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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 7th 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 74th 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, 74th 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 74th 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 74th 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 74th 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 11th 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 12th 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 74th 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 74th 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 20th 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 (in millions)

Urban population to total population (%)

Growth over 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 (mllions)

1028.61 1192.50 1339.74 1399.83

Urban population (millions)

285.4 357.94 432.61 534.80

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 Municipalities

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 5th and 6th areas the parliament has yet extend the

provision to urban local bodies (Chaubey, 2005).

The 74th 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

Expenditure

(Rs in Crore)

Revenue

Expenditure

(Rs in Crore)

Capital

Expenditure

(Rs in Crore)

% Growth

Rate of Total

Expenditure

% Growth

Rate of

Revenue

Expenditure

% Growth

Rate of

Capital

Expenditure

% Share of Rev.Exp.to Total Expenditure

% Share of Capital Exp. Total 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-

2000

14451.67 10690.3 3761.36 20.08 18 26.41 73.97 26.02

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 11th, 12th and 13th 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

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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 (Crore)

Per Capita Total Expenditure ( in Rupees)

Per Capita Revenue Expenditure ( in Rupees)

Per Capita Capital

Expenditure ( 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 11th, 12th and 13th 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

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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.

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Table 3.6

Per Capita Expenditure of Urban Local Bodies of Selected States

AP GUJRAT HARYANA KARNATKA MP MAHARASHTRA RAJASTHAN TAMIL

NADU

UP WEST

BENGAL

ALL

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

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 11th, 12th and 13th Central Finance Commission, Government of India, Census Report 2001, Government of India

96

97

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

98

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

revenue (Rs in Crore)

Own tax (Rs in Crore)

Own non tax (Rs in Crore)

Own revenue (Rs

in Crore)

Other revenue (Rs

in Crore) 1992-93 5162.53 2638.9 957.5 3596.41 1566.11

1993-94 6059.68

(17.37)

3175.49 (20.33)

1166.32 (21.80)

4356.16 (21.12)

1717.87 (9.69)

1994-95 7686.9

(26.85)

3900.65 (22.83)

1316.57 (12.88)

5632.34 (29.29)

2062.52 (20.06)

1995-96 8733.17

(13.61)

4454.5 (14.19)

1484.45 (12.75)

6404.25 (13.70)

2343.73 (13.63)

1996-97 10325.25

(18.23)

5100.84 (14.50)

1746.63 (17.66)

7373.75 (15.13)

2979.36 (27.12)

1997-98 12178.78

(17.95)

5891.69 (15.50)

2127.25 (21.79)

7599.37 (3.05)

3608.13 (21.10)

1998-99- 11514.64

(-5.45)

4755.52 (-19.28)

2117.9 (-0.43)

6873.42 (-9.55)

4641.22 (28.63)

1999-2000 13172.96

(14.40)

5151.01 (8.31)

2228.84 (5.23)

7379.86 (7.36)

5793.1 (24.81)

2000-01 14581.04

(10.68)

5617.57 (9.05)

2642.95 (18.57)

8260.52 (11.93)

6320.52 (9.10)

2001-02 15149.2

(3.89)

5885.81 (4.77)

2874.35 (8.75)

8760.16 (6.04)

6389.04 (1.08)

2002-03 12596.5

(-16.85)

4941.18 (-16.04)

2419.11 (-15.83)

7360.28 (-15.98)

5236.22 (-18.04)

2003-04 23111.52

(83.47)

9704.73 (96.40)

4735.09 (95.73)

14440.71 (96.19)

8670.81 (65.59)

2004-05 26755.78

(15.76)

10861 (11.91)

5424.89 (14.56)

16285.89 (12.77)

10469.89 (20.74)

2005-06 31662.98

(18.34)

12152.38 (11.89)

6082.81 (12.12)

18235.19 (11.96)

13427.79 (28.25)

2006-07 37422.34

(18.18)

14198.03 (16.83)

6632.02 (9.02)

20830.05 (14.22)

16592.29 (23.56)

2007-08 44429.05

(18.72)

15277.72 (7.60)

8243.66 (24.30)

23521.38 (12.96)

20907.67 (26)

Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India

Note: figure in the parenthesis bracket indicate percentage growth rate over the previous years.

99

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

100

Table-3.8

Transfer from Central Government to ULBs in India

Year A+D (Rs in Crore)

Transfer from TFC/THFC (Rs in Crore)

Grants-in -Aid (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 (19.84)

- 2251.21 (24.52)

2000-01 2981.84 (12.66)

- 2239.24 (-0.53)

2001-02 2744.63 (-7.95)

- 2671.65 (19.31)

2002-03 2228.9 (-18.79)

276.5 2075.97 (-22.29)

2003-04 4172.18 (87.18)

378.43 (36.86)

2164.46 (4.26)

2004-05 4580.08 (9.77)

442.45 (16.91)

3062.92 (41.50)

2005-06 6092.26 (33.01)

766.95 (73.34)

4104.34 (34.00)

2006-07 7338.9 (20.46)

1025.49 (33.71)

4514.44 (9.99)

2007-08 9171.11 (24.96)

869.02 (-15.25)

5676.25 (25.73)

Source: Reports of 11th, 12th and 13th 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

101

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) ,

97

Table3.9

State-Wise Own Revenue of ULBs as Percentage of Total Expenditure

( in percentage)

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 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

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 11th, 12th and 13th Central Finance Commission, Government of India

10

2

97

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-

03

2003-

04

2004-05 2005-

06

2006-

07

2007-

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

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 11th, 12th and 13th Central Finance Commission, Government of India

10

3

97

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 NADU

UP WEST BENGAL

ALL 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

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 11th, 12th and 13th Central Finance Commission, Government of India, Census Report 2001, Government of India

10

4

105

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

97

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

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 11th, 12th and 13th Central Finance Commission, Government of India

10

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107

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.