RBI Releases Report On Municipal Finances across All States

Published: 18th Nov, 2022

Context

Recently, the Reserve Bank of India (RBI) has released a Report on Municipal Finances for all States.

About

About the Report:

The Report complies and analyses the budgetary data for 201 municipal corporations (MCs) across all States.
Theme: The Report explores 'Alternative Sources of Financing for Municipal Corporations'.

Findings of the Report:

Lack of adequate Infrastructure:The rapid growth of urbanisation in India has not been accompanied by a corresponding increase in urban infrastructure, which is reflected in the performance of the urban local bodies, especially MCs.
Lack of Financial autonomy: While the size of the municipal budgets in India are much smaller than peers in other countries, revenues are dominated by property tax collections and devolution of taxes and grants from upper tiers of government, resulting in lack of financial autonomy of MCs.
Lack of alternate sources of funding:
- Municipal Corporations mostly rely on borrowings from banks and financial institutions and loans from Centre/State governmentsto finance their resource gaps in the absence of a well-developed market for municipal bonds.
- MCs' committed expenditure in the form of establishment expenses, administrative costs and interest and finance charges is rising, but capital expenditure is minimal.

About Municipal Bonds:

A municipal bond (muni) is a debt security issued by a state, municipality, or county to finance its capital expenditures, including the construction of highways, bridges, or schools.
The Securities and Exchange Board of India (SEBI)’s detailed guidelines for the issue and listing of municipal bonds in March 2015.
Uses:
Through muni bonds, a municipal corporation raises money from individuals or institutions and promises to pay a specified amount of interest, and returns the principal amount on a specific maturity date.

Need for an alternate mode of finance:

Many of the civic bodies are financially weak and suffering from a resource crunch.
There is also the need to ramp up infrastructure in cities.
Local bodies in India are among the weakest globally, as they don’t have enough autonomy to:
- levy taxes
- grant exemptions
- borrow funds
It makes them dependent on bank loansor federal and state governments for resources.
Municipal revenues are dominated by property tax collections and the devolution of taxes.

Suggestions by the Central Bank:

Levying a tax on residents to pay bondholders
Backing the bonds, by earnings from particular projects
Working out a hybrid mechanism where revenues are used to service the debt.
Pool Financing: Common bond is issued by several municipal bodies to keep costs in check.

Benefits of the Municipal Bonds Market

Challenges:

Help ULBs to garner revenue to complete budgetary projects as property tax is the only major source of municipal revenue.
Critical for large cities and towns to upgrade their creaking infrastructure.
Critical to the success of the Centre’s pet projects such as Smart Cities and Amrut

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