Moving beyond dependence

Over 50 per cent of municipal corporations generate less than half their revenue independently, while government transfers rose by over 20 per cent in 2022-23, according to the Reserve Bank of India's (RBI's) recent report on municipal finances.

- AMIT KAPOOR

Decentralising local governance is crucial to empowering municipal bodies with greater administrative autonomy and financial independence.

Strengthening municipal revenue streams is not merely a financial necessity but a fundamental requirement for effective urban governance.

Municipalities can develop more responsive and sustainable urban management strategies by diversifying income sources and enhancing fiscal capabilities.

Effective municipal finance management involves a dual approach that necessitates financial transfers from higher levels of government and the proficient generation, use, and allocation of local revenue streams.

In India, urban local bodies (ULBs) face significant challenges in achieving financial autonomy, primarily due to the limited devolution of authority and resources.

Financial transfers to municipal governments account for only 0.45 per cent of India's gross domestic product (GDP), a stark contrast to countries like Brazil, Indonesia, the Philippines, and Mexico, where the figures range from 1.6 per cent to 5.4 per cent.

In European nations, such transfers can even reach 6 per cent to 10 per cent of GDP, exemplifying the critical role of robust intergovernmental fiscal frameworks in supporting local governance.

These international benchmarks highlight the pressing need to enhance financial transfers to Indian municipalities.

Equally important is the ability of municipal bodies to generate their own revenue, an area where they lag significantly.

In this second aspect, municipal finance in India faces a triad of challenges, including low revenue collection, heavy reliance on transfers from the state and the Centre, and an increase in municipal borrowings.

The 2024 RBI report titled "Own Sources of Revenue Generation in Municipal Corporations: Opportunities and Challenges" sheds light on these challenges.