Syllabus: Devolution of powers and finances up to local levels and challenges therein
Introduction
- Urban India contributes nearly two-thirds of the national GDP but controls less than 1% of the country’s tax revenue. This stark discrepancy highlights critical flaws in India’s fiscal structure, with centralization of taxation powers diminishing municipal autonomy.
- This issue is crucial as it intersects with governance, decentralization, urbanization, and fiscal federalism.
Urban Economic Contribution vs Fiscal Control
- Economic Strength vs Fiscal Weakness:
- Indian cities, though economic powerhouses, face fiscal constraints, heavily relying on State and Central transfers, loans, and schemes. This has created a centralised power structure while decentralising responsibilities.
- Impact of GST on Municipal Finances:
- The GST introduced in 2017 subsumed taxes like octroi, entry tax, and local surcharges, resulting in an average 19% reduction in municipal revenue. Compensation mechanisms have been ineffective at the municipal level, leading to fiscal uncertainty and reliance on higher governments.
Municipal Bonds
- Municipal bonds are debt securities issued by local governments or States. They fund public projects like infrastructure, schools, transportation, or utilities.
- The most common type is General Obligation Bonds (GO Bonds).
- These bonds are backed by the tax and non-tax revenues of the local body.
- Their repayment is guaranteed by these funds.
- Tax Benefits
- Interest from municipal bonds is tax-free, provided the buyer follows the rules set by the municipal corporation. This makes them attractive to high-income earners.
The Role of Municipal Bonds in Urban Finance
- Potential and Limitations:
- Despite support from NITI Aayog and recent urban reforms, municipal bonds have seen limited uptake due to systemic flaws and challenges in attracting investors.
- Creditworthiness Issues:
- Rating agencies often assess cities based on their own revenue, overlooking grants and transfers that form a substantial portion of municipal income. This reflects a bias that undermines the cities’ autonomy and their role as equal governance entities, as envisioned by the 74th Constitutional Amendment.
- Challenges with Property Tax:
- Although property tax reforms are necessary, they contribute only 20-25% of a city’s total revenue potential. The over-reliance on the user-pays model burdens citizens, particularly the urban poor, converting public services into private goods.
Constitutional Mandates and Fiscal Autonomy
- The 74th Amendment and Urban Local Bodies: The 74th Constitutional Amendment (1992) envisioned urban local bodies (ULBs) as self-governing institutions, but the lack of fiscal devolution has reduced them to implementers of centrally designed schemes, limiting their autonomy.
- The Need for Fiscal Justice: Grants and shared taxes must be viewed as rights rather than favours. Urban fiscal empowerment is not just a technical reform but a moral and political imperative for enhancing cooperative federalism.
Moving Towards a Reformed Fiscal Framework
- Decentralising Fiscal Powers: A Scandinavian model should be adopted, granting cities the right to levy and collect local taxes, including income taxes in some cases. This promotes accountability, transparency, and a more direct relationship between citizens and governance.
- Redefining Fiscal Federalism: Cities should receive predictable, adequate, and untied transfers, with municipal grants integrated into a shared fiscal ecosystem, rather than as discretionary handouts.
- Revamping Municipal Bonds: Municipal bonds should incorporate grants and shared taxes into city income, and governance indicators such as transparency and citizen participation should be factored into credit ratings. Cities should be allowed to use GST compensation or State tax shares as collateral for borrowing.
- Enhancing Local Revenue Mechanisms: Strengthening property tax systems, digitising assessments, and diversifying revenue sources such as land value capture, service charges, and urban transport levies will help cities secure sustainable funding.
- Restructuring Urban Fiscal Governance: Addressing urban challenges like waste management, housing, climate resilience, and infrastructure requires cooperative federalism, with an emphasis on predictability and autonomy for municipalities.
Conclusion: For India’s urban future to be sustainable, the fiscal relationship between the Centre, States, and municipalities needs to be rebalanced. Municipal finance should not be reduced to a mere administrative task but viewed as a reflection of democratic and moral values. For cities to function as engines of national prosperity, trust, autonomy, and resources must be restored to grassroots governance.
Q- Examine the fiscal challenges faced by urban local bodies in India. How does the centralization of taxation powers impact municipal autonomy and governance?(10 marks/150 words)