Impoverished, cities are on prowl

What is the city but the people? The Bard’s surmise still arguably holds true, more or less. Though, these days, up-to-date amenities, infrastructure and public services can and do make all the difference to the urban experience. After all, the planner’s lookout is to find ways of creating, within the civic space, the sense of belonging and place. The figures suggest that from later this year, the majority of people world-wide will be in cities. The times are indeed changing.

Urban areas contribute close to half of India’s GDP. But city finances are in a bad shape, pan-India. There is a growing urban infrastructure deficit as well. It is in this context that Financing Cities, a recent volume of policy papers published by the World Bank, is timely. The book deals with country experiences of municipal finance in such high-growth potential economies as China, India and Brazil.

The key message that comes across is the need to mobilise “more public finance, be it in user charges or taxes”, to boost investment in urban infrastructure. The international track record would suggest that private participation in infrastructure (PPI) “has more potential to improve efficiency than to mobilise new finance”. India accounts for only about 1% of urban PPI transactions, as per the World Bank data.

The biggest gap in India’s infrastructure remains urban infrastructure, as emphasised by Vijay Kelkar, former finance secretary, in the foreword. The Constitution “allocates primary responsibility for urban infrastructure in India to states”, as mentioned in the overview paper by Subhash Chandra Garg, joint secretary (state finance) in the finance ministry. The municipalities have “very limited resource raising authority”.

Meanwhile, most states have abolished octroi, the highly buoyant source of municipal revenue, and it is being phased out elsewhere in what is generally considered a distortionary levy. Additionally, the property tax base has yet to become a buoyant revenue source.

It is not often that there is resort to market borrowings, given the weak institutional arrangements. So municipal bodies largely depend on states for fiscal transfers, which have traditionally been rather limited. Of late, the Centre has indeed been providing grants for local bodies, but surely the way ahead is urban reform along PPP to coagulate funds.

The urban population has grown to 300 million, living in some 3,700 urban areas, including 27 million-plus cities. Although India is still largely rural, it has a larger urban population than the entire population of the US! But municipalities have remained under-funded for years. As a study conducted by the 12th Finance Commission showed, the share of municipalities’ “share in own taxes is around 3% and their revenue is less than 0.75% of GDP”.

The comparative figures are higher abroad. The 74th constitutional amendment did envision municipalities as the first tier of governance and development. But Parliament stopped short of conferring the mandate envisaged in the Twelfth Schedule on municipalities and left it to states to delegate as they deemed fit. There is a marked reluctance on the part of states to grant fiscal authority and revenue earning functions to municipalities.

The end-result is that while India’s services economy—such as trade, transport, telecom, banking et al—are on a high-growth path, urban infrastructure services such as water, power, public transport, sewage disposal, roads, etc have not quite responded to the growing demand either in terms of quantity or improved quality.

Given that many urban services such as power supply, mass transportation and those at airports are ‘charged’, there is much scope for PPPs to rev up efficiency in service delivery and for appropriate pricing and user charges. The monies now centrally budgeted for urban renewal do imply much-needed funding. But the key really is to reduce dependence on government finances and instead boost municipal capability.

Since many municipal-level services are perfectly amenable to cost recovery and right pricing, the way ahead is for strong local governments that are in charge of urban services. Note that many city-level power firms in pre-Independence days were merged into state monopolies with consequent loss of transparency. Now, reform of electricity distribution clearly needs to subsume municipal reforms. It would stem power theft and runaway revenue leakage.

Municipalities have no debt overhang on them given that they have been starved of funds. Also, there is no constitutional bar on municipalities borrowing abroad, as is the case with states. Municipalities can borrow from banks as they are “bodies corporate”.

There are regulatory restrictions on such bank loans to states. Municipalities can and do need to tap the capital market, issue bonds and step up recourse to bank finance to boost infrastructure investments. What is lacking is a conducive legislative framework. The urban development ministry has drafted a model municipal law for reform of municipal services. It calls for proper norms for levy of user charges and standards for local services. The model law needs to be enacted and adopted by states and duly made into law. Right away!