CITY FINANCES: STARVATION DIET
CITY FINANCES: STARVATION DIET
A recent headline in the local newspapers stated that the Bangalore City Corporation was broke; contractor payments were delayed by several months, and there was little money for infrastructure investment. This is not an unusual situation across urban India. While some of the blame for their poor financial health must rest with the cities themselves – terrible property records, massive corruption on building licences etc. – the truth is that they are being kept on a starvation diet by state and central governments.
One fundamental difference between government finances and that of the private sector is the focus on expenditure versus income: for a government institution, we first determine its expenditure obligations, and then see what revenue sources are available; whereas, in a private company, we look to grow revenues, and squeeze costs to improve profits.
The expenditure obligations of our cities are determined by the federal structure of government in our country. The mandate for urban local governments comes from Schedule XII of the Constitution, which lists 18 possible functions – urban planning, water and sanitation, street lights, municipal roads, garbage, healthcare etc.
The next step is to estimate how much it costs to deliver these services. Astonishingly, we still use a report prepared in 1961 - the Zakaria Committee Report - as a reference (tells you something about how important urban issues are on the national radar screen). An OP Mathur study puts this at about Rs 700/capita/year in 2001 terms. Unfortunately, the Zakaria estimates seem way off. One example: it costs the Bangalore Water Supply and Sewerage Board (BWSSB) Rs 20/kilolitre to deliver water in the city. At consumption levels of 100 lpcd, this comes to about Rs 750/person/year. Factoring leaks and wastage (50%), the actual cost for water supply alone is around Rs 1,500/capita, two times the estimated Zakaria cost for all core services. Add sanitation, garbage, health, roads, streetlights etc., and the figure could be ten times the estimate.
Place this issue on hold. Next question: what are municipal revenues to meet these obligations? All municipalities together generated Rs 12,750 crores in 2001-02. This works out to Rs 425/capita/day, half Zakaria’s requirements, and possibly less than 10% of the actual number. One of the first things my boss told me when I joined banking was, “If it doesn’t jingle, it doesn’t count.” So we can dream all we want, but our cities aren’t going to be able to deliver unless we fix their money supply problem.
Just like the Central Finance Commission determines the formula for the division of government revenues between centre and states, State Finance Commissions (SFCs) do the same between states and local governments. Unfortunately, we have made a mess of fiscal federalism in our country. A report filed by NIRD on the functioning of SFCs is replete with state government violations. One example, “several States have not honoured their financial commitment; nor did they bring about the changes in the administrative procedures/rules and legislative framework. Several recommendations of the first SFCs (continue) to be 'under examination'. (And) through lapse of time, they seemed to meet a natural death.”
Pussyfooting around the politics of decentralisation for the past fifty years, we finally acknowledged the legitimacy of local governments only in the early 90s, but have not truly empowered these governments. State governments have behaved like dogs in the manger – not wanting to let go of political power, offering corruption, lack of capacity and other specious excuses to prevent funds from actually reaching local governments. A study by NIPFP showed that “transfers to municipalities form (just) 3.85 per cent of the combined own resources of states.” In effect, states are robbing villages and cities of funds that are rightfully theirs.
This has massive consequences in how public expenditures are being incurred. A study by Datta indicated that “while local government expenditures in the developed world vary between 20 and 29 percent of total government expenditures, in India local government account[ed] for only 8.6 percent of total government expenditure in 1976-77 and 6.4 per cent in 1986-87”. The figure actually dropped over ten years!
In contrast, China – the country we most like to compare ourselves to these days – spends only 30% of its funds at the national level, with the majority of spending occurring at sub-national levels.
If shapes could be metaphors for government structures, countries like Switzerland are built like a pyramid, with local governments having a large space at the base. Countries like Sweden are like hour-glasses, with strong local and national governments, and relatively weak regional governments in between. India is like a top: big at the national level, marginally smaller at the states, and emaciated at the bottom. “Top-heavy” is probably more apt.
Getting state governments to change their stance is not going to be easy – there are deep entrenched interests. In a study on the constitutional amendments on decentralisation, Chibber et al wrote, “The 73rd Amendment made some key changes to the 64th Amendment with respect to financial relations between state and local governments. In the 64th Amendment bill, the State Finance Commissions’ recommendations were to govern the ‘determination of taxes, duties, tolls and levies which could be assigned to, or appropriated by, the Panchayats.’ This was deleted in the 73rd Amendment, thereby placing local finances in the hands of the state government. At the same time, references to audits of local government finance by the Comptroller and Auditor-General of India (which would have diluted the authority of state governments) were deleted.”
As Govinda Rao put it, “it will not be an exaggeration to say that the institutional environment does not seem conducive to the success of decentralization at local level in India.”
The next time we marvel at how cities in other parts of the world look, let us acknowledge their substantially different financial positions. And remember how our cities are being starved by self-interested state governments. And how the union government is just wringing its hands.
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The author is founder of Janaagraha. He can be reached at ramesh@janaagraha.org