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Strengthening Fiscal Health of Urban Local Bodies

Soumyadip Chattopadhyay (soumyadip.chattopadhyay@visva-bharati.ac.in) teaches economics at Visva Bharati University, Santiniketan.

In West Bengal, municipal fiscal indicators have improved, but municipality finances are in a grossly unsatisfactory state. Inter-category fiscal disparities are large. Own source revenue is insufficient to cover revenue expenditure. Therefore, municipalities are dependent on intergovernmental transfers, and their fiscal autonomy is limited. Intergovernmental transfers are equalising in nature. There is an increasing need for adequate resources, especially owing to the decentralisation of urban service delivery, and a need for strengthening the fiscal health of urban local bodies by increasing own source revenue or intergovernmental transfers, by restructuring intergovernmental transfers, or by performing both actions.

The authors thank the anonymous referee for critical comments and suggestions on an earlier version of the paper.Maumita Das (maumita.das21@gmail.com) teaches economics at Barrackpore Rastraguru Surendranath College, Kolkata. 

The concept of decentralisation encompasses a wide variety of institutional restructuring. Fiscal decentralisation is assumed to create incentives for fiscal accountability through assignment of expenditures (deciding the spending responsibilities of national and subnational governments) and taxes (giving subnational governments the option of covering the total or additional expenses with their own resources) among the different levels of governments (Litvacket al 1998). The public economics framework argues that the local government body should be assigned responsibilities for services whose impacts are confined to their jurisdiction (Oates 1999; Dillinger 1993). After the local governments’ functional responsibilities are specified, decentralised arrangements may lead to greater mobilisation of local resources through the greater willingness of consumers of local public services to “share the burden” when they believe that a significant proportion of taxes will be retained locally and spent on projects and services that they value. The possibility of financing basic services from taxes borne by local taxpayers establishes a clear and close link between the costs and benefits of public services and, thus, renders decision-makers more responsive to local residents. However, in most developing countries, expenditure assignments are more decentralised than revenue assignments (Bardhan 1996). Local governments have utilised intergovernmental fiscal transfer and borrowing to bridge the gap between their revenue-raising abilities and expenditure responsibilities. Nevertheless, it is generally believed that greater the financial autonomy, greater the incentives for local decision-makers to be sensitive to both costs and local priorities (Klugman 1994).1 Financial autonomy makes local decision-makers accountable to local residents. Such accountability can result in improvement in the delivery of urban services.

In India, formal decentralisation of fiscal and political authorities to cities took place through the 74th Constitutional Amendment Act (CAA) of 1993 that devolves various administrative and fiscal functions to urban local bodies (ULBs). In India, urban governance is a state subject. State governments have exercised their discretion in implementing various provisions of the act but, in practice, they have only made partial devolution of finance and functionaries at the municipal level. Although the 74th CAA mandates the constitution of a state finance commission (SFC) every five years to review as well as recommend measures for improving the financial health of municipalities, ad hoc and discretionary state transfers have failed to address ULBs’ expenditure needs. Only recently the Fourteenth Finance Commission strengthened the urban fiscal decentralisation framework by devolving larger amounts of grants to ULBs (Mehta and Mehta 2015). For incentivising ULBs to perform as local self-government institutions, grants are linked to proper accountability of local finance and service delivery as per nationally accepted service level benchmarks.

West Bengal is viewed as one of the better performers on decentralisation initiatives among Indian states. In conformity with the 74th CAA, the state government has attempted to enhance ULBs’ fiscal strength, by devolving to them the power to tax and spend, and by arranging for correcting imbalances between resources and responsibilities. In West Bengal, municipal areas, apart from municipal corporations, are categorised on the basis of population: above 2,00,000 (category A); above 1,50,000 but not exceeding 2,00,000 (category B); above 75,000 but not exceeding 1,50,000 (category C); above 25,000 but not exceeding 75,000 (category D); and population not exceeding 25,000 (category E). These municipal areas are divided into municipal bodies located within the Kolkata Metropolitan Area (KMA) and non-KMA municipalities. Different categories of urban areas vary in fiscal capacity and governance processes. Larger municipalities enjoy a strong base for manufacturing and tertiary activities and correspondingly have higher per capita income (Kundu 2003), but a poor economic base and lack of employment opportunities in smaller municipalities result in lower per capita income. Insufficiency of human resources exacerbates the problem of weak institutional capacity in smaller municipalities, which make their challenge of raising fiscal resources and delivering adequate urban services even tougher.

Against this background, this paper evaluates the state of urban fiscal decentralisation in West Bengal by performing an inter-category comparative analysis of relevant indices. It identifies the determinants of fiscal disparities among different categories of ULBs. Data and information on municipalities in West Bengal and in India overall are inadequate, which has undermined the ability of municipalities, analysts, and policymakers to comprehend the ground level situation and develop and implement effective urban policies. This paper puts together available municipal finance data for the period between 1999–2000 and 2010–11 to identify major trends and patterns in municipal finances in West Bengal.

Urban Finance in India and West Bengal

Municipalities in India are among the weakest in the world in terms of access to resources, financial autonomy, and revenue-raising capability (Mohanty 2014). As per the Finance Commission data, the total revenue of ULBs in India accounted for only 0.70% of the country’s gross domestic product (GDP) in the 1990s; it increased marginally to 0.85% in 2002–03 and to 0.94% in 2007–08. These figures are substantially lower than the percentage of municipal revenue to GDP in South Africa (estimated at 6%) and Brazil (estimated at 7.4%) (Afonso et al 2006). In terms of both revenue and expenditure, ULBs in India account for only 2%–3% of the combined revenue and expenditure of the central, state, and local governments. In advanced countries, local governments account for 20%–35% of the total government expenditure.

The extent of urban fiscal decentralisation is unsatisfactory. In recent years, ULBs have experienced increasing financial dependence (Table 1). The trend of revenue autonomy ratio—the percentage share of own revenue, tax and non-tax, in the total revenue of ULBs—reveals that own revenue constituted about 70% of the total revenue of municipalities in India in 1990–91, but that figure declined to 52% in 2007–08. Own revenue was insufficient to meet even the revenue expenditure of ULBs as the financial autonomy ratio—the percentage share of ULBs’ revenue expenditure funded out of own source revenue (OSR)—hovered between 50% and 80% during the period under consideration.

Performance varies widely among states. In terms of indicators of revenue and financial autonomy, West Bengal performs poorly, along with Bihar, Odisha, Uttar Pradesh, Himachal Pradesh, Madhya Pradesh, and Rajasthan (HPEC 2011; Mathur 2006). Municipalities in West Bengal are in poor financial health—their OSR fails to cover establishment costs—and they depend on the state for nearly three-fourths of their revenue (Pierce 2016).

The revenue autonomy and financial autonomy ratios have improved for categories of ULBs other than municipalities in categories C and D (Table 2), but the percentage values of relevant indicators are lower during the period under consideration. The revenue autonomy and financial autonomy ratios were higher for municipal corporations and municipalities in categories A and B than for municipalities in the other three categories. The ratios for municipalities in categories C, D, and E are lower mainly because of their poor economic base and inadequate capacity to mobilise sufficient tax and non-tax revenue. Following the implementation of the 74th CAA, the problem of scarcity of resources became more acute, as ULBs were entrusted with new responsibilities which, in turn, enlarged their functional domain and expanded their financial commitment. For all categories of municipalities, OSR was insufficient to meet their expenditure responsibilities. An analysis of trends and patterns of composition of municipal revenue and expenditure would provide further insight into the fiscal health of different categories of ULBs in West Bengal.

Scale and Structure of Municipal Finance in West Bengal

The Constitution of India does not spell out specifically the sources from which municipalities may gather revenue; state governments determine their revenue sources. In West Bengal, several tax2 and non-tax3 revenue sources are assigned to municipalities. The municipality chooses the “tax rate” within the broad “rate band” set out by the statutes. The components of municipal revenue other than OSR (tax and non-tax) are non-plan grants4 and plan grants5 from the higher levels of governments. Apart from OSR (tax and non-tax), the municipal revenue includes non-plan grants and plan grants from the higher levels of governments. Total expenditure is divided into general administration and collection charge; public safety; public health and convenience, including expenditure on water supply, drainage, roads; and other miscellaneous charges. This section analyses the trend, pattern, and composition of revenue of ULBs in West Bengal at four points in time: 1999–2000, 2003–04, 2007–08, and 2010–11.6

Own source revenue: OSR measures the fiscal performance of ULBs by reflecting on their fiscal power and capacity to effectively utilise such power. In West Bengal, ULBs experienced an increasing trend in per capita OSR (Table 3). The average (real) per capita OSR of ULBs was ₹`96.62 in 1999–2000; it increased to ₹`198.36 in 2007–08 and to ₹`310.08 in 2010–11. Still, the levels of per capita OSR of ULBs in West Bengal are lower than the national average (HPEC 2011), and there are large variations across different categories of ULBs: in 1999–2000, category A municipalities had (real) per capita OSR of ₹`82.14, but category B municipalities generated ₹`151.06. The extent of fiscal disparities seems to have increased in recent times. In 2010–11, the (real) per capita OSR for category B municipalities was ₹`774.91, around four times that of category C municipalities (which raised only ₹`180.85 as [real] per capita OSR). Municipal corporations and municipalities in categories A and B recorded almost a fivefold increase in OSR in 2010–11 as compared to 1999–2000.

Two points deserve to be emphasised. First, general improvement in OSR receipts of ULBs during the period under consideration is coupled with considerable inter-category disparities that have increased in the recent past. Second, ULBs with a larger population have been able to generate greater resources than their smaller counterparts, mainly due to agglomeration effects, more developed infrastructure, and greater capacity to levy taxes and user fees. Average per capita OSR for KMA municipalities was higher than that for non-KMA municipalities in all the time points. This may be because non-KMA municipalities are less developed or their revenue mobilisation efforts are low. An analysis of trends and patterns of major components of OSR would shed more light on the financial health of municipalities.

Own tax revenue: The average (real) per capita tax revenue of the ULBs was ₹`62.73 in 1999–2000, and it increased to ₹`113.07 in 2007–08 and decreased to ₹`87.42 in 2010–11 (Table 4).

In all the four time points, KMA municipalities recorded greater average (real) per capita tax revenue than non-KMA municipalities. Disparities in municipal performance across different categories are quite large. In 1999–2000, municipal corporations generated (real) per capita tax revenue of ₹`124.32 but category E municipalities generated ₹`47.83. Similarly, in 2010–11, category B municipalities recorded the highest average (real) per capita own tax revenue figure of ₹`249.45 while category A municipalities recorded the least, ₹`72.11. In general, if the different categories are classified by the average (real) per capita tax revenue, the configuration obtained shows that smaller municipalities have made less effort than larger municipalities in generating revenue from tax sources.

There is a gradual decline in the share of own tax revenue in total OSR for each category of ULBs in the four time points. Own tax revenue constituted on average almost 67% of total OSR of ULBs as a whole in 1999–2000 while the corresponding average percentage figure decreased to around 42% in 2010–11 (Table 5). All the categories of municipalities experienced this declining trend. There is considerable variation among different categories of ULBs in the proportion of tax revenue to OSR.

Property tax is the major fiscal instrument available to ULBs in West Bengal. But, low coverage, low rates, poor collection efficiency, and improper valuation and assessment adversely affect the buoyancy of property tax and contribute to its declining share in total OSR. Assessment of properties under the annual rental value method—the gross annual value rent at which property may “reasonably” be expected to be rented—has yielded little tax revenue as it gives tax collectors enormous discretion and provides scope for corruption. Various government establishments do not pay taxes; that worsens the overall collection ratio. Moreover, ULBs do not collect any tax from unauthorised construction on encroached lands. Other factors of low collection of property tax in West Bengal are lockouts and closure of mills and factories, and citizens’ apathy towards paying taxes. Even ULBs rarely undertake any penal action against defaulters. Quite rightly, the third SFC (2008) recommended that the “capital value” method of valuation be adopted, a geographical information system be introduced, and provision be made for enabling ULBs to collect at least service tax from occupiers of unauthorised constructions. Of late, the establishment of many commercial organisations and several developed and modern institutions in urban areas has opened up new opportunities to increase the collection of property tax. Even a small percentage change in the proceeds from this most buoyant source of municipal revenue can make a huge difference (Chattopadhyay 2011).

Non-tax revenue: The importance of non-tax revenue in the OSR of ULBs is increasing. This section analyses its trends and patterns. The average (real) per capita non-tax revenue of ULBs was ₹`35.70 in 1999–2000; it shot up to ₹`86.88 in 2007–08, and to ₹`222.66 in 2010–11 (Table 6). The average (real) per capita non-tax revenue was greater in KMA municipalities than in non-KMA municipalities only in recent years. The category-wise performance of municipalities on the criterion of resource mobilisation from non-tax sources runs along the same track as that of OSR. Larger municipalities belonging to the A and B categories of municipal corporations recorded higher average (real) per capita non-tax revenue than their smaller counterparts.

Overall, revenue collection from non-tax sources has improved. But in West Bengal, ULBs’ efforts in effectively utilising this important source of revenue have been unsatisfactory. In states like Andhra Pradesh and Karnataka, such efforts resulted in higher annual average growth of non-tax revenue (Mathur 2006). Narrow political compulsions and peoples’ dissatisfaction with municipal services constrain ULBs from fully exploiting these forms of taxes and fees.7 Recent improvements can be attributed to a provision of the West Bengal Municipal Act, 1993 that empowered a municipality to levy fees and charges for any specific service rendered in pursuance of the provisions of this act subject to the state government’s prescribed scale of fees or charges. In urban areas, the demand is increasing for commercial spaces. Municipal governments are allowed to develop parking spaces, office blocks, shopping complexes, and hotels, and lease these to the government and individuals. Apart from the monthly rent recoverable from these properties, the advances received from the prospective occupiers of such properties could generate a revolving fund for local bodies.

User charges constitute another non-tax source that could generate substantial income. User charges are important not only to enhance OSR but also to introduce efficiency and accountability into the system. The third SFC recommended the introduction of water rates on the basis of consumption and imposition of garbage collection fees. If implemented, these recommendations, although few, are expected to raise ULBs’ non-tax revenue collection in the near future and, thereby, improve their OSR.

Grants: Following the partial implementation of the 74th CAA in India, the delegation of tax revenue power has not been consistent with ULBs’ expenditure needs. Further, due to differences in the socio-economic conditions and fiscal capacities of ULBs, fiscal imbalances arise among different categories. In West Bengal, ULBs depend on intergovernmental transfers to meet their revenue shortfall. There was an increase in the average (real) per capita grant received by all the categories of ULBs from the higher levels of government over the period under consideration (Table 7). However, there are large variations across different categories of ULBs in terms of per capita grant receipts. For ULBs in categories D and E, average per capita grants receipts were found to be in excess of the state average per capita grant receipt in all the four time points.

The revenue dependency ratio—the percentage share of grant receipt in ULBs’ total revenue—has also been calculated. Analysis shows that grants constituted 70%–80% of the total revenue of ULBs in West Bengal over the period under consideration. The dependency on fiscal transfer has reduced in recent times for larger municipalities, but ULBs in categories C and D continued to rely on the state for nearly 80% or more of their total revenue.

From this analysis, several important features may be noted. First, fiscal transfers are the most important constituents of finances of all categories of ULBs in West Bengal. This implies that functional devolutions are not backed up by the commensurate transfer of fiscal power to ULBs. Second, smaller cities experienced higher transfer dependence, and smaller municipalities recorded lower average (real) per capita OSR. Their high dependence on fiscal transfers indicates that grants are distributed on an equalising basis. This coheres with the findings of Pierce (2016) in West Bengal.

Municipal expenditure: The trend and pattern of total municipal expenditure is examined to understand how ULBs spend their money. For each category of municipalities, the per capita total expenditure exhibited an increasing trend (Table 8). The average (real) per capita total expenditure of ULBs was ₹`288.81 in 1999–2000; it increased to ₹`372.30 in 2007–08, and to ₹`578.76 in 2010–11. However, Mathur (2006) notes that ULBs in West Bengal recorded medium level of expenditure, while ULBs in the states like Maharashtra, Punjab, and Gujarat ranked high on this measure. There are also large disparities in expenditure incurred by different categories of ULBs. The KMA municipalities recorded higher average per capita total expenditures than non-KMA municipalities during the period under consideration. Per capita expenditure by the highest spending category of ULBs is nearly 1.5 times as great as that of the lowest. Interestingly, it appears that municipalities in categories D and E spent more per person than other categories of municipalities, except municipal corporations.

Table 9 shows that the average (real) per capita general expenditure and collection charges of the ULBs was ₹`90.28 in 1999–2000; it increased to ₹`152.05 in 2007–08 and further to ₹`280.26 in 2010–11. In per capita terms, ULBs in categories D and E were found to spend higher than, or at least as much as, the average amount spent on general administration and collection charges in all the four time points. One possible explanation is that smaller ULBs incur higher governance costs and spend more on administrative functions.

In terms of average (real) per capita expenditure on urban services, municipal corporations posted relatively higher per capita expenditures than the state average. The least populated municipalities recorded almost the same level of per capita expenditure on urban services as their larger counterparts over the period under consideration.

Table 10 depicts the variations among different categories of municipalities in terms of distribution of expenditure on general administration and urban services. All categories of municipalities experienced a general increase in the share of general administration and collection charges in total expenditure. In 1999–2000, the ULBs spent on average around 34% of their total expenditure on general administration and collection, which increased to around 47% in 2010–11. Correspondingly, all categories of municipalities experienced a general decrease in the share of public service spending in total expenditure. Among Indian states, ULBs in West Bengal on average spend a lower proportion of expenditure on urban services than in states like Andhra Pradesh, Gujarat, Maharashtra, and Punjab (Mathur 2006).

From this discussion, three important trends may be noted. First, there has been an increase in the average (real) per capita expenditure incurred by ULBs in West Bengal over the period under consideration. Second, average (real) per capita expenditures of smaller ULBs are higher than that of larger ULBs, except the municipal corporation. Third, there has been a general decline in the share of municipal spending on urban services and an attendant increase in administrative expenditure. A challenge in analysing municipal expenditure data in West Bengal, as in other Indian states, is that it is difficult to differentiate between revenue expenditure and capital expenditure due to faulty accounting procedures (Third SFC 2008). In general, a significant proportion of capital expenditure in the urban sector is incurred by parastatals and state government departments, and not by ULBs (HPEC 2011). Revenue expenditure includes expenditure on salaries and the wages and maintenance costs of assets and services. Staff salaries and wages constitute the major item of expenditure of ULBs in many states of India, including West Bengal.8 Further, in West Bengal, ULBs are heavily dependent on state government transfers for staff salaries and wages (Third SFC 2008). The increase in state government grants to all categories of ULBs might have caused an increase in municipal expenditure in West Bengal. Moreover, expenses on general administration can be treated as fixed cost that ULBs need to incur for the daily functioning of municipalities. These costs do not vary much with the population size of the ULBs.9 Therefore, smaller municipalities experienced higher per capita general administration and collection charge. Further, smaller and larger municipalities incur almost the same per capita expenditure on urban services. This might be due to the bias towards municipalities with smaller population in West Bengal in allocating grants.

Analysing Disparities in Municipal Finance

Identifying the determinants of fiscal disparities would help in framing fiscal policy to strengthen the financial health of ULBs in general. The dependent variables are per capita OSR, including tax and non-tax revenues, per capita grants received, and per capita total expenditure incurred. Independent variables are population size, proportion of SC/ST population, literacy rate, proportion of marginal workers, and location (Table 11). Here, population is used to measure the size of a ULB and the percentage of SC/ST population; the literacy rate and the percentage of marginal workers is used to measure the level of economic development. The location variable is expected to account for unmeasurable qualitative factors, such as political power and influence, differences in management and administrative capacities, and proximity to or location within the KMA.

The larger the population size, the higher the OSR of ULBs. It is expected that, with a larger population, there would be greater levels of economic activity and, therefore, ULBs will have more capacity to generate OSR. Population size is expected to have a negative relationship with the per capita grant received by ULBs and their per capita spending. The fixed cost related to general administration constitutes a significant portion of the total expenditure, and the related expenditure falls for the larger ULBs. Allocation of government grants may be higher for ULBs with smaller populations. A higher percentage of SC/ST population suggests a greater concentration of poor households and less taxable capacity. Therefore, we expect the percentage of SC/ST population to have a negative relationship with per capita OSR and a positive relationship with per capita grant. Greater amounts of government grants to local governments with heavier concentrations of SC/ST population are likely to result in higher per capita expenditure; therefore, the relationship between percentage of SC/ST population and per capita total expenditure is assumed to be positive. The proportion of marginal workers is another indicator of economic backwardness; it signals weaker taxable capacity and greater need for increase in expenditure. The proportion of marginal workers is expected to have a negative impact on per capita OSR generation but a positive impact on per capita grant and per capita expenditure.

A higher literacy rate reflects greater consciousness and willingness on the part of residents to pay tax; this attitude is expected to lead to higher revenue generation. The literacy rate is expected to have a negative effect on the level of per capita grant received because it is hypothesised that a higher literacy rate is associated with a smaller concentration of the population below (the) poverty line (BPL). A positive relationship is hypothesised between the literacy rate and per capita municipal expenditure, as literate people, apart from having a greater willingness to pay, are more likely to demand better services. Multi-variable regression has been used to model the determinants of fiscal disparities observed among the ULBs in West Bengal. The application of Breusch–Pegan test indicates the presence of heteroscedasticity; therefore, we have used a heteroscedasticity-consistent estimation method to counter it.

 

Per capita own source revenue: The ordinary least squares (OLS) estimates of the determinants of variations in OSR are represented in Table 12. The literacy rate variable has the expected positive sign, and it is significant for the year 2011. Higher the literacy rate, greater the willingness of people to pay taxes, which leads to greater mobilisation of OSR. The association between population and OSR generation is not significant. This might be due to the strong performance of a few large ULBs with a larger population in generating revenue, which raised the average per capita OSR for ULBs, while others in the same category have not performed well. The proxy measures for the concentration of poverty (SC/ST population and marginal workers) are statistically insignificant. The location effect turned out to be positive for both time points, and it is significant for 2001, implying that relative proximity to the KMA provides ULBs with positive externalities in terms of economic and management factors that are reflected in higher per capita OSR.

 

Per capita grant: Table 13 presents the OLS estimates of determinants of variations in per capita grants received by ULBs in West Bengal. Population size significantly affects the quantum of grant amount received by ULBs. This implies that per capita grant is distributed more towards ULBs with a smaller population in both time points which, in turn, indicates the equalising nature of grants. The marginal effects of variables related to SC/ST populations and marginal workers are positive but insignificant. The positive marginal effect of literacy rate, although insignificant in 2011, indicates it is a counter-equalising influence in the distribution of grants. The positive marginal effect of literacy rate, although insignificant in 2011, indicates that it has counter-equalising influence in the distribution of grants. The first and second SFCs considered the SC/ST population and literacy rate as two important constituents of the formula for distributing grants to ULBs, but the third SFC noted the lack of transparency in the distribution formula. This could be one of the reasons for the insignificant impacts of proxy measures of poverty and economic development. Location effects are not significant, suggesting that management and political factors do not have any noticeable impact on the distribution of grants among ULBs in West Bengal. Overall, it can be concluded that intergovernmental transfers are distributed away from heavily populated ULBs in West Bengal.

Per capita expenditure: The OLS estimates of the determinants of variations in total expenditures are represented in Table 14. The marginal effects of population size are negative and significant for both time points. This is indicative of the economies of size effect that leads smaller municipalities to spend more in per capita terms. The hypothesised association between literacy rate and per capita expenditure is confirmed in the multivariate model with the same being significant in 2011. This implies that a higher literacy rate generates stronger demand for urban services, and so ULBs spend more when the literacy rate is higher. However, the association between proxy measures for the concentration of poverty and per capita expenditure is not significant. The location variable has a positive, but insignificant, impact on per capita spending.

Conclusions

Municipal fiscal indicators improved over the period under consideration, but the finances of ULBs are in a grossly unsatisfactory state. There are large inter-category fiscal disparities. A common characteristic of municipal finance across countries has been the disparate fiscal situation of big cities and other ULBs. The ULBs of West Bengal are no exception. In West Bengal, larger municipalities have generated greater revenue mainly because of their strong economic base and the capacity to mobilise sufficient tax and non-tax revenues. However, the OSR of ULBs is insufficient to cover revenue expenditure. Therefore, ULBs are highly dependent on state transfers. This, in turn, limits their fiscal autonomy. Smaller ULBs with low levels of OSR demonstrate a higher level of transfer dependence, suggesting that transfers are equalising in nature. Also, smaller ULBs tend to spend more on per capita basis, mainly due to their higher fixed costs, due, in turn, to the higher proportion of expenditure on general administration and on salaries and wages. As a result, little funds are left for development purposes, and that limits the capacity of ULBs to provide urban services. The regression results reinforce the above findings.

Location matters for revenue generation, probably because ULBs located within the KMA enjoy special economic circumstances in terms of tax base, collection efficiency, and level of economic activity in the city area. Given that the responsibility of managing urban services has been decentralised to ULBs in West Bengal, the importance of availability of adequate resources is more than ever. Strengthening fiscal health is essential for all categories of ULBs. This can be achieved by increasing ULBs’ own revenue or intergovernmental transfers, or by restructuring intergovernmental transfers, or by both, increasing ULBs’ own revenue or intergovernmental transfer and restructuring intergovernmental transfers. Devolution of revenue-raising power to ULBs through taxation should be accompanied by the authority to set the tax rate and determine the tax base. Reforms should be made to fully utilise the revenue potential of property tax by adopting the “unit area”10 method of tax determination and by efficient collection of property tax. All measurable services for which consumers can be identified should be charged on the basis of costs. ULBs might also concentrate on introducing technology- and incentive-based reforms as they are the least politically contested and, yet, enhance efficiency in collection of taxes and fees. Grants from higher levels of government need to be utilised to supplement municipal resources and not to substitute these. State governments should seriously consider the SFCs’ recommendations for ensuring transparent and predictable transfers to ULBs to enable them to plan and execute their functions efficiently. Also, ULBs should be given autonomy to set the expenditure priorities as per their local requirements. A portion of such transfers might also be used as incentive grants to reward their revenue mobilisation efforts. These initiatives are expected not only to enhance the capacities of ULBs to improve revenue mobilisation, but also to help create an environment in which municipalities can play their role more effectively and ensure better service delivery.

Notes

1 There are some pitfalls with respect to local financial autonomy. Subnational governments may not fully utilise all the revenue sources available to them or may attempt to extract revenues from other sources for which they are not accountable, thus obviating the basic efficiency argument (Bird 2000). Fiscally sufficient local government bodies may resort to regressive patterns, whereby non-elites are taxed to bear the burden of providing services to local elites. In such cases, it is desirable to put some restrictions on local governments’ ability to levy local taxes (Mookherjee 2004).

2 Property tax, advertisement tax, taxes on professions, trade, and callings are the major components of tax revenue. Among them, property tax is the mainstay of municipal bodies’ own source revenue.

3 Non-tax revenue sources of municipalities consist of rents and fees from municipal markets, building plan sanction fees, mutation fees, sales of forms, fees for supplying water in tanker, fees for cleaning septic tanks, sale of condemned materials, and parking fees.

4 The non-plan grant comprises mainly shared taxes: entertainment tax, entry tax, and motor vehicle tax; and dearness allowance subvention grant.

5 The ULBs receive plan grants from the government on projects and schemes related to developmental works at the municipal level.

6 These are the years for which we have data on income and expenditure for most of the ULBs in West Bengal.

7 In spite of the mandatory provision for imposition and collection of water taxes as per the West Bengal Municipal (Levy of Fee for Supply of Water) Rule 2002, the state government has discontinued the water tax.

8 Many municipal operations are labour-intensive in nature. For example, tasks of collection and management of solid waste are vastly labour-intensive, with the exceptions of a few large cities where mechanised collection has replaced manual lifting of garbage. This results in high municipal expenditures on establishments, and salaries and wages (Mathur 2006).

9 In reality, despite some statutory restrictions in creating posts and recruiting municipal staff, most ULBs in West Bengal recruit personnel—under political compulsions—violating recruitment procedures or without obtaining the state government’s approval (Chattopadhyay 2011).

10 Under this method, properties are classified and taxed on the basis of parameters such as type of construction, category of use, and location.

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Updated On : 1st Oct, 2018

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