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10th January 2023 (6 Topics)

Municipal corporations in India are gasping for funds

Context

As per the Study titled ‘Report on Municipal finances’, the combined budget of Municipal corporations of India is much less than the Central and State government, released by RBI for Urban local bodies in the country. 

Details of the Report:

  • About: The Report compiles and analyses the budgetary data for 201 municipal corporations (MCs) across all States.
  • Key highlights:
    • It stated that how municipal corporations are dependent on fund transfers from Central and state governments and their earnings are limited.
    • The allocation of its revenue goes into the department’s salaries, pension and emoluments.
    • 70% of the revenue generated goes for such expenditures and capital expenditures.
    • The tax revenue of the municipal bodies is less and expenditure is more.
    • Government transfers to these bodies have increased and thus limited their autonomy.
  • The fund crunches:
    • As estimated by RBI, the revenue of the Municipal body was about 0.61% of the GDP for the year 2019-20.
    • The estimates were done considering tax revenue, non-tax revenue and transfers.
  • Issues identified:
    • Dependence on Property tax
    • Increasing population density and Urbanisation
  • Global comparisons:
    • Property tax exploitation in India due to devaluation remains very less; the collection of taxes is also less than in OECD countries.
    • The GDP for Urban local bodies is about 7% for Brazil and 6% for South Africa.

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 loans or federal and state governments for resources.
  • Municipal revenues are dominated by property tax collections and the devolution of taxes.

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.

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.

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