This PPT delivered in a conference organised by Administrative Staff College of India discusses what needs to be done to improve municipal finances in India.

1. Improving Indian Municipal Finances
– Experiences and Way forward
Dr Ravikant Joshi
Workshop on ‘Making ULBs of Telangana Financially
Self-Reliant’ - June 25, 2019
Organised by Administrative Staff College of India
Bella Vista Campus - Hyderabad

2. Improving Indian Municipal Finances – Experiences
and Way forward – Old and New Stories
Vishakhapatnam –
Property Tax
Bruhad Bangalore –
Property Tax Surat – User Charges
Mumbai – Capital
Value PT and
Development Charge
72 ULBs of Telangana –
Property Tax
Ujjain – Property Tax –
Not reported
Recent Fiscal Health Improvement Efforts
Raipur – Property Tax
– Not reported
Ranchi - Property Tax Bhubaneshwar - Adv
Tax
Nashik –Property Tax
Rajasthan Annual
Accounts, Auditing
Reforms - Janaagraha
Chhatisgarh DEBAAS
and internal/external
auditing reforms
Lack of Expenditure Management / Expenditure Rationalization Reforms

3. Improving Indian Municipal Finances – Experiences
and Way forward - Issues
 There are many successful examples with each of these good municipal
financial management practices
 Each successful example has certain new features
 Literature is full of well documented case studies
 Now most of people in the system knows what needs to be done?
But
 Final outcomes of many of these reforms not realised, or realised very less
than promise or potential -
 Has not changed municipal financial situation !!
 Decelerated in medium term – sustainability issues
 Lacked granularity, lacked systems approach
 Expenditure Management (Budgeting Reforms) completely neglected

4. Improving Indian Municipal Finances –
Experiences and Way forward - Issues
• Improving municipal finances barring some exceptions has not
received due importance, necessary support and suffers from
various issues -
• Lack of data / documentation about such experiences,
• Failure to report/document experiences in improving fiscal health of ULBs,
• Real fact is, there are very few experiences in improving fiscal health of ULBs
• As Fiscal Health Improvement initiatives are few, they failed to have impact on
overall municipal finances in India.
• Lack of consistency – sustainability
• Lack of eco systems including incentive system to sustain such reform initiatives
• Lack of mass replicability

5. Improving Indian Municipal Finances – Experiences
and Way forward – insignificant impact
• Macro data, which is also dated now, suggests miniscule impact of
such efforts -
• Funding of Cities through national and regional sources increased to 49 per cent
from 37 per cent during 2002-2012.
• Municipal tax revenue to GDP ratio declined from 0.39 to 0.32 per cent
• Municipal non-tax revenue to GDP ratio declined from 0.20 to 19.8
• With abolition of Octroi now even in Gujarat and Maharashtra ULBs’ minimum
dependence on devolutions is more than 65 per cent.
• Out of 100 Smart Cities 76 Cities have not been able to contribute their own share
• Annual Survey of India’s City Systems (26 cities) Report by Janaagraha states that -
• 54 % cities do not generate enough revenue to meet their salary costs
• 39 % is the average percentage of own revenues to total expenditure
• 70 % cities had budget variances of over 30%

6. Improving Indian Municipal Finances – Experiences and
Way forward – Insignificant impact, Inadequate efforts
Credit rating (mid 2008) Credit rating (2017)
Rating
Category
No.
Cities
%
Share
Financial health implication No of Cities % Share
AAA -- 20
cities
31.7 %
No ULB in this category 34 cities
7 %
AA 10
A 10
BBB 18 42
cities
66.6 %
weak financial profile, high dependence on government
grants/transfers
127 cities
27 %
BB 17
negative operating surpluses, limited ability to borrow or
service debt
B 07 inadequate and volatile grant support
C 01 1.6% In no position to repay debt. 362
Total 63 463

7. Shortcomings of municipal financial reforms?
 Property tax reforms have remained constrained because
 they are not adopted capital value method of assessment
 rates were not revised adequately
 Coverage improved to some extent but collection efficiency did not
 User charge reforms have not been attempted in right earnest still mainly
suffer from coverage and collection efficiency
 Advertisement tax is least explored
 Streetlight and Fire Service tax where they have been introduced are
based on property like property tax and suffer from same limitations
 Professional tax in many states not given to Urban Local Bodies and even if
given suffers from constitutional limitation
 Development charges are area based, unrevised
 Value capture finance, TDR etc non starter

8. Why improving Municipal Financial Management
Practice?
 Share of Municipal Own Resource Revenue in GDP is continuously
falling as annual growth of municipal revenue is less than Central
and State Revenue growth / national economic growth
 Devolution has increased but not sufficient to meet growing needs
 There exists sizeable resource/income potential but not realised
mainly due to operational issues – Coverage and collection
efficiency – leading to equity issue
 Most of the water supply and sewerage service finances are in loss
because of coverage and collection issues
 There do exist structural issues like tax/charge design & tariff
structure
 Finally own source revenue is linked with financial independence

9. Expenditure Management / Expenditure
rationalisation
 Expenditure management comprises three aspects
Fiscal Discipline, Allocative Efficiency, Operational Efficiency
 Municipal resource mobilisation has off late receiving attention
but expenditure management in municipal bodies is yet to
receive such importance.
 Rupee saved is Rupee Generated
 Across the world public expenditure management is now
receiving increased attention,
 GOI has adopted it – expenditure management commission
 Need to be adopted in Indian municipal bodies

10. Expenditure Management / Expenditure
Rationalisation
The main tool of public expenditure management is
budget and budgetary control
Precisely budgeting and budgetary control systems are
weakest in municipal bodies.
Even expenditure management (budgets) in municipal
bodies which are big, advanced and leader in other
aspects is defective, inadequate
There is urgent need to improve expenditure
management (budgeting) in municipal bodies.

11. Expenditure Management (Budgeting) in
Municipal Bodies - Way Forward
 Reorganize, restructure budget, reclassify budget items
 Streamline and prune down budget
 Introduce subsidiary appendixes
 Judicious use of budgeting techniques – Adopt Zero base and
performance cum outcome budgeting
 Adopt long term (five years) and medium term (three years) budgeting
framework with rolling plan format
 Regularize accounting system and work; tune budget with it
 Make Expenditure contingent to resource realization
 Adopt contingency budgeting
 Separate revise budget approval process
 Introduce centralized financial control
 Introduce system of budget variance analysis
 Adopt short term budgeting (weekly, monthly)

12. Experiences in Improving Fiscal Health of
local bodies in India - Way Forward
• State Governments to take lead – delegation powers, necessary
legal amendments, handholding support,
• Front Loading of Fiscal Health Reforms – should become part of
prequalification norms for ULBs to receive funding /grants
• Strong incentive structure to motivate ULBs to undertake fiscal
health improvements
• Separate line of credit/funding for fiscal reforms by ULBs
• Doing away with soft budgetary constraints approach while
devolving funds

13. Experiences in Improving Fiscal Health of local
bodies in India - Way Forward
• Creation of appropriate eco systems
• Creation of centralised IT Platform/web portal and institutional
structure for documenting, reporting, analysis and sharing of
fiscal health improvement success stories of ULBs
• Creation of independent financial performance ranking system
run by GOI and State Government
• Creation of annual credit rating of ULBs putting that data in
public domain
• Regular statutory and performance audit of ULBs by designated
agencies and publication of audit report on centralised Web
portal

14. Improving Indian Municipal
Finances – Experiences and
Way forward
Thank You

15. Municipal Financial Management
 Financial management is planning, directing, monitoring, organising
and controlling the monetary resources of an organisation
 Financial management is the management of the finances of a
business/organisation in order to achieve its financial objectives like
 Creating wealth for organisation
 Generating adequate cash
 Providing return on investment in tune with risk involved
 Its basic objectives are
 maintenance of liquid assets & maximization of the profitability of the
organisation
 Ensuring operational efficiency by efficient & effective utilisation of finances
 Ensuring financial discipline in the organisation

16. Municipal Financial Management
Three decisions – interrelated and their joint impact should be
taken in to account
The Investment Decision (effective utilisation of resources)
allocation and reallocation of capital, involves risk. Capital Budgeting main
tool of this decision.
Includes the decision to reallocate capital when an asset no longer
economically justifies the capital committed to it
The Financing Decision (Procurement of Funds)
Multiple needs and methods of financing
Each source characterized by strengths & constrains
Determining the best financing mix or structure for the organisation. Risk, return
and control are the crucial factors for this decisions.

17. Municipal Financial Management
The Dividend Decision (disbursing or reinvesting
operating surplus)
It deals with decisions like how much dividend should be
paid? The stability of absolute dividend over time,
repurchase of stock etc. The value of dividend to be
equated against the opportunity cost of the retained
earnings lost as a means of equity financing.
Three areas of financial management are generic
& relevant for all types of institutions/municipal
bodies