The RBI released its maiden report on Municipal Finances in November 2022. The current 2024 report delves into the fiscal position of 232 Municipal Corporations (MCs) from 2019-20 to 2023-24 (Budget Estimates), with a focus on ‘Own Sources of Revenue Generation in Municipal Corporations’. Here is a review.
India is experiencing rapid urbanization, with projections suggesting that half of its population will reside in urban areas by 2050. Currently, there are more than 250 Municipal Corporations (MCs) in the country, and this number continues to grow alongside population expansion and urban development. In this scenario, effective local governance and robust local financial freedom for MCs are pivotal for achieving sustainable development in these urban centres. While the 74th Constitutional Amendment empowered urban local bodies to function as self-governing institutions, their ability to generate adequate revenue remains limited.
The Reserve Bank of India (RBI) addressed this critical issue in its inaugural report on municipal finances in 2022, followed by another report in 2024, focussing on revenue receipts, expenditure, and overall financial health of MCs. In this story, we take a look at revenue generation trends, expenditures of MCs, and the challenges involved in the financial sustenance of 232 MCs analysed in RBI’s 2024 report.
Note
- The figures for 2023-24 given in the RBI report were not considered in the story since they were Budget Estimates (BE).
Between 2019-20 to 2022-23, Revenue Receipts of MCs were over 1 lakh crores each year with over 58% accounted by the top 10 MCs
As per the 2024 report, there are four broad heads of revenue for the MCs These are Own Sources, Assigned (Shared) Revenues, Grants-in-Aid Receipts, and Borrowings. The sources under each of these heads are given below.
From the year 2019-20 to 2022-23, the total revenue receipts of 232 MCs covered in the report were Rs. 1,11,308 crores, Rs. 1,11,891 crores, Rs. 1,37,058 crores, and Rs. 1,42,178 crores, respectively. The expenditure incurred by MCs during the same period were Rs. 1,06,394 crores, Rs. 1,10,857 crores, Rs. 1,23,201 crores, and Rs. 1,31,608 crores, respectively.
Though the revenue expenditure incurred during each year was less than the revenue receipts, implying an overall positive trend, the top 10 MCs contributed to about 58% of total revenue. While the report did not disclose the names of these 10 MCs, these are most likely to be metropolitan cities. Therefore, it is most likely that the bulk of the MCs could be financially struggling and thus relying on state and central governments, and other avenues for finance. This was noted RBI report itself as follows:
“Despite significant responsibilities, MCs’ revenue receipts are quite modest (0.6 per cent of GDP in 2023-24) and pale in comparison to those of Central and State governments (9.2 per cent and 14.6 per cent of GDP in 2023-24, respectively). Revenue receipts of MCs exhibit concentration, with the top 10 MCs accounting for over 58 per cent of total municipal revenue receipts”
“The MCs rely heavily on the upper tiers of government for revenues, which can limit their financial autonomy and capacity to plan and execute long-term projects”
Post-GST, Revenue Receipts through Own Resources of MCs have come down
Out of the total revenue receipts, the revenue of MCs from their own sources such as Tax, Non-tax, and Other Receipts, were 59%, 55%, 61%, 60%, and 62%, respectively, during the period 2019-20 to 2022-23, at an average of about 60% each year. The rest of the receipts were through other sources such as Transfers.
Before the introduction of the Central Goods and Services Tax (GST) Act, the share of own receipts to total revenue receipts of MCs was about 74% in the year 2016-17. However, since the introduction of GST in 2017-18, this share dropped to about 60% each year. The report notes this is because GST subsumed several municipal taxes such as Octroi (entry tax), entertainment tax, advertisement tax, and others, impacting the independent revenues of MCs.
Notable among these subsumed taxes is the Octroi tax, which is a major tax. The report notes that though the GST Act provides compensation to state governments for such losses, it does not, however, mandate the state governments to compensate MCs, leaving it to the discretion of state governments. It further substantiates the RBI’s observation that MCs are heavily reliant on the upper tiers of the government for their financial needs.
Over 40% of the States with MCs have Revenue Deficits each year
The RBI analysed 232 MCs data belonging to 28 states. As per this data, during the period of 2019-20 to 2022-23, the number of revenue surplus and deficit states in terms of the Revenue Receipts and Expenditure of the MCs in each of these years is as follows.
| Year | Number of States where MCs are Revenue Surplus | Number of States where MCs have Revenue Deficit |
| 2019-20 | 15 | 13 |
| 2020-21 | 16 | 12 |
| 2021-22 | 17 | 11 |
| 2022-23 | 15 | 10 |
In 2022-23, the data of 3 states, namely, Assam, Arunachal Pradesh, and Manipur, was not available.
The top 3 states in terms of revenue surplus were Maharashtra, Telangana, and Gujarat in 2019-20, Maharashtra, West Bengal (WB), and Andhra Pradesh (AP) in 2020-21, Maharashtra, Gujarat, and AP in 2021-22, and Maharashtra, Haryana, and Telangana in 2022-23, respectively. In terms of deficit, the top 3 states were Karnataka, Tamil Nadu (TN), and Rajasthan in 2019-20, Karnataka, TN, and Delhi in 2020-21 and 2021-22, TN, Jammu and Kashmir (J&K), and Delhi in 2023-24.
The state of Maharashtra with 27 MCs in the state stood on top each year as the highest revenue surplus state. However, the state of TN with 25 MCs in the state stood among the top 3 revenue deficit states each. Further, the state of Telangana with 13 MCs featured twice out of four years among the top 3 revenue surplus states.
The data underscores the point that the bulk of the MCs in India may not be financially sustainable, though the overall trend presents a positive picture. In addition, it also highlights the inconsistency among states in terms of financial sustainability. To this effect, the report states that “State-specific strategies are necessary to strengthen the finances of MCs through local taxation reforms, better enforcement of tax laws, and innovative non-tax revenue sources.”
RBI makes key recommendations
The RBI notes that amidst the pace of urbanization, the administrative and financial capacities of city authorities need continuous augmentation to meet public aspirations. Therefore, it made the following key recommendations, among others:
- Strengthening Revenue Sources: Municipal Corporations (MCs) need to increase their own revenue sources by implementing reforms in property tax, rationalizing user charges, and improving collection mechanisms.
- Boosting Non-Tax Revenue: MCs can enhance non-tax revenue streams by periodically adjusting user charges and fees for essential services such as water supply, sanitation, and waste management.
- Ensuring Timely Transfers: Financial stability and effective service delivery depend on timely and direct transfers from state governments to MCs. It is vital that these transfers are predictable and adequate, based on a well-defined formula that considers revenue forgone, inflation adjustments, and the growth potential of the city economy.
- Innovative Financing Mechanisms: Transparent and efficient financial management is crucial for introducing innovative financing mechanisms. This can be achieved by adopting standardized accounting practices to improve financial transparency and the dissemination of MCs’ financial positions
