Why is the fiscal structure of municipalities flawed? | Explained

The story thus far: Urban India generates practically two-thirds of the nationwide GDP, but its municipalities management lower than one per cent of the nation’s tax income. Indian cities will not be producing income, not as a result of they’re inefficient, however as a result of the fiscal structure has failed them. Today, municipal finance depends on intergovernmental transfers, loans, and schemes. The core of the issue lies within the centralisation of taxation powers.

How did cities lose its tax revenues?

After the introduction of the Goods and Services Tax (GST), Indian cities misplaced practically 19% of their very own income sources. Octroi, entry tax, and native surcharges — the normal lifelines of municipal budgets — had been subsumed into the GST framework. Promised compensatory mechanisms have largely bypassed the municipal stage, deepening cities’ dependence on State and Central grants.

Therefore, municipalities lack each fiscal autonomy and predictable income streams. The result’s a peculiar inversion of democracy — the place energy is centralised and accountability decentralised. Cities are anticipated to ship strong waste administration, inexpensive housing, local weather resilience, and digital infrastructure, however with out the assets to fund such providers.

What about municipal bonds?

Every main coverage pronouncement — from NITI Aayog’s city technique to the most recent reform-linked incentive grant — promotes bonds as the brand new frontier of native finance. However, the credibility of Indian municipal bonds stays abysmally low. It is just not merely that cities are unable to generate capital to again their bonds; it’s that the very framework of assessing credibility is skewed. A metropolis’s creditworthiness is commonly judged narrowly by its “personal income” efficiency — property taxes, consumer expenses, and charges — whereas fully discounting the common move of grants and transfers from larger ranges of presidency. This is not only an accounting error; it’s an ideological one. When the RBI or credit standing businesses low cost grants as “non-recurring revenue,” they perpetuate the parable that cities survive on charity. In fact, these grants are legit entitlements, a part of a redistributive compact enshrined within the Constitution. The 74th Amendment didn’t conceive of cities as beggars earlier than the State or the Union however as equal tiers of governance entitled to a share of the tax pool. Similarly, establishments just like the World Bank and Asian Development Bank have lengthy argued that cities ought to grow to be “self-reliant” by specializing in property tax assortment and consumer charges. While property tax reform is essential, this slender prescription is insufficient and unjust. It is insufficient as a result of property tax usually accounts for less than 20-25% of a metropolis’s whole income potential, and is commonly politically and administratively constrained. It is unjust as a result of it shifts the burden of city financing disproportionately onto residents, particularly in lower-income settlements already combating poor providers. The obsession with “consumer pays” logic converts public items into personal commodities. Clean water, sanitation, public lighting, and mobility — these will not be marketable merchandise however collective entitlements.

What is the way in which forward?

India should democratise the fiscal contract. In Scandinavian nations, the place cities get pleasure from robust fiscal well being, the native tax base is just not an afterthought — it’s the basis of the welfare state. Municipalities in Denmark, Sweden, and Norway have the precise to levy and acquire revenue taxes instantly, making certain a clear and accountable relationship between residents and native governments.

This decentralised mannequin has produced each effectivity and fairness: residents can see the place their cash goes, and cities have the flexibleness to plan for the long run. Most importantly, transfers from larger ranges of presidency are handled as a part of a shared fiscal ecosystem, not as discretionary favours. India can study from this. What is required is a reimagined mannequin of fiscal federalism, the place municipalities have predictable, sufficient, and untied revenues — each from their very own sources and from constitutionally mandated transfers.

Similarly, for municipal bonds to grow to be credible devices, step one is to recognise grants and shared taxes as legit elements of metropolis revenue. Only then can cities construct a reliable stability sheet. Second, the ranking system should account for the governance capability of a metropolis — transparency, audit compliance, citizen participation — slightly than solely counting on monetary metrics. Third, cities must be empowered to earmark a portion of their GST compensation or State share as collateral for municipal borrowing. Such reforms would restore the precept of cooperative federalism that the Constitution envisaged.

India’s city future relies on fiscal justice. Municipal finance have to be seen not as a bookkeeping train however as an ethical and political query. The grants that move to cities will not be presents; they’re a part of a social contract. The revenues that cities generate will not be charity; they’re a proper. True reform will start solely when India accepts that cities will not be price centres — they’re the muse of nationwide prosperity.

Tikender Singh Panwar is a former Deputy Mayor of Shimla and presently a member of the Kerala Urban Commission.