MUNICIPAL FINANCES: Test of States' Governance

THAT CITIZENS EXPECT the government to spend on education, health, defence, infrastructure, subsidies, law and order, and general administration, is a given. That most of us, the citizens, do not know or understand how the government’s revenues and budgets are segregated across the Union, state and municipal levels is an understatement.

- Srinath Sridharan

Most citizens assume that because they pay direct and indirect taxes of different kinds like income tax and GST, their local municipality would be rich and have sufficient resources to keep the local areas smoothly functioning! And importantly, that to spend enough, governments, including the local government and municipalities, must have sufficient revenues, is not spoken of openly in the daily citizenry conversations.

In its last released State Finances 2021-22 report the Reserve Bank of India (RBI) noted that the urban local bodies and municipal corporations have “come under severe strain, forcing them to cut down expenditures and mobilise funding from various sources”.

The report pushes across the observation that the diversion of municipal corporation funds may have severe consequences for the financial sustainability of cities in the short to medium term. This has impacted their ability to provide services to local communities, as municipalities and gram panchayats have spent on Covid fighting measures. The report also concludes that the local governments suffered from insufficient budgets, overreliance on funds from upper tiers of government, lack of access to new sources of revenue and limited autonomy.

Administration – a reckoner

The administration in India operates at three levels, the central government of India, the state governments, and the local municipal bodies. The state and central governments raise funds for their developmental works through direct and indirect taxes.