Focus on municipal finance: how India can empower its urban local governments

The latest protest of metro trading life is underway in Bangalore, which has yet to accept last weekend’s 131mm of rainfall in 24 hours, bringing many parts of the city to their knees. As usual, this has prompted calls for bold plans in urban planning and governance, and the need to increase capital allocation to improve urban infrastructure.

The request to strengthen local urban authorities (ULB) is not new. The financial independence of ULBs has been a long-standing concern. They are limited in their autonomous income and largely dependent on state transfers. The 74th Constitutional Amendment Act (CAA), 1992 recognized ULBs as the “third level of government”. However, not much has happened since. India’s municipal revenue as a percentage of GDP has remained constant at 1% since 2007-2008. This, compared to that of other developing countries like Brazil and South Africa where it is 7.4% and 6%, respectively.

Fiscal strains have affected the finances of all levels of government. However, local governments have been hardest hit. RBI’s November 2021 report, “State Finances: A Study of Budgets of 2021-22” (bit.ly/3RH1xKc), estimates that local authorities lost 15-25% of their revenue in 2021, making it difficult maintaining their current level of delivery service. A survey of 141 ULBs shows that 70% of them have experienced a drop in their income, and 71% an increase in their expenses.

The low and deteriorated level of urban service delivery needs to be addressed urgently. Cities contribute about 63% of India’s Net Domestic Product (GNP). Therefore, deteriorating service delivery levels will impact their growth potential. The question policymakers need to ask is whether there are ways to improve service delivery without spending more.

Spending efficiently is key. By comparing spending and service delivery on solid waste management (SWM) for 27 large municipalities for 2016, we tested two hypotheses:

Is the lack of funding a binding constraint for ULBs to improve service delivery?

How sensitive is increased spending to improved service delivery?

We found that 19 of the 27 cities spend more than the benchmark amount. Nine of these 19 cities spend at least 1.5 times more. Yet none have the expected perfect score in terms of cleanliness. Moreover, only 23% of the variation in cleanliness performance between cities is explained by a city’s spending.

On average, large cities spend significantly more on GDS with no significant difference in terms of better service delivery. Cities with more than 5 million people spent an average of ₹728 per capita per year, compared to ₹480 and ₹419 for cities with 1-5 million people and less than 1 million, respectively.

The respective cleanliness performance, as captured by Swachh Survekshan, is not that different for these city classes. Cities with more than 5 million inhabitants obtained an average of 1,378 points (out of 2,000); cities with 1 to 5 million people got 1,262, and those with less than 1 million, 1,168. So while cities with more than 5 million people spent almost 70% more per person compared to cities with less than 1 million inhabitants, their result was only 17% better.

Brihanmumbai Municipal Corporation (BMC), one of the wealthiest municipalities with the highest per capita expenditure on GDS, spent ₹1,234 per capita in 2016 which rose to ₹1,320 in 2020. Yet the city ​​has seen a substantial decrease in its cleanliness score – from 77% in 2016 to 54% in 2021.

At first glance, non-monetary factors such as public-private partnership (PPP), citizen engagement and stable leadership go a long way towards improving service delivery without requiring more funds. Indore, for example, has been ranked #1 in the Swachh survey for the past five years. One of the peculiarities is that the mayor of Indore has remained the same throughout this period. Additionally, Nawanshahr Municipality in Punjab achieved 100% source separation within a year of its behavior change campaign in 2017.

The Ministry of Housing and Urban Affairs (MoHUA) has realized the importance of these factors. The November 2021 Survekshan includes PPPs and citizen engagement in its city ranking parameters. The purpose of giving importance to civic engagement is to encourage ULBs to collaborate with private organizations and citizens to be more effective in providing SWM services.

The GoI, in collaboration with NITI Aayog and selected Champion States, is expected to conduct pilot exercises to produce an annual report on expenditure and results in all States and cities with populations over 1 million over the next 2-3 coming years. This will usher in a new level of responsibility in service delivery, where ULB could lead the way.

Melissa C. Keyes