City Finances : Challenges and Practical Solutions

Updated: Sep 20, 2021

Municipal Finance is a systematic analytical study of economic behavior of local government as a relationship between multiple social needs, scarce productive resources, having alternative uses, attainment of general well-being. Municipal or City finances are the reflection of what urban local bodies perform with their budgets. There is a saying “An empty pocket teaches you a million things in life. But a full pocket spoils you in a million ways”. This blog talks about few key questions and practical solutions related to city finances.

The power of Urban Local Bodies (ULB) to make financial decisions of their city:

  • Under the 74th Constitutional Amendment Act, it is mandatory to have devolution of powers to urban local bodies (ULBs) or city governments as the lowest unit of governance in cities and towns.

  • It has been stated under section 243X that “Power to impose taxes by, and Funds of, the Municipalities.-The Legislature of a State may, by law,- (a) authorize a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits; (b) assign to a Municipality such taxes, duties, tolls and fees levied and collected by the State Government for such purposes and subject to such conditions and limits; (c) provide for making such grants-in-aid to the Municipalities from the Consolidated Fund of the State; and (d) provide for constitution of such Funds for crediting all moneys received, respectively, by or on behalf of the Municipalities and also for the withdrawal of such moneys therefrom”.

  • With this devolution, the local bodies have been given the responsibility to fund for operational services of cities along with investment in capital intensive projects. Though the central and state governments transfer certain amount to the local bodies, sustaining operations and maintenance expenditure is still a question for Indian cities.

  • Under the section 243Y the Finance Commission has been constituted (under article 243-I) to review the financial position of the Municipalities and make recommendations to the Governor.

Challenges faced by Urban Local Bodies to manage municipal finance:

1. Optimizing revenue

2. Municipal Expenditure Management

3. Public Debt

4. Financial Administration

Finance is cycle of money investing to generate revenue and again investing. The need of the hour is to take better investment and financing decisions for urban local bodies, it is always considered as a good practice to create municipal surplus for investments then to create savings and make investments out of it. Local municipal bodies are hugely dependent on state and central grants and borrowings. The space and share of municipal body is shrinking and local bodies are losing resources to fund their own projects. The entire concept of government as an economic unit and money as a public good has a direct co-relation with people’s welfare in creating a dynamic infrastructure.

External factors like inadequate local resources play a huge concern but along with this internal factors like ULBs not able to augment their own sources, poor administration structure of taxes and weak budgetary systems are also major concerns that cities suffer in making infrastructure investments. Poor budgetary and accounting management systems has also led to ineffective tax collections. Around 35 ULBS have A grade credit rating and 161 ULBS have B grade rating in managing finances. (AMRUT, 2018)

Most of the Indian cities have to fund their major projects through their property tax collections. However, revenues from property tax only constitute 0.2% of the GDP. The JUNNurm reform also focused that cities should at least collect 85% of their property taxes. However, in practice, cities are facing huge challenges in tax collections. Only one-third of property taxes get collected in Indian cities. Almost 40% of the properties in Indian cities are unregistered and do not fall in the tax net. A lot of property tax collection remains untapped and the loss occurs mainly due to unregistered properties which are not covered and brought in the tax net.

Practical Solutions to manage city finances: Five Rules

  1. The first rule of municipal finance is become cost conscious – wherever possible control cost without affecting quality and quantity – remove all avoidable cost – A rupee saved is rupee generated.

  2. The second rule is wherever possible tax/charge and recover cost through rational but possible minimum rates /charges through full coverage and collection efficiency. Property tax constitutes a suitable tax from which to finance the provision of pure, local public goods Services such as water, garbage collection, public library and public recreation should be subjected to pricing.

  3. The third rule – earn – wherever possible earn by undertaking commercial activity – adopt product differentiation in service like market.

  4. The fourth rule – converge / dovetail funds available under other schemes of government and from corporates under Corporate Social Responsibility(CSR) , and also from private sector under Public Private Partnership (PPP) mode; and finally from social sector under participatory mode.

  5. The fifth rule – leverage your financial capacity to raise you funds from market to speed up development.

Window of hope for Urban Local Bodies to manage city finances:

A lot of practical solutions for cities to achieve better financial management systems are being talked about and in order to achieve this in practice, the dimensions of streamlining the processes need to be looked upon. Cities might not need to invest for high cost technological solutions but should rather focus on low cost process improvements.

  • Enterprise resource planning is an effective solution of the first step of process improvement. Considering the issue of untapped property tax of unregistered properties, there is a bigger challenge as the property addresses are not correct.

  • A city can plan to enhance its property tax system by adapting simple low cost solutions like covering all the properties in the tax net by surveys and digitize the manual database.

  • States like Telangana have carried out GIS Mapping of properties across 72 ULBs and have been successful in adding 40 crore to their revenue base. Collection efficiencies can be improved by improving the billion and collection processes where streamlining of tax calendars can be done. Cities of Gujarat and Maharashtra like Ahmedabad, Vadodara and Pune have managed to achieve 90-95% of property tax collections through this process. It also becomes important for cities to assess their expenditure patterns.

  • Cities need to assess and reduce their expenditure on services by re-aligning processes and linking them with services. Water supply services can be monitored by effective reduction of NRW losses and collection of more taxes. Cities also need to set better pricing mechanisms where they don’t overburden the taxpayer. If the taxes levied are high, the tax payers will find difficulty in paying them which can create low collection efficiencies.

  • A good governance indicates good public infrastructure investments with low taxes. Investing in social infrastructure will definitely create an asset for the people, further creating a goodwill and will boost citizens to pay their taxes. The Swachch Bharat Mission is one of the most successful public movement which has resulted in effective management of cities through public participation.

  • Another example of best practice is the case of Vadodara Municipal Corporation where the city passed a resolution where the locals could visit nearby public parks at free of cost and could take the responsibility of maintaining them. Thus, a domino effect was created where people enjoyed the public infrastructure, took the responsibility of maintaining them on a voluntary basis and helped the city in reducing maintenance burdens. Public Private Partnership can also be looked upon with a different lens.

Cities can and will achieve better financial management with a strong support from the bureaucrats to incorporate accounting and financial reforms and an equivalent support from its people to pay effective taxes. More revenue sources need to be created for smooth revenue mobilization through better reforms, process streamlining and better investment decisions.

Keywords: City, practical cities, municipal finance, financial reforms, accounting, property tax, revenue sources, resource mobilization


Learn more from full Masterclass 03 video :

Practical Solutions to managing City Finances by Dr. Ravikant Joshi

About the Speaker

Dr. Ravikant Joshi is an Urban Management and Urban Financial Management Expert. He holds 35 years of experience in municipal finances and is the former chief accountant of Vadodara Municipal Corporation. He has worked with World Bank, USAID, ADB, DFID, Asia Foundation, CRISIL Risk and Infrastructure Solutions, Urban Management Center, various state governments in India in the field of urban management, finance and urban governance reforms.


Blog by Saubiya Sareshwala

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