.28 5236.22 (-16.85) (-16.04) (-15.83) (-15.98) (-18.04) 2003 -04 23111. 52 9704.73 4735.09 14440.71 8670.81 (83.47) (96.40) (95.73) (96.19) (65.59) 2004 -05 26755.78 10861 5424.89 16285.89 10469.89 (15.76) (11.91) (14.56) (12.77) (20.74) 2005 -06 31662.98 12152.38 6082.81 18235.19 13427.79 (18.34) (11.89) (12.12) (11.96) (28.25) 2006 -07 37422.34 14198.03 6632.02 20830.05 16592.29 (18.18) (16.83) (9.02) (14.22) (23.56) 2007 -08 44429.05 15277.72 8243.66 23521.38 20907.67 (18.72) (7.60) (24.30) (12.96) (26) Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India Note: figure in the parenthesis bracket indicate percentage growth rate over the previous years.

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The uneven growth in revenue is chiefly because of the fact that in certain years share of the ULBs in assigned taxes and the grants to it are not released in time. Hence, when these are released in the next year or a couple of years after, the revenue receipts of the ULBs increases suddenly.

The internal sources consist of taxes and rates, fees, rents, and other sundry municipal revenues. The analysis of internal sources of revenue of the ULBs has revealed that the ULBs has been overwhelmingly depending up on the external sources

(grants, assigned taxes, transfer from central governments) of income which is not welcome trend either for local autonomy or for ensuring an effective fiscal planning at the local level. This is chiefly due to the fact that the nature and type of the sources of internal revenues vary at great deal between the ULBs and other civic authorities.

Apart from their own revenue sources, i.e., tax and non-tax revenue sources, the municipal corporations depend upon funds from central governments. These funds are primarily intended to compensate for the mismatch of functions and finance. Most of the ULBs receive financial support in the form of revenue grants from state governments, transfer from finance commission, and assignment and devolution from central government to meet current expenses. Similarly, capital grants are also provided for meeting project related expenditure.

Table 3.8 shows the external source of revenue or transfer of funds from central government to ULBs which comprises assignment plus devolution, transfer of funds from EFC/TFC and grants-in-aid. Table shows that the all three components are increasing from 1998-99 to 2007-08. During 1998-99 to 2007-08, assignment plus devolution increases from Rs2208.32 crore to Rs. 9171.11 crore where grants-in-aid increases from Rs. 1807.86 to Rs. 5676.25 crore, the TFC/THFC grants also increases

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Table-3.8

Transfer from Central Government to ULBs in India

Year A+D Transfer from Grants-in -Aid (Rs in Crore ) TFC/THFC (Rs in Crore ) (Rs in Crore ) 1992-93 - - - 1993-94 - - - 1994-95 - - - 1995-96 - - - 1996-97 - - - 1997-98 - - - 1998-99 2208.32 - 1807.86 1999-2000 2646.6 - 2251.21 (19.84) (24.52) 2000-01 2981.84 - 2239.24 (12.66) (-0.53) 2001-02 2744.63 - 2671.65 (-7.95) (19.31) 2002-03 2228.9 276.5 2075.97 (-18.79) (-22.29) 2003-04 4172.18 378.43 2164.46 (87.18) (36.86) (4.26) 2004-05 4580.08 442.45 3062.92 (9.77) (16.91) (41.50) 2005-06 6092.26 766.95 4104.34 (33.01) (73.34) (34.00) 2006-07 7338.9 1025.49 4514.44 (20.46) (33.71) (9.99) 2007-08 9171.11 869.02 5676.25 (24.96) (-15.25) (25.73) Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India

Note: A+D= Assignment + Devolution from Rs. 276.5 crore to Rs. 869.02 crore. The table also indicate that there is some increasing and decreasing trend in revenue as well as percentage growth rate over the previous years. For example, in 2003-04, the assignment plus devolution shows a higher growth rate of 87.18% over the previous years and it suddenly decline in very next year with a lower percentage growth of 9.77%. Like this, TFC/THFC also shows a

100

lower percentage growth rate of 16.91% in 2004-05, and the next year it increases of

73.34%. The sudden increase or decrease of these sources of revenue of ULBs is due to the change in policy regarding the ULBs.

An analysis of these external sources of revenue indicate that after 2002-

03,there has been an increase in external sources because of heavy allocation of funds to the ULBs and the dependency of ULBs on external sources has also been growing.

Table 3.9 provides some basic information relating to own revenue receipts as percentage of total expenditure in selected states during 1993-94 to 2007-08.

The table pointed out that expenditure of Maharashtra’s ULBs met from own sources is highest(72.75 percent) followed by Gujarat(56.14 percent), Rajasthan (46.99 percent), West Bengal(41.29 percent), Haryana (35.04 percent), Tamil Nadu (34.25 percent), and Karnataka (31.93 percent) .On the other hand the lowest financing from own sources was recorded in Uttar Pradesh (4.71 percent) and Madhya Pradesh (9.21 percent).

The functional domain of the ULBs consists of a mix of activities which involve different quantum and types of expenditure. In terms of the statutory provisions, ULBs are expected to perform functions which broadly be divided in to civic functions .The civic functions comprise in the main provision of drinking water, drainage and sanitation, solid waste management, preventive health care etc. Maintenance functions include maintenance of building and common property resources.

Table 3.10 pointed out that own revenue as percentage of total revenue was recorded highest in Maharashtra (76.07 percent) followed by Gujarat(61.54 percent) ,

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Table3.9 State-Wise Own Revenue of ULBs as Percentage of Total Expenditure

( in percentage )

1993-94 1994-95 1995-96 1996-97 1997- 1998-99 1999- 2000- 2001 2002 2003 2004 2005 2006 2007 98 2000 01 -02 -03 -04 -05 -06 -07 -08 AP 0.76 0.70 0.86 0.68 0.82 64.08 52.18 64.42 60.97 60.80 48.33 50.89 59.50 47.93 44.21 GUJRAT 83.61 90.67 97.08 94.77 85.21 72.57 62.70 66.93 72.73 74.61 76.21 82.65 76.80 75.22 56.14 HARYANA 22.58 29.40 32.77 19.98 30.23 77.93 81.00 62.124 59.17 94.01 80.58 73.33 50.93 58.48 35.04 KARNATKA 56.40 48.55 39.93 39.86 36.41 70.00 49.37 44.09 49.07 56.48 59.02 37.62 36.47 28.74 31.93 KERALA 57.44 56.50 56.49 46.88 41.79 31.47 36.64 45.47 46.19 50.87 46.50 45.12 44.14 38.57 37.33 102 MP 41.34 40.73 20.24 21.47 23.84 39.49 37.78 39.02 48.19 49.49 25.41 11.71 11.70 10.17 9.21

MAHARASHTRA 22.66 25.80 19.80 10.97 3.38 73.00 64.65 60.23 58.86 49.68 86.21 86.17 87.97 84.25 72.75 RAJASTHAN 4142.36 4334.96 124.21 110.66 114.72 34.89 16.15 17.57 24.91 23.59 29.59 33.08 40.84 40.98 46.99 TAMIL NADU 44.41 51.77 58.36 48.56 52.62 41.10 45.15 47.40 54.03 46.60 38.71 39.66 37.99 36.97 34.25 UP 28.35 27.75 32.08 23.53 28.44 25.11 23.63 24.64 27.66 28.96 20.11 20.24 20.37 20.51 4.71 WEST BENGAL 17.44 18.42 17.98 16.42 19.76 39.53 33.78 36.79 54.10 60.21 53.13 46.18 40.02 45.77 41.29

Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India

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Table3.10

State-Wise Own Revenue of ULBs as Percentage of Total Revenue

( in percentage )

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002- 2003- 2004-05 2005- 2006- 2007- 03 04 06 07 08

AP 45.53064 46.86 49.66 50.73 52.85 67.53 66.26 68.99 69.30087 64.61 46.54 49.16 52.12 49.74 58.45

GUJRAT 69.21 70.41 78.74 80.40 67.97 79.27 74.55 73.55 76.32 77.05 79.33 77.08 74.76 76.92 61.54

HARYANA 70.41 70.90 66.88 42.17 58.39 80.72 82.27 48.97 74.37 71.65 74.44 76.71 54.12 57.77 33.52

KARNATKA 56.05 44.05 43.81 47.66 38.95 51.86 46.49 39.25 40.59 63.07 52.15 46.18 40.02 31.46 34.16

103 KERALA 70.38 68.97 59.51 47.60 43.64 56.46 64.52 68.39 69.61 68.62 40.86 37.40 39.06 39.68 39.52

MP 47.68 47.72 26.05 26.83 30.59 49.86 47.70 50.74 45.40 50.58 20.77 9885.80 13.22 10.94 11.56

MAHARASHTRA 93.87 90.97 90.57 90.15 70.39 71.04 68.46 72.64 73.63 61.41 83.75 79.99 80.85 77.78 76.07

RAJASTHAN 2789.47 2692.53 72.41 73.86 74.54 33.02 15.70 17.24 22.73 23.29 30.37 32.75 38.87 37.10 39.49

TAMIL NADU 56.30 59.13 60.14 54.59 53.76 47.15 50.52 49.95 60.10 48.36 43.59 45.43 41.15 38.91 38.41

UP 30.17 28.97 29.59 27.61 27.48 25.64 26.27 25.80 28.16 92.87 28.60 27.45 18.25 18.22 14.81

WEST BENGAL 23.90 8.74 9.08 8.33 8.18 47.97 30.60 35.16 38.07 52.2 56.12 54.20 47.61 54.59 51.70 Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India

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Table3.11

Per Capita Revenue of Urban Local Bodies of Selected State during 1993-94 to 2007-08

(In rupees)

AP GUJRAT HARYANA KARNATKA MP MAHARASHTRA RAJASTHAN TAMIL UP WEST ALL NADU BENGAL INDIA 1993-94 195.02 406.92 226.35 165.26 197.33 759.74 219.91 226.35 138.95 111.34 218.84 1994-95 209.11 484.23 248.93 180.78 215.32 889.69 255.68 274.18 145.24 321.06 249.98 1995-96 239.12 518.89 284.20 181.24 220.03 1020.09 349.85 319.25 158.24 337.59 308.71 1996-97 271 547.08 425.27 203.69 287.01 1167.80 380.00 368.82 180.63 401.78 341.40 1997-98 332.56 689.07 336.26 251.06 306.60 1327.36 421.52 502.20 194.67 433.86 392.89 1998-99 359.28 843.41 303.46 600.74 577.77 682.86 458.29 499.09 217.17 289.06 451.06

104 1999-2000 382.22 1003.01 317.77 576.56 716.83 693.81 411.52 571 228.05 487.68 415.09

2000-01 444.81 1013.78 420.26 618.48 714.21 748.75 476.81 626.95 260.19 450.32 462.20 2001-02 500.41 938.55 277.55 627.91 734.03 780.46 559.02 538.09 288.55 523.13 498.15 2002-03 631.58 633.38 196.96 295.92 740.62 396.88 531.69 709.29 98.52 490.05 503.63 2003-04 827.47 1034.44 342.78 792.33 556.65 1916.62 492.95 736.73 330.46 526.72 407.65 2004-05 1103.72 1219.06 378.11 943.50 604.60 2194.72 568.25 744.40 345.87 532.62 728.15 2005-06 1214.68 1345.69 522.44 1047.32 796.86 2339.98 668.01 806.08 522.03 635.83 820.47 2006-07 1195.91 1518.23 647.35 1217.89 1118.04 2836.54 770.59 900.26 523.91 695.92 945.16 2007-08 1287.70 1701.83 795.56 1561.43 1178.98 3300.84 937.5 998.65 645.35 736.98 1087.22 Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India, Census Report 2001, Government of India

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Andhra Pradesh (58.45 percent),West Bengal (51.70 percent) , Rajasthan (39.46 percent), Tamil Nadu (38.41 percent), Karnataka (34.10 percent), and Haryana (33.52 percent). The lowest percentage recorded in Madhya Pradesh (11.56), and Uttar

Pradesh (14.18 percent).

Table 3.11 presents an analysis of per capita revenue of all the ULBs in the ten selected states shows that it ranged from Maharashtra 3384.84 rupees to Uttar Pradesh

645.35 rupees ,where as all India per capita revenue was 1087.22. It may be observed from the table that out of ten states only five states have recorded the per capita revenue more than the per capita revenue at national level and in the remaining states, it is lower than the national average in 2007-08.

The lower per capita revenue of ULBs is due to the weak collection of taxes and lower allocation of funds by central government which is insufficient to meet the demand services by citizen in urban areas.

3.8 Fiscal Mismatch

The analysis of fiscal mismatch between own revenue and total expenditure of ULBs present very interesting picture and shows that ULBs are facing a huge deficit and their own resources are very low to meet out the emerging fiscal needs. Table 3.12 shows that the fiscal mismatch between own revenue and total expenditure of ULBs at all tiers in Andhra Pradesh and Maharashtra is high during 1993-94 to 1997-98. Both states show a heavy decline in fiscal mismatch because of increase in central fund and their own resources. Later it increased in almost all the selected states .Table indicates that in

2007-08, the highest fiscal mismatch recorded in UP with Rs 7786.03 crore followed by Maharashtra Rs 4739.16 crore, Tamil Nadu Rs 27.78 crore, Karnataka

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Table3.12 Fiscal Mismatch of Selected States during 1993-94to 2007-08

(Rs in Crore )

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

AP 21446.1 26064.28 26146.22 38584.75 41242.43 270.61 468.75 347.42 459.39 552.38 876.83 1130.98 943.85 1440.8 2146.58

GUJRAT 85.01 55.77 20.01 40.72 140.59 449.81 813.98 696.18 520.87 332.05 524.96 416.09 662.48 861.55 1881.6

HARYANA 245.81 199.15 191.04 366.37 240.18 38.83 35.56 76.55 89.74 5.93 42.41 75.94 204.24 207.1 405.31

KARNATKA 107.42 129.97 188.67 237.26 283.47 226.96 478.27 550.88 483.94 270.36 550.79 1423.4 1474.6 1966.24 2422.39

106 KERALA 58.11 64.29 70.02 116 158.66 332.09 317.74 250.93 263.18 285.75 262.98 275.25 314.56 409.55 478.33

MP 206.89 233.19 352.17 442.22 473.22 701.68 900.83 911.58 576.68 619.31 553.06 1154.52 1311.97 1781.79 2229.17

MAHARASHTRA 8103.46 7981.41 13209.19 31091.15 100155.9 692.38 1033.65 1472.42 1694.72 1073.95 1149.92 1298.66 1228.74 2020.64 4739.16

RAJASTHAN -6465.35 -7465.4 -56.3 -31.93 -48.8 350.2 429.52 509.25 517.12 557.34 509.55 553.41 567.89 637.95 668.11

TAMIL NADU 336.54 330.71 310.88 501.25 593.13 852.98 918.29 945.12 775.75 1147.63 1540.19 1615.42 1765.21 2018.36 2576.78

UP 312.53 329.8 305.24 510.49 433.54 548.1 652.58 708.31 747.96 807.97 1385.85 1409.8 1433.83 1457.73 7786.03

WEST BENGAL 248.15 249.86 286.65 354.31 305.77 458.22 643.68 609.36 386.99 393.86 618.02 813.98 1115.85 1129.46 1381.44 Source: Reports of 11 th , 12 th and 13 th Central Finance Commission, Government of India

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Rs. 2422.39 crore ,MP Rs 2229.17 crore, AP Rs 2146.58 crore and in Gujarat Rs1881.6 crore. On the other hand ,the lowest fiscal mismatch recorded in Haryana Rs405.31 crore followed by Rajasthan Rs668.11 crore ,West Bengal Rs1381.44 crore .Table also shows an interesting fact that during 1993-94 to 1997-98 ULBs in Rajasthan shows a surplus status.

The above analysis shows that there is a huge fiscal mismatch between own revenue and total expenditure at all tiers of the ULBs.It means that the own financial resources of ULBs are highly inadequate to meet out the fiscal needs. Even though the financial devolution has been ensured to the local bodies, these bodies face fiscal deficit. The reason behind this fiscal deficit is that the revenue of ULBs is not increasing the same proportion as to increase in expenditure. Another reason is that the functions which are performed by ULBs are more and the funds and revenue from internal sources are not sufficient to meet these functions. Thus, there is a need to reconsider the devolution criteria and transfer of resources to the ULBs for their fiscal needs.

Borrowing plays an important role in development finance. In India, the development expenditures of both central and states governments are largely met from borrowed funds. Many states government intended to provide this facility to their

ULBs.

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CHAPTER - IV

FINANCES OF URBAN LOCAL BODIES (ULB S) IN UTTAR PRADESH

4.1 Introduction:

Urbanization is perceived as a determinant, as well as consequence of economic development. Over the past two decades many countries in Asia have experienced rapid economic growth. This has led to a rapid rise in their urban population.

However, in spite of a significant increase in national wealth and personal income, the quality of life of an average urban resident is not satisfactory. Urban centres are characterised by squalor slums, traffic congestion and shortages of water and power.

While the national government pursue the goal of economic development, it is generally left to the local government to manage rapidly growing urban areas and provide basic services to its residents (RCUES).

The urbanization process that has been taking place in India and growth of

urban population compels one to conclude that the urbanization process has been led

by blind market forces and both the central and state governments have not been able

to comprehend the implications of this process for not merely urban civic services but

also for orderly development of economy. The central and state governments, which

have been preoccupied with compulsions of rural development, could not provide

adequate financial assistance to ULBs. Apart from this, the urban development and

town planning authorities could not effectively plan and develop orderly urban

settlements. The government of India and the state governments have not being able

to formulate appropriate urban development policies for and orderly urban development. Instead both the central and state governments imposed unjustifiable regulations and restrictions on private efforts in housing and other civic societies in urban areas. The cumulative effect of all these lop-sided policies had left to haphazard growth of urban settlement and severe deterioration of urban civic services

(Thimmaih, 1998).

The large size of urban population as also that increase in it has serious repercussions for the municipal authorities. This requires mobilisation of huge financial resources for capital investment in order to provide the basic urban infrastructure and services, and also recurring expenditure on the created assets. The provision of urban infrastructure, its level and quality, assumes further significance as these are instrumental in attracting and sustaining a wide range of economic activities in the urban centres. The success of the economic reform process itself is dependent largely on productivity of urban economy. Despite this crucial role of urban centres, in most of the cities and towns, the availability of basic services has either declined or remained inadequate and sizeable population in them without access to basic services- such as water supply, sewerage, drainage, disposal of solid waste, street lighting and road etc. The municipal bodies that are statutorily responsible for the provision and maintenance of basic services are experiencing tremendous fiscal stress. The poor financial health of these urban local bodies has been documented in a number of studies and expert group reports (Mathur, 1998).

Uttar Pradesh is the most populous state of the country. According to the 2001 census, the state has a population of 1660.53lakhs, showing an increase of 25.8% over the 1991 census (RCUES).

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4.2 Urban Local Governments in Uttar Pradesh

The state has a long history of urban local government. Uttar Pradesh (the erstwhile

united province) has been pioneer in enacting the legislations as well as governs the

functioning of the urban local institutions. A municipal act exclusively for Lucknow

was enacted in 1856, followed by north-west provinces and avadh municipal act, 1873

which was substituted in 1883 in pursuance of Ripon act of 1882. In accordance,

sufficient reforms were introduced in 1870 and 1882 in municipal administration. The

notified area committees were constituted under an act of 1900 and the zilaparishad

act come into existence in 1906. The U.P. town area act was enacted in 1914 and the

UP Municipalities act came into effect in 1916, in 1919 UP town improvement act

was legislated and improvement trusts were created in five big towns. In 1945 Kanpur

urban area development act was passed and the development board substituted the

improvement board there. The building regulation act was legislated in 1958 followed

by the UP municipal corporation act 1959. In 1973 UP planning and development act

was enacted and the development authorities were set up. The legislation of UP water

supply and sever system act 1975 enacted a number of Jal Sansthans. These acts have

been amended to cope with the changing scenario.

In consonance with the 74 th amendment to the constitution, the UP local self government laws (amendment) act, 1994 was passed by the legislature of UP, which came in to force w.e.f. 31.05.1994. Some of the salient changes made through the amendment act, 1994 are as under-

1. UP (Nagar Mahapalika) Act, 1959 and UP Nagar Palika (Municipalities) act,

1916 have been renamed as UP Nagar Nigam act, 1959 and UP Nagar Palika

act, 1916 respectively, while the UP Town Area act, 1914 has been repealed.

110

2. Before 74 th amendment there were 5 categories of the urban local bodies i.e.,

(i) Nagar Mahapalika

(ii) City board

(iii) Nagar Palika

(iv) Notified Area committee

(v) Town Area Committee.

But after the 74 th amendment there are only three categories of urban local bodies in the Uttar Pradesh.

1. Nagar Nigam (Municipal Corporation)

2. Nagar PalikaPrishad (Municipal Board)

3. Nagar Panchayat (Town Panchayat)

Before 74 th amendment under section 30 of the Act, the state government was empowered to dissolve any municipality any time if it is satisfied that the board has made a willfull default in the performance of any duty or has exceeded or abused its powers.

But after 74 th amendment this power has been curtailed and now it is provided

under section-30 of the act (1916) that, if the government, is satisfied that a

municipality persistently make willful default in the performance of duties imposed

upon it or exceeds or abuses more than once its power it may dissolve it after having

given the municipality a reasonable opportunity to show cause.

3. At present urban local bodies cannot be kept dissolved for more than six months

period. According to section-8 of UP municipal corporation act, 1959 and

section-10-A of UP Municipalities Act, 1916 election have been made

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compulsory before the expiry of a period of six months from the date of its

dissolution.

4. Financial powers: financial powers of mayor and mukhyanagaradhikari in case

of Municipal Corporation and president in case of municipalities and nagar

panchayat have been increased to a great extent.

5. Expansion in the duties: functions which have been added as a consequences of

the 74 th amendment in the duties of the urban local bodies,

6. Constitution of state finance commission (S.F.C.): Consequent upto 73 rd and

74 th amendments to the constitution of India, and in exercise of the power

conferred by article 243(i) and (x), the governor wide finance departments

notification no. RG-1933/X-53-94 dated October 22, 1994 constituted the state

finance commission (Panchayati Raj and Urban Local Bodies). The SFC was

required to study and recommend among other things to the distribution between

state, gram/kshetra/ zilapanchayats and urban local bodies, of the net proceeds

of taxes, duties, tolls and fees leviable by the state which may be divided

amongst them under part ix and ix-A of the constitution and the allocation

between panchayats at all levels and urban local bodies of their respective shares

of such precedes. Subsequently the state government through notification no.

RG-743/X-94-68/94 dated April 24, 1995 extended the term of the commission

till 31 st December 1995, which was again extended up to 31 st December, 1996

later on.

First state finance commission submitted its interim recommendations to the

state government on 31 st December, 1995 and final recommendations on 31 st

December 1996, which were accepted by the government in January 1998. The

recommendations of the SFC were made effective since 1 st April 1997. There are in all

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61 recommendations of the SFC which deal with the urban local bodies, foremost amongst them are as follows:-

1. Tax collection should be made on self-assessment forms and sufficient penalty

may be fixed for default and wilful concealment of information. Tax collection

may be made annually with the demand notice served once a year.

2. The commission recommends that property tax, water tax and latrine tax are to

be collected by the urban local bodies concerned and so long as decision to put

Jal Sansthan and development authorities under one umbrella is not taken by the

state government.

3. In order to bring about improvement in essential civic services, the commission

recommends private participation to be encouraged in urban local bodies.

4. The commission recommends that the urban local bodies should make special

drive for recovery of their dues in full and with that ensure liquidation of their

outstanding liabilities.

5. State government should enact one common legislation for all urban local

bodies so that the ambiguities about levy and recovery of taxes presently evident

in the U.P. municipal corporation act, 1959 and U.P. municipalities act, 1916 are

done away with and every urban local body has the same set of legal provisions

throughout the state.

6. For loans advanced to urban local bodies for integrated development of small

and medium towns, the commission recommends that such outstanding loans as

on 31.03.1994 with interest thereon may be converted into grant.

7. With a view to improving the resources position of ULBs, the commission

recommends that levy of various taxes should be made mandatory for all the

urban local bodies and for this purpose amendments in U.P. municipal

113

corporations and U.P. municipalities act should be brought about. It is further

recommend that the urban local bodies should also make concerted efforts not

only to collect their own taxes but also to ensure that the percentage recovery

against the demand improves perceptibly.

8. The commission recommends that budgets of all urban local bodies should be

prepared ward-wise and operated upon by adopting a uniform pattern for which

specific recommendation has been made in the report.

Viewing the condition of sanitation in urban local bodies as highly unsatisfactory, the commission recommends that the sanitation workers are made to work according to norm, and, if necessary, private parties/N.G.O.s should be given on contract the work of sanitation and disposal of garbage.

The most important recommendations of the second state finance commission report of Uttar Pradesh, which are as follows:-

1. Devolution of funds should be passed on directly to urban local bodies by the

finance department.

2. Seven percent of the net proceeds of the state’s total tax revenue should be

earmarked for devolution to urban local bodies. Inter-se apportionment of the

above allocation should be done on the basis: 3.12% each to Nagar Nigams

and Nagar Palika Parishads, and 0.76% to Nagar Panchayats.

3. To settle the outstanding liabilities of urban local bodies, the commission

recommended for constituting a standing committee.

4. For inter-distribution of the devolved funds between different categories of

ULBs, the commission recommended the criterion of distribution of 80% on

the basis of population and 20% on the basis of area.

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5. SFC formula is applied for TFC grants also for inter-se distribution of

devolution of funds.

6. Adoption of carpet area as the basis for assessing the annual rental value of

properties on the basis of certain criteria.

7. Property tax/ water tax/ latrine or sewerage tax would be collected by ULBs

but after a decision to bring is a jalsansthan and development authority under

umbrella of the concerned ULBs..

8. Charges/ rates for consumption of water should be revised to make them

commercially viable.

9. Privatisation is one option to augment the civic municipal services in the

states.

10. Special drive should be launched to cover the ULBs dues to enable them to

clear out-standing loans due from these bodies.

11. There should be one common legislation for all urban local bodies.

12. Property rights of land in urban areas should vest in urban local bodies to

enable them to raise their incomes from rise in land prices.

13. The activities of all urban local bodies are common in nature so they should

have common budget formats.

14. Accounts of all urban local bodies may continue to be maintained according to

the present rules.

15. Urban bodies must take initiative to collect pending arrears so that the salary

& provident fund of their employees could be paid regularly.

16. To improve the finances of urban local bodies it was recommended that all

taxes should be levied compulsorily by amending acts.

17. There should be fixed norms for maintenance of roads.

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18. Local bodies carry heavy liabilities. There is slackness in local bodies in

tapping their own sources of income. To improve their working efficiency

there should be proper training of staff.

Recommendations of Third State Finance Commission (TSFC)

1. For strengthening the financial position of local bodies, the state government

should allocate 15 percent revenue of its tax revenue and non-tax revenue to

local bodies.

2. For increasing the revenue of urban local bodies, the state finance

commission has recommended:-

a. Tax on consumption of electricity at the rate of 5p/unit

b. Revenue from extra stamp duty should be allocated to urban local bodies

c. There should be tax on transfer of immovable property like extra stamp

duty

d. Like Nagar Nigam, Nagar Palika Parishad and Nagar Panchayats should

be levied a property tax up to the limit of 32% on annual rental

e. Tax on businesses

3. Distribution of allocated fund of urban local bodies among Nagar Nigams,

Nagar Palika Parishad, and Nagar Panchayats on the basis of population ratio

i.e. 40 : 40 : 20, respectively

4. For the Nagar Nigams, the allocated funds should be distributed between the

Nagar Nigams of state on the basis of following formula, and the same

formula should be applied for the Nagar Parishad, and Nagar Panchayats

Parameter Weight

a. Population 50 percent

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b. SC/ST population 10 percent

c. Development indicator 30 percent

d. Effort of revenue collection 10 percent

5. In view of raising the revenue of urban local bodies, the SFC has

recommended that 2 percent of its total allocated funds should be allocated to

encouragement fund

6. The dues on establishment expenditure at state level released among Nagar

Nigams as soon as possible

7. For the newly formed local bodies after 01.04.2006, the allocation of funds by

state government should be on the basis of recommended formula by the state

finance commission

8. The 5 percent of total allocated funds of Nagar Nigam should be given to that

Nagar Nigam which has more than 15 percent slum population according to

2001 census

9. It is compulsory for urban local bodies and rural local bodies to obtain a

utilisation certificate with regard to the allocation of funds of state finance

commission and central finance commission

4.3 Municipal Expenditure in Uttar Pradesh

Municipal expenditure viz-a-viz infrastructure and services are governed by the municipal functions described in the 12 th schedule of 74 th CAA. However, since Uttar

Pradesh has a long tradition of municipalities, even before its constitutional recognition by the 74 th CAA, many of the functions listed in the 12 th schedule were already being performed by them, and municipalities were increasing expenses on these (Pethe and Lalvani, 20005). Whilst these functions are the goal post, the actual

117 municipal expenditure is substantially curtailed. This is because most municipalities have negligible revenues left after paying for non-developmental expenditure such as establishment expenses that include the salaries and wages of its staff and general administrative posts. In general, the allocation of public expenditure at the local level is poorly planned and calls for streamlining the administrative machinery of the local governments. The few municipalities that earn some revenue surpluses undertake developmental activities such as the operation and maintenance of the local infrastructure and services. With respect to the creation and development of public assets and infrastructure, the central and state departments bear a major share of responsibility. Hence capital expenditure for public works is predominantly financed by transfer and loans from the central and state governments (Venkatachalan, 2007)

The importance of municipal expenditure needs no emphasis. The performance of municipalities in the discharge of its functions is judged by the way the tax revenues are utilised, the tendency towards increase or decrease of expenditure and the satisfaction which is derived from such expenditure. The extent to which taxation may be felt as a burden by the taxpayers depends upon to a large extent on the way the tax revenues are spent and the manner in which the benefits of expenditure are distributed. It has been observed that increasing role which is being assigned to expenditure on social services seems to diminish the unpopularity of the tax system, while what is of even greater value; the increasing importance given to the development expenditure tends in the long run actually to increase the taxable capacity of the people.

Due to the growth of population, industrialization urbanisation, inflation, higher pay scales, dearness allowance and other amenities to Municipal staff, interest

118 payments on loans obtained for development works, system of grant-in-aid based upon expenditure and, finally the cost of democratizing the municipal administration the burden of expenditure on municipalities in the state has increased. At the same time there has been a persistent demand by citizens for greater and better municipal services.

The revenue receipts of the municipalities on the other hand, have not increased sufficiently to cope up with these requirements. This undermined the efficiency of municipal services, further with the growing industrialisation as well as popular awareness of the needs for municipal services and involvement of local bodies in development, the expenditure has increased. This increased the dependence of the municipalities on state government. The problem has assumed alarming proportions in certain cases, as the delegation of functions without adequate resources to fulfil them is not only meaningless but also dangerous (Pandya, 1993).

Classification of Municipal Expenditure

Local expenditure is generally divided, for accounting purpose, into two broad groups, namely, revenue expenditure and capital expenditure. The expenditure which is net from current resources and is often of an annually recurring nature is termed as revenue expenditure. Outlay on administration, maintenance of services, loan charge, etc. fall into this category. Local government during the course of their development undertake the provision of services which necessitate large initial outlays of expenditure and it may not be practicable to finance such project from current revenues, consequently, loan finance may leave to be resorted to in order to meet the cost involved. Such expenditure is termed as capital expenditure.

119

Local expenditure may also be classified into developmental and non-

developmental. The expenditure which directly contributes to social services and civic

amenities is known as developmental expenditure, while the remaining expenditure is

non-developmental. Expenditure on public wealth, sanitation, and education, public

works, safety, conveniences etc. is included in the first category while expenditure on

administration, revenue collection, repayment of loans, etc. is included in the second

category. Local governments should try to keep the non-developmental expenditure at

a low level as it does not directly contribute to the welfare of the citizens who

generally regard it wasteful. On the other hand development expenditure should be

increased as it directly results in the welfare of the people. Moreover, development

expenditure reduced the unpopularity of taxes and increases the taxable capacity of

the local people. The result of increased taxable capacity is increased tax revenue

resulting in increased development expenditure. Development expenditure gives a

momentum to the process of the development and welfare of the inhabitants

(Bhagwan, 1983).

It is a matter of great significance that both the 73 rd and 74 th amendment to the

constitution made provision for the creation of state finance commission to make

recommendations on financial transfers to ULBs as well as PRIs. The 74 th amendment,

under article 243-1 SFCs are required to look into the needs of ULBs also. It is for the

first time in India that such constitutional bodies came to be created under state laws

to assess the financial requirements of local bodies and make appropriate

recommendation to augment their resources. The 73 rd and 74 th constitutional amendments have provided, for the first time, a constitutional foundation for financial relations between state governments and local bodies.

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Article 243-W of the constitution refers to the powers, authority and responsibilities that the legislature of a state may by law endorsed upon the municipal bodies to enable them to function as institution of self-government.

As per the 12 th scheduled the functions listed for urban local bodies are-

1. Urban planning including town planning

2. Regulations of land use and construction of buildings

3. Planning for economic and social development

4. Roads and bridges

5. Water supply for domestic, industrial and commercial purpose

6. Public health, sanitation, conservation and solid waste management

7. Fire services

8. Urban forestry, protection of the environment and promotion of ecological

aspects.

9. Safe guarding the interest of weaker section of the society including the

handicapped and mentally retarded

10. Slum improvement and upgradation

11. Urban poverty alleviation

12. Provision for urban amenities and facilities such as parks, gardens play

grounds etc.

13. Promotion of cultural , educational and aesthetic aspect

14. Burial and burials ground, cremation ground and electric crematoriums.

15. Cattle ponds, prevention of cruelty to animals

16. Vital statistics including registration of births and deaths.

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17. Public amenities including street lighting parking lots, bus stops and public

convenience.

18. Regulation of slaughter houses and tanneries

In the Uttar Pradesh, urban local self government laws (amendment,), 1994, all the functions listed in the 12 th schedule of the 74 th constitutional amendment act,

have been included. Out of the 18 functions listed, the following are discretionary- (1)

urban planning including town planning (2) regulation of land use and construction of

building (3) fire services. The rest are obligatory.

It needs to be mentioned here that out of the 18 functions listed in the 12 th

schedule, 12 are traditional ones being already performed by ULBs. The revised laws

incorporate six new functions for ULBs i.e. (1) planning for economic and social

development (2) construction and maintenance of parking lots, bus stops and public

conveniences (3) promotion of urban forestry and ecological aspect and protection of

environment ( 4) safeguarding the interest of weaker section of society, including the

handicapped and mentally retarded(5) slum improvement and ubgradation and (6)

urban poverty alleviation (SSFC, UP, 2002)

4.4 Growth of expenditure

It is not necessary to analyse the growth of expenditure of individual local bodies since it is not very pertinent to the subject concerning financial administration. The growth in the volume of total expenditure is analysing with a view to highlight the problems associated with administrating such expenditure. The following factors are responsible for growth in local expenditure-

1. The changes in the concept of the state from the maintenance of law and order to

providing welfare activities for the people and decentralisation of the functions

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have increased the activities of the local bodies. This new functions necessitate

heavy expenditure.

2. Under the assistance of five year plans there has been a tendency on the part of

national and state government to extend financial assistance to the local bodies

in the shape of grant and loan.

3. Growth in industrialisation has relate to urbanisation necessity investment of

more funds in building the infrastructure i.e. roads , transport , building and

markets (Das, 1988).

4. The increase in the level of expenditure also determined, to a great extent, by

urban sprawl and the type of the physical form of the city. If the city sprawls

around, it requires relatively more to be spend on the trunk service lines, roads,

street lighting, scavenging etc, if however, urban expansion takes the form of

leap froging, leaving behind washed stretched of vacant land.

5. It is the flow of real purchasing power in to the hands of the consumers which

increases the effective demand for commodities and services. With the increase

in income, the existing level of services and gap in it no longer acceptable. The

standard utility analysis of consumer demand tells us that a rational consumer

thrice to keep the ratios of commodities he consumed proportionally to their cost

of acquisition. With the increase in income and wealth the consumer wants to

consume increased quantity and quality of civic services.

6. Technological changes have brought about substantial external diseconomies

like air pollution, contamination of water and problems of traffic control, etc.

7. Municipal expenditure increases also because of rise in prices of the things

purchased by the civic authorities. The consequent erosion in the purchasing

power of money makes them spend more even to maintain the existing service

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level for the rising population level if, however, the quality and quantity of

services have to be increased, the local authority have to spend much more

because of price increases of material, equipment and the increase in pay and

allowances of the employees.

8. Demand for services is generated, in the main, by the city size which in turn is

determined by the demographic growth of the cities or town. Like the firms , the

size of the city also provide scope for the economies of services but the

optimum city size for the supply of services at the minimum cost varies not only

in different situations owing to population and economic structure of the cities

but also for the different services. In any case beyond a point, the diseconomies

of size begun to set in and the unit cost of supplying services record and increase

together with increases in population. Therefore, the high rate of population

growth leads to higher municipal expenditure in very large cities.

Following table 4.1 indicate that the increase in the volume of total expenditure during the period from 1995-96 to 2005-06 is quite significant. The total expenditure has increased from about Rs 216.5core in 1995-96 to Rs805.16crore in

2005-06, which is more than three times to its expenditure in 1995-96. The compound aggregate growth rate (CAGR) during the said period was 13.59.

The revenue expenditure has increased by13.13 %(CAGR), while capital

expenditure has increased at much higher rate of 18.22%(CAGR) during the above

mentioned period. After analysing the table, it has been observed that there is some

ups and downs in the volume of expenditure as well as in the percentage change over

the previous year. Out of the two components of expenditure of ULBs UP, capital

124 expenditure shows a major fluctuation due to the dependency of funds on upper tier of governments.

Table-4.1

Trends and Patterns of Expenditure of MCs in UP

Year Total Expenditure Revenue Capital Expenditure Expenditure 1995-96 216.52 203.79 12.73 1996-97 251.82 231.2 20.62 (16.30) (13.45) (61.97) 1997-98 306.61 272.09 34.52 (21.75) (17.68) (67.41) 1998-99 369.56 325.62 43.94 (20.53) (19.67) (27.28 1999-2000 435.73 382.52 53.21 (17.90) (17.47) (21.09) 2000-2001 532.95 483.29 49.65 (22.31) (26.34) (-6.69) 2001-2002 555.59 482.82 72.76 (4.24) (-0.09) (46.4) 2002-2003 582.37 555.29 67.07 (4.82) (6.72) (-7.82) 2003-2004 682.43 583.51 98.91 (17.18) (13.23) (47.47) 2004-2005 667.96 601.09 66.86 (-2.12) (3.01) (-32.40) 2005-2006 805.16 719.88 83.28 (20.14) (19.76) (24.55) CAGR(U.P.) 13.59 13.13 18.22

Source: Reports of second and third state finance commission, Government of Uttar Pradesh

The analysis of expenditure thus, indicates a remarkable dynamism in the

growth of expenditure. The rising level of aggregate expenditure of the municipal

corporations of UP is only symptomatic of their growth and dynamism. Before an in-

depth study of the trends and pattern of expenditure, it would be useful to analyse

more specifically the factors which gives rise to the increases in the municipal

125 expenditure for, it would help in comprehending the relationship between expenditure and revenue of the municipal corporations in Uttar Pradesh as also the rising deficits in their finances ( Jha, 1988).

Table-4.2

Share of Revenue Expenditure (RE) and Capital Expenditure (CE) to Total Expenditure (TE)

(In percent)

Year Share of RE to TE Share of CE to TE 1995-96 94.12 5.87 1996-97 91.81 8.18 1997-98 88.74 11.25 1998-99 88.11 11.88 1999-2000 87.78 12.21 2000-2001 90.68 9.31 2001-2002 86.90 13.09 2002-2003 88.48 11.51 2003-2004 85.50 14.49 2004-2005 89.98 10.00 2005-2006 89.40 10.34 Source: Reports of second and third state finance commission, Government of Uttar Pradesh

The table 4.2 indicates that the share of revenue expenditure to total

expenditure is very high as compared to capital expenditure. In 1995-96, share of

revenue expenditure was 94.12 per cent of total expenditure where as the capital

expenditure was only 5.87 per cent of total expenditure of Municipal corporations of

Uttar Pradesh (UP). While analysing the above table, it has been observed that there is

a slow and steady decline in revenue expenditure from 94.12 per cent in 1995-96 to

89.40 per cent in 2005-06, whereas capital expenditure recorded marginal increase

during the period and increased from 5.87 per cent to 10.34 per cent. The increase in

126 capital expenditure of Municipal corporations of UP is because of increase in expenditure on various developmental programmes.

Per Capita Expenditure (PCE)

Public expenditure is inevitably related with population for whom it is incurred.

Aggregate expenditure does not give an indication of actual level of services being provided per person, per capita expenditure provides very first approximation of an exact analysis of service level.(Jha, 1988)

Table -4.3 Per Capita Expenditure (PCE) of Municipal Corporations of UP

Year Population Per capita Per Capita Per Capita (in crore) Total Revenue Capital Expenditure Expenditure Expenditure (In rupees) (In rupees) (In rupees) 1995-96 1.1 196.83 185.26 11.57 1996-97 1.13 222.84 204.60 18.24 1997-98 1.16 264.31 234.56 29.75 1998-99 1.2 307.96 271.35 36.61 1999-2000 1.24 351.39 308.48 42.91 2000-2001 1.28 416.36 377.57 38.78 2001-2002 1.32 420.90 365.77 55.12 2002-2003 1.36 428.21 378.88 49.31 2003-2004 1.4 487.45 416.79 70.65 2004-2005 1.44 463.86 417.42 46.43 2005-2006 1.49 540.37 483.14 55.89 Source: Reports of second and third state finance commission, Government of Uttar Pradesh, Census Report 2001, Government of India

The table 4.3 comprises urban population of Uttar Pradesh, per capita total expenditure, per capita revenue expenditure and per capita capital expenditure of

Municipal corporations of UP from 1995-96 to 2005-06. The table indicate that with the increase in urban population, there has been also increase in per capita total expenditure, per capita revenue expenditure and per capita capital expenditure.

127

In 1995-96, the per capita total expenditure was rupees 196.83, whereas PC revenue expenditure and capital expenditure was rupees 185.26 and 11.57 respectively and which rose to rupees 540.37, 483.14 and 55.89 respectively in 2005-

06. While analysing the above table it is found that both the components of expenditure have increased over the years, however, per capita capital expenditure have increased over five times during the above mentioned period. In absolute terms per capita revenue expenditure is still over four times larger than per capita capital expenditure of municipal corporations of U.P. the high volume of per capita revenue expenditure is mainly due to larger establishment expenses. The low level of PC capital expenditure shows that the expenditure on developmental work in urban areas in U.P. is very low. The pathetic condition of civic services in the urban areas of U.P. is an indicator of low level of per capita capital expenditure.

Per capita Expenditure on Core Services

Urban centres in U.P. present a grim picture with regard to the availability of core services. At the aggregate level although around 90% of the urban population is reported to have access to safe drinking water, there are severe deficiency with regard to quantity and quality of water available to urban residents. In case of sanitation although around 50% of urban population is covered with sanitation services, the proportion of the urban households connected to the public sewerage system is much lower. The position with respect to the collection and disposal of garbage is worse.

The problems are not only of the shortage of services but also inequitable distribution of the services among the different sections of society. Moreover, it is observed that services provided to the poor below the norms in terms of quality and quantity. The core services have been put to further strain as a result of an increase in economic and

128 industrial activity following the liberalisation and globalisation measures, as a large proportion of new investments are in the town and cities. While the responsibility to meet the growing demand to augment existing services is increasing rapidly, there is not much commensurate increase in their revenue base.

Table-4.4 Per Capita of Municipal Expenditure on Core Services (In rupees)

Year Water Road Street Sanitation & Drainage Waste Supply Light Sewerage Disposal 1995-96 2.65 11.77 4.25 2.43 1.30 0 1996-97 3.38 16.30 4.09 2.69 1.45 0 1997-98 3.66 21.13 5.33 4.16 3.62 0 1998-99 5.06 34.06 8.61 4.54 4.20 0 1999-00 6.61 31.52 9.41 4.79 2.62 0 2000-01 68.31 93.98 13.85 141.77 18.47 0 2001-02 69.17 86.86 13.16 139.98 17.00 0 2002-03 65.91 89.52 14.79 148.96 18.00 0 2003-04 78.64 100.93 19.42 148.35 23.69 0 2004-05 75.40 110.97 17.73 146.79 23.82 0 2005-06 95.25 116.27 28.31 160.87 24.47 0 Source: Reports of second and third state finance commission, Government of Uttar Pradesh, Census Report 2001, Government of India

The table (4.4) shows per capita expenditure (PCE) on core services of

municipal corporations of Uttar Pradesh, namely, water supply, road, street light,

sanitation and sewerage, drainage and waste disposal. Among all services, the waste

disposal has no expenditure on it. The table shows that remaining five services are

experiencing increasing trend from 1995-96 to 2005-06.In 1995 the PCE on road is

high that is Rs11.77 followed by street light, water supply, sanitation &sewerage, and

drainage that isRs4.25,Rs 2.65,Rs 2.43, and Rs 1.30. After 1995 the PCE of all five

services have increased till 1999-2000. The table also exhibit that there is a huge

increment in per capita expenditure of all services of municipal corporations of Uttar

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Pradesh. This sharp increase in all five services is due to the allocation of bulk fund to the Municipal Corporations by central government. After 2000, the financial situation of all MCs in the state has drastically changed in a positive way. Thus, due to the above mentioned reasons, the levels of services offered by MCs of Uttar Pradesh have increased. But in comparison to Zakaria Committee norms (see appendix) the per capita expenditure of Uttar Pradesh municipal corporations on core services is low, it means that the level or quality of delivered services is poor and also due to this mass population does not get benefit of these services.

The above analysis of the growth in expenditure thus reveals that though there has been an increase in the revenue expenditure of the municipal corporations of

Uttar Pradesh since 1995-96, the increase in expenditure in relation to population growth has been marginal. On several basic civic services the per capita expenditure has either been steady or has increased over the years .A major portion has gone to establishment expenditure leaving relatively smaller funds to be allocated to services

.The capital expenditure has also not followed any definite trend and scheme of priorities

4.5 Municipal revenue

The constitution divides the public revenues of the country in to two parts- one for the union and other for the state and permit the state authorities to allot any resources at their discretion to local governments out of state’s share of the public revenue. Due to this peculiar provision in the constitution of India the local bodies have scanty sources of revenue as compared to the union government and the state governments. These bodies are also helpless in this matter as they cannot impose any taxes on their own.

Local taxes are imposed by municipalities out of the given list of taxes and also not

130 higher than the maximum rate specified in certain cases. The poverty of resources of local authorities in India is well known and needs hardly any emphasis in the discussion of the problems of local finance (Pandey, 1988).

The sources of revenue of municipal governments vary across country but generally includes taxes, user fees, and inter governmental transfers. Other revenue may include investment income, property sells, and licence and permits. In terms of taxes, the property tax is levied by local government in many countries (UN Habitat,

2009). The sources of income for municipalities in India are either own resources or external transfers and loans. Own sources of revenue consist of tax and non tax levies.

Taxes includes property tax, tax on vehicles, tax on profits from profession or vocations or tax on entertainment, show and advertisements. Examples of non tax revenues are fees and fines, user charges rents from the municipal assets and income from municipal investment or undertaking. External revenue sources comprise fiscal transfer from the central or state governments such as grants-in-aid or shared taxes, and borrowing and loans from domestic sources (Vankatachalan, 2007).

It is well laid in public finances theory that the expenses matching with

functions should also match with revenue. The matching of revenue with expenses is

an essential indicator of state of financial health of local governments and a necessary

requirement in some of the countries. However, conceptually there exist potential

mismatches due to the design of the system such that there is a devolution of

responsibility but not equivalent revenue (which is known as vertical imbalance) and

that there is variation in the revenue generation capacity of respective local

government (which is known as horizontal imbalance) (Nallathiga, 2008).

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The constitution of India does not lay down the revenue base for municipalities. The power to determine their revenue base- be it the tax authority , tax base , tax rate setting, local tax autonomy, or even the grants-in-aid and other form of transfer rents with the state government. Within this framework , the state government have specified the taxes that the municipalities can levy and collect , which historically have comprised taxes on land and building (entry 49), taxes on the entry of goods in to local area for consumption use or sell there in (entry 52), taxes on advertisement other than advertisement published in news papers (entry 55), taxes on animals and boats (entry 58), tolls (entry 49), taxes on professions, trades , callings and employment (entry 60), and other taxes on entertainment (entry 62). In addition, there are charges, fees and fines forming the non tax base of municipalities (entry 66)

(Mathur, 2006).

At present municipal corporations in the state depend heavily on funds devolved by the state and central government through the state finance commission, central finance commission and grants made for other purposes of loan extended etc.

The contribution of revenue from municipal corporations on resources remains quite low. This is primarily low because present resource base of Municipal Corporations is narrow, shallow and inelastic, and also because the full potential of even the available base has not been adequately exploited due to a number of reasons-

1. Under section 172 of the Uttar Pradesh municipal corporation act 1959, Nagar

Nigams are requiring to levy the following obligatory taxes.

(a) Property tax which include a general tax, water tax, drainage tax and

conservancy tax

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(b) A tax on vehicles other than mechanically propelled vehicles and other

consequences playing for higher or kept within the city or on boats moored

there in and

(c) A tax on animal used for driving , draught or burden kept within the city

In addition Nagar Nigams may levy the following discretionary taxes-

1. A tax on trades, calling and professions, and holding of public and private

appointment

2. Tax on dogs kept within the city

3. A betterment tax

4. A tax on deed of transfer or immoveable property situated within the city

5. A tax on advertisement published in newspapers

4.6 Trends and Pattern of Receipts of Municipal Corporations of Uttar

Pradesh

The operations of municipal corporations are governed by various provisions in the state Acts which are the fountainhead of the powers of local bodies. The sources of revenue are mandated by such provisions and their autonomy in taxation is circumscribed by these. Also, their autonomy for deciding expenditure priorities is similarly limited. The municipal corporations have a very limited choice regarding taxation, which is further restricted by various regulating principles decided by the state. Whilst it can be granted that the higher level government should play a supervising and controlling role, the restrictions imposed on municipal corporations seem to be suffocating them. The important point being made here is that municipal

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Table-4.5 Revenue Receipts of MCs of UP

Year Total Receipts Own Tax Non-Tax Revenue (Rs in crore) (Rs in crore) (Rs in crore) 1995-96 69.43 35.06 22.88 1996-97 74.35 39.55 33.43 (7.08) (12.80) (46.11) 1997-98 102.96 49.73 36.05 (38.48) (25.73) (7.83) 1998-99 459.74 57.4 45.64 (346.52) (15.42 (26.60) 1999-2000 374.09 68.4 45.04 (-18.63) (19.16) (-1.31) 2000-2001 576.9 108.61 95.26 (54.21) (58.78) (111.50) 2001-2002 603.63 124.02 107.88 (4.63) (14.18) (13.24) 2002-2003 710.75 129.4 133.31 (17.74) (24.35) (23.57) 2003-2004 682.04 154.65 129.98 (-4.03) (19.49) (-2.49) 2004-2005 753.99 181.43 175.5 (10.54) (17.31) (35.02) 2005-2006 891.57 215.17 179.21 (18.24) (18.59) (2.11) Source: Reports of second and third state finance commission, Government of Uttar Pradesh Note: Figure in parenthesis ( ) shows percentage growth rate over the previous years corporations have a very limited autonomy vis-a-vis sources of their revenues, and hence the entire revenue-expenditure process needs to be assessed bearing this in mind. Like taxation, the non-tax revenues of the municipal corporations are also limited to conventional sources. The powers of municipal corporations of Uttar

Pradesh appear to be highly restricted with respect to both, the tax and the non-tax sources of revenues, which constitute their own sources. This has forced the municipal corporations to be dependent on the state for their finances. These

134 constitute external sources of finance, which complement the own sources of municipal corporations (Pethe and Lalvani, 2005)

The revenue of the MCs may be classified in to two broad categories, (i) tax revenue (ii) non-tax revenue. Tax comes from taxes levied by the corporations. Non- tax revenue includes rent, fees, tahbazari, etc. non-tax revenue results in reduced burden of taxation on the people. Table 5 give details of the growth of own tax and non-tax revenue of the municipal corporations. The following conclusions emerge from a close study of table 4.5.

1. Own tax and non-tax revenues have increased almost with similar pace during

the period under review. Total receipts become more important and increased at

a faster rate in comparison to own tax and non-tax receipts. The faster growth of

total receipts of corporations is mainly due to huge transfers and grants-in-aid

from upper tier governments.

2. The municipal corporations of relying on both direct taxes and indirect taxes.

Over the period revenue from direct taxes has increased rapidly as compared to

revenue from indirect taxes. it is satisfactory to note that the municipal

corporations are more inclined to exploit the direct taxes rather than the indirect

taxes, and that the tax structure of the corporations is becoming progressive in

character.

Following table 4.6 gives an insight in to share of own tax and non-tax revenue of municipal corporations. From the analysis of the table it has been observed that the share of own tax & non-tax receipts in the total receipts has receded during the period under review.

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Table -4.6

Share of Own Tax and Non-Tax Revenue to Total Receipts of MCs of UP

Year Own Tax Non-Tax Total receipts (in percent) (in percent) (in percent) 1995-96 50.49 32.95 83.45 1996-97 53.19 44.96 98.15 1997-98 48.30 35.01 83.31 1998-99 12.48 9.97 22.41 1999-2000 18.28 12.03 30.32 2000-2001 18.82 16.51 35.33 2001-2002 20.54 17.87 38.41 2002-2003 18.20 18.75 36.96 2003-2004 22.67 19.05 41.73 2004-2005 24.06 23.27 47.27 2005-2006 24.13 20.10 44.23 Source: Reports of second and third state finance commission, Government of Uttar Pradesh

This decline in own sources of revenue as a proportion to total receipts is accompanied with an increase in transfers and grants-in-aid from upper level of governments. The share of tax revenue in comparison to non-tax revenue is still higher, which is against the sound principles of local finance under which non-tax revenue is expected to reduce the tax burden of the people.

Transfer from Finance Commission to Municipal Corporations of UP

In all multilevel fiscal systems, efficient assignment of expenditure powers does not correspond to efficient revenue powers. Further, variations in revenue capacity among sub national units can cause horizontal inequity. The resulting vertical and horizontal fiscal imbalances have to be offset through a system of unconditional inter- governmental transfers. In addition, efficient provision of public services with

136 significant spill overs at sub national levels or for merit good reasons, specific purpose transfers will have to be made. It is generally recognized that (i) the transfer system should be formula based rather than negotiated; (ii) the design of transfers should not have adverse incentives in fiscal management and in particular, general purpose transfers should be designed to offset shortfall in revenue capacity and excess expenditure needs of sub-national units and specific purpose transfers should be designed to ensure minimum standards of targeted services. (Rao, 2000)

The analysis of following table 4.7 shows that a rising trend in transfers from

finance commission to MCs of UP with few exceptions. Share of transfers in the total

municipal receipts have gone up to 11.59% from 0.95% during 1996-97 to

2005-06.

Table -4.7

Transfer from Central Finance Commission to MCs of UP

Year Transfer from Finance Percentage Growth Percentage Share of Commission(Rs in Rate Total Receipts crore) (In percent) (In percent) 1995 -96 0 0 1996-97 0.71 0.95 1997-98 9.24 1201.40 8.97 1998-99 14.6 58.00 3.17 1999-2000 20.68 41.64 5.52 2000-01 4.22 -79.59 0.73 2001-02 15.11 258.05 2.50 2002-03 45.57 201.58 6.41 2003-04 45.57 0 6.68 2004-05 22.78 -50.00 3.02 2005-06 103.40 353.82 11.59 Source: Reports of second and third state finance commission, Government of Uttar Pradesh

The local governments however, are still largely dependent on transfers of

resources from the higher levels of government. As resources get scarcer, the urban

city services have sharply deteriorated. This calls for large investments not just in new

137 infrastructure but also for maintenance of the existing networks. The solution is to find mechanisms of encouraging the MCs to access capital market funds. The larger local bodies with defined finances will find it easier to access the markets, but India is home to a large number of smaller MCs. Alternatives thus need to be devised for the larger segment of MCs which cannot raise market funds on a non-recourse basis. At the same time there is a need to bring in market dynamics without guarantees from the higher levels of government (Ghodke, 2004)

4.7 Revenue-Expenditure Balance

Municipal corporations in India are statutorily required to maintain a balanced budget even a surplus in several states. However, an accurate accounting of municipal finance accounts stands hampered by cash based accounting, which makes it difficult to track outstanding payments, and absence of distinction between capital account and revenue account receipts and expenditure. In UP number of municipal corporations does not remit dues to the state government, which enable them to post large surpluses over expenditure.

As it is evident from table (4.8) that municipal receipts exceeds municipal expenditure during six years out of the eleven years study period. It is important to point out that even when the finances of municipal corporations were in shambles, their account show accounting surpluses. Given these limitations, the conclusions that emerge are as follows:

1. Expenditure levels on core services provided by municipal corporations are low

when these are compared with the norms established by the Zakaria Committee.

2. Own revenues of municipal corporations in Uttar Pradesh are insufficient to

meet the revenue account expenditure

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Table 4.8 Per Capita Revenue and Expenditure of Municipal Corporations of UP

Year Population Per capita revenue Per capita total (In crore) (In rupees) expenditure (In rupees) 1995 1.1 63.118 196.83 1996 1.13 65.79 222.84 1997 1.16 88.75 264.31 1998 1.2 383.11 307.96 1999 1.24 301.68 351.39 2000 1.28 450.70 416.36 2001 1.32 457.29 420.90 2002 1.36 522.61 428.21 2003 1.4 487.17 487.45 2004 1.44 523.60 463.86 2005 1.49 598.36 540.37 Source: Reports of second and third state finance commission, Government of Uttar Pradesh

The analysis of growth of revenue reveals erratic growth in it over the years.

This, to a great extent has been due to the lack of any fiscal planning and their over dependence on external finance .This extensive reliance on external funds has been acting as an obstacle in effective fiscal planning as they do not have any administrative control over their revenue which is released to them . They have not yet entered in a big way in tapping the resources by developing commercial projects for which there exists ample demand in the state.

Therefore, need to strengthen the autonomous functioning of the municipal corporations through positive measures, and in particular, ensure their financial self- reliance. The following are the major issues:

• The revenue gap is widening in most ULBs(own revenue & expenditure) due to

low revenue generation, enhanced expenditure responsibility, and inefficient

financial management.

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• Wide differences exist among Municipal Corporations in tax jurisdiction and

degree of control over fixing the tax base, rates, and exemptions, and how

efficiently taxes are administered and enforced.

• The expenditure function has to be linked to revenue-generating capacity.

Central level interventions are needed to make state governments surrender their

expenditure responsibilities to local bodies, and make expenditure

commensurate with the devolved revenues.

• Transparency in expenditure assignment and tax devolution is a prerequisite for

decentralization. The mandate given to SFCs to devolve taxes from the state

divisible pool to Municipal Corporations should be exercised in a rational and

time-bound manner.

• The resource devolution mechanism should evolve; taking into account regional

features, and should be based on up-to-date information. Uniformity of such

functions among Municipal Corporations should be ensured, at least within a

state.

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CHAPTER – V

ANALYSIS OF FINANCES OF THE SELECTED MUNICIPAL CORPORATIONS OF U.P.

The present study purports to investigate the pattern of local finances in four municipal corporations of Uttar Pradesh from 1995-96 to 2010-11. There are two ways of approaching the problem of municipal finance through mobilization of local resources. The first is to undertake an empirical study of the actual expenditure and revenue of each municipal corporation and determine the overall trends for a given period of time. This information would be supplemented by assessing the development actually achieved during this period. Such an approach is not possible because the required information is not readily available for all the municipal corporations of Uttar Pradesh. Furthermore, many municipal corporations have prepared town development plans or schemes under the town planning act but these are essentially land use plans to control city structure and direction of growth of the city. The other approach would be to undertake an intensive study of a few cases.

This is the only feasible method for investigating financial performance of urban local bodies of a state of the size and population of Uttar Pradesh.

It is observed that a good number of municipal corporations do not fulfill the condition of being reckoned as urban areas. A non-random sampling i.e. judgment sampling of municipal corporations may provide better picture of financial situation of urban local bodies. For this reason, we have selected four municipal corporations, namely Agra, Aligarh, Allahabad, and Meerut. While the Agra, Aligarh, and Meerut are industrially developed areas, Allahabad is a non industrial area in its economic character. The study highlighted the state of local finances, its pattern of expenditure

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in relation to improvement of services of municipal corporations. Special attention has been given to the consideration of the adequacy or otherwise of local revenues and problems that local administration faces in raising the required resources. In this connection some specific sources of revenue, have been taken up for investigation in view of their importance. The greater part of the study has been devoted to the analysis of the overall pattern of local revenue, expenditure and its role in the promotion of municipal corporation’s services. However, it did not take in to account other aspects of urban development like housing and employment which were beyond the scope of the study, being listed as state subjects.

5.1 Agra Municipal Corporation

Agra city is one of the major cities of Uttar Pradesh. Its history dates back to 1475

AD when Raja Singh Badal laid the foundation for the city. It is best known as the home of the Taj Mahal, and as an important tourist destination, transport hub and commercial centre Situated in the extreme southwest corner of Uttar Pradesh, Agra stretches across 26° 44' N to 27° 25' N and 77° 26' E to 78° 32' E. Its borders touch

Rajasthan to its west and south, the district of Firozabad to its East and the districts of Mathura and Etah to its North. Agra is well connected from Delhi and Jaipur. It has its own domestic airport named as Kheria, which is only 5 km from the city. All major domestic airlines provide flight services to and from the city of Taj. It is well connected by a network of trains to almost all major destinations throughout the country. Agra has seven railway stations of its own, excluding the Tundla junction, which is just one hour away from the city. Agra boasts of three National Highways including N.H. 2, 3 and 11. The government and private bus services are available to and from Agra to all of the nearby major destinations. Some important tourist

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destinations situated in the city and in nearby areas include: the Taj Mahal, Agra

Fort, Fatehp ūr Sikri, Mankameshwar Temple, Guru ka Tal, Jama Masjid, Chini ka

Rauza, Ram Bagh, Mariam's Tomb, Mehtab Bagh, Keetham Lake, Mughal Heritage

Walk, The Cathedral of the Immaculate Conception.

Agra urban agglomeration consists of Agra Municipal Corporation and Agra

Cantonment Board. The spatial area of Agra Municipal Corporation is spread over

120.57 sq. km and an area of about 20 square km falls within the Cantonment Board

and Swami Bagh and Dayal Bagh municipalities. The entire area of the Corporation

is divided into 90 electoral wards, while for the purpose of revenue collection the

area of Agra Municipal Corporation has been divided into eight divisions. Each of

these divisions has been further divided into several zones. The eight divisions are

Hariparvat, Lohamandi North, Lohamandi South, Rakabganj, Chatta, Kotwali, Ward

No. 7, and Tajganj. The local government is constituted by Agra Municipal

Corporation, Agra Cantonment Board and Dayal Bagh and Swami Bagh Nagar

Panchayats. The Administration, Engineering and Lighting, Accounts, Health, and

Revenue departments of Agra Municipal Corporation carry-out various governance

functions. Apart from the municipal administration, a government level urban

development authority, named the Agra Development Authority, is in place to

provide quality housing to the local people at an affordable cost. Service delivery

mechanisms for providing basic services like health, education, shelter etc. are more

easily accessible to city residents (non slum residents), whereas most slum dwellers

do not meet the minimum requirements as they do not have access to the basic

amenities.

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The city regularly faces severe power breakdowns, ranging from 4 to 6 hours per day. Additionally, there is a severe shortage in water supply. Studies reveal that every day there is a shortage of 50 million litres of water, and about 40% of total water supply losses occur during transmission. The water supply suffers from low water quality, contamination, and shortages. The sewerage network covers only 30% of the city area; thus, 70% remains uncovered by the sewerage network. Water quality in the Yamuna River is poor due to industrial and sewerage discharge. About

24 drains directly discharge effluents and sewage into the river. Furthermore, the solid waste management in the city is very poor. Uncollected solid waste amounts to

450 t/day. The situation is the worst in the Petha industry area. The total air pollution in the city from domestic sources, diesel generators (D.G.) sets, industrial sources, Petha units, and vehicular sources is 51 t/day. The unreliability of the electricity supply has resulted in a large number of D.G. sets being used, which in- turn has considerably increased air pollution. The city's poor Infrastructure gets overloaded during the festival season when the daily tourist inflow reaches about

80,000 to 100,000, resulting in various environmental problems.

Demographic Profile

The total population of the Agra urban agglomeration (which includes

Cantonment areas, Swamibagh and Dayalbagh) is 1,331,339; whereas the city population is about 1,275,000. The city is now growing in the western direction, following the Delhi-Agra corridor in a linear pattern. The decennial growth rate of

Agra city (1991-2001) is 40.66%, which is twice the national decennial growth rate of 21.34%. The population density of Agra is 897 persons per square km as compared to the national Indian average of 324. These data indicate the immensely

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overcrowded conditions in the city. As per the 2001 census, the sex ratio of the city was 846 females per 1000 males (Indian average is 933). It is worthwhile to mention that the city has registered an approximate six-point decline in the sex ratio during the last decade (852, 1991). The literacy rate in Agra is around 70%. Agra city is predominantly a heritage city, famous for its secular and Sufi leanings. Eighty-two percent of the local population is of the Hindu religion, 15% are Muslims, 1% Jains and the remaining 2% are Sikhs, Christians and others. The population comprised of

55% Males and 45% Females. Caste wise majority is of Scheduled Caste (SC) population, which is 21.5% of the total. The population of 0-6 years constitutes

13.53% of the total and the sex ratio in this age group is around 900.

5.2 Aligarh Municipal Corporation

Aligarh, with a population of 2.99 million, is one of seventy districts in Uttar

Pradesh (U.P.) and is located at 27.30 N latitude and 79.40 E longitude in the western part of U.P. Aligarh is situated at a distance of about 131 Km (81 Miles) on the plain between the Ganges river and the Yamuna. The city is the administrative headquarters of Aligarh district, Aligarh police range and Aligarh division, which is comprised of the Etah, Hathras (Mahamayanagar) and Kanshi Ram Nagar districts.

It shares common boundaries with the district of Bulandshahr in the North, Etah in the East, Mathura in the west and Hathras (Mahamaya Nagar) in the south. The history of Aligarh dates back to the 12th Century A.D, when the Aligarh town and fort were held by the Tomar rulers (the city was known as Koil). After that, the fortress was captured by Muslim rulers. Later, it was passed to Turk and Afghan kings and was renamed from Koil to Aligarh. The Jats subsequently took over the city from the Afghans, after which it was taken by the Marathas and finally by the

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Britihers in 1804. In 1920, the Aligarh Muslim University was founded. Aligarh

Municipal Corporation was formed in 1975 and the Aligarh Development Authority came into existence in 1981.

Aligarh is well connected to the rest of country by rail and road transport, as it is located on the Delhi-Calcutta Railway and Grand Trunk Road route. The

National Highway (NH-91) connects Aligarh to Delhi. Regular buses connect the city to destinations such as Delhi, Jaipur, Agra, Mathura, Ghaziabad, Varanasi etc.

Aligarh junction is the main railway station, which connects Aligarh to the cities of

New Delhi, Agra, Kanpur, Lucknow, Banaras, Jaipur, Kolkata, Mumbai etc. The nearest airport is in New Delhi, which is about 130 km from downtown Aligarh.

Aligarh city experiences a tropical monsoon type climate. The summer temperature varies from 36 to 45 degrees Celsius and winter temperatures range between 5 to 25 degrees Celsius. Aligarh is famous for the Aligarh Muslim University, a premier central university, Aligarh Fort, Dor fortress, various tombs of Muslim saints, Shree

Varshney Mandir and Mangalayatan. Mangalayatan is known as Asia's largest pilgrimage location for Jains. Aligarh city is divided into 70 municipal wards and a mayor is elected based on votes from each ward. The Aligarh Development

Authority is responsible for the planning and development of the city. For purposes of law and order, the city is divided into three administrative divisions, i.e. City,

Infrastructure and Finance & Revenue, each headed by the District Magistrate. The

District Magistrate has the overall responsibility for the district law and order, revenue collection, taxation, the control of planning permission and the handling of natural and manmade emergencies. The city can be divided into four zones, including the upper kot, Achal tal, the civil lines area, and the peripheral ring. The upper kot area makes up the core of the city and is primarily occupied by working 146

and middle class Muslim population. This area is the most congested part of city with industries, such as lock, biscuits, dyes and building & fitting that are polluting the environment. The Achal tal area is inhabited predominantly by Hindus and include the famous locations of Manik chowk and madar gate (wholesale market).

The Britishers developed the civil lines area, which is a sparsely populated open area. The land values are high in this area. The peripheral ring around the city has been recently developed by the private builders ADA & CGHS. This land is being used for commercial and residential purposes. Based on its development, the city can be broadly divided into two areas known as Old Aligarh (City) and New Aligarh

(Civil Lines). New Aligarh consists of Ramghat Road, Lal Diggi Road, Anwarul

Huda Compound, Amir Nisha, Azim Compound, Zakaria Market, Dhurra, Sir Syed

Nagar, Friends Colony, Jamalpur, Badar Bagh, Habib Bagh, Bhamola, Zohrabagh,

Dodhpur, Shabitan Compound, Jeevangarh, Kela Nagar, Firdaus Nagar, Janakpuri,

Professor Colony, Prag Sarover, Gyan sarover, Maan sarover, Avantika-1 and 2,

Shyam Nagar, Medical Colony, Lekhraj Nagar, Ramesh Vihar Colony, Durga Wadi,

Marris Road, Vidhya Nagar, Ram Krishna Puram, Sasni Gate and Delhi GT Road.

Old Aligarh contains Rasalgunj or Russellganj, Nai Basti, Avas Vikas Colony, Sarai

Hakeem, Manik Chowk, Delhi Gate, Gular Road, Anona House, Pahasu House,

Sasni Gate, Mahavir Ganj, Railway Road, Saray kawa, Babri Mandi, Mitha Kuan,

Jaiganj, Pathan Mohallah (Afghanan), Kala Mahal, Ghaski Mandi, Upper Kot, Jama masjid Gambhir, Pura, Mahendra Nagar, Bank Colony (Premier Nagar), Gandhi

Nagar, Saray Sultani, Achal Talab, Khirni Gate, Janak Puri and Vikram colony are some of the residential areas in old Aligarh. The limited civic amenities are virtually collapsing due to augmenting pressure of rapidly growing population. The rate of land consumption for urban purposes was substantially moderate until the 1980s, but

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the 1990s witnessed a sharp increase in land consumption as compared to population growth. Land consumption for urban purposes in the last 15 years is estimated to be

1.428 km/ year. The city still does not have a sewage treatment plant, and of the estimated 40 million litres per day of sewage only 27 million litres per day is pumped out or diverted for irrigation purposes. The remaining sewage pollutes the urban environment or contaminates ground water resources.

Aligarh has shortfall of basic facilities and housing problems are acute due to a high rate of population growth. The city has poor infrastructure both in terms of quality and quantity of domestic water supply. Inhabitants prefer bore wells more than municipal connection, as it is more reliable in terms of supply. Because of topography (bowl shaped), stagnant pools and flooding of low-lying areas is quite common. Sewage and sanitation is for the most part missing. Child labour is the worst aspect of the city's industries, as children are engaged in lock, brass and metal works. The electric supply is inadequate compared to the requirements of the city and is of major concern. Apart from university area and few new settlements, an overall state of urban comfort is missing.

Demographic & Social Profile

Demographic data for Aligarh city from the 2001 Census has been analyzed

to understand the demographic patterns. The total population of the city is 669,000.

The population consists of 53% males and 47% females. According to the 2001

Census there are 102,000 households and approximately 12% of total population is

under the age of six. The total sex ratio of the district is lower than the city sex ratio

i.e. 862. The literacy rate of Aligarh city was recorded at 63.9% during 2001 census.

About 17% of total population belongs to the SC category. The population of the

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city consists of Hindus, Muslims and Christians. Decadal growth of the Aligarh district was 39.0 between 1991-01.

5.3 Meerut Municipal Corporation

Meerut city, the head quarter of Meerut District, situated 70 km from Delhi, has been a place of historical, cultural and administrative importance since the time immemorial. The city plays a significant role in different areas of economy in the modern times that includes trade & commerce, tourism & pilgrimage, transportation

& distribution. The city is the gateway to Hastinapur, one of the earliest Indian cities like Ayodhya, Kashi which was the capital of the Kauravas and Pandavas during

Mahabharata times. Meerut is famously associated with igniting the spark of first

Freedom struggle in 1857 against East India Company, which transformed into a great revolution later. Meerut cantonment is the place where the movement started.

The entire region around Meerut is dotted with places of religious, tourist and historical importance, Buddhist and Jain shrines.

Meerut district is the part of upper Gagna-Yamuna doaba, which lies between 280 47' and 290 18' north latitudes and between 770 7' and 780 7' east longitudes. On the north it is bounded by Muzaffarnagar district; in the south by

Bulandshahar district while Ghaziabad and Baghpat districts form the southern and western limits. Ganga River makes its boundary in the east direction and separates it from the districts of Moradabad and Bijnor. Hindon River makes its western

Boundary in the west and separates it from the Baghpat district. Unplanned development of the cities marked with the falling far below the norms in terms of service levels in delivering citizen services. Municipalities/ULBs vested with

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authority to plan and implement infrastructure schemes also lack in co-ordination among them. These factors are resulting in the falling levels of service delivery.

As per 2001 Census the city of Meerut has attained the status of a metropolitan city i.e. million plus population city. In exact terms the population was recorded to be 11.61 lakhs. During the decades 1951-61 and 1961-71, the population in the city grew by 23.14% and 26.08% respectively against the national growth rates of 26.14% and 38.23% during the same periods. Between 1971 and 2001, there has been a rapid increase in population in the city which exceeded over 58% in the

70s, when the population growth in Meerut surpassed the national average. The increase in population rate during the decade of 1991-2001 was 42.5%, which was less than that of the previous two decades. It is evident from the above analysis that the population rate decreased steadily in the recent years. The drop in population growth in Meerut can be attributed to the development of new housing areas in several competing towns in the neighboring areas which are indeed equipped with better and modern infrastructure facilities such as Noida, Ghaziabad, Greater Noida and Gurgaon. Meerut on the other hand could not continue the phase of infrastructure development started in late 60’s and 70’s.

5.4 Allahabad Municipal Corporation

Allahabad city, also known as Prayag, is an ancient holy city of India. The city of

Allahabad is situated at the confluence of two sacred rivers, the Yamuna and the

Ganges. The confluence is known as Sangam and is visited by thousands of Hindu pilgrims every year. Allahabad is among the largest cities of Uttar Pradesh in terms of population and area. The geographical area of Allahabad is about 62 sq km (under municipal corporation). Its spatial extension falls at 25°28’ N latitude and 81°54’ E

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longitude. The district of Allahabad is surrounded by the Pratapgarh districts in the

North, district Jaunpur in the Northeast, Sant Ravidas Nagar and Mirzapur in the east, Kaushambi and Chitrakoot in the west and the state of Madhya Pradesh in the

South. Allahabad has its own domestic airport, Bambruali, which is located 14 km away from the city. Apart from Indian Airlines, few private airlines also provide flight services to and from Allahabad. However, nearby cities, i.e. Varanasi (147 km) and Lucknow (210 km) also have airports. Allahabad is well connected by a network of trains to almost all major destinations throughout the country i.e.

Kolkata, Delhi, Patna, Guwahati, Chennai, Mumbai, Gwalior, Meerut, Lucknow,

Kanpur and Varanasi. Allahabad is located on National Highways 2 and 27. The government and private bus services are available to and from Allahabad to all nearby major destinations. From early days of civilization, Allahabad has been a seat of learning, wisdom and culture. The oldest monument is a pillar (c.242 BC) with inscriptions from the reign of Asoka. Allahabad served as the capital of the United

Provinces from 1901 to 1949 and the centre of the Indian independence movement against the British rule, with Anand Bhawan being the epicentre. It was in Allahabad that Mahatama Gandhi proposed his program of non-violent resistance to liberate

India. Aside from having many prime educational institutions and organizations, the presence of key government offices gives Allahabad city an important status.

Allahabad is a district administrative headquarter, a cultural centre and a trading centre. It has a university, museum, High Court of Uttar Pradesh, office of Auditor

General of Uttar Pradesh, office of Principal Controller of Defence Accounts

(Pension) PCDA, Uttar Pradesh, Madhyamik Shiksha Parishad (UP BOARD)

Office, Police Headquarter, Engineering College (MNREC), Medical and

Agriculture College, and the Indian Institute of Information Technology (IIIT). The

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main tourist attractions in Allahabad include: the Sangam; Anand Bhawan; Swaraj

Bhawan; Bharadwaj Ashram; Akshya Vat; Fort; and all Saint Cathedral.

Municipal Corporation of Allahabad (Allahabad Nagar Nigam) is one of the oldest municipalities of the state. The corporation came into existence in 1864, when the Lucknow Municipal Act was passed. Administratively, the city municipal area has been divided into 80 wards and there are 185 documented slums in the city. A member (the Corporator) from each ward is elected to form the Municipal

Committee. The Corporators elect the Mayor of the city. The chief executive is the

Commissioner of Allahabad, who is appointed by the state government. The

Allahabad Municipal Corporation is incorporated as a special department, which could function systematically with the aim of providing civic infrastructure facilities throughout the city. The obligatory functions of the municipal corporation include ensuring sufficient water supply to all, maintaining and regularly cleaning rivers.

The municipal corporation also undertakes construction of schools and health centres. In addition, the corporation has undertaken development projects pertaining to the construction of tube wells, parking spaces and bridges. The Allahabad

Municipal Corporation takes care of all ongoing development in the city. It regulates property tax rates for different residential and commercial properties. According to the 2021 master plan, presently about 62% of total city area is occupied under residential activities, 17% is occupied under transportation related activities, only

7% has been used for the activities related to public and semipublic services and the remaining 14% of city area is being used for other activities. Based on the status of development, Allahabad city can be divided into two zones, i.e. underdeveloped areas and developed areas. Underdeveloped areas of the old City include the Central

Business District or Chowk which is also the economic centre of the city. The 152

localities which come under this category are Bakshi Bazar, Atala, Katra, Malviya

Nagar, Atarsuiya, Zero Road and Sahagunj . This area has a high population density and the market layout is haphazard, with major roads used as both transport corridors and market streets. Localities such as Civil Lines, Lukargunj, Georgegunj,

Tagoretown and Ashok Nagar are relatively developed areas of the city. The newer city around Civil Lines area was conceived during the British rule. This area is well planned based on a grid-iron road pattern with additional diagonal roads. It is a relatively low-density area with wide tree lined avenues. It houses major educational institutions, offices, gardens and cantonment areas. The outer growth areas include satellite towns along major highways passing through city. It also includes city areas

Trans Ganges and Yamuna. The imprints of Britishers and Mughals can be seen in buildings, gardens and places in Allahabad. The architectural styles reflect a good mix of western Gothic and Mughal influence. Allahabad is also one of the greenest city in the state. During the rains many parts of the city face an acute problem of water stagnation. The city is surrounded by embankments for protection against floodwater from the river, but these embankments also obstruct the flow of rainwater. Additionally, the city faces an acute residential problem. According to

Master Plan 2005, presently there is a shortage of 94,000 houses, which is expected to reach up to 264,000 by 2021.

Demographic & Social Profile

Census data classifies Allahabad city as the 32nd most populous city in India with the population of 975,000. Allahabad city has a larger household size (6.66) than that of Uttar Pradesh (6.45), indicating the predominance of the joint family concept in the city. The city has a relatively poor sex ratio at 807 females per 1000

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males, with the number of males being 539,772 and females 435,621.

Approximately 10% of the total population falls between 0-6 years. The literacy rate was recorded at 81%, which is slightly better than many other cities of U.P. About

12.4% of the total population belongs to the Scheduled Caste (SCs) category. The city registered a population growth of about 23% during the last decade. According to the 2001 Census, the average population density is 16,559 persons per sq. km.

Yet, due to unplanned population growth, the distribution of the density in various wards is very uneven and varies between as high as 106,254 per sq. km (at Ward No.

34) to 2,515 per sq km (Ward No. 75).

5.5 Expenditure Pattern of Selected Municipal Corporations

In the performance of their functions, governments incur expenditure and have to find the resources to meet it. Since expenditure and not revenue is the governing factor in public finance, it is more logical to start with the expenditure side of the account. It is proposed to study the pattern of and trends in expenditure of selected municipal corporations of U.P. as the corporations of U.P. have inherited the strength as well as the weakness of the financial structure of all these selected municipal corporations, it will be useful to analyze their expenditure and revenue during the period of 16 years, that is from 1995-96 to 2010-11.

The analysis of expenditure thus, on the face of it, indicates a remarkable dynamism in the growth of expenditure. This is seemingly fast growing. As is evident from given table 5.1, the expenditure has increased continuously over the years. Although in the initial years there was continuous increase in expenditure, afterwards the annual growth rate is found to be erratic and uneven. In certain years, the annual percentage increase is found to be not only low but also negative. The

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trend instead of being smooth and upward is found to bumpy with occasional bumps upward and then registering negative growth rate.

Table-5.1

Growth Trend in the Expenditure of Selected Municipal Corporations

Year Agra Aligarh Allahabad Meerut (Rs in lakhs) (Rs in lakhs (Rs in lakhs (Rs in lakhs 1995-96 1996-97 2374.75 978.05 2298.58 1792.78 (15.56) (10.73) (8.14) (11.39) 1997-98 3287.17 1551.09 2879.03 2099.15 (38.52) (58.59) (25.25) (17.08) 1998-99 3422.16 2027.74 2582.56 3324.56 (4.1) (30.73) (-10.29) (58.37) 1999-2000 4269.25 2584.7 2919.31 3750.31 (24.75) (27.46) (13.03) (12.8) 2000-01 4607.12 2350.03 3589.87 2338.29 (7.91) (-9.07) (22.96) (-37.65) 2001-02 4639.99 2386.08 6910.33 N.A. (0.71) (1.53) (92.49) 2002-03 4481.35 2915.7 4068.97 3053.590 (-3.41) (22.19) (-41.11) 2003-04 4479.72 3085 4322.07 8463.91 (-0.03) (5.8) (6.22) (177.17) 2004-05 5004.9 3271.56 4820.31 1682.4 (11.72) (6.04) (11.52) (-80.12) 2005-06 5647.89 3882 5622.04 1808.13 (12.84) (18.65) (16.63) (7.47) 2006-07 6881.58 4312.59 7738.23 3104.65 (21.84) (11.09) (37.64) (71.7) 2007-08 9132.92 5245.97 7684.08 2491.02 (32.71) (21.64) (-0.69) (-19.76) 2008-09 14117.93 7087.96 8226.36 16239.13 (54.58) (35.11) (7.05) (551.9) 2009-10 18940.4 8052.68 19590.29 8056.27 (34.10) (13.61) (138.14) (-50.38) 2010-11 N.A. 7125.35 N.A. 15174.56 (-11.51) (88.35) CAGR 13.3 14.7 13.1 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh Note: the figure in parenthesis ( ) in table shows percentage growth rate over the years.

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The compound annual growth rates for total expenditure in Agra, Aligarh,

and Allahabad are 13.3%, 14.7%, and 13.1% respectively.

Table 5.2 reveals that while revenue expenditure continuously increased at a faster rate, the expenditure on capital account increased at a lower rate. It is evident from the table that the expenditure on revenue account rose noticeably throughout the period under review except some years. The revenue expenditure increased

6times,9 times, 4 times, and more than 2 times respectively during 1995-96 to 2010-

11 in the municipal corporations of Agra, Aligarh, Allahabad, and Meerut, While the capital expenditure increased with large ups and downs.

Revenue expenditure has been divided under eighteen heads in the budget of the municipal corporations of Agra, Aligarh, Allahabad, and Meerut. We have regrouped these heads in to the three main heads. The three main heads are: 1.

Establishment expenditure (salary, pension, and other establishment expenditure), 2.

Operation and maintenance expenditure on core services (water supply, road, street light, sanitation and sewerage, drainage, and waste disposal), 3. Other services. The capital expenditure of the corporations is divided in to the expenditure on operation&maintenance on core services and other services.

Expenditure on road, street light, water supply, sanitation and sewerage etc. and the part of the other revenue expenditure which is concerned with developmental and social services such as grants to educational institutions, libraries, expenditure on maintaining swimming pools, night shelters etc. non- developmental expenditure includes general administration and collection of revenue, repayment of loans and a part of miscellaneous revenue expenditure which

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is related to pensions, provident funds and gratuity to employees, employees

welfare, expenditure on municipal press and reserve for unforeseen charges.

Table-5.2 Percentage Change in Revenue and Capital Expenditure of Agra, Aligarh, Allahabad, and Meerut MCs

Revenue expenditure(Rs in Lakh) Capital expenditure(Rs in Lakh) year Agra Aligarh Allahabad Meerut Agra Aligarh Allahabad Meerut 1994-95 1912.57 776.09 2125.42 1330.56 142.33 107.18 0 278.9 1996-97 1941.39 949.25 2298.58 1560.24 433.36 28.8 0 232.44 (1.5) (22.32) (8.14) (17.26) (204.47) (-73.12) (-16.65) 1997-98 2421.97 1267.99 2879.03 1575.72 865.2 283.1 0 523.43 (24.75) (33.57) (25.25) (0.99) (99.64) (882.98) (125.18) 1998-99 2506.85 1767.21 2454.39 2172.48 915.31 260.53 128.17 1152.08 (3.5) (39.37) (-14.17) (37.87) (5.79) (-7.97) (120.1) 1999-00 3415.47 1891.79 2830 2557.37 853.78 692.91 89.31 1192.94 (36.24) (7.04) (15.30) (17.71) (-6.72) (165.96) (-30.31) (3.54) 2000-01 3901.08 1853.71 3583.22 1069.12 706.04 496.32 6.65 1269.16 (14.21) (-2.01) (26.61) (-58.19) (-17.3) (-28.37) (-92.55) (6.38) 2001-02 4210.14 1976.7 5910.33 0 429.85 410.09 1000 0 (7.92) (6.63) (64.09) (-100) (-39.11) (-17.37) (14937.59) 2002-03 4027.72 2433.89 4068.97 2031.17 453.63 481.84 0 1022.42 (-4.33) (23.12) (-31.15) (0) (5.53) (17.49) 2003-04 3964.85 2791.95 4322.07 2523.21 514.87 293.05 0 260.69 (-1.56) (14.71) (6.22) (24.22) (13.49) (-39.18) (-74.5) 2004-05 4177.35 2800.2 4820.31 1053.12 827.55 471.36 0 629.28 (5.35) (0.29) (11.52) (-58.26) (60.72) (60.84) (141.39) 2005-06 4754.44 3333.34 5622.04 1305.4 893.46 548.64 0 502.73 (13.81) (19.03) (16.63) (23.95) (7.96) (16.39) (-20.11) 2006-07 6105.98 4051.76 7738.23 2879.33 775.6 260.83 0 225.31 (28.42) (21.55) (37.64) (120.57) (-13.19) (-52.45) (-55.18) 2007-08 6968.75 4845.97 7684.08 1631.89 2164.17 400 0 859.12 (14.12) (19.6) (-0.69) (-43.32) (179.03) (53.35) (281.3) 2008-09 11235.92 6563.25 8219.97 (8258.05) 2882.01 524.7 6.39 7981.08 (61.23) (35.43) (6.97) (406.04) (33.16) (31.17) (828.98) 2009-10 12993.76 7181.71 9149.29 3884.51 5946.64 870.97 10441 4171.75 (15.64) (9.42) (11.30) (-52.96) (106.33) (31.17) (163295.9) (-47.72) 2010-11 6381.71 3370.42 N.A 743.62 11804.14 N.A (-11.13) N.A. (-14.62) N.A (182.95) Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh Note: the figure in parenthesis ( ) in table shows percentage growth rate over the years.

The following table 5.3 analyses the share of revenue expenditure and capital

expenditure in the total expenditure of municipal corporations of Agra, Aligarh,

Allahabad, and Meerut it can be observed from the table that the share of revenue

expenditure in the total expenditure has declined from 93.07%, 100%, and 82.67%

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to 68.60%, 46.70%, and 22.21% respectively under the review period in the MCs of

Agra, Aligarh, Allahabad, and Meerut.

Table-5.3 Share of Revenue and Capital Expenditure in the Total Expenditure of Selected MCs Year Revenue Expenditure (% share) Capital Expenditure (% share) Total Agra Aligarh Allahabad Meerut Agra Aligarh Allahabad Meerut Expen- diture (%) 1994-95 93.07 87.86 100 82.67 6.92 12.13 0 17.32 100 1996-97 81.75 97.05 100 87.02 18.24 2.94 0 12.96 100 1997-98 73.67 81.74 100 75.06 26.32 18.25 0 24.93 100 1998-99 73.25 87.15 95.03 65.34 26.74 12.84 4.96 34.65 100 1999-00 80.00 73.19 96.94 68.19 19.99 26.80 3.05 31.80 100 2000-01 84.67 78.88 99.81 45.72 154.32 21.11 0.18 54.27 100 2001-02 90.73 82.84 85.52 0 9.26 17.18 14.47 0 100 2002-03 89.87 83.47 100 66.51 10.12 16.52 0 33.48 100 2003-04 88.50 90.50 100 29.81 11.49 9.49 0 3.08 100 2004-05 83.46 85.59 100 62.59 16.53 14.40 0 37.40 100 2005-06 84.18 85.86 100 72.19 15.81 14.13 0 27.80 100 2006-07 88.72 93.95 100 92.74 11.27 6.094 0 7.25 100 2007-08 76.30 92.37 100 65.51 23.69 7.62 0 34.48 100 2008-09 79.58 92.59 99.92 50.85 20.41 7.40 0.07 49.14 100 2009-10 68.60 89.18 46.70 48.21 31.39 10.81 53.29 51.78 100 2010-11 0 89.6 0 22.21 0 10.43 0 77.78 100 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

Whereas Aligarh municipal corporation shows a stagnant change.

Correspondingly, the percentage share of capital expenditure to total expenditure of

the selected municipal corporations have increased from 6.92%,0% and 17.32% in

1995-96 to 31.39%, 53.29% and 77.78% respectively, while Aligarh municipal

corporation shows a constant figure. This shows that there was a greater emphasis

on development expenditure since the establishment of the corporations. The greater

emphasis on development expenditure by the corporations may be considered as a

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healthy trend, though the true picture will be revealed only after analyzing the expenditure on major heads.

The absolute increase in capital expenditure has been quite considerable. The

reason for this is the rise in the cost of administration and revenue collection and an

increase in the amount of repayment of debt (including interest).

Per Capita Expenditure

The per capita analysis of municipal development expenditure brings to light glaring disparities between the levels of development expenditure in different local bodies and in the same service provided by each of them. The period under review was marked by price spiral and population explosion.

Table-5.4 Per Capita Expenditure of Selected MCs Year Agra Aligarh Allahabad Meerut 1995-96 199.89 161.18 244.58 186.06 1996-97 222.98 172.8 259.43 200.75 1997-98 297.75 265.14 318.82 226.2 1998-99 298.87 335.16 280.71 354.95 1999-2000 359.97 412.89 311.22 376.91 2000-01 374.56 363.21 375.50 226.79 2001-02 363.92 356.66 708.75 0 2002-03 339.23 421.95 409.76 276.34 2003-04 327.22 432.07 427.08 739.2 2004-05 352.7 442.7 467.08 141.85 2005-06 383.94 508.11 534.41 147.24 2006-07 451.5 546.58 721.84 244.26 2007-08 578.03 642.88 703.67 189.14 2008-09 861.9 839.8 739.11 1190.55 2009-10 1115.45 920.3 1726.01 570.55 2010-11 790.82 0 1037.93 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

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The two factors neutralised a major part of the increase in expenditure of the corporations. Table 5.4 gives the per capita expenditure of total expenditure of municipal corporations of agra, aligarh, allahabad, and meerut.

A close scrutiny of above table 5.4 reveals that the growth in expenditure has been eaten up by the price rise and population explosion. The per capita expenditure of municipal corporations of Agra, Aligarh, Allahabad, and Meerut rose from Rs

199.89, Rs 161.18, Rs 244.58, and Rs 186.06 in 1995-96 to Rs 765.23, Rs 790.82,

Rs 1726.01 and Rs 1115.45 in the year 2010-11 respectively. The increase is almost low considering the length of the period, rise in the expectations of the people for municipal services and the fact revealed by a recent study in the field of local expenditure that in case of increase in population, per capita municipal expenditure has to be raised to maintain the standard of services.

Having studied the trends in expenditure of the municipal corporations of Agra,

Aligarh, Allahabad, and Meerut, we now proceed to compare their expenditure pattern with each other.

It is revealed by the following table 5.5 that the expenditure on revenue account of the corporations are increasing at faster rates as compared to the rate of increase in the expenditure on capital account Among the four corporations selected for the study, the municipal corporation of Allahabad has the highest per capita revenue expenditure where as the Municipal corporation of Meerut recorded a lowest per capita expenditure on revenue account during the period. While on capital account, the per capita capital expenditure of the Meerut municipal corporation shows a satisfactory figure among them. The lowest per capita capital expenditure in the municipal corporations of Agra, Aligarh, and Allahabad indicates a lower

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expenditure on development work and also the poor quality of services which is provided by the corporations.

Table-5.5 Per Capita Revenue & Capital Expenditure of Selected MCs Per Capita Revenue Expenditure Per Capita Capital Expenditure Year Agra Aligarh Allahabad Meerut Agra Aligarh Allahabad Meerut 1995-96 186.04 141.62 244.58 153.82 13.84 19.55 0 32.24 1996-97 182.29 167.71 259.43 174.71 40.69 5.08 0 26.02 1997-98 219.38 216.75 318.82 169.79 78.36 48.39 0 56.4 1998-99 218.93 292.1 266.78 226.06 79.93 43.06 13.93 119.88 1999- 287.98 302.2 301.70 257.02 71.98 110.68 9.52 119.89 2000 2000-01 317.16 286.5 374.81 103.69 57.4 76.71 0.69 123.09 2001-02 330.20 295.47 606.18 0 33.71 61.29 102.56 0 2002-03 304.89 352.22 409.76 183.81 34.33 69.73 0 92.52 2003-04 289.61 391.02 427.08 220.36 37.6 41.04 0 22.76 2004-05 294.38 378.91 467.08 88.79 58.31 63.78 0 53.05 2005-06 323.21 436.3 534.41 106.3 60.73 71.81 0 40.93 2006-07 400.39 513.53 721.84 226.54 50.85 33.05 0 17.72 2007-08 441.06 593.62 703.67 123.9 136.97 49.01 0 65.23 2008-09 685.95 777.63 738.54 605.42 175.94 72.16 0.57 585.12 2009-10 765.23 820.76 806.10 275.1 352.21 99.52 919.91 295.44 2010-11 708.29 0 230.53 0 82.53 0 807.39 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

The expenditure of the municipal corporations of Agra, Aligarh, Allahabad, and Meerut on both revenue and capital accounts has increased substantially during the period under review. This increase has been neutralized by price rise and population increase and the result is that an increase in per capita expenditure has been only marginal.

When we study the pattern of expenditure, it gives satisfaction to note that in the municipal corporations, development expenditure is gaining more importance in the expenditure structure and its rate of growth is higher than that of non- developmental expenditure. An increasing trend in non-developmental expenditure

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was one of the main drawbacks of the financial structure inherited by the corporations from the erstwhile local bodies. It is evident that this drawback has been removed by the establishment of the corporation. However it is to be noted that the absolute increase in non-development expenditure has been considerable. .

Expenditure on Major Heads

There are five major heads on which the municipal corporations allocates and spends their expenditure .These heads of expenditure along with the proportion of total expenditure are presented in various tables. A close look at the tables would reveal that the pattern of expenditure does not give any definite trend over the years except that a proportion of MCs total expenditure has been spent on water supply, road, street light, sanitation and sewerage, and drainage. The proportion of expenditure on other essential municipal services like scavenging, fire brigade, gardens and open spaces etc. has been allocated as a lower percentage of total expenditure.

Road has been getting the lion’s share with more than one-fourth of the total expenditure ever since the inception of MCs.In certain years it has received more funds than other years, because of rapid growth of urbanization and massive migration from rural areas to urban areas. So far as the growth in expenditure on various heads has increased marginal by till 1999-2000, but after 2000 it increased very fast because of the recommendations of the eleventh finance commission, the government allocated more fund to MCs for their better performance.

Water supply

The supply of pure and wholesome water to its citizens is an important function of

Municipal Corporations in India. However, revenue from water supply has never

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been adequate to meet the cost of the service and the corporation has been meeting the deficit from the general revenue. The following table 5.6 gives the detail of the per capita expenditure on water supply. The per capita expenditure on water supply of Meerut Municipal Corporation is higher than the MC of Aligarh, while the water supply of Agra city and Allahabad is regulated by separate agencies.

The main reasons for the inadequate revenue generated through user charges by MCs on water supply are, (1) poor collection of its bills, and (2) leakage. The audit reports for the various years have indicated a large number of irregularities resulting in poor collection. Leakage of water has tended to worsen the situation.

Table-5.6 Per Capita Expenditure of Water Supply

Year Agra Aligarh Allahabad Meerut 1995-96 0 3.39 0 1.73 1996-97 0 3.05 0 9.86 1997-98 0 6.11 0 4.14 1998-99 0 6.40 0 15.19 1999-2000 0 6.95 0 15.45 2000-01 0 9.95 0 31.46 2001-02 0 11.87 0 N.A. 2002-03 0 15.84 0 49.30 2003-04 0 52.5 0 55.03 2004-05 0 36.09 0 29.94 2005-06 0 15.34 0 45.37 2006-07 0 16.02 0 46.40 2007-08 0 14.95 0 51.43 2008-09 0 21.79 0 50.06 2009-10 0 21.64 0 49.67 2010-11 0 22.30 43.74 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

The foregoing discussion leads us to conclude that if the municipal

corporations collects its revenue efficiently and plugs the water leakage, it would not

require any subsidy from the general revenue of the corporations.

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Roads

The expenditure on the development of roads is good investment because it brings people together and assists commercial and economic activities. Roads are said to be arteries of a city or a country as the smooth flow of life largely depends upon them.

The construction and maintenance of roads in the area under its jurisdiction is an obligatory function of the municipal corporations. The engineering department of the corporation is responsible for the performance of this function.

Table-5.7 Per Capita Expenditure of Road Year Agra Aligarh Allahabad Meerut 1995-96 1.3 11.83 19.61 0.6 1996-97 4.48 16.31 22.20 0.75 1997-98 5.41 36.09 23.27 0.8 1998-99 7.31 52.04 19.24 1.29 1999-2000 7.88 45.61 25.14 1.09 2000-01 8.03 20.05 37.76 0 2001-02 4.02 27.53 66.97 0 2002-03 18.5 19.21 75.83 62.63 2003-04 16.49 47.76 83.99 32.06 2004-05 3.36 24.38 89.34 11.88 2005-06 20.32 52.64 104.75 31.7 2006-07 22.32 69.16 203.35 70.09 2007-08 54.88 84.59 156.13 39.62 2008-09 221.52 312.09 183.82 170.61 2009-10 128 199.81 187.50 7.75 2010-11 N.A. 114.17 N.A. 9.93 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

The expenditure on roads has constantly been increasing during 1995-96 to

2010-11. Above table 5.7 shows the growth of expenditure in terms of per capita on the construction and maintenance of roads. Laying of new roads generally involves borrowed funds, while the maintenance and widening of the old ones is provided

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from the general revenue. It is clear from table above 5.7 that, after some fluctuations in earlier years, the per capita expenditure on roads has recorded a definite upward trend.

Though, among all the four municipal corporations, the Allahabad has recorded a highest per capita expenditure on roads. There are three main reasons for the increase in the expenditure on the roads; (1) laying of new roads (2) increased surface area which has to be maintained regularly; (3) manifold increase in the cost of construction and maintenance during the period under review. The audit reports have pointed out that the funds provided for the roads are not properly utilized. As non-completion of the work was a clear case of breach of contract, the corporation was entitled to recover damages. They should not have only recovered the amount of damages but also blacklisted the contractor. The administration is also guilty of extraordinary delay in cancelling the contract.

Besides, the roads are not properly maintained. They become worse with every monsoon. Inadequacy of funds and their improper utilization are the reasons for such a situation. Increased funds and their proper utilization are required for improving the network of roads in the corporation area.

Street lighting

Public lighting is an important aid to civic life. The main object of public lighting is to ensure the safe use of roads by vehicular and pedestrian traffic during the hours of darkness. However, this is only one of the many advantages to be gained; others included protection of property from criminals and the lighting up of recreational places such as parks and gardens. Provisions of public lighting are an obligatory function of the municipal corporations of Agra, Aligarh, Allahabad, and Meerut. The

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following table 5.8 presents the trends in expenditure in terms of per capita expenditure of selected MCs on public lighting.

It is clearly evident from the table 5.8 that the per capita expenditure of all selected MCs have increased under the review period. The table also reveals that except Allahabad municipal corporation, the remaining three MCs shows a lower per capita expenditure. The main reasons for the increase in expenditure on street light are; (1) increased cost of energy, and (2) switchover from incandescent lamps to fluorescent and vapour lamps.

Table-5.8 Per Capita Expenditure on Street Light

Year Agra Aligarh Allahabad Meerut 1995-96 2.49 0.81 1.19 0.84 1996-97 2.46 0.29 8.78 2.09 1997-98 3.3 5.88 5.26 0.88 1998-99 5.36 15.95 5.22 2.09 1999-2000 6.01 2.67 3.98 1.65 2000-01 1.89 3.44 6.69 5.84 2001-02 5.28 3.68 15.69 0 2002-03 2.62 1.35 14.19 6.11 2003-04 2.25 3.49 15.31 19.53 2004-05 4.13 2.9 15.01 25.58 2005-06 8.87 2.79 19.48 5.97 2006-07 20.28 2.3 55.97 7.34 2007-08 10.24 4.12 45.78 9.74 2008-09 33.02 6.17 25.15 10.76 2009-10 38.42 6.57 20.26 9.8 2010-11 0 8.86 0 8.5 Source: various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

The public lighting service is often criticized by the public through the press. The general complaints are non-replacement of burnt out lamps and non- switching on of lights, these result in inconvenience to the people. Also, quite often

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we come across reports of lamps remaining switched on during the day time which results in wastage of valuable energy. With a little more care and attention towards the grievances of the public and with a watchful eye on the utilization of funds, the corporation can provide much improved public lighting service to its people.

Sanitation & sewerage

Maintenance of sanitation is the primary duty of any local government. Proper sanitation is one of the preventive methods for checking the spread of various diseases. Improved sanitary conditions contribute a lot towards general efficiency, and keep the cities and towns fit for human habitation. There are varied aspects of sanitation, namely drainage conservancy, scavenging, provision of public latrines and urinal. Important sanitary services of municipal corporations of Agra, Aligarh,

Allahabad, and Meerut are removal and disposal of refuse, street cleaning, drainage,

and provision of public latrines and urinal. The corporation has a large force of

sanitary staff equipped with various types of equipment such as wheel-barrows,

trucks and bulldozers for leveling the refuse at dumping grounds. The corporations

are spending increasing amounts on their sanitation services year after year. It is

evident from the following table 5.9 that the per capita expenditure on sanitation and

sewerage is very low in all selected municipal corporations and only Agra Municipal

Corporation shows a higher per capita expenditure on sanitation and sewerage. On

the other hand the per capita expenditure on drainage is also not satisfactory. Out of

four municipal corporations, the per capita expenditure on drainage is high only in

Aligarh and Meerut Municipal Corporation.

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Table-5.9 Per Capita Expenditure on Sanitation and Sewerage Year Agra Aligarh Allahabad Meerut 1995-96 0.41 0.2 0.49 0.08 1996-97 0.58 0.33 0.58 0.10 1997-98 1.29 1.36 0.62 0.12 1998-99 0.9 0.12 0.66 2.46 1999-2000 0.94 0.39 0.67 0.91 2000-01 12.90 0.44 1.01 4.86 2001-02 21.92 1.43 1.33 0 2002-03 18.30 1.89 0.35 1.45 2003-04 19.37 1.89 0.35 2.51 2004-05 23.09 1.96 1.23 1.55 2005-06 22.57 3.55 1.02 2.06 2006-07 29.57 2.82 1.70 2.37 2007-08 43.30 4.45 1.25 1.87 2008-09 59.74 4.88 1.90 3.78 2009-10 80.77 3.94 0.95 5.80 2010-11 0 2.51 0 6.50 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

The sanitary conditions nevertheless in the area under the jurisdiction of the corporations are far from satisfactory. There appears to be a progressive deterioration in this respect. The city areas have become filthy and stinks owing to heaps of garbage lying in the streets which are not removed for days together. The reasons for such a situation are the attendance records of the sanitary staff are not properly maintained. The various equipments also are not fully utilized. About one- third of refusal-removed trucks remain off the road. Lack of civic and sanitation consciousness of the people is also, to some extent, responsible for the poor sanitary conditions. People were not at all interested in the problems of public health. They are not sanitation minded.

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Table-5.10 Per Capita Expenditure on Drainage

Year Agra Aligarh Allahabad Meerut 1995-96 0.37 0.43 0.29 0.83 1996-97 4 0.22 0.32 1.14 1997-98 6.33 5.14 2.83 1.45 1998-99 5.05 9.41 0.23 3.98 1999-2000 2.79 3.68 0.11 0.83 2000-01 0 2.02 0.41 8.22 2001-02 0 0 0.41 0 2002-03 0 4.84 0.20 8.82 2003-04 0 1.24 0.21 40.4 2004-05 0 0 0.39 18.75 2005-06 0 7.56 0.52 19.56 2006-07 0 24.13 0.69 16.9 2007-08 0 87.48 0.68 21.22 2008-09 0 7.45 0.74 23.1 2009-10 0 0 1.11 26.59 2010-11 0 0 0 18.74 CAGR Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

The table 5.11 shows that there is no expenditure on waste disposal in all

four municipal corporations except Aligarh. Where from 2008-2010, there is some

expenditure on this heads.

It is clear from the above discussion that owing to administrative weaknesses and lack of sanitation consciousness on the part of the people, the sanitary conditions in the corporation’s area are deplorable in spite of increased spending. To correct this it is desirable that proper attendance records be maintained and regularly checked, that the equipments be properly used and serviced and the stores be properly controlled.

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Table-5.11 Per Capita Expenditure of Waste Disposal Year Agra Aligarh Allahabad Meerut 1995-96 0 0 0 0 1996-97 0 0 0 0 1997-98 0 0 0 0 1998-99 0 0 0 0 1999-2000 0 0 0 0 2000-01 0 0 0 0 2001-02 0 0 0 0 2002-03 0 0 0 0 2003-04 0 0 0 0 2004-05 0 0 0 0 2005-06 0 0 0 0 2006-07 0 0 0 0 2007-08 0 0 0 0 2008-09 0 43.22 0 0 2009-10 0 40.93 0 0 2010-11 0 47.15 0 0 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

These are the minimum measures required to be taken to rid the city of its garbage-heap image. The discussion also indicates that the expenditure on these services is very low and due to this the quality of services which is provided by municipal corporations are very poor. Thus, there is a need to huge investment in these services by state government as well as local governments.

Miscellaneous

A large number of social services provided by the corporations, which individually involve small funds, have been grouped under this head. Besides, the expenditure on small development works is also included under this head. The social service include promotion of cultural and sports activities, construction and maintenance of

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swimming pools and stadia, construction of community halls, running of community centres and reading rooms, providing old age pensions to the

Table-5.12 PCE on Other Services of MCs of Agra, Aligarh, Allahabad, and Meerut Year Agra Aligarh Allahabad Meerut 1995-96 14.26 7.90 29.40 4.33 1996-97 14.09 12.14 25.85 7.27 1997-98 15.87 16.56 61.06 5.80 1998-99 11.60 28.24 16.49 6.95 1999-2000 11.48 22.93 19.01 6.13 2000-01 57.86 27.24 26.45 1.68 2001-02 66.25 28.75 229.51 0 2002-03 52.36 73.98 26.19 1.62 2003-04 55.76 44.09 23.31 3.31 2004-05 34.46 75.04 22.78 1.06 2005-06 28.88 137.88 21.63 1.62 2006-07 36.03 -0.43 26.36 1.70 2007-08 55.64 97.34 21.68 0 2008-09 71.35 37.09 51.02 2.162 2009-10 60.23 40.07 51.88 2.155 2010-11 23.65 2.712 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

poor, maintaining night shelter homes for pavement dwellers. Constructing and maintaining tourist camps, etc. the corporations also gives grants-in-aid to the voluntary organizations providing such services. The per capita expenditure on other heads has been given in the above table 5.12, it is evident from the table that among the four selected MCs the three MCs namely, Agra, Aligarh, and Allahabad shows a higher per capita expenditure on other services except Meerut municipal corporations where the per capita expenditure on other services is very low. The result is that today the corporations provide a fairly large number of such services which were not provided by the erstwhile local bodies.

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The analysis of patterns of expenditure of the four municipal corporations of

Uttar Pradesh namely Agra, Aligarh, Allahabad and Meerut thus indicates that there

is no definite trend over the years. The expenditures have been fluctuating with a

wide range of variation. This is indicative of lack of any fiscal planning for the

provision of incremental civic services over the years. With the increase in

population, physical area and prices, the expenditure on various civic services

should have shown a progressive rise. In a growing metropolis the expenditure on

different municipal services should progressively increase not only for providing the

basic services for a growing population over a larger physical area but also at a

higher level of services. This has apparently not happened.

5.6 Trends in Receipts of Selected Municipal Corporations

Municipal revenues are counterparts of municipal expenditure. The fundamental problem of municipal governments is to provide money necessary to meet the cost of services to be carried out without imposing an intolerable burden up on the taxpayers and without local bodies becoming unduly dependent upon the assistance from the government. After having analyzed the expenditure of the municipal corporations of Agra, Aligarh, Allahabad, and Meerut, it is proposed to study the trends in and system of revenue of corporations.

The revenue of the municipal corporations of Agra, Aligarh, Allahabad, and

Meerut has been marked by buoyancy almost all along the period under review. The following table5.13 comprises the yearly data of the percentage change in total revenue of Agra, Aligarh, Allahabad and Meerut Municipal Corporation of Uttar

Pradesh from 1995-96 to 2010-11. The revenue of these corporations increased from

Rs 2253.86, 893.02, 2178.95, and 1583.13 lakhs in 1995-96 to 16371.82, 6703.89,

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17873, and 8361.1lakhs in the year of 2009-10 respectively. It is clear from above table that the receipts of the corporations of Aligarh and Allahabad are increasing at faster rate in comparison to the corporations of Agra and Meerut.

Table-5.13

Growth Trends in Total Receipts of Selected Municipal Corporations

(Rs in lakh) Year Agra Aligarh Allahabad Meerut 1995-96 2253.86 893.02 2178.95 1583.13 1996-97 2525.15 1007.59 2379.42 1880.81 (112.03) (12.82) (9.20) (8.80) 1997-98 3416.48 1553.42 2888.18 2395.81 (35.29) (54.17) (21.38) (27.38) 1998-99 3959.93 2455.41 3063.89 3020.77 (15.90) (58.06) (6.08) (26.08) 1999-2000 3413.22 2233.96 2788.22 3678.55 (-13.80) (-9.01) (-8.99) (21.77) 2000-01 4411.22 2542.44 6845.15 4858.36 (29.23) (13.80) (145.50) (32.07) 2001-02 5176.89 2550.5 4044.27 -100.00 (17.35) (0.31) (-40.91) 2002-03 4689.59 3138.54 4364.85 4675.12 (-9.41) (23.05) (7.92) (0) 2003-04 4652.24 3278.9 4989.41 4887.92 (-0.79) (4.47) (14.30) (4.55) 2004-05 5416.8 3402.48 5310.85 5023.42 (16.43) (3.76) (6.44) (2.77) 2005-06 7412.9 3999.15 6481.99 5687.62 (36.85) (17.53) (22.05) (13.22) 2006-07 7044.17 4468.54 7845.69 5433.06 (-4.97) (11.73) (21.03) (-4.47) 2007-08 14703.95 6789.76 7937.29 3884.48 (108.73) (51.94) (1.16) (-28.50) 2008-09 12165.89 5774.81 16445.2 7923.46 (-17.26) (-14.94) (107.18) (103.97) 2009-10 16371.82 6703.89 17873.54 8376.1 (34.57) (16.08) (8.68) (5.71) 2010-11 - 7850.76 - 11448.99 (17.10) (36.68) CAGR -13.59 14.10 14.28 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh Note: the figure in parenthesis ( ) in table shows percentage growth rate over the years.

Above table also reveals that during few years the increase in receipts was quite substantial while in others it was marginal or even negative. The reason for this

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is that in some of the years installments of the grants-in-aid and transfer from central government were not received while in other years, the arrear installments were received.

Tax and Non-Tax Revenue

The revenue of the corporations may be classified in to two broad categories. (i) tax revenue, and (ii) non-tax revenue. Tax revenue comes from taxes levied by the corporations and also from the share of the corporations in central taxes. Non-tax revenue includes miscellaneous incomes such as rent, fees, tahbazari, etc. non-tax revenue results in reduced burden of taxation on people. (bhagwan,1983)

The corporations has to levy almost six taxes, (i) property tax,(ii) tax on vehicles and animals,(iii) theatre tax,(iv) tax on advertisements published in newspapers, (v) duty on transfer of property, and (vi) tax on the application for sanction of building plans. In addition the corporations are empowered to levy the following taxes: (i) tax on professions, trades, callings and employment, (ii) betterment tax on the increase in urban land values caused by the execution of any development or improvement work, (iii) tolls, (v) tax on boats,(v) education cess,(vi) tax on the consumption, sale or supply of electricity. Share in three main taxes, namely, terminal tax, entertainment tax, and motor vehicles tax constitutes another significant source of tax revenue. Apart from this, another main source of tax revenue is water tax. Out of four municipal corporations under study, only Aligarh and Meerut Municipal Corporations have powers to levy this tax. In the remaining two municipal corporations the water tax levied by another agencies, namely Agra

Jal Sansthan and Allahabad Jal Sansthan. All the taxes referred to have been

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statutorily reserved for local use. The incidence of these taxes falls mainly on the local people.

Table-5.14 Trends in Own Tax and Non-Tax Revenue Tax Revenue Non-Tax Revenue Year Agra Aligarh Allahabad Meerut Agra Aligarh Allahabad Meerut 1995-96 284.22 166.19 203.11 367.95 122.36 62.28 301.00 94.45 1996-97 221.56 212.69 239.43 484.38 74.11 122 405.84 72.79 (-22.04) (27.98) (17.88) (31.64) (-39.43) (95.88) (34.83() (-22.93) 1997-98 302.33 243.13 273.38 554.82 170.4 160 300.63 88.12 (36.45) (14.31) (14.17) (14.54) (129.92) (31.14) (-25.92) (21.06) 1998-99 463 296.86 328.27 532.85 330.67 180.99 362.17 137.86 (53.14) (22.09) (20.07) (-3.95) (94.05) (13.11) (20.47) (56.44) 1999-2000 331.99 357.61 434.89 658.54 410.6 149.85 438.09 252.52 (-28.29) (20.46) (32.47) (23.58) (24.17) (-17.20) (20.96) (83.17) 2000-01 387.12 459.03 681.1 649.93 247.17 330.02 867.6 405.31 (16.60) (28.36) (56.61) (-1.30) (-39.80) (120.23) (98.04) (60.50) 2001-02 874.09 439.75 634 NA 215.45 275.86 544.28 -100.00 (12.79) (-4.20) (-6.91) (-12.83) (-16.41) (-37.26) 2002-03 519.92 796.4( 682.8 895.46 474.93 281.3 701.05 220.91 (-40.51) (81.10) (7.69) (120.43) (1.97) (28.80) 2003-04 742.45 602.48 1292.8 969.45 291.58 604.11 701.61 441.96 (42.80) (-24.34) (89.33) (8.26) (-38.60) (114.75) (0.07) (100.06) 2004-05 1180.39 866.68 1093.45 949.54 332.59 511.9 722 327.82 (58.98) (43.85) (-15.42) (-2.05) (14.06) (-15.26) (2.90) (-25.82) 2005-06 646.35 1060.08 1293.55 1021.01 286.9 828.18 1338.44 203.82 (-45.24) (22.31) (18.29) (7.52) (-13.73) (61.78) (85.37) (-37.82) 2006-07 888.48 1085.5 1318.5 946.35 391.85 717.32 1122.19 213.55 (37.46) (2.39) (1.92) (-7.31) (36.58) (-13.38) (-16.15) (4.77) 2007-08 3646.85 1443.65 1320.5 1135.4 360.5 632.44 1186.79 154.53 (31.45) (32.90) (0.15) (19.97) (-8.00) (-11.83) (5.75) (-27.63) 2008-09 1859.68 1193.5 1441 1171.2 374.07 1140.79 836.02 1022.57 (-49.00) (-17.32) (9.12) (3.15) (3.76) (80.37) (-29.55) (561.72) 2009-10 2038.05 1263.55 1671 1309.75 664.76 1085.76 929.93 1753.8 (9.59) (5.86) (15.96) (11.82) (77.71) (-4.82) (11.23) (71.50) 2010-11 1281.17 1762.35 1240.27 2561.33 (1.39) (34.55) (14.23) (46.04) CAGR 17.71 16.80 16.96 9.65 20.66 10.06 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh Note: the figure in parenthesis ( ) in table shows percentage growth rate over the years.

Receipts from both direct and indirect taxes comprise the total tax revenue.

There is no unanimity regarding the basis of classifying the taxes in to direct and indirect ones. Generally speaking direct tax is one whose entire burden is borne by the person on whom it is levied, whereas indirect tax is one whose burden partly or wholly shifted by the person on whom it is levied to some other person or persons.

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In the present study on practical considerations, property tax, education cess, tax on animals and vehicles, etc. has all been regarded as direct tax. Tax on advertisements, duty on transfer of property, tax on consumption, sale on supply of electricity and share in terminal tax, motor vehicles tax and entertainment tax have been included in the indirect taxes group.

The following conclusions emerge from a close study of the above table 5.14;

1. The revenue has become more important as it is evident from the table that the increase in tax revenue is higher than the increase in non-tax revenue. The growth rate of tax revenue of Agra and Allahabad municipal corporations is higher than the corporations of Aligarh and Meerut. This is against the sound principle of local finance under which non-tax revenue is expected to reduce the tax burden of the people. Substantial contribution by non-tax sources was the only good point in the financial structure of the erstwhile local bodies inherited by the corporations. It is quite disheartening to note that over the period this important feature of financial structure has been watered down.

2. Among the four corporations namely, Agra, Aligarh, Allahabad, and Meerut, only

Meerut Municipal Corporation shows lower tax revenue in comparison to other three remaining MCs, it indicates the inefficiency of financial administration of corporation whereas the scenario of tax levy and its collection is poor. In case of non-tax revenue, the Aligarh and Meerut municipal corporations shows a satisfactory picture in comparison to Agra, while Allahabad municipal corporations presents a grim picture.

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Grants-in-aid

The principle that the grants-in-aid should form one of the important sources of revenue of local governments has been accepted all over the world. In fact, it is a device by which the central, state and local governments join together in financing local services. Certain services such as public health measures, primary education, maternity, child welfare, etc., are of local character but of national importance.

Central and state governments have assumed the responsibility of these services.

These governments get these services supplied through the local governments under financial arrangements with them. It is in this sphere that central financial aid to local bodies plays an important part. It bridges the gap between national responsibility and local administration. Furthermore, the local functions have been expanded to the extent that they overreach the local revenue sources and the grants- in-aid are needed to perform these functions properly (Bhagwan, 1983)

The following table 5.15 shows the amount of grants-in-aid received by the municipal corporations of Agra, Aligarh, Allahabad, and Meerut during various years and also the percentage share of grants-in-aid to the total revenue of the corporations. it is evident from the table that out of four municipal corporations only two corporations; Agra and Allahabad shows a continous trend.

The conclusion that emerges from the discussion in the above paragraphs is that the amount of grants-in-aid needs to be augmented. The corporation should furnish necessary details to the government for a timely release of the grants. This measure is likely to contribute a substantial amount of revenue to the corporation. The government also should be generous in the matter of grants.

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Table-5.15

Growth and Share of Grants in the Receipts of Selected MCs

Grants-in-aid (Rs in lakh) % share of total receipts Year Agra Aligarh Allahabad Meerut Agra Aligarh Allahabad Meerut 1995-96 1847.28 597.55 1674.84 1077.00 81.96 66.91 76.86 68.02 1996-97 2229.48 660.5 1734.15 1270.13 88.29 65.55 72.88 67.53 (20.68) (10.53) (3.54) (17.93) 1997-98 2817.12 1013.73 2210.63 1752.87 82.45 65.25 76.54 73.16 (26.35) (53.47) (27.47) (38.00) 1998-99 751.69 756.82 347.79 107.1 18.98 30.82 11.35 3.54 (-73.31) (-25.34) (-84.26) (-93.89) 1999-2000 291.19 587.59 97.8 99.93 8.53 26.30 3.50 2.71 (-61.26) (-22.36) (-71.87) (-6.69) 2000-01 3174.32 - 2173.54 869.32 71.96 0 31.75 17.89 (990.11) (2122.43) (769.92) 2001-02 3194.1 0 - 250 - 61.69 0 6.18 - (.62) (-88.48) 2002-03 3090.01 - 281 - 65.89 0 6.43 0 (-3.25) (12.4) 2003-04 3097.85 - 260 - 66.58 0 5.21 0 (0.25) (-7.47) 2004-05 3828.75 - 260 98.65 70.68 0 4.89 1.96 (23.59) (0) 2005-06 6358.52 - 450 - 85.77 0 6.94 0 (66.07) (73.07) 2006-07 5319.46 - 550 - 75.51 0 7.01 0 (-16.34) (22.22) 2007-08 10187.21 - 530 - 69.28 0 6.67 0 (91.50) (-3.63) 2008-09 8973.99 - 8416 - 73.76 0 51.17 0 (-11.90) (1487.92) 2009-10 13087.75 - 8533.1 - 79.94 0 47.74 0 (45.84) (1.39) 2010-11 - 4.5 - - - 0.05 - 0 CAGR Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh Note: the figure in parenthesis ( ) in table shows percentage growth rate over the years.

Loans

In modern times local governments undertake many big developmental programmes which involve large capital outlays and confer benefits on the people for a number of years. No local government can ordinarily finance such development projects available for a long period; it is desirable that the burden of such expenditure should

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be spread over a number of years. Hence debts are incurred to meet the cost of such development programmes.

In the case of Uttar Pradesh, on the recommendation of the first state finance commission, the state government took a decision that the loans advanced to urban local bodies by state government which were of non remunerative nature, like loans for water supply schemes, integrated urban development schemes, special and general component plan schemes for scheduled castes and schedule tribes, integrated development of small and medium towns, and were outstanding as on march 31,

1997, together with interest thereon have been converted in to grants. The commission has been informed by the directorate of local bodies that this decision of the state government could not be implemented fully owing to non-availability of details in respect of outstanding loans. This information has been asked from all urban local bodies by the directorate. In the light of the above mentioned decision of the state government loans which were outstanding on 31-03-1997 stood converted in to grants. Thus the loan liabilities of urban local bodies as on march 31, 1999 would be confined only to the loans taken by them during the years 1997-98 and

1998-99 (SSFC, UP, 2002).

Transfers from the Higher to Lower Tiers of Government

Transfers from the higher to lower tiers of governments are an outstanding, and perhaps the most significant feature of public finance and instrumental in making local financial adjustments. Transfers form an important component of the revenue base of municipalities although the importance of transfers varies between states and often between municipalities within the same state. As a proportion of municipal governments revenues, transfers are high or low, depending on the revenue raising

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powers of municipalities, the efficiency with which these are used, and of course, the spending responsibilities of municipal governments. A tax on the entry of goods into a local area for consumption, use or sale therein (octroi) makes a phenomenal difference to the role of transfers in the finances of municipalities. Many of the transfers are not possible to be separately accounted for, as these are absorbed directly into state government expenditures.

Table-5.16

Growth and Share of Central Transfers in the Receipts of Selected MCs Year Central transfers (Rs in lakh) % share to total receipts Agra Aligarh Allahabad Meerut Agra Aligarh Allahabad Meerut 1995-96 0 0 0 0 0 0 0 0 1996-97 0 0 0 0 0 0 0 0 1997-98 126.63 61.56 103.54 0 3.70 3.96 3.58 0 1998-99 126.63 61.56 103.54 114.35 3.19 2.507 3.37 3.78 (0) (0) (0) 1999- 126.63 61.56 103.54 228.69 3.709 2.755 3.71 6.21 2000 (0) (0) (0) (99.99) 2000-01 0 61.56 103.54 0 0 2.42 1.51 0 (0) (0) 2001-02 0 68.91 115.99 0 0 2.701 2.86 N.A (11.93) (12.02) 2002-03 0 161.58 200 300.24 0 5.14 4.58 6.42 (134.47) (72.42) 2003-04 0 92.63 235 172.05 0 2.82 4.70 3.51 (-42.67) (17.5) (-42.69) 2004-05 0 92.63 235 172.05 0 2.72 4.42 3.42 0 (0) (0) 2005-06 0 104.84 400 191.38 0 2.62 6.17 3.36 (13.18) (70.12) (11.23) 2006-07 0 210.21 1400 383.73 0 4.70 17.84 7.06 (100.50) (250) (100.50) 2007-08 0 314.82 1400 574.69 0 4.63 17.63 14.79 (49.76) (0) (49.76) 2008-09 0 209.88 1252 383.13 0 3.63 7.61 4.83 (-33.33) (-10.57) (-33.33) 2009-10 0 203.18 1539.6 371.73 0 3.03 8.61 4.43 (3.19) (22.97) (-2.97) 2010-11 582.74 819.77 7.42 7.16 (186.19) (120.52) Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh Note: the figure in parenthesis ( ) in table shows percentage growth rate over the years.

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An important feature of transfers to municipalities is the discretionary nature. Unlike the Constitutional provisions that lay down the revenue-sharing arrangements between the central and state governments, there exist no statutory provisions in the state municipal laws which define the conditions under which transfers should take place from the state governments to municipalities. Since local government is a state subject and spending responsibilities and taxation powers of municipalities are determined by state governments, it is assumed that state governments have the obligation of bridging the gap between what the municipalities are able to raise by way of taxes, charges, levies, etc. and what they need to administer their spending responsibilities, with the provision that such a gap is worked out on sustainable normative considerations and not attributable to inefficiencies and fiscal profligacy. Transfers are made for other purposes as well.

We provide key statistics that throw light on the role of central transfers in the finances of municipal corporations. It is evident from the table that the growth rate of all selected municipal corporation was remains almost same with some minor fluctuations. The share of all selected municipal corporations namely, Agra, Aligarh,

Allahabad, and Meerut shows an increasing trend, out of four municipal corporations, the Allahabad municipal corporation shows a higher share of central transfers to total receipts. The lower share of transfers indicates the inefficiency of revenue raising of these municipal corporations and also the weak spending responsibilities of municipal governments.

Transfers from the State Government

State transfers to the municipal governments own revenues of municipalities to constitute the total fund availability. The fund represents municipal revenue-raising

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effort on the one hand, and on the other, they comprise what the state governments consider necessary to transfer in order to enable municipalities maintain and operate services at some acceptable or normative levels. Transfers have several roles, the foremost being to bridge the gap, since it would be unusual for the revenue-raising capacity of municipalities to be perfectly matched with their expenditure needs. In principle, such vertical gaps are possible to be closed by assigning additional tax powers to municipalities, or reducing service standards. However, most governments prefer transfers, which enable municipalities to provide services at prescribed levels, and also to influence their spending patterns and reduce spatial inequalities in services. Here, we analyse the role of transfers in a limited way: to what extent are the state-transfers able to supplement the resources of municipalities to enable them perform mandated functions and responsibilities. (Mathur, 2006)

The following table 5.17 reveals the situation of transfers from state governments to municipal corporations of Agra, Aligarh, Allahabad, and Meerut.

Out of four MCs, the Agra municipal corporation received transfers from the state government only during the two years. The state transfer plays an important role in the municipal finance in Uttar Pradesh. It is evident from the table that the growth of transfers rate of all four municipal corporations is not healthy, but the share of transfers from the state to total receipts of Municipal Corporation is very high. Out of the three MCs namely, Aligarh, Allahabad, and Meerut, the share of Allahabad

Municipal Corporation is decreasing in comparison to the remaining two MCs.

There are some important features that we note from the following table.

First, transfers are an important constituent of the finances of municipal corporations

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of Agra, Aligarh, Allahabad, and Meerut. Secondly, the dependency of these municipal corporations on state is increasing over the years.

Table-5.17

Growth and Share of Transfers from State Government in the Selected MCs

State Transfer (Rs in lakh) % Share to Total Receipts Year Agra Aligarh Allahabad Meerut Agra Aligarh Allahabad Meerut 1995-96 - - 0 - 0 0 0 0 1996-97 - - 0 - 0 0 0 0 1997-98 - - 0 - 0 0 0 0 1998-99 2287.94 1159.18 1922.12 2129.01 57.77 47.20 62.73 70.47 1999-2000 2252.94 1077.35 1713.9 2063.87 66 48.22 61.46 56.10 -1.53 -7.05 -10.83 -3.05 2000-01 - 1295.81 3020 2645.98 0 50.96 44.11 54.46 20.27 76.20 28.20 2001-02 - 1437.96 2500 0 0 56.37 61.81 10.96 -17.21 -100.00 2002-03 - 1713.26 2500 3011.46 0 54.58 57.27 64.41 19.14 0 3011.46 2003-04 - 1808.68 2500 3224.18 0 55.16 50.10 65.96 5.56 0 7.06 2004-05 - 1729.77 3000 3432.35 0 50.83 56.48 68.32 -4.36 20.00 6.45 2005-06 - 2006.05 3000 4219.41 0 50.16 46.28 74.18 15.97 0 22.93 2006-07 - 2340.51 3500 3844.42 0 52.37 44.61 70.75 16.67 16.66 -8.88 2007-08 - 4398.85 3500 636.49 0 64.78 44.09 16.38 87.94 0 -83.44 2008-09 - 3230.64 4500 534.65 0 55.94 27.36 6.74 -26.55 28.57 -16.00 2009-10 - 4078.92 5200 4931.8 0 60.84 29.09 58.87 6.25 15.55 822.43 2010-11 - 4742.08 - 6305.52 60.40 55.07 16.25 27.85 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh Note: the figure in parenthesis ( ) in table shows percentage growth rate over the years.

Per capita Receipts of Municipal Corporations As the period under review has recorded a fast increase in price with a parallel high rate of population increase, the major part of the increase in revenue has been neutralized by these two forces. To study the real increase in revenue, it is necessary

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to analyze the per capita revenue of the municipal corporations of Agra, Aligarh,

Allahabad, and Meerut.

Table-5.18

Per Capita Total Receipts of Selected MCs (Rs in rupees) Year Agra Aligarh Allahabad Meerut 1995-96 219.24 162.95 250.74 183.02 1996-97 237.10 178.01 268.55 210.61 1997-98 309.46 265.54 319.84 258.16 1998-99 345.84 405.85 333.03 314.33 1999-2000 287.79 356.86 297.25 369.70 2000-01 358.63 392.95 716.01 471.22 2001-02 406.03 381.24 414.79 NA 2002-03 355.00 454.20 439.56 423.08 2003-04 339.82 459.22 493.02 426.89 2004-05 381.73 460.41 514.61 423.55 2005-06 503.93 523.44 616.15 463.16 2006-07 461.91 566.35 731.87 427.46 2007-08 930.62 832.07 726.85 294.94 2008-09 742.72 684.21 1477.55 580.89 2009-10 964.18 766.15 1574.76 593.20 2010-11 - 871.33 - 783.10 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

The above table 5.18 reveals that during the period under review, the per

capita receipts of all selected municipal corporations have increased over the years.

It increased from Rs219.14, Rs 162.95, Rs20.74 and Rs183.02 in 1995-96 to

Rs964.18, Rs766.15, Rs1574.76, and Rs593.10 in 2009-10 of the municipal

corporations of Agra, Aligarh, Allahabad, and Meerut respectively. It is evident that

the population increase has neutralized a major part of the revenue growth and the

real per capita revenue increased only marginally. Above discussion indicates that in

some of the years per capita revenue is higher than the expenditure, but in several

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years the per capita expenditure is higher than the per capita revenue of MCs. The growth in per capita expenditure was negligible. The per capita revenue has not been able to keep pace even at that rate. The conclusion is that the per capita revenue of the corporations is rising at lower rate than the per capita expenditure.

It will be useful to highlight the important findings of the analysis carried out in this chapter. The percentage increase of revenue over the period under review is attractive, but its major portion has been offset by the population and price rise, with the result that per capita revenue has recorded only a marginal increase. It is quite disconcerting to note that the increase in revenue is less than the corresponding increase in expenditure.

The non-tax revenue of the corporations has not increased substantially so as

to relieve the tax burden on the people. The increased progressiveness of the tax

structure gives some satisfaction as the progressive taxes put more burdens on the

rich. In recent years the share of revenue to total receipts has been increasing,

showing that the corporations are making efforts to raise revenue and also indicating

that the government of India is becoming more and more strict in the matters of

grants-in-aid. However, the special problems faced by the corporations, certainly

require generous grants-in-aid from the government. The expenditure of the

corporations is rising at a rapid rate. To meet this rising expenditure, the

corporations should thoughtfully utilize them in order to raise the necessary revenue.

They should also try to tap their non-tax revenue sources and the central government

should provide generous grants-in-aid to them so that they can provide many more

and better services.

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5.7 Financial Mismatch in the selected Municipal Corporations

The following table 5.19 shows that most of the MCs are generating revenue surplus and overall resource gaps are not very large except during some years, where MCs shows a deficit. From 1995-96 to 1998-99 , three MCs namely

Agra, Aligarh and Meerut shows a revenue surplus except Allahabad that shows revenue surplus in 1996-97, 1997-98 only.

Table-5.19

Fiscal Mismatch in the Selected MCs

(Rs in lakh) Year Agra Aligarh Meerut Allahabad 1995-96 198.96 9.75 53.53 -26.33 1996-97 150.4 29.54 80.84 88.02 1997-98 129.31 2.33 9.15 296.66 1998-99 537.77 427.67 481.33 -303.79 1999-2000 -856.03 -350.74 -131.09 -71.76 2000-01 -195.9 192.41 3255.28 2520.07 2001-02 536.9 164.42 -2866.06 0 2002-03 208.24 222.84 295.88 1621.53 2003-04 172.52 193.9 667.34 -3575.99 2004-05 411.9 130.92 490.54 3341.02 2005-06 1765.01 117.15 859.95 3879.49 2006-07 162.59 155.95 107.46 2328.41 2007-08 5571.03 1543.79 253.21 1393.46 2008-09 -1952.04 -1313.15 8218.84 -8315.67 2009-10 -2568.58 -1348.79 -1716.75 319.83 2010-11 725.41 -3725.57 Source: Various Budgets of Municipal Corporations of Agra, Aligarh, Allahabad, and Meerut, Uttar Pradesh

The table shows that except during some of the years , all of the four

municipal corporations shows a revenue surplus .at the same time ,it could be

observed that spending by all the municipal bodies is lower than that required for

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providing a minimum level of civic services .this apparent contradiction of sound fiscal health and high level of under spending is due to statutory obligations where by ULBs are generally bound to restrict their expenditure to the resources available and are also not granted liberal permission by state governments to incur debt.

The revenue surplus of all MCs in many years also due to the low per capita expenditure on major basic civic services as compared to per capita spending on core services by all of the four municipal corporations in terms of the zakaria committee norms. It indicates that the level of under-spending on an average works out to be high .The per capita expenditure of all MCs on all civic services is very low as compared to the zakaria committee norms.

Analysis of expenditure and revenue of the local bodies generates the following broad conclusions:

The municipal corporations inherited a slow growing revenue structure against the fast increasing population, price level and expectations of the people of local services. Among the different components of revenue, the tax revenue increased at the slow rate in comparison to the other transfers from the government.

This indicates slackness on the part of the local bodies in raising revenue and their increasing dependence on the government funds. One good feature of this revenue structure was that it was broad-based. Miscellaneous items such as rent, fees, fines, etc. contributed substantial revenue.

The expenditure pattern inherited by the corporations was marked by a faster increase of non-development expenditure than that of development expenditure. The municipal corporations were spending a very large part of their revenue as non- development expenditure. There were variations in the per capita development

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expenditure in the different municipal corporations. These variations highlight the problem of inter-local inequality within the jurisdiction of the corporation which was an amalgam of these unevenly developed local bodies.

From the above analysis we reject our null hypothesis. It is statistically

proved that the both expenditure and revenue of the municipal corporations have

significantly increased over the period of study. The result shows that there is

positive relationship between expenditure and revenue of the municipal

corporations, but the pace of increment in revenue is lower than the expenditure.

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CHAPTER – VI

CONCLUSION AND SUGGESTIONS

Conclusion

There is widespread acceptance of the view that decentralization of expenditure responsibilities to lower tier governments is efficiency augmenting, Sub-national governments are better informed and can more readily respond to the needs and preferences of the citizens living in their jurisdictions. Decentralized governance require active participation of people in development planning ,implementation and monitoring of development programmes .Therefore, the development administration particularly urban development programmes and schemes call for re-orientation and re-thinking in the changed environment of governance .The imperatives of decentralized planning in India have been emphasized during the plan periods, however the progress in this direction remained slow despite repeated change in policy prescriptions

Local Self-Government Institutions or Local Bodies directly influence the

welfare of the people by providing civic, social and economic infrastructure services

and facilities in both urban and rural areas. Given their strategic position in delivering

services in the hierarchy of Government set up, following the Constitutional (73 rd &

74 th ) Amendment Acts, more functions, powers and resources have been provided to them. However, over a period of time, the functions and responsibilities of ULBs have increased considerably without commensurate enhancement of their resource base.

Constitutionally built-in imbalances in functions and finances assigned to various levels of government eventually reflect in the high dependency of local bodies on

State Governments and the latter, in turn, on Central Government for funds.

Moreover, in the absence of financial support coming from the upper tiers of

Government, these bodies may have to resort to borrowings from financial institutions and the capital market.

Urbanisation is an important ingredient of economic development. The trend towards greater urbanisation is observed across the developing world. Going by this trend, India is slated to have 50 per cent of its population living in cities and towns in the next few decades, up from the current proportion of about 30 per cent. Although

India’s urban population has been growing, the level and pace of urbanisation have been low in comparison with other developed and developing countries. After liberalisation of the economy, India made strides in economic growth; a large part of it has been through the contribution of urban areas.

In the case of ULBs in India, the 74 th Amendment to the Constitution of India,

1992 identified enormous responsibilities for the urban local governments. Besides

the 18 items listed as municipal responsibilities in the Twelfth Schedule of the

Constitution, the Legislature of a State, by law, can assign any tasks relating to: (i) the

preparation of plans for economic development and social justice; and (ii) the

implementation of schemes as may be entrusted to them. For strengthening the

finances of urban local governments, two positive features were provided in the 73 rd

and 74 th Amendments to the Constitution: (a) provision for the constitution of State

Finance Commissions (SFCs) every five years (Article 243-I as per the 73 rd

Amendment) and (b) amendment of Article 280 of the Indian Constitution by

inserting section 3(C) which requires the Central Finance Commission (CFC) to

190 suggest measures needed to augment the consolidated fund of the states to supplement the resources of municipalities devolved on the basis of the respective SFC recommendations. However, the progress in the implementation of SFC recommendations in several states has not been very encouraging. The CFC has also grappled in making recommendations of resource transfer to local governments in states. However, in the absence of authentic data, successive CFCs have made recommendations for the transfers of funds for local bodies on ad hoc basis.

With the 73 rd and 74 th Constitutional Amendments, The democratic base of decentralized governance has widened and the scope for functional and financial devolution to urban local bodies has been ensured through mandatory provisions. The urban local bodies have been empowered to raise their resources in order to enable them to discharge the functions assigned to them. It has been observed that the powers and functions which have been assigned to urban local bodies are overlapping in areas, functions and responsibilities between the three tiers of urban local bodies. The type of functions assigned to any tier of urban local bodies is ambiguous. Often the same function is performed by two or three different tiers of urban local bodies. There is no principle or criteria adopted for the assignment of responsibilities to the different tiers of urban local bodies. Functions have not always been fully transferred. Even where the functions have been transferred, functionaries and functions have remained under the control of higher level of government. Notwithstanding the constitutional amendments and the relevant statutory provisions, there is neither political will nor administrative will to strengthen the urban local bodies.

Our analysis of the revenues and expenditure of ULBs in general and municipal corporations in particular reveals that most MCs are generating revenue

191 surplus and overall resource gaps are not very large. At the same time, it could be observed that spending by all the municipal bodies is lower than that required for providing a minimum level of civic amenities. This apparent contradiction of sound fiscal health and high level of under-spending is due to statutory obligations, whereby

ULBs are generally bound to restrict their expenditure to the resources available and are also not granted liberal permission by State Governments to incur debt. In view of the above factors, the study has undertaken the assessment of municipal finance in

“normative terms”, besides the “standard approach” of revenue or fiscal balance. A comparison of per capita spending on core services by the MCs in terms of the

Zakaria Committee norms indicates the level of under-spending on core services.

Reasons for under-spending are traced to MCs’ own operations (endogenous) as well as to policy issues related to the upper tiers of Government (exogenous). Exogenous factors include dependency for resources on the upper tiers of Government and inadequate delegation of revenue-raising powers. Endogenous factors include inefficient revenue (tax) administration, low cost recovery and poor quality of expenditure.

While analysing the finances of selected municipal corporations, it has been observed that the financial situation of all four municipal corporations namely; Agra,

Aligarh, Allahabad and Meerut is not satisfactory. The per capita expenditure on core services is much lower than the Zakaria Committee norms. Lower per capita expenditure on civic services is an indicator of poor quality of civic services rendered by these MCs.

Decentralisation increases efficiency of the lower levels of Government in the

provision of various local services due to their limited jurisdiction and better matching

192 of resources, services and preferences. An increase in decentralisation is expected to delegate more powers to local government authorities and augment their capacity to mobilise resources. Dependency of local government on the upper tiers of

Government arises from the support extended to them in the form of grants, which arise largely out of vertical mismatches between functions and finance, as well as out of the compulsions necessitated by horizontal disparities between different jurisdictions. However, greater dependency on the upper tiers renders the local governments vulnerable regarding spending on the provision of basic infrastructure and services. This adversely affects the performance of the local governments.

Quality of expenditure, measured as establishment and administrative expenditure as a proportion of total expenditure also turns out to be a major factor in determining the ability of MCs to provide basic services. Some of the MCs have an unsustainably high proportion (more than 50 per cent) of total expenditure on establishment and administration, which affects the sustainability of their finances and their service delivery capacity. Lower spending on administrative and establishment purposes would leave more resources with the MCs to provide civic amenities.

Accordingly, the study suggests that guidelines/norms may be framed for the ULBs towards spending on capital and maintenance works as well for rationalizing the staffing pattern. It is apparent from the analysis that there is a need to substantially increase the spending by urban local bodies. Given the constraints faced by State

Governments, it is essential that the MCs be granted access to borrowed funds. At least there are two convincing arguments in favour of MCs going for borrowed funds.

First, there is a scope for MCs to go in for borrowed funds as their current level of indebtedness is not very large. Secondly, there is a scope to raise user charges which are abysmally low in the State. Enhancement of user charges would make the new

193 projects undertaken with borrowed funds economically viable and ensure that MCs are debt-sustainable. MCs which have lower levels of under-spending or better performance have fared well on 4 out of 5 criteria viz., dependency, decentralization, tax administration and expenditure quality. On the other hand, MCs with ranking

“below average” on these 4 parameters are also the ones which have been spending less on core civic amenities. Notably, those MCs which had better delegation of revenue powers and less dependency on the upper tiers of Government were the best performers, in terms of provision of core services (lower under-spending). Thus, the analysis suggests that restructuring of revenue powers may be given top priority by the State Government if urban amenities are to be improved significantly.

Though the delegation of revenue powers is a key factor, the need for efficient revenue (tax) administration cannot be underplayed. Examination of various taxes across the local bodies reveals that property and profession taxes are important sources. Octroi, however, is the most important source of revenue in municipal corporations belonging to Maharashtra and Gujarat. The local bodies need to adequately tap the existing avenues. Unit area system of computation, based on self- assessment principle, with respect to property tax needs to be extended to all ULBs.

ULBs, where Octroi has been a major source of revenue, should be adequately compensated when Octroi is abolished. Other sources like entertainment tax, development charges, betterment levies, etc need to be tapped. The 12 th Schedule

introduced in the Constitution by 74 th Amendment Act envisages that functions like

‘safeguarding the interests of weaker sections of society, including the handicapped and the mentally retarded’, ‘slum improvement and upgradation’ and ‘urban poverty alleviation’ belong to the legitimate functional domain of urban local bodies.

However, there are no commensurate resources with these institutions to discharge

194 these functions. This is a case of expenditure assignment without a corresponding revenue assignment. An implicit assumption may be that these functions will be discharged by ULBs, but financed by higher levels of government which have access to buoyant and redistributive taxes. The mix of municipal revenues in India - taxes, user charges and fees, transfers and loans - is narrow compared to international benchmarks with regard to the financing of local public services. The revenue instruments assigned to urban local bodies by State Government at present are grossly inadequate and not commensurate with the functions expected to be performed by them in accordance with the 74th Amendment Act.

The study concludes that there is a need for certain lines of reforms to restructure the system of municipal finances in the country by revisiting expenditure assignment and revenue assignment, finding an alternative to Octroi, developing national consensus on a Municipal Finance Schedule, raising local revenue efforts, reforming property tax, using urban land as a resource, adopting ‘users pay’,

‘beneficiaries pay’ and ‘polluters pay’ principles, linking individual services with user charges and collective services with benefit taxes, restructuring inter-governmental transfers with a simple distributive formula that gives due weights to needs, rights to minimum basic services, incentives to performance and inter-jurisdictional equity, easing borrowing restrictions on ULBs, financing urban infrastructure through exploring the options of i) specialized banks for municipal lending, ii) municipal bond markets, and iii) specialized municipal funds and strengthening the creditworthiness of ULBs, developing public-private partnerships, addressing poverty alleviation through linkage to buoyant redistributive taxes, improving expenditure management and disclosure, promoting fiscal responsibility and professionalizing municipal management. A ‘Municipal Finance Schedule’ for assignment to the ULBs to match

195 the list of functions included in the 12th Schedule may comprise property tax including vacant land tax and taxation of Central and State Government properties (or service charges in lieu thereof), professional tax, entertainment tax, advertisement tax, business licensing fee or tax, motor vehicle tax or a share from the same, planning permission fee, development impact fee, betterment levy, a surcharge on stamp duty on registration deeds or a share from it and a proportion of the Value Added Tax.

State Governments may provide freedom to ULBs in matters relating fixation of tax base and tax rate. Restrictions, if any, may only be by stipulation of ceilings or maximum rates of levy and limiting the power to grant exemptions. As regards SFCs,

the study suggests that they may follow the suggestions made by the Twelfth Finance

Commission regarding approach to be adopted to study the finances of local bodies,

identifying problems and making recommendations. SFCs may accord priority to

‘measures’ for improving municipal finances and financial management to address the

fundamental factors leading to vertical imbalance rather than adopting a gap-filling

approach.

The study has extensively used the Zakaria Committee norms for working out

under-spending by the urban local bodies. In this context, it could be indicated that the

Zakaria Committee norms, developed during the early 1960s, pertain to only five core

services. Moreover, the costs of services may be subject to convexity due to

technological changes and lack of natural advantages (e.g. on account of over-growth

of cities). Therefore, there is a strong case for developing new benchmarks for

estimating the costs of municipal services in India by constituting new groups and by

undertaking more primary studies.

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One serious difficulty encountered while studying the municipal finances U.P. related to the lack of availability of comprehensive and consistent data. There is no source of reliable data on finances of all local bodies in U.P. to estimate their resource gaps. There is also a lack of uniformity in classification and reporting of financial data, which do not allow precise comparison on various parameters.

Major Findings of the Study

Some key findings from the study are as follow: i) There is mismatch between functions and finances of ULBs, which primarily

explains the vertical imbalance. Out of 18 functions to be performed by the

municipal bodies in India less than half have a corresponding financing source.

The 12 th Schedule in the Constitution’s 74 th Amendment Act also envisages that

functions like ‘safeguarding the interests of weaker sections of society,

including the handicapped and the mentally retarded’, ‘slum improvement and

upgradation’ and ‘urban poverty alleviation’ belong to the legitimate functional

domain of urban local bodies. However, there are no commensurate resources

with these institutions to discharge these functions. Thus, vertical imbalance is

constitutionally in-built and correction to the same needs to be achieved through

reforms in the structure of fiscal federalism, including revenue assignment and

inter-governmental transfers through the Central and State Finance

Commissions. There is a need for function-finance mapping to ensure that each

function to be performed by the ULBs is backed by a corresponding financing

source. The revenue instruments assigned to a tier of government should match,

as far as possible, the expenditure requirements to induce fiscal responsibility.

197 ii) Own taxes and user charges of ULBs in U.P. is grossly inadequate to meet the

expenditure needs of ULBs. Inability of the State to assign a buoyant tax to

ULBs in the place of Octroi has seriously affected municipal fiscal autonomy.

Besides, elaborate State Government controls on the municipal authority to levy

taxes and user charges, set rates, grant exemptions, borrow funds etc. and on the

design, quantum and timing of inter-governmental transfers are constraining

ability of the ULBs in mobilising resources

iii) In addition to ‘own’ and ‘shared’ revenues, grants-in-aid received from the state

government constitute a major resource of ULBs. However, the fiscal position

of the state itself has been weak with high level of deficits and outstanding

liabilities. Hence, the state government have not been in a position to provide

sufficient funds to their ULBs as per the recommendations of the SFC. The

present system in States is ad hoc , with very little incentive to ULBs to prompt

efforts for bridging the fiscal gap and rendering performance. Transfers often

bail out the incompetent and the irresponsible.

iv) The study highlights deficiencies in the conventional method for assessing

municipal finances in terms of analysis of revenue and expenditures of

municipalities. ULBs are required to generate revenue surplus due to statutory

requirements. Overall resource gaps of ULBs, as seen from municipal budgets,

are not very large. However, the spending by all the municipal bodies is lower

than that required for providing a minimum level of civic amenities. A

comparison of per capita spending on core services by municipal corporations in

terms of the Zakaria Committee norms indicates the level of under-spending.

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Thus, the assessment of municipal finances in “normative terms”, besides the

“standard approach” of revenue or fiscal balance is very essential.

v) Under-spending in civic services is evidently linked to certain exogenous and

endogenous factors. Exogenous factors include: delegation of revenue powers

(decentralization) and dependency of ULB for resources on upper tier of

government (dependency ratio). Endogenous factors include: revenue (tax)

administration, cost recovery and quality of expenditure. vi) ULBs have low outstanding debt and debt sustainability parameters such as

interest coverage and debt coverage ratios suggest that these bodies have

considerable scope for debt financing of their expenditure needs.

Municipal Finance Reforms

The study suggests that to start with, the issues of lack of clarity, consistency and predictability in expenditure assignment and revenue assignments should be addressed. In particular, the system of taxes, user charges, inter governmental transfers and borrowings in respect of ULBs need to be reviewed for their adequacy and suitability to match the expenditure needs. Resources are required to be aligned with expenditures so that the delivery of services most required by citizens can take place effectively. Reforms need to focus on the basic issues of fiscal federalism, namely, revenue assignment must be clear and revenue assignment must correspond to expenditure assignment. There is also a need to address the issues of service delivery management as in the ultimate analysis outlays will have to translate into outcomes valued by the public.

The study finds that ULBs, which have better delegation of revenue powers and less dependency on upper tiers of Government, perform well in terms of provision

199 of core services or lower underspending. Thus, the restructuring of revenue powers to

ULBs needs to be given top priority by State Government, if urban services are to be improved. Simultaneously, the quality of expenditure by ULBs needs to be enhanced with a rationalization of the work force and reduction in spending on establishment and administration. There is considerable scope for the ULBs to recourse to borrowed funds for improving civic infrastructure as their current level of indebtedness is perceived to be low. Thus, several ULBs would be in a position to access the capital market if borrowing constraints are eased and tax-free bonds are facilitated. However, strong revenue reforms, covering both general revenues and user charge revenues, area pre-condition for accessing market funds. There is a significant scope to raise the user charges which are abysmally low in the State.

The study suggests some measures for improving the municipal finances in U.P. as follows:

Expenditure Assignment

The Constitution (74 th Amendment) Act 1992 identifies 18 functions in the

12th Schedule as belonging to the legitimate domain of urban local bodies. A study of

amendments to municipal acts by the State Governments following the 74th

Amendment reveals that there is inadequate clarity regarding the assignment of

functions to ULBs. Some municipal acts mention of functions ‘as may be assigned

from time to time’ by the State Government. In the absence of activity mapping and

clarity regarding the levels at which component of functions such as policy-making,

planning, formulation of programmes and projects, implementation, monitoring,

quality assurance, assessment and evaluation are to be performed in connection with

the delivery of particular public services, overlap between the functional domains of

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ULBs, State and Central Governments will continue. Functions of various tiers of government need to be clear and without any ambiguity.

Revenue Assignment

Inadequate assignment of tax and non-tax resources including inter-

governmental transfers, incomplete delegation of revenue raising powers,

inappropriate user charges, inefficiency in tax administration and under-exploitation

of assigned revenues are some major factors that have contributed to the resource

crunch of ULBs. The ULBs must be made an integral part of revenue mobilization in

as much as they share responsibilities. Study recommend a combination of benefit

taxes, user fees, development charges and borrowings for long gestation capital works

as appropriate for meeting civic expenditures. User charges should be based on the

marginal cost of additional units of services from the infrastructure and development

charges on the marginal cost of extending infrastructure to new developments, levied

on a development-by-development basis.

Alternative to Octroi

Assigning an alternative in the place of Octroi to ULBs is a critical reform,

which is pending since long. The Twelfth Finance Commission has recommended that

a tax, preferably linked to the consumption characteristic of good and hence also

buoyant, would be a suitable alternative to Octroi. The search for a substitute for

Octroi may perhaps end with a reasonable formulae-based share for the ULBs in the

Value Added Tax.

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Municipal Finance List

A national consensus needs to evolve on a ‘municipal finance schedule’ for

assignment to the ULBs to match the list of functions included in the 12th Schedule.

The context is critical and given the patterns of urban public finance prevailing in the

state, property tax including vacant land tax and taxation of Central and State

Government properties (or service charges in lieu thereof), professional tax,

entertainment tax, advertisement tax, business licensing fee or tax, motor vehicle tax

or a share from the same, planning permission fee, development impact fee,

betterment levy, a surcharge on stamp duty on registration deeds or a share from it

and a proportion of the Value Added Tax may be considered as part of the scheme of

revenue assignment to ULBs. State Governments need to provide freedom to ULBs in

matters relating tax base, tax rate and exemptions. Restrictions, if any, may be only by

stipulation of ceilings or maximum rates of levy.

Matching Revenues and Expenditure

The Bahl-Linn (1992) principles of local public finance provide useful

guidance for matching local revenue sources with the expenditures needed. They

provide directions for determining the types of local public services that could be best

financed out of revenues from particular user charges, benefit taxes, generic taxes,

administrative fees and borrowings. There is a need for drawing a map showing broad

correspondence between expenditure responsibilities to be discharged by ULBs and

the most appropriate ways to finance them.

Raising Local Revenue Efforts

While the huge resource gaps of the ULBs require major structural reforms

that take time, there are no two opinions that ULBs should exploit the revenue sources

202 already assigned to them more effectively. There is a particular need for focusing on maximization of revenues from property taxes, user charges and the use of urban land as a resource. ‘Users pay’, ‘beneficiaries pay’ and ‘polluters pay’ are the cornerstones of local public finance as suggested by theory as well as practice. They must be fully made use through scientific ways of identifying tax base. Capital value taxation is recognized as a desirable way to enhance the yield from property taxes. However, the process to move to such a system is bound to be slow given the view that tax-payers in cities in U.P. are ‘property-rich’, but ‘cash-poor’. Moreover, most ULBs do not have a cadre of trained assessors to evaluate property values and update them regularly. Experiences of cities like Hyderabad and Bangalore suggest that area-based property tax systems, linked to self-assessment schemes, have considerable scope for enhancing property tax revenue. Vacant land tax, which remains one of the most under-exploited taxes in the state at the local level, can be a major source of ULB revenues, with a low rate of tax levied on capital value of land based on benchmark values for registration. Reforms in administration of property tax, including assessment, valuation and record-keeping are also called for.

Linking Services with User Charges

Property tax is collected under various Municipal Acts with components such as water tax, drainage tax, lighting tax, conservancy tax and general tax. It is desirable that services like water supply, which can be measured and for which beneficiaries can be identified without incurring a huge cost, are financed through user charges.

Linking of services to earmarked user charges and benefit taxes introduces a surrogate market in the provision of the local public goods concerned. Moreover, there is a visible trend in the developed countries towards more effective utilisation of user

203 charges and benefit taxes by local governments due to citizens’ preference for them over general taxes. ULBs in India need to be enabled to levy user charges for individual services with the goal of full cost recovery. Benefit taxes should be levied when the levy of user charges is not possible.

Inter-Governmental Transfers

India being a three-tier federal system, inter-governmental fiscal transfers are bound to remain an integral mechanism for solving the problems of vertical imbalance in the assignment of responsibilities and fiscal powers between the Centre, State and local bodies. These transfers could be an effective tool to correct such vertical imbalance, reduce the inequalities amongst ULBs due to a variety of factors including fiscal power, cost disabilities, revenue effort, etc. And promote public spending in desired sectors like water supply, education, health etc. In addition to the factors of vertical balance, equalization principle and externalities, administrative justification in terms of economies of scale in tax collection at the Central or State level also stands as argument in favour of inter-governmental transfers to local bodies. The design of inter-governmental transfers from State Government must be based on the principles of objectivity, transparency and predictability. The following criteria are advocated:

(a) the transfers must imply a hard budget constraint for the municipalities and there should be no soft options at the margin; (b) the quantum and frequency of transfers must be predictable; (c) they must be transparent through explicit and identifiable entries in government budgets; (d) they must be pre-determined rather than open- ended and (e) they must have in-built incentives for promoting local resource mobilisation and effective public service delivery. A simple distributive formula that

204 gives due weights to needs, rights to minimum basic services, incentives to performance and interjurisdictional equity may be designed.

Financing Urban Infrastructure

Some key options for financing urban infrastructure include: i) specialized

banks for municipal lending, ii) municipal bond markets and iii) specialized municipal

funds ( e.g. Tamil Nadu Urban Development Fund). Bank lending model is used in

Western Europe while the municipal bond model is adopted in North America. For accessing capital market funds, the municipalities need certain financial, structural, institutional and administrative changes. These include i) availability of buoyant sources of revenue at their disposal, ii) transformation of the urban governance system with limited control by State Governments, iii) changes in the capital market structure, iv) recovery of cost of services and v) escrowing mechanisms to make the urban infrastructure projects commercially viable. In particular, efforts need to be made to broaden and deepen the market for Municipal Bonds in the country, by promoting tax-free and taxable bonds as in USA. For strengthening issuance of municipal bonds, measures such as bond insurance facility and listing of bonds on domestic stock exchanges are required.

Strengthening the creditworthiness of ULBs requires that they be given autonomous authority to set realistic tax-rates and user charges for the basic services provided by them and also for pursuing right-sizing of staff.

Developing Public-Private Partnerships

While a crucial role exists for the private sector to participate in urban

infrastructure, the intervention of the state and public policy and the format for such

partnerships must be carefully designed. It is also imperative to safeguard the

205 ecological and equity interests of the society and enforce accountability of both public and private actors. The ULBs, especially the smaller ones, have limited capacity to develop public-private partnerships and need to be assisted by specialized state agencies.

Addressing Poverty Alleviation

The functions of urban poverty alleviation and slum development and

upgradation are envisaged as legitimate municipal functions under the 12th Schedule

of the Constitution, incorporated by the 74th Amendment Act, 1992. If these

redistributive functions are to be discharged effectively by the urban local bodies, the

sources of financing the same must be clearly spelt out. Unless the ULBs have

‘assured’ or ‘predictable’ sources of revenue for these functions, there is little

likelihood that they will ‘own’ them. The municipalities need to be induced to adopt

these functions on the assurance of funding from State and Central Governments,

which have recourse to more buoyant resources.

Expenditure Management and Disclosure

Many ULBs are seen to incur wasteful expenditure and considerable savings can be achieved through the elimination of the same. This is particularly true of administrative and establishment expenditures. There is a need to review expenditure norms and rationalize them to realistic levels. Procurement reforms, institution of performance measurement and management system for service providers and regulators, enforcement of norms of transparency and accountability and implementation of the Right to Information Act, 2005 are bound to improve the quality of local government expenditures. Budgeting and accounting systems of urban

local bodies need to be simplified; accrual-based accounting must be put in place

206 following the National Municipal Accounting Manual. Municipal accounts may be disclosed to the public at regular intervals in simple and easily understandable formats

to induce informed debate and enforce vigilance.

Promoting Fiscal Responsibility

Key indicators of fiscal health of urban local bodies need to be designed from

time to time to facilitate meaningful cross-municipal comparisons, benchmarking,

drawing conclusions for measures to augment municipal revenues, cut unnecessary

expenditures and enable the access to market funds. Appropriate fiscal responsibility

legislations need to be considered by State Governments for the urban local bodies.

Municipal Expenditure Norms

The study has extensively used the Zakaria Committee norms for working out

the under-spending by urban local bodies and for projecting resource requirement for

10 years. In this context, it could be indicated that the Zakaria Committee norms,

developed during the early 1960s, pertain to only five core services. Moreover, the

costs of services may be subject to convexity due to technological changes and lack of

natural advantages ( e.g. on account of over-growth of cities). Therefore, there is a strong case for developing new benchmarks for estimating the costs of municipal services in India by constituting new groups and by undertaking more primary studies.

Best Practices and Innovations

There are many best practices and innovative experiments undertaken by urban local bodies and State Governments in India in areas such as local resource mobilization, expenditure management, capital budgeting, participatory planning etc.

207

The same need to be documented and disseminated widely. A national network of

resource centres on urban development, urban poverty alleviation and local public

finance and a national bank on urban best practices and innovations by urban local

bodies in the country and outside may also be developed.

Municipal Finance Database

One serious difficulty encountered while studying the municipal finances in

U.P. relates to the lack of a comprehensive and consistent database. The entire discussion in Chapter 8 of the Twelfth Finance Commission’s Report brings out the fact that despite several attempts, there is no source of reliable data on finances of all local bodies in India to estimate their resource gaps. The present study of budgets of the MCs in the state reveals the lack of uniformity in classification and reporting of data, which do not allow precise comparison on various parameters. There is an imperative need to develop a robust database on municipal finances and the same may be made public on a regular basis. With increasing urbanization, urban public finance is going to have important implications for state and national finances.

208

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217

Annexure: 1

The Trends in Urbanisation and Metropolitan Growth in India

Table 1.1: Number and Population (in Million) of Urban Agglomerations (UAs) and Towns (1901-2001 )

Census year Number of Total Urban Urban population as UAs/Towns Population Population % total population 1901 1 1830 238,396,327 25,851,873 10.8 1911 1 1815 252,093,390 25,941,633 10.3 1921 1 1944 251,321,213 28,086,167 11.2 1931 2 2066 278,977,238 334,459,89 12.0 1941 2 2253 318,660,580 44,253,297 13.9 1951 2 2822 361,088,090 62,443,934 17.3 1961 2 2334 439,234,771 78,936,603 18.0 1971 2 3567 548,159,692 109,113,977 19.9 1981 3 3347 683,329,097 159,462,547 23.3 1991 3 3769 846,387,888 217,551,812 25.7 2001 4 4378 1,028,610,328 286,119,689 27.8 1. Urban Agglomerations, which constitute a number of towns and their outgrowths, have been treated as one unit. 2. The total population and urban population of India for the year 2001 includes estimated population of those areas of Gujarat and Himachal Pradesh where census could not be conducted due to natural calamities. 3. The total population and urban population of India for the year 1991 includes interpolated population of Jammu & Kashmir where census could not be conducted. 4. The total population and urban population of India for the year 1981 includes interpolated population of Assam where census could not be conducted. Source: Census of India 2001

I

Annexure: 2 Million Plus Cities in India

Rank Cities Population, 2001 1 Greater Mumbai 16,368,084 2 Kolkata 13,216,546 3 Delhi 12,791,458 4 Chennai 6,424,624 5 Bangalore 5,68,844 6 Hyderabad 5,533,640 7 Ahmedabad 4,519,278 8 Pune 3,755,525 9 Surat 2,811,466 10 Kanpur 2,690,486 11 Jaipur 2,324,319 12 Lucknow 2,266,933 13 Nagpur 2,122,965 14 Patna 1,707,429 15 Indore 1,639,044 16 Vadodara 1,492,398 17 Bhopal 1,454,830 18 Coimbatore 1,446,034 19 Ludhiana 1,395,053 20 Kochi 1,355,406 21 Visakhapatnam 1,329,472 22 Agra 1,321,410 23 Varanasi 1,211,749 24 Madurai 1,194,665 25 Meerut 1,167,399 26 Nashik 1,152,048 27 Jabalpur 1,117,200 28 Jamshedpur 1,101,804 29 Asansol 1,090,171 30 Dhanbad 1,064,357 31 Faridabad 1,054,981 32 Allahabad 1,049,579 33 Amritsar 1,011,327 34 Vijayawada 1,011,152 35 Rajkot 1,002,160 Total 107,881,836 Source: Census of India, 2001

II

Annexure: 3

Status Functions as Per 74th Amendment

Items 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Andhra N N N Y N Y N Y Y N N Y N Y N Y N Y Pradesh Gujarat N N N Y Y Y Y Y Y N N Y Y Y Y Y Y Y Haryana N N N Y Y Y Y N N Y N Y N Y Y Y Y Y Himachal N N N Y Y Y Y N N N N Y N Y Y N Y N Pradesh Karnataka Y Y N Y Y Y N Y Y Y Y Y Y Y Y Y Y Y Kerala Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Madhya Y Y Y Y Y Y Y Y Y N Y Y N Y Y Y Y Y Pradesh Maharashtra N N N Y Y Y Y N N N Y N Y Y Y Y Y Y Rajasthan N N N Y Y Y Y N N N Y N Y Y Y Y Y Y Tamil Nadu Y Y Y Y Y Y Y Y N N N N N Y Y Y Y Y Uttar Y N N N Y Y N Y Y Y Y Y Y Y Y Y Y Y Pradesh West Y Y N Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Bengal Delhi N N Y N N Y N N N N N Y N Y Y Y Y Y

This Annexure gives the status of 18 functions as assigned to the municipalities in the 12 schedule of the Constitution defined in Page 12. Y here implies for Yes: function assigned to municipalities by the state government, & N here implies for No: function not assigned to municipalities by the state government. Thus a state like Kerala has all the Y implying that all the 18 functions have been assigned to the local bodies by the state government.

Source: National commission to review the working of the constitution: Decentralization and Municipalities.

III

Annexure: 4

Revenue Powers of Municipalities across Major States

states taxes Fees Compulsory Discretionary Andhra Property:(Lighting, Water, Advertisement Advertisement Fee, Mutation Pradesh Scavenging, Drainage, Fee, Registration Fee, Trade General), Vehicles, Duty License Fee, Slaughter House on Fee, License Fee Transfer of Immovable Properties, Animals Assam Property: (Lighting, Water License on carts, carriages, Drainage), Markets, Tool on animals, dogs & cattle, boats, Bridges, Transfer of Properties. betterment, fire brigade, public health Bihar Duty on Transfer of On Persons in Sole or Joint Registration of dogs, carts, Property Occupation of Holding vehicles, vessels according to their Circumstances and Property(Lighting, Water, Latrine), Vehicles, Animals, Profession Gujarat Property, Vehicle, Boats, Registration Fee, License Fee, Animals, Motor Vehicles, Swimming Bath Fee, Slaughter Octroi,, Dogs, Special and House Fee, Building General Sanitation, Lighting, Construction Fee, Stock Sale of Cattle in the Market, Registration Fee, Water Betterment Levy Connection Fee, Cattle Pound Fee Haryana Property, Octroi, Duty on Profession, Vehicles, Animals, License Fee, Building Immovable Property Dogs, Show, Toll on Vehicles, Application Fee, Teh Bazari Fee, Boats, Consumption of Advertisement Fee, Slaughter Electricity House Fee, Cattle Pound Fee, Registration Fee, Street Fee Karnataka Property, Advertisement, Boats, License Fee(Building, Trade & Animals, Lighting, Toll on Hotel), Building Betterment Fee, Vehicles, Duty on Transfer of Birth & Death Registration Fee, Immovable Property Food Adulteration Fee, Slaughter House Fee, Compounding Fee Kerala Property: (Lighting, Water, License Fee, Building Fee, Drainage, General Purposes, Dangerous and Offensive Trade Sanitary), Transfer of License Fee, Market Fee, Properties, Profession, Slaughter House Fee Animals, Vessels, Show, Timber, Advertisement Madhya Property, Water, Lighting, Latrine,Conservancy,Drainage, License Fee, Market Fee, Pradesh Sanitary, Fire, Local Body Profession, Vehicles, Animals, Animal Registration Fee, Hotel Tax Dogs, Show, Toll on Vehicles / Restaurant License Fee, on Entry of Goods and Animals not mentioned Composting Fee, Teh Bazaar above, Betterment, Pilgrim, Fee, Building Application Fee, Persons occupying Houses, Compounding Fee Buildings, Land according to circumstances and property, Toll on New Bridges, Entertainment, Advertisement, terminal Contd…

IV

Maharashtra Consolidated Property tax: Vehicles, Animals, Dogs, License Fee, Slaughter House (General, Water, Lighting, Show, Toll on Vehicles, Boats, Fee, Building Permission Fee, Sanitary) Advertisement, Animals not mentioned above, Fee for Sale of Goods, Water Profession, Theatre, Octroi Dogs Latrine, Drainage, Connection Fee, Warrant Fee, Special Water Tax, Pilgrim, Prevent of Food Adulteration, Special Education Tax, etc. License Fee, Cattle Pounds Fee, Swimming Pool Fee, Birth & Death Registration Fee, Betterment/ Development Fee Orissa Property: (Lighting, Water, License Fee, Advertisement Fee, Drainage), Animals, Vehicles, Registration Fee, Market Profession, Octroi, Education, Fee, Slaughter House Fee, Profession Cattle Pound Fee, Dog Registration Fee, Cart Stand Fee, Building Planning Fee Punjab Property, Profession, Vehicle, License Fee, Slaughter House Animals, Menial Domestic Fee, Building Application Fee, Servants, Scavenging, Composition Fee, Teh Bazari Building Application Fee, Water Connection Fee Rajasthan Property, Octroi, Vehicle and other Conveyance, Advertisement Fee, Building Profession Dogs, Animals, Toll on Permission Fee, Trade License and Vocations Vehicles, Boats, Scavenging, Fee, Registration Fee, Cattle Latrine, Sanitary, Lighting, Pound Fee, Bus Stand Fee, Water, Trade, and Calling, Copying Fee Artisans Tamil Nadu Property, Profession, Carriage License Fee (Building, Hotel, and Animals, Advertisement, Restaurant, Dangerous and Servants (hill stations) Offensive Trade), Market Fee, Slaughter House Fee, Cart Stand Fee, Encroachment Fee Uttar Pradesh Property, Trade, Calling, Vocation, Entertainment, Vehicle, Boat, Dogs, Animals, Inhabitants assessed on property and circumstances (Water, Drainage), Scavenging, Conservancy, Transfer of Property West Bengal Profession, Property, License Fee, Advertisement, Advertisement, Vehicles, Building, Planning / Toll Development Fee, House on Ferries and Bridges Connection Fee, Permission Fee, Market / Slaughter House Fee, Birth and Death Registration Fee, Fees from burning ghats

V

Annexure: 5

Central Finance Commission and Municipal Finances

Items Tenth Finance Eleventh Finance Twelfth Finance Commission Commission(2000-2005) Commission(2005-2010) (1995-2000) Terms of Not specified. However, To make recommendations The measures needed to R e f e r e n c e since Article 280 had to augment the augment the Consolidated relating local been amended before the Consolidated Fund of the Fund of a state to bodies expiry of the term, the states to supplement the supplement the resources Commission felt that it resources of local bodies of the panchayats and was obliged to deal with on the basis of SFC municipalities in the the issue in terms of the recommendations. state on the basis of the amended Article 280. The EFC recommendations made was asked to make its by the Finance own assessment, if the Commissions recommendations of of states. SFCs were not available. Recommendations Recommended Rs.1000 Recommended ad hoc Recommended a sum of crore for municipalities annual grant of Rs.400 Rs.5,000 crore for the to be distributed amongst crore for municipalities. period 2005-2010 as the states. Activities such as grants-in-aid to augment maintenance of accounts, the Consolidated Fund of development of database the states to supplement and audit to be the first the resources of charge on this grant. municipalities. Criteria for Inter-state ratio of slum Based on the following Based on the following distribution of population derived from factors and weights: factors and weights: grant among 1971 census. 1. Population 40% 1. Population 40% states 2. Geographical area 2. Geographical area 10% 10% 3. Distance from Per 3. Distance from highest Capita Income (PCI) PCI 20% 20% 4. Index of deprivation 4. Index of 10% decentralization 5. Revenue effort 20% 20% 5. Revenue effort 10% Conditions Local bodies were Matching contribution No conditionality. No required to raise was not imposed requirement of matching ‘suitable’ matching grant. Suggested that 50 contribution for the per cent of the grants purpose. No amount was provided to each state to be used for should be earmarked for expenditure on salaries collection, segregation and wages. and transportation of solid waste. Central Government should not impose any conditions for releasing the grants-in- aid. Source : Central Finance Commission Reports.

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Annexure: 6

Devolution System and Recommendations by State Finance Commissions

Divisible Pool of the State State and share (per cent) of State and share of ULB ULB as per second SFC as per first SFC Gross tax and non tax revenue AP-1.74a AP-3.63 Non-loan gross own revenue Karnataka-5.4 Karnataka-8 Gross tax revenue + share in Goa-9 central taxes Net tax and non tax revenue MP-1.3 (recommended) 0.514 MP-1.07 (recommended) (accepted)c Net tax revenue Rajasthan-0.5Assame Punjab-1.3 UP-7per cent Rajasthan-0.53d Uttaranchal-6.35f UP-7.5 Kerala g

Net tax revenue except certain Tamil Nadu-2.72 to 4.08h Tamil Nadu-2.9 to 3.65 taxes Kerala-0.15i West Bengal j Other cases Individual Taxes Maharashtra, Orissa, Haryana, Gujarat and Punjab Lumpsum Grants HP, Manipur HP Notes: Certain states have been omitted in the analysis due to non-availability of their SFC reports. (a) The commission has recommended that 39.24 per cent of state tax and non-tax revenue be devolved to all local bodies. This includes the plan fund, excluding which the additional devolution is 10.93 per cent of the total tax and non-tax revenue. This has been distributed to ULBs and RLBs in a ratio of 1.74:9.14. (b) Non loan gross own revenue receipts of the state government include the gross yield from taxes and non taxes levied and collected by the state. It also includes interest receipts. (c) The commission recommended 8.67 per cent for local bodies in the proportion of 85:15 for rural and urban local bodies. However, the state has agreed to devolve 2.91 per cent in the same proportion. (d) The net tax pool does not include entertainment tax, which has been separately shared with ULBs as 15 per cent of the receipts. (e) The devolution consists of 2 per cent of state tax for local bodies. The share of urban local bodies has not been specified. (f ) 11 per cent of the net state tax revenue to be distributed among all local bodies. The ULBs are assigned 57.77 per cent of the 11 per cent. (g) The commission has recommended 5.5 per cent and 3.5 per cent of the annual own tax revenue as ‘maintenance grants’ and ‘general purpose grants’ respectively. The share of ULBs is based on a detailed formula. (h) The devolution from the net tax receipts (excluding entertainment tax) varies from 8 per cent to 12 per cent during 1997–98 to 2001–2002. After deducting 15 per cent for ‘Equalization and Incentive Funds’, 85 per cent is shared by PRIs and ULBs in the ratio of 60:40 respectively. (i) Share from the 1 per cent of state revenues (excluding from certain sources) has been distributed between the rural and urban local bodies in proportion to their population (85:15 as per Census 1991) and transferred to them as non-statutory, non-plan grants. (j) The devolution constitutes 16 per cent of the net revenue receipts from taxes (except urban land revenue, entertainment tax and irrigation charges) to be allocated to districts within which the share of panchayats, municipalities, and special areas is based of their respective total populations. Source: SFC Reports of the states

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Annexure: 7

Suggested Financial Norms for Provision of Core Municipal Services (At 2004-05 Prices)

(Rs/capita)

Core Services Planning Commission Zakaria Committee (w. Average)

Low High Water supply 1260.24 1890.36 907.88 Sewerage 1260.24 1418.36 1234.92 Solid Waste 158.12 252.52 N.A. Management Storm/Water Drains 473.18 630.12 621.43 Roads 1260.24 1890.36 1063.74 Street Light 377.60 377.60 527.57 Source: zakaria committee (1963) financial resources of urban local bodies, (wt. Avg. Of class wise norms)

Planning commission (1983) task force on housing and urban development.

Note: N.A. - Not Available

VIII

PREFACE

Time is up for all of us to take more seriously our local governments, not merely in their management and performance, but more as an expression of our faith in near direct democracy and creative freedom. Exercise of freedom, both individual and collective, at the local community level, can be as well creative and purposeful as at national or state levels. The pathology of our town government is much lamented and picturesquely portrayed, but scarcely any adequate therapeutic measures are administered, and at times even attempted. If freedom is necessity, urban government is emerging as the most necessitous area for its deployment.

Role of urban local government in the cities has become more varied and complex due to a very fast rate of demographic growth which requires augmentation of civic services and amenities. But a large section of population is not in a position to pay for services as the process of migration simply converts rural poverty in to slums and squatter settlement which do not pay any tax or user charges. The present study is not an exception to this Indian cities scene and fiscal stress of the local authorities.

The present work has attempted to provide a comprehensive though primarily an economic frame for understanding the working of urban local government. In this the district governments as well as rural governments are excluded and our attention is focussed on municipal government. The corporations deserve to be studied as an independent urban entity. The municipalities with their semi rural urban features need a separate study, though there may appear some commonness with the other two types of local government.

In order to have an insight into process of urban growth, its impact on local finance and the issues for resolving financial problems of the municipal corporations

iii the study divided in to six chapters. While chapter 1 outlines the concepts of local self- government and history of local self-government in India. Chapter 2 provides review of literature. Chapter 3 and chapter 4 examine the finances of these local bodies at India level as well as at state (Uttar Pradesh) level. The core of the study lies in chapter 5 which studies the pattern of and trends in the expenditure and revenue of the selected municipal corporations. The chapter analyses the different heads of expenditure to assess the impact of expenditure on the quantity and quality of social services and civic amenities available to the people. Chapter 6 reviews the important findings and outlines some suggestions and recommendations for putting the finances of the corporations on an even kneel.

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