Urgent Urban Finance Reforms for Cities – the ‘engines of economic growth’ for India

In June 2013, I had written a blog highlighting the need for increasing urban finance autonomy to make cities having better infrastructure and better management. This was, in reference to the High Powered Executive Committee (HPEC) recommendations that have been made to effectively implement the decentralisation promised in the 74th Amendment to the Constitution of India.

For such financial reforms, there are two side pulls and pushes that are essential. One, where the urban local body, including its political and administrative set up, demand for it. And the other is, through the State Government, who makes the required changes to actually decentralize the cities and their financial management.

There has been a long standing argument of the State Governments that urban local bodies have shown such a poor performance with regards to governance that adding to the financial revenue and giving financial autonomy will spell disaster, leading to higher levels of corruption and fund mismanagement. The HPEC report argues against this point. It states that the added revenue will ensure that capacity building will happen in urban local bodies and financial autonomy will mean that urban local bodies will have to become more accountable, more transparent. In fact, the HPEC Report argues that financial autonomy will ensure that funds are managed better than when an urban local body it is dependent on State and Centre grants. The fact that the Local authority will not be able to throw up its hands nor point fingers at the State, will ensure that accountability will get built in. This is similar to how we are more responsible and mature when we are earning & spending our own money versus when we are spending someone elses, right?

Pune Janhit Aghadi (PJA), a political party, is carrying forward the agenda of financial revenue addition and autonomy for Pune, thus creating the required one side push to the system. The suggested flow of finances maps very well with what is recommended by the HPEC and thus, there is hope that the State Government will will look positively at these much needed reforms.

PJA has outlined 10 mechanisms which can add revenue to the coffers of Pune Municipal Corporation.
1. Part of Revenue from Stamp Duty            estimated to be 750 crores annually
2. Part of RTO Registrations                        estimated to be 112 crores annually
3. Part of VAT                                            estimated to be 900 crores annually
4. Part of Fuel Surcharge                             estimated to be 40 crores annually
5. Part of N.A. Tax                                     estimated to be 30 crores annually
6. Traffic Violations                                    estimated to be 7 crores annually
7. Part of Excise                                         estimated to be 223 crores annually
8. Part of Professional Tax                          estimated to be 6 crores annually
9. Part of Entertainment Tax                       estimated to be 35 crores annually
10. Part of Cable TV charges                      estimated to be 20 crores annually.

The most simple argument that PJA has put forth and that the HPEC report has also stated is that for generation of revenue from the above tax structures happens in cities, using city infrastructure. Vehicles use city roads, professionals use offices in cities, cinema goers use theatres in cities and traffic violations are also causing an indirect burden to the city and its citizens. Isn’t it just logical to get a portion of all these taxes and charges directly into the city administration? Why should the city, which lets its infrastructure be used, have to beg for grants to the State government?

Also, when this disbursement happens through the State government, other factors like priorities, political ambitions and will affect the way these finds are distributed to the city. And more often than not, we have experienced that this fund allocation is based on the whims and fancies of the elected political candidates, their agenda at that time and the priorities facing the political party in power.

All across the world, cities have functioned better when they are made financially autonomous. In fact, cities then compete to generate external funds, much like a competitive business, to attract investments and thus revenue, when it knows that the money will flow directly into the city coffers.

The HPEC report states some startling aspects of city finances, where not even 0.9% of the total revenue is generated by the city for its own use and since the past decade, most cities have shown this self revenue to be consistently decreasing. There is neither an incentive nor an opportunity to make cities better places when finances are not just limited, but also managed by another overbearing authority. See the report at http://www.niua.org/projects/hpec/finalreport-hpec.pdf

PJA and its President Shri Ujwal Keskar and its Convenor Vinay Hardikar, have shown the gap that exists between the 74th Amendment and its actual implementation through this proposed revenue outlay to the Finance Commission of Maharashtra. That, this financial autonomy is not on the agenda of ruling and opposition political parties in cities, is a sad but true reality.

Decentralization will happen only when finances and thus power, are decentralized! And we will see better urban infrastructure in cities only when cities are truly empowered to make their own financial decisions. And only when they do so, will they act as “engines of economy” – a much needed boost for India’s economy in these troubled times!

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