A THESIS ON

Municipal Finance Challenges and Prospects

A Case of Municipal Corporations of Gujarat

NAME OF THE GUIDE NAME OF THE STUDENT

PROF. ANJANA VYAS (PhD) Swapneel Vaijanapurkar

(IP 2112)

DISSERTATION 2013-14

Faculty of Planning and Public Policy, Cept University, Ahmedabad-09

2

UNDERTAKING

I, Mr. Swapneel Rajendra Vaijanapurkar, the author of the thesis titled

Municipal Finance Challenges and Prospects, hereby declare that this

is an independent work of mine, carried out towards partial fulfillment of the

requirements for the award of Masters Degree in Planning with specialization

in Infrastructure Planning at the Faculty of Planning, CEPT University,

Ahmedabad. This work has not been submitted to any other institution for the

award of any Degree/Diploma.

Date : 26-03-2014 Name of Student: Swapneel Vaijanapurkar

Place : Ahmedabad Code No. : IP 2112

Signature:

3

ACKNOWLEDGEMENT

This Dissertation would have been incomplete without the help and co-

operation of a number of people. I take this opportunity to express my sincere

gratitude.

I am indebted to my Guide Professor Anjana Vyas because without her

periodic guidance and inspiration, the work of this nature would not have been

possible.

I would like to thank Dr. Ravikant Joshi for his valuable comments on the

work. I would also like to thanks Chief account officer of Vadodara Municipal

Corporation Mr. Santosh Tiwari and Mr. I.G Patel, Deputy Director Statistics

at Gujarat municipal finance board for providing me the necessary data.

I am deeply grateful to all my senior officers of Gujarat Industrial

Development Corporation especially Mr. Janak Gamit (Executive Engineer,

I/c Superintending Engineer), Mr. Arun Patel (Deputy Executive Engineer)

and Mr. Kaushik Gamit (Sr. Addl. Assistant Engineer) for extending co-

operation and providing necessary facilities during the course of my study.

With their support completion of this thesis completion would not have been

possible.

On a personal note I would like to express my deepest gratitude to my parents

for helping me sail through all odds. I would like to thank my sweet little sister

Sampada who stood by my side all the ways throughout the completions of

thesis and my best friends Mihir and Swapnil for their ceaseless support and

for the precious time they spent for me, going through may draft report, data

collection and suggesting the necessary correction.

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I humbly acknowledge Krishna, Manan, Sankalp and all my group of friends

at CEPT University, Ahmedabad for their help and support at different stages

of this work.

Forever grateful,

Swapneel Vaijanapurkar

Infrastructure Planning

Faculty of Planning and Public Policy,

Cept University, Ahmedabad.

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DISCLAIMER

This document describes work undertaken as part of a program of study at the

Faculty of Planning and Public Policy, CEPT University, Ahmedabad. All

views and opinions expressed therein remain the sole responsibility of the

author, and do not necessarily represent those of the institute.

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EXECUTIVE SUMMARY

There has been a substantial growth in the GDP of Indian economy over the

past two decades. The credit for this high growth goes to the macroeconomic

policies which the country has adopted. This growth is followed by a shift

from traditional agro based economy to urban based economy such as

manufacturing and financial services. The contribution of the primary sector to

the GDP was 22% in 2011 which was more than 50% in 1960s.

Thus the base of the economy has shifted from villages to the cities.

Urbanization shifts people from low productivity rural employments to higher

productivity non-agricultural employments such as manufacturing and

financial services.

The urban areas are now contributing 58 percent of the gross domestic

product. These areas were contributing just 46 percent of net domestic product

in 1990. It is expected that by 2030, urban areas will contribute to more than

70% of the GDP. Thus urban areas will act as engines of economic growth.

Although the total urban population increased more than 11 fold between 1901

and 2001 the increase in the number of towns has been steady across the

decades. So it is clear that the population growth is concentrated in cities and

the growth in urban population is happening due to expansion of cities in all

direction and not because of addition of new smaller towns.

Because of 74th

CAA functions and responsibilities of municipal corporations

have increased considerably without commensurate enhancement of their

resource base. Both urbanization and decentralization are mounting strain on

the fiscal position of Municipal Corporation to provide civic infrastructure

facilities and services.

Apart from this the city level attractiveness for the investments is affected by

the quality of infrastructure in the cities. If the local infrastructural services

such as municipal roads, street lighting, water supply and drainage are well

established, it has a positive and significant effect on city-level attractiveness

7

to investment. But in order to construct these local infrastructural services and

to access the wide gamut of funds that are available through market

borrowing, the balance sheets of the municipal corporations need to be

healthy.

Thus the study of municipal finance becomes important especially the

municipal finance of cities.

Gujarat is the most urbanized state in the country. It would be second highest

urbanized state after Tamilnadu in 2030. As per the Mckinsey urban

awakening report, Gujarat will be the second highest contributor to the GDP

of nation after Maharashtra in 2030.

Moreover in the list of top 15 cities contributing to the GDP of the country

three cities are from Gujarat which are Ahmedabad, Surat and Vadodara. Thus

Municipal corporations of Gujarat will be playing an important role for

economic development of state and their fiscal health becomes an important

area to study.

The present study Municipal Finance Challenges and Prospects thus

focuses on municipal corporations of Gujarat. The entire study is divided into

three parts.

First part looks at the overall status of municipal finances in the state of

Gujarat. The second part, which is further divided into three sub parts focuses

on selection of case cities, overall finances analysis of municipal budgets in

case cities and evaluating the levels of under spending done by the municipal

corporations on core urban infrastructural services. The third part analyses the

factors which are responsible for under spending done by the municipal

corporations and giving recommendations to improve the fiscal performance.

The first part of the study aims at assessing the fiscal position of municipal

corporations of Gujarat. The fiscal position of Municipal corporations is

assessed for the period of five years (2007-08 to 2011-12).

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Overall status of Municipal finances

For this part of study seven out of the eight municipal corporations of Gujarat

are considered. As the municipal corporation of Gandhinagar is newly formed,

it would lack of time series data for analysis and hence it is excluded from the

present study.

The study begins with a cross sectional analysis of municipal corporations of

Gujarat looking at the income and expenditure sides. Income side analysis

looks at various aspects of revenue income such as Average annual growth

rate of per capita tax income and revenue income, dependency and

decentralization.

While the expenditure side analysis looks at the relative shares of expenditure

on establishment, operation and maintenance expenditure and capital

expenditure. The expenditure side analysis also tries to calculate the average

cost recovery ratio in provision of various infrastructural services through the

use of proxy indicators.

The second part is subdivided into three parts i.e. selection of case cities,

overall finances analysis of municipal budgets in case cities and evaluating the

levels of under spending done by the municipal corporations on core urban

infrastructural services.

Selection of Case Cities

For selecting the case cities, the rationale is to select one municipal

corporation from each class of population size in the state of Gujarat. Apart

from the population size, the income and expenditure of the municipal

corporations on per capita basis and the geographical spread of the study areas

have been kept in mind while selecting the case cities.

Thus the following parameters were used to select the towns:

1. Population

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2. Per Capita income and expenditure

3. Geographical Spread

Municipal corporations in which are selected for analysis using the above

mentioned parameters are Ahmedabad Municipal Corporation, Vadodara

Municipal Corporation and Jamnagar Municipal Corporation.

Overall financial Analysis

A detailed investigation into their revenue income of the municipal

corporations reveals that the share of tax sources is 26-30%, non tax sources is

13-15% while the grants constitute about 57-59% in the total revenue income

for the last five years. This implies that the municipal corporations are heavily

dependent on the state government for grants.

Bigger municipal corporations like Ahmedabad are more dependant ion grants

than smaller municipal corporations like Jamnagar. Moreover the income

through taxes is higher in smaller municipal corporations.

In revenue expenditure side analysis, establishment expenditure varied from

40-55%, while the operation and maintenance expenditure varied from 20-

30%. It was found that the establishment expenditure in smaller municipal

corporations like Jamnagar is higher than bigger municipal corporations like

Ahmedabad.

The sources of capital income are own, loan and grants. The smaller

municipal corporations are totally dependent on grants for capital investments

with less own source contribution compared to larger municipal corporations

which have a significant own source contribution.

The urban roads, water supply and waste water and drainage are the

infrastructure sectors which on which most of the capital expenditure are

done by the case cities.

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The infrastructure assessment in the selected cities indicates that the coverage

of urban infrastructure is found to be nearly sufficient for the existing

population sparing the case of Jamnagar.

Under spending

Amount of expenditure incurred by a local body is an indirect indicator of the

quality of the services offered by that local body to its citizens. A comparison

of municipal spending with the Zakaria Committee norms and norms given by

high powered expert committee, after revising them to the current period,

reveals the level of under-spending by the ULBs.

As per Zakaria committee norms, the under-spending recorded in the case

cities varied from 83% in Ahmedabad to 82% in Vadodara and 80% in

Jamnagar. The average level of under-spending for all the municipal

corporations selected for the study works out to be 81%.

Comparing the levels of municipal expenditure with the norms given by

HPEC, the under spending levels are 96% for Ahmedabad, 93% for Vadodara

and 97% for Jamnagar.

Thus the aggregate levels of under spending as per Zakaria committee is 82%

while if we compare it the norms laid down by High powered expert

committee it is 94%. From the analysis it is evident that the levels of spending

as far below than what is desired as per Zakaria committee report and HPEC.

The third and the final part of the study look at the factors which are

responsible for these under spending levels of the cities.

Factors responsible for under spending

From the analysis and literature review, the factors which contribute to this

high under spending done by the cities are identified as low cost recovery ratio

for the services rendered high dependency on grants from state and central

government and higher levels of decentralization.

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LIST OF ABBREVATIONS

ADB Asian Development Bank

AMC Ahmedabad Municipal Corporation

AUWSP Accelerated Urban Water Supply Programme

CAA Constitution Amendment Act

CFC

CUR

Central Finance Commission

Capital Utilisation Ratio

FIRE (D) Financial Institutions Reform and Expansion (Debt)

GDP Gross Domestic Product

GMFB Gujarat Municipal Finance Board

HUDCO Housing and Urban Development Corporation Limited

IDSMT Integrated Development of Small and Medium towns

JNNURM

JMC

ORR

Jawaharlal Nehru National Urban Renewal Mission

Jamnagar Municipal Corporation

Operating Revenue Ratio

NIUA National Institute of Urban Affairs

NIPFP National Institute of Public Finance and Policy

PT Property Tax

SFC State Finance Commission

UIDSMT Urban Integrated Development of Small and Medium

towns

ULB Urban Local Body

USAID

VMC

United State Agency for International Development

Vadodara Municipal Corporation

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Table of Contents 1. Introduction ......................................................................................................... 19

1.1. Brief Background ........................................................................................ 19

1.2. Importance of Municipal finance to cities .................................................. 21

1.3. Rationale ..................................................................................................... 22

1.4. Research Problem ....................................................................................... 26

1.5. Key research questions and objectives ....................................................... 27

1.5.1. Research Questions ............................................................................. 27

1.5.2. Objectives ........................................................................................... 27

1.6. Scope and limitation ................................................................................... 28

1.6.1. Scope ................................................................................................... 28

1.6.2. Limitation ............................................................................................ 28

1.7. Methodology ............................................................................................... 29

2. Literature Review................................................................................................ 30

2.1. Resources of Local Bodies .......................................................................... 30

2.1.1. Revenue Base of Municipalities ......................................................... 30

2.1.2. Expenditure Domain of Municipal corporations ................................ 31

2.1.3. Principles of Tax Assignment ............................................................. 31

2.1.4. Imbalance of Revenues and Responsibilities ...................................... 33

2.1.5. Indian Studies on Municipal Finance.................................................. 34

2.2. Urban development Institutions .................................................................. 36

2.2.1. Urban development & urban housing department .............................. 36

2.2.2. Gujarat municipal finance board (GMFB) .......................................... 37

2.2.3. Gujarat housing board ......................................................................... 37

2.2.4. Gujarat urban development company ................................................. 37

2.2.5. Gujarat urban development mission (GUDM) .................................... 37

2.3. Schemes for urban development ................................................................. 39

2.3.1. Urban infrastructure development scheme for small and medium

towns (UIDSSMT) .............................................................................................. 39

2.3.2. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) ...... 40

3. Cross sectional Analysis of Municipal corporations of Gujarat ......................... 44

3.1. Revenue performance ................................................................................. 44

3.1.1. Per capita total receipt ......................................................................... 45

3.1.2. Growth of per Capita total tax revenue ............................................... 46

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3.1.3. Growth of per Capita revenue income ................................................ 47

3.1.4. Composition of tax and non tax revenue of top performers ................ 48

3.1.5. Decentralisation .................................................................................. 50

3.1.6. Dependency......................................................................................... 51

3.2. Expenditure performance ............................................................................ 52

3.2.1. Level of revenue expenditure .............................................................. 52

3.2.2. Relative shares of Expenditure ........................................................... 53

3.2.3. Quality of expenditure ........................................................................ 54

3.2.4. Cost Recovery ..................................................................................... 55

4. Assessment of Municipal finances in case cities ................................................ 57

4.1. Selection of Cases ....................................................................................... 57

4.1.1. Population ........................................................................................... 57

4.1.2. Per Capita Income and Expenditure .................................................... 58

4.1.3. Geographical Spread ........................................................................... 59

4.2. Case 1: Ahmedabad Municipal Corporation ............................................... 61

4.2.1. Municipal Finance Scenario of Ahmedabad Municipal Corporation . 62

4.2.2. Revenue Income - Ahmedabad Municipal Corporation ..................... 63

4.2.3. Revenue Expenditure Ahmedabad Municipal Corporation ............. 65

4.2.4. Capital Account Ahmedabad Municipal Corporation ...................... 66

4.3. Case 2: Vadodara Municipal Corporation .................................................. 68

4.3.1. Municipal Finance Scenario of Vadodara Municipal Corporation ..... 69

4.3.2. Revenue Income Vadodara Municipal Corporation ........................ 70

4.3.3. Revenue Expenditure Vadodara Municipal Corporation ................. 72

4.3.4. Capital Account Vadodara Municipal Corporation ......................... 73

4.4. Case 3: Jamnagar Municipal Corporation ................................................... 75

4.4.1. Municipal Finance Scenario of Jamnagar Municipal Corporation ..... 76

4.4.2. Revenue Income Jamnagar Municipal Corporation ......................... 78

4.4.3. Revenue Expenditure Jamnagar Municipal Corporation ................. 79

4.4.4. Capital Account Jamnagar Municipal Corporation.......................... 80

4.5. Comparative Analysis ................................................................................. 83

4.5.1. Growth Trend in Income and Expenditure ......................................... 83

4.5.2. Operating Revenue Ratio (ORR) ........................................................ 85

4.5.3. Capital Utilisation Ratio (CUR) .......................................................... 86

Figure 4-22: Capital utilisation Ratio ......................................................................... 88

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5. Status of urban infrastructure .............................................................................. 89

5.1. Water supply ............................................................................................... 89

5.1.1. Water utilisation factor ....................................................................... 89

5.1.2. Population covered with piped water supply ...................................... 90

5.1.3. Per capita water supply ....................................................................... 91

5.2. Sanitation .................................................................................................... 92

5.3. Solid Waste Disposal .................................................................................. 93

6. Under spending ................................................................................................... 94

6.1. Zakaria Committee norms ........................................................................... 94

6.1.1. Overall under spending ....................................................................... 96

6.1.2. Sectoral under spending - Ahmedabad ............................................... 97

6.1.3. Sectoral under spending - Vadodara ................................................... 98

6.1.4. Sectoral under spending - Jamnagar ................................................... 98

6.2. HPEC Norms ............................................................................................ 100

6.2.1. Overall under spending ..................................................................... 102

6.2.2. Sectoral under spending - Ahmedabad ............................................. 103

6.2.3. Sectoral under spending - Vadodara ................................................. 104

6.2.4. Sectoral under spending - Jamnagar ................................................. 104

7. Conclusions ....................................................................................................... 106

7.1. Overall Fiscal Trend ................................................................................. 106

7.2. Revenue Income ....................................................................................... 107

7.3. Revenue Expenditure ................................................................................ 107

7.4. Under spending ......................................................................................... 107

7.4.1. Dependency and under spending ...................................................... 108

7.4.2. Decentralisation and under spending ................................................ 108

7.4.3. Cost Recovery and under spending ................................................... 109

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List of Tables

Table 1-1 Average Annual Growth Rate of GDP ............................................ 19

Table 2-1 Tax Assessment ............................................................................... 32

Table 2-2Vertical Imbalances in selected countries ........................................ 33

Table 2-3 Eligible Cities .................................................................................. 41

Table 2-4 Funding Pattern ............................................................................... 42

Table 2-5 Eligible Sectors ................................................................................ 43

Table 3-1 Composition of Income ................................................................... 49

Table 3-2 Classification of top and bottom performers ................................... 49

Table 3-3 Relative shares of Expenditure ........................................................ 54

Table 4-1: Population Categories given by Zakaria Committee ...................... 57

Table 4-2: Population of Municipal Corporations of Gujarat .......................... 58

Table 4-3: Income and Expenditure Statement of Ahmedabad Municipal

Corporation ...................................................................................................... 62

Table 4-4 Trends in the share of revenue income of Ahmedabad Municipal

Corporation ...................................................................................................... 64

Table 4-5 Expenditure details of Ahmedabad Municipal Corporation ............ 65

Table 4-6 Capital Income details Ahmedabad Municipal Corporation ........... 66

Table 4-7: Income and Expenditure Statement of Vadodara Municipal

Corporation ...................................................................................................... 70

Table 4-8 Trends in the share of revenue income of Vadodara Municipal

Corporation ...................................................................................................... 71

Table 4-9 Expenditure details of Vadodara Municipal Corporation ............... 72

Table 4-10 Capital Income details Vadodara Municipal Corporation ............. 73

Table 4-11: Income and Expenditure Statement of Jamnagar Municipal

Corporation ...................................................................................................... 77

Table 4-12 Trends in the share of revenue income of Jamnagar Municipal

Corporation ...................................................................................................... 78

Table 4-13 Expenditure details of Vadodara Municipal Corporation ............. 79

Table 4-14 Capital Income details Jamnagar Municipal Corporation ............. 81

Table 4-15 : Growth Trend in Income (CAGR of 17 Years Period) ............... 83

Table 4-16 : Growth Trend in Expenditure (CAGR of 17 Years Period) ........ 84

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Table 4-17 : Operating Revenue Ratio ............................................................ 85

Table 4-18 : Capital Utilisation Ratio .............................................................. 87

Table 5-1 : Water Utilisation Factor ................................................................ 89

Table 5-2 : Solid Waste Collection and Generation in the selected cities

(2012/13) .......................................................................................................... 93

Table 6-1 Projected Zakaria Committee norms for case cities ....................... 95

Table 6-2 Actual spending by the selected cities ............................................. 96

Table 6-3 Under spending levels of the cities. ................................................. 96

Table 6-4 Overall under spending levels of the cities...................................... 97

Table 6-5 HPEC norms for case cities .......................................................... 101

Table 6-6 Actual spending by the selected cities ........................................... 102

Table 6-7 Under spending levels of the cities. ............................................... 102

Table 6-8 Overall under spending levels of the cities.................................... 103

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List of figures

Figure 1-1 Sectoral Contribution to the economy............................................ 19

Figure 1-2 Split of Urban Rural Economies. .................................................. 20

Figure 1-3 Growth pattern of Ahmedabad and Surat City ............................... 23

Figure 1-4 Five states most likely to be more than 50% Urbanized ................ 25

Figure 1-5 GDP of Top 13 Indian Cities in 2030 ............................................ 25

Figure 2-1 Conventional Sources of municipal Finance .................................. 30

Figure 3-1 Per Capita Total receipt .................................................................. 45

Figure 3-2 Average Annual Growth rate of Tax Revenue ............................... 46

Figure 3-3 Average annual growth rate of Revenue Income ........................... 47

Figure 3-4 Average annual growth rate of Population..................................... 48

Figure 3-5 Income Composition ...................................................................... 49

Figure 3-6 Decentralization Ratio .................................................................... 50

Figure 3-7 Dependency Ratio .......................................................................... 51

Figure 3-8 Per capita Total Expenditure .......................................................... 53

Figure 3-9 Composition of Expenditure .......................................................... 55

Figure 3-10 Average annual growth rate of Population................................... 56

Figure 4-1 Per Capita Total Receipts ............................................................... 59

Figure 4-2 Per Capita Total Expenditure ......................................................... 59

Figure 4-3 Locations of Municipal corporations of Gujarat ............................ 60

Figure 4-4 Trends in Revenue account: AMC ................................................. 63

Figure 4-5 Share in Revenue Income Trends: AMC ....................................... 64

Figure 4-6 Components of Revenue Expenditure for Ahmedabad Municipal

Corporation ...................................................................................................... 65

Figure 4-7 Components of Capital Income: AMC .......................................... 67

Figure 4-8 Capital Expenditure on core urban services: AMC........................ 67

Figure 4-9 Trends in Revenue Account: VMC ................................................ 70

Figure 4-10 Share in Revenue Income Trends: VMC ..................................... 71

Figure 4-11 Components of Revenue Expenditure for Vadodara Municipal

Corporation ...................................................................................................... 72

Figure 4-12 Components of Capital Income: VMC ........................................ 74

Figure 4-13 Capital Expenditure on core urban services: VMC...................... 74

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Figure 4-14 Trends in Revenue Account: JMC ............................................... 77

Figure 4-15 Share in Revenue Income Trends: JMC....................................... 78

Figure 4-16 Components of Revenue Expenditure for Jamnagar Municipal

Corporation ...................................................................................................... 80

Figure 4-17 Components of Capital Income: JMC .......................................... 81

Figure 4-18 Capital Expenditure on core urban services: JMC ....................... 82

Figure 4-19: Growth trends in Income............................................................. 83

Figure 4-20: Growth trends .............................................................................. 84

Figure 4-21: Operating Revenue Ratio ............................................................ 86

Figure 4-22: Capital utilisation Ratio .............................................................. 88

Figure 5-1 Population Covered with piped water ............................................ 90

Figure 5-2 Water Supplied ............................................................................... 91

Figure 5-3 Coverage by sewerage system ....................................................... 92

Figure 6-1 Sectoral Under spending: Ahmedabad ........................................... 97

Figure 6-2 Sectoral under spending: Vadodara ............................................... 98

Figure 6-3 Sectoral under spending: Jamnagar ................................................ 99

Figure 6-4 Sectoral under spending: Ahmedabad .......................................... 103

Figure 6-5 Sectoral under spending: Vadodara ............................................. 104

Figure 6-6 Sectoral under spending: Jamnagar .............................................. 105

Figure 6-4 Dependency and under spending ................................................ 108

Figure 6-5 Decentralization and under spending ........................................... 109

Figure 6-6 Cost Recovery and under spending .............................................. 109

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1. Introduction

1.1. Brief Background

There has been a substantial growth in the GDP of our country over the period

of time. India has been able to achieve an average growth rate of over 5% in

past 20 years. The reasons for such successful performance can be attributed

to the macroeconomic policies the country has adopted. This progress has

been accompanied with a substantial shift in the economic base from

traditional agro based economy to urban based economy such as

manufacturing and financial services.

Year Average annual growth rate of GDP

1971-1981 3.2

1981-1991 5.4

1991-2001 5.6

2001-2011 7.5

Average 5.4

Table 1-1 Average Annual Growth Rate of GDP

(Om Prakash Mathur)

Figure 1-1 Sectoral Contribution to the economy

0

20

40

60

80

100

19

50

/51

-1

95

9/6

0

19

60

/61

-1

97

0/7

1

19

70

/71

-1

98

0/8

1

19

80

/81

-1

99

0/9

1

19

90

/91

-2

00

0/0

1

20

00

/01

-2

01

0/1

1

Sectoral contribution to the economy

Primary Secondary Tertiary

20

(Mukherjee)

Thus the base of the economy has shifted from villages to the cities. Urban

areas act as engines of economic growth for the country. Urbanization shifts

people from low productivity rural employments to higher productivity non-

agricultural employments such as manufacturing and financial services.

The urban areas are now contributing 58 percent of the gross domestic

product. These areas were contributing just 46 percent of net domestic product

in 1990.

Figure 1-2 Split of Urban Rural Economies.

(National Institute of Rural Development)

According to the 2011 census, India has a population of 1210 million. The

number of people living in urban areas of India was 2.6 crores in 1901 which

was 10.8% of the total population which has now increased to 37.7 crores in

2011 which is around 37.7% of the total population. With the increase in

urban population, there is a need to improve and increase the urban facilities in

those areas. Urban centers contribute around 50% to the GDP of India, and

this contribution is likely to grow.

But the recognition that cities have a lions share in promoting economic

development and the prioritization of the municipal sector to manage the

process of urban growth has proceeded very slow.

54 46 42 31

46 54 58 69

1990 2001 2008 2030

A split of Rural and Urban Economies

Rural Urban

21

1.2. Importance of Municipal finance to cities

There has been an increasing recognition of the contribution of urbanization to

the economic growth. Thus strengthening of the fiscal position of the

municipal corporations through various reforms is a key component in the

Government of Indias development agenda.

Moreover a strong municipal finance system is necessary for successful

functioning and administration of Indias urban policy. Over the past twenty

years, numerous initiatives have been taken to brace municipal institutions.

1. They include the 74th Constitution Amendment Act, 1992,

A Constitutional status for municipalities

Functional reform aimed at an enlarged role for municipalities

2. Amendment to the Income Tax Act, 1961 to allowing municipalities to

issue tax-free bonds

Market based financing of municipal services

3. Jawaharlal Nehru National Urban Renewal Mission (JNNURM).

Incentives for municipalities to undertake reform of property taxation

and user charge system

Public-private partnership in the provision of municipal services

Tenure security for slum dwellers

Reform of the urban land and property market

Disclosure and transparency in municipal functioning

If the local infrastructural services such as municipal roads, street lighting,

water supply and drainage are well established, it has a positive and significant

effect on city-level attractiveness to investment. Moreover for the construction

of these local infrastructural services and to access the wide gamut of funds

that are available through bilateral and multilateral financial institutions, the

balance sheets of the municipal corporations need to be healthy.

22

Thus municipal finance affects the level of investments in the city.

1.3. Rationale

Why Planners should study municipal finance?

Planning is often described making a plan which can be created for both short

term and long term. Planning can be of various forms. Planning has several

branches which includes urban and regional planning, environmental planning

which deals with management of natural resources and its protection, urban

transportation planning which deals with development and management of the

urban and regional transportation system etc.

Generally, most of the planners spend their entire time thinking on technical

requirements of the process in which they work.

For example, planning for an urban transportation can be challenging. Traffic

flows need to be studied. Multi-modal integration need to be considered. In

most of the cases planning activities have a financial dimension that is not as

well understood by planners. Activities undertaken by planners can affect the

revenues and expenditures of urban local bodies in many ways. The financial

aspects and implications of the planning are not well understood by the

planners. It is a general belief that planners do the physical planning activities

such as zoning administration, chartered accountants make budgets and

financial operation plans etc.

However planners can increase the probability of their plan getting

implemented if they better understand how municipal budgets and related

financial mechanisms work. Thus knowledge of municipal finance can act as a

bridge between urban infrastructure plans and projects.

(Jack R Huddleston)

23

Why this study focuses on Municipal Corporation?

Municipal corporations are larger forms of urban local bodies. They act as

major economic hubs for the state. Although the total urban population

increased more than 11 fold between 1901 and 2001 the increase in the

number of towns has been steady across the decades. So it is clear that the

population growth is concentrated in cities and the growth in urban population

is happening due to expansion of cities in all direction and not because of

addition of new smaller towns. Apart from this the industrial development is

also concentrated in areas around the corporation cities of Ahmedabad, Surat,

Vadodara, Bhavnagar, Rajkot and Jamnagar to continue overtime. The growth

of cities has added an additional burden on the finances of the city and its

stressed infrastructure services.

(Rakesh Mohan and Shubhagato Dasgupta)

Figure 1-3 Growth pattern of Ahmedabad and Surat City

From the study of growth pattern of top two municipal corporation of the state

it is evident that the growth has been due to enlargement of existing cities and

not because of addition of new towns.

24

Why this study focuses on Municipal Corporation of Gujarat?

Reason I

Since its inception in the year 1961, Gujarat has distinguished itself as a

leading industrial state in the country. Beginning from the traditional textile

base, it has diversified into fields like chemicals, petrochemicals, dyes & dye

intermediates, pharmaceuticals, engineering, food processing, agro-based

industries, dairy, edible oils etc.

In spite of the industrial incentives for the backward regions have been an

element in the States industrial policy these were not found to be fiscally

sound. The focus of industrial development is concentrated in areas around the

corporation cities of Ahmedabad, Surat, Vadodara, Bhavnagar, Rajkot and

Jamnagar and the same is assumed to continue overtime.

(H.M. Shivanand Swamy)

Reason II

As per the Mckinsey urban awakening report

Gujarat would be having urban GDP of 16494 Billion Rupees by 2030.

Second highest in terms of Urban GDP contribution after Maharastra

which is 26660 Billion Rupees.

Ratio of Urban GDP to the total GDP would be 77%, which would be

highest in the country

25

Figure 1-4 Five states most likely to be more than 50% Urbanized

Reason III

Out of Top 13 cities contributing to the GDP of India in 2030, three cities

happen to be from the state of Gujarat. Gujarat presently contributes about 7%

to the GDP of India (2013) and the contribution is likely to increase in future.

For sustaining this urban based growth, the municipal corporations need to be

more efficient in the service delivery and managing the budgets.

Figure 1-5 GDP of Top 13 Indian Cities in 2030

(India's Urban awakening report: Building inclusive cities and sustaining

growth)

Keeping in mind the above situations, Gujarat becomes important case to

study.

5344 44

37 36

67 6658 57 52

Tamilnadu Gujarat Maharastra Karnataka Punjab

Five States most likely to be more than 50 % Urbanised

Scenario - 2008 Scenario - 2030

296265

169127

76 73 68 67 53 37 35 24 15

GDP by 2030 (Billion USD)

26

1.4. Research Problem

The 74th Constitutional Amendment Act was an effort towards empowerment

of urban local bodies through functional devolution. However, it listed only

the expenditure responsibilities of municipalities, without specifying any

sources of revenue for the same.

Because of the unevenness in functions and finances, there is higher

dependence of urban local bodies on respective state governments which in

turn results in higher dependence of state government on central government.

The reasons why municipal finance is not growing in line with the growth of

population and economy is:

1. Lack of income elasticity: The growth of municipal revenues does not

match the increase of incomes or economic activities.

2. Lack of buoyancy: Revenues fall behind the tax base. For example, in

case of property taxation, the rising property values are not captured in

the tax demand because properties are rarely revalued on an annual

basis, in most countries revaluation is completed only every five years.

3. Control by higher level governments: There is absence of autonomy of

municipalities in fixing the tax base, rate structure, and enforcement

procedure.

4. Inefficient financial management: This is an internal factor

contributing to municipal finance problems. Lack of qualified staff,

inefficient and poorly maintained records, inability of managing

services in a cost-effective manner, etc. are factors leading to lack of

management and availability of data in a consolidated manner.

27

The net result is deprivation of sizeable proportion of urban population from

core urban services such as water supply, sanitation, primary health, street

lighting, primary education, etc. This has led to marked worsening in the

standard and quality of life of urban residents.

To cater to the issues of provision of basic services & civic infrastructure and

maintaining the same; the Urban Local Bodies need to have a sound financial

system. As per Indian infrastructure report on a per capita basis, the

spending levels of municipalities on per capita basis are about 130 per

cent lower compared with the established norms and standards.

Hence, there is a need to understand and critically examine the municipal

finances of the cities and the factors affecting the same.

1.5. Key research questions and objectives

1.5.1. Research Questions

1. How is the performance of municipal corporations of Gujarat in terms

of fiscal efficiency indicators?

2. Is there any under spending in provisioning of basic infrastructural

services and what are the causing this factors responsible for this?

3. What are the factors responsible for this under spending?

1.5.2. Objectives

1. To examine the trends in major sources of income and expenditures of

Municipal Corporation and assess their fiscal position for the period of

five years (2007-08 to 2011-12).

28

2. To calculate the level of under spending on basic infrastructural

services such as street lighting, urban roads, storm water drainage,

water supply, drainage and sanitation.

3. To develop relationship between under spending and various income

and expenditure side indicators.

1.6. Scope and limitation

1.6.1. Scope

The proposed study will focus on three municipal corporations of different

sizes out of seven Municipal corporation of the state i.e. Ahmedabad, Surat,

Vadodara, Rajkot, Jamnagar, Bhavnagar and Junagadh1.

1.6.2. Limitation

1. The present study doesnt consider other urban local bodies such as

Class I, II, III and IV municipalities in the state.

2. The study will be limited to the secondary data availability from

different agencies of state government and Budget documents from the

respective Municipal Corporation website.

1 As the municipal corporation of Gandhinagar is newly formed, it would lack of time series

data for analysis and hence it is excluded from the present study.

29

1.7. Methodology

Objective Step Sources

To examine the trends in

major sources of income

and expenditures of

Municipal Corporation

and assess their fiscal

position for the period of

five years.

Calculating the revenue

side and expenditure

side performance.

Secondary data from

Gujarat state finance

commission and

literature review.

To calculate the level of

under spending on basic

infrastructural services

such as street lighting,

urban roads, storm water

drainage, water supply,

drainage and sanitation.

To compare the capital

and operations and

maintenance

expenditures done by

the selected municipal

corporations with the

norms laid down by

Zakaria committee after

doing suitable

projections.

Secondary data from

budgets of respective

Municipal corporations

and literature review.

To develop a relationship

between under spending

and various income and

expenditure side indicators

To conduct a regression

analysis between income

and expenditure indicators

and under spending.

Inferences from literature

30

2. Literature Review

2.1. Resources of Local Bodies

2.1.1. Revenue Base of Municipalities

The conventional sources of municipal revenue are mainly grouped into:

Own Sources: It includes the tax and non-tax sources. The state

legislations govern the tax to be levied by urban local bodies. Some non-

tax sources are fees, rents, user charges, etc. Amongst the various taxes,

most common type of tax is property tax and also stable source of income

for majority urban local bodies in the country.

Transfers: It includes transfers, in form of grant from higher level of

governments

Loans/ Borrowings: Borrowings from governments, financial institutions,

donors international agencies etc. are included in this category.

(Om Prakash Mathur, Sanjukta Ray)

Figure 2-1 Conventional Sources of municipal Finance

Own Sources of Revenue

31

In the current times, a new area of municipal revenues has come up in the

form of Market borrowings and it includes borrowings from sources of the

capital market through commercial projects, etc.

The taxes that state legislations can levy depend only on the respective acts of

ULBs within a State.

2.1.2. Expenditure Domain of Municipal corporations

The expenditure done by the municipal corporations is classified into two

components i.e. revenue expenditure and capital expenditure. The further

bifurcation of revenue expenditure is done into

Establishment

Operation and maintenance

Interest payment on loans

In the same way the capital expenditure can be bifurcated into

Capital formation costs

Repayment of principle.

Officially Municipal governments are required are governed by the mandates

of having a have a balanced budget.

2.1.3. Principles of Tax Assignment

(Musgrave, Richard A.) In his report stated that

Central government should levy those taxes which are suitable for

economic stabilization.

Central government should assign Progressive re-distributional taxes.

Lower-level governments such as urban local bodies should tax only

those activities which have low mobility amongst the jurisdictions.

32

Table 2-1 Tax Assessment

S.

No

.

Tax Type Determination of Collection and

Administration Tax Base Tax Rate

1 Customs N N N

2 Corporate Income N N N

3 Personal Income N N, P, L N

4 Wealth taxes (incl.

capital, inheritances)

N N, P N

5 Payroll N, P N, P N, P

6 Value Added Tax N N N

7 Resource Taxes:

Rent (profit) Tax N N N

Royalties/ Fees P, L P, L P, L

Alcohol, tobacco N, P N, P N, P

Gambling, betting P, L P, L P, L

Lotteries P, L P, L P, L

8 Taxation of Bads

Carbon N N N

Motor Fuels N, P, L N, P, L N, P, L

Congestion Tolls N, P, L N, P, L N, P, L

Parking Fees L L L

9 Motor Vehicles

Registration P P P

Driver's License P P P

10 Business Taxes P P P

11 Excises P P P

12 Property Tax P P P

13 Land Tax P P P

14 User Charges N, P, L N, P, L N, P, L

Note: N = National or Central, P = Provincial or State, L = Local

Source: Broadway (2000) (P. K. MOHANTY, B. M. MISRA, RAJAN GOYAL, P. D. JEROMI)

33

2.1.4. Imbalance of Revenues and Responsibilities

It is found that the central government allocates more functions to the state

government but the resources allocated to carry out function are very less.

Same is the case between the state and local government. The responsibilities

allocated by the state government to the local government far exceed the

finances allocated.

This vertical imbalance is present not only in India but over major countries of

world as given in table below. It is evident that local governments are unable

to carry out the functions assigned to them because of insufficient resources.

Table 2-2Vertical Imbalances in selected countries

Country

Share of sub-national government (per cent)

In total public

expenditure

In total tax

revenue

1990 1997 1990 1997

Argentina 46.3 43.9 38.2 41.1

Brazil 35.3 36.5 30.9 31.3

France 18.7 18.6 9.7 10.8

India 51.1 53.3 33.8 36.1

Italy 22.8 25.4 3.6 6.5

Kenya 4.4 3.5 2.2 1.9

Malaysia 20.2 19.1 3.7 2.4

South Africa 20.7 49.8 5.5 5.3

United Kingdom 29 27 5.9 3.6

United States 42 46.4 33.8 32.9

The term used above i.e. sub national government indicates two tiers of

government which is there is the countries of India and United States, while in

United Kingdom there is only one tier of sub national government.

34

2.1.5. Indian Studies on Municipal Finance

National institute of public finance conducted a study of two ninety three

urban local bodies in India which were spread over the seven States: Andhra

Pradesh, Assam, Kerala, Gujarat, Punjab, Maharashtra, and West Bengal. The

study recognized the issues related to imbalances in terms of function and

finances both horizontally and vertically. It was also highlighted in the study

that there was an insufficient utilization of existing resources by urban local

bodies.

(Om Prakash Mathur) In his report provided a structure for municipalities to

evaluate their creditworthiness for tapping the rising but increasing capital

market for urban infrastructure financing. The paper discussed the

amendments which are desired in the legal framework within which municipal

corporations borrows money from the market. In this report four municipal

corporations were selected for study i.e. Agra, Allahabad, Bangalore and

Vadodara

Mathur and Thakur studied the financial position of the urban local bodies.

The study included a review of financial management of municipalities and

anticipated load on state government finances due to implementation of the

State Finance Commission recommendations.

The study highlighted that the size of municipal sector, in terms of revenues,

was only three percent of the resources that are raised by the governments. It

was also found that the levels of municipal expenditure on core urban

infrastructural services are much less than those prescribed by the Zakaria

committee report.

(P. K. MOHANTY, B. M. MISRA, RAJAN GOYAL, P. D. JEROMI) In their

report found that finances of urban local bodies in India are grossly

inadequate. The expenses levels of municipalities were nearly 130 per cent

lesser as compared to the standards. Own revenues of municipalities are

inadequate to meet the expenditure of revenue account.

35

The revenue-expenditure gap is predominantly elevated in states like Madhya

Pradesh, Rajasthan, Uttar Pradesh and West Bengal.

All the above study conducted on municipal finance can be broadly clubbed

into four types

Type I: Those which analyze the finances of municipalities these studies are

in the nature of updating of municipal finance data in order to determine

whether the finances have improved or deteriorated.

Type II: Those which examine the specific aspects of municipal finances, e.g.,

nature of the intergovernmental transfer system, property taxation, local

finance data systems, and municipal borrowings.

Type III: Those which are aimed at estimating the level of under-spending on

municipal infrastructure and services and the financial requirements for the

same.

Type IV: Those focusing on analyzing the reports of the Central Finance

Commissions, and the State Finance Commissions especially the revenue-

sharing methodology formulated by them.

The present study is a combination of type I and III as it studies the

municipal finance data over the period of time and also accesses the levels

of under spending if any.

36

2.2. Urban development Institutions

The state government has diverse ministries and a range of departments for

suitable administration of all sectors in the state. Subsequent details focuses on

ministries, which are doing a noteworthy role in functioning and organization

of urban areas of the state.

2.2.1. Urban development & urban housing department

The state government constitutes urban development & urban housing

department (UD&UHD) in July 1983 to gear up planned growth in the state.

Along with it, the department also declares & monitors various schemes and

programmers for upgrading urban areas and for welfare of citizens of the state.

The state government constitutes urban development and area development

authorities and also selected municipalities as the area development

authorities. All of them work under the urban development & urban housing

department.

Some of the organizations and subsidiary associations which function under

the department are:

1. The directorate of municipalities

2. Gujarat housing board

3. Gujarat slum clearance board

4. Gujarat urban development mission

5. The Gujarat town planning and valuation department

6. Gujarat municipal finance board

7. Gujarat urban development company limited

As the present thesis focuses on municipal corporations, we have excluded the

Directorate of municipalities from the present study.

37

The information focuses on departments, which are performing a noteworthy

role in carrying out functions and managing of urban areas of the state are as

under.

2.2.2. Gujarat municipal finance board (GMFB)

Gujarat municipal finance board was established in 1979 under legislation

passed by the government of Gujarat. The main goals of GMFB are:

Encouraging urban local bodies (ULBs) to provide civic facilities.

Bring about administrative effectiveness and discipline

Advising ULBs to augment financial resources through taxation

Augmenting financial capital to ULBs

To arrange institutional finance for ULBs

2.2.3. Gujarat housing board

The Gujarat housing board was established on 1st May 1960 as a result of

splitting of Bombay state. The Gujarat housing board takes responsibilities

like the housing activities in the state according to the provisions of the

Gujarat housing board act, 1961.

2.2.4. Gujarat urban development company

GUDC was formed to assist urban development by assisting the state

government and accessible agencies in formulation of policy, institutional

capacity building and project execution.

2.2.5. Gujarat urban development mission (GUDM)

With the objective of supporting urban renewal and urban infrastructure

development along with achieving better standards of living in all major cities

and towns the Gujarat urban development mission (GUDM) is established

38

Several other departments which are included in development and

management of urban areas are

Women & child development department

Forest & environment

Industries & mines

Information & broadcasting

Health & family welfare

Social welfare & tribal development

39

2.3. Schemes for urban development

2.3.1. Urban infrastructure development scheme for small and

medium towns (UIDSSMT)

A. Background

The Urban infrastructural development scheme for small & medium towns

focuses on improvement of infrastructure in small cities and in a planned

manner. It is a continuation of the earlier government schemes i.e. integrated

development of small and medium towns and accelerated urban water supply

programme.

B. Aim

1. Create durable public assets and give quality oriented services in

cities & towns.

2. Improvement of infrastructure development through public private

partnership.

3. Encouragement of development which is conducted in planned manner

for the development of cities and town

C. Important features of the schemes

The period of the scheme is seven years starting from year 2005-06. The state

level nodal agency (SLNA) for plans under this scheme is Gujarat urban

development mission (GUDM). The committee assigns greater priority to

projects of

Supply of water (also includes de-salination plants) and sanitation

Road network

Constructing and improving the drains / storm water drains

Sewerage and solid waste management

40

D. Financial Provisions

The sharing of funds is on base of the ratio of 80:10:10, where 80 and 10 are

the shares between central government & state government. The balanced

10% has to be raised through project implementation agencies.

E. Preparation & submission of proposal

The urban local body will have to identify sectors which need to be given

priority, and prepare detailed project reports and submit it to state level nodal

agency. Also, state level nodal agency of the state has to help ULBs in

preparation of project proposals.

2.3.2. Jawaharlal Nehru National Urban Renewal Mission

(JNNURM)

A. Background

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) scheme

was launched on 3 December 2005 for a period of seven years (200512) with

a designed out lay of Rs 50,000 crores as an supplementary central assistance

(ACA) to state governments for 65 selected cities which includes 35 cities

with more than population of 10 lakhs, state capitals and 30 particular cities of

religious, sightseer or historic importance. It is a innovative idea to increase

the infrastructure of the significant Indian cities.

The renewal program has 2 sub-missions namely:

1. Sub-Mission for Urban Infrastructure and Governance (UIG):

Ministry of Urban Development will administer this through the Sub-

Mission Directorate for Urban Infrastructure and Governance.

41

2. The main thrust of it will be on infrastructural projects relating to water

supply and sanitation, solid waste management, sewerage, road

network, redevelopment of old city areas and urban transport

3. Sub-Mission for Basic Services to Urban Poor (BSUP): This

submission will be administered by the Ministry of Urban Employment

and Poverty .The main thrust of the this would be on integrated

improvement of slums through projects like providing shelter, basic

services and other related civic facilities with a viewpoint to provide

utilities to the urban poor.

B. Objectives

The chief objective of the operation is to create economically productive, well-

organized, equitable and responsive cities.

C. Cities Eligible for Assistance under JNNURM

Primarily total 63 cities were selected under this operation. The JNNURM will

be giving support for infrastructural development in the eligible cities/ Urban

Agglomerations (UAs) across the many states in the country and these cities/

UAs have been chosen as per the following criteria:

Table 2-3 Eligible Cities

Case Category of City

( as per 2001 census ) No. Of cities

A Cities/ UAs with 4 million plus population 7

B Cities/ UAs with 1 million plus but less than 4 million

population 28

C Selected Cities/ UAs (State Capitals and other cities/

UA of religious/ historic and tourist importance)

28

Total 63

(Source: Overview of the Policy, JNNURM)

42

D. Eligible Sectors and Projects for Assistance

Table given below represents all the eligible sectors and projects included

under the sub missions i.e. sub mission for Urban Infrastructure and

Governance and sub mission for Basic Services to Urban Poor .

E. Financial Provisions

Under JNNURM, cities are classified in 3 categories case A, B and C as

discussed in section 3.5. Funding outline, as decided by central government,

is different for all three types of cities. Under sub mission of UIG for case A

cities 50% of sum project cost will be contributed by the ULB and remaining

50% amount of total project cost will be contributed by central and state.

Likewise for other cases and for both the sub mission % share by state and

central government and by ULB agencies is decided. It has is given in the

table below.

Table 2-4 Funding Pattern

Case Category Of City

UIG BSUP

Grant ULB/

Parastatal

Grant State/

ULB/

Parastatal

Centre State Centre

A > 4 million 35 15 50 50 50

B 1-4 million 50 20 30 50 50

C

Selected cities < 1

million 80 10 10 80 20

(Source: Overview of the Policy, JNNURM)

Note: Percentage is with respect to the total project cost.

43

Table 2-5 Eligible Sectors

Sr.

No

Urban Infrastructure and

Governance (UIG)

Basic Services For Urban Poor

(BSUP)

1 Urban renewal 2

Integrated development of slums,

housing and development of

infrastructure projects in slums in the

identified cities.

2 Water supply (including

desalination plants) and sanitation

Projects involving development,

improvement, and maintenance of basic

services to the urban poor.

3 Sewerage and solid waste

management.

Slum improvement and rehabilitation of

projects.

4 Construction and improvement of

drains and storm water drains.

Projects on water supply, sewerage,

drainage, community toilets, and baths

etc.

5

Urban transportation including

roads, highways, expressways,

MRTS, and metro projects.

Projects for providing houses at

affordable cost for slum dwellers, urban

poor, economically weaker sections

(EWS) and lower income group (LIG)

categories.

6 Parking lots and spaces on PPP

basis.

Construction and improvement of

drains and storm water drains.

7 Development of heritage areas Environmental improvement of slums

and solid waste management.

8

Prevention and rehabilitation of

soil erosion and landslides only

cases of special category states

where such problems are common

Civic amenities like community halls,

child care centres etc.

9 Preservation of water bodies. Operation and Maintenance of assets

created under this component.

10 Convergence of health, education and

social security schemes for urban poor.

2 It is redevelopment of inner (old) city areas, shifting of industrial and commercial

establishments, replacement of old water supply, sewerage and drainage pipes etc

44

3. Cross sectional Analysis of Municipal corporations

of Gujarat

The revenue and expenditure part of Municipal Corporation are analyzed in

terms of growth rate and other general indicators. Though the borrowed fund

plays an important role in the development of urban infrastructure, it is not

examined in this analysis as only few big municipal corporations of Gujarat

like Ahmedabad and Vadodara have actually gone to market and made the

borrowing. Therefore debt sustainability is excluded in this primary analysis.

3.1. Revenue performance

According to (Nallathiga) the ability of a municipality to generate revenue

depends upon an array of factors:

Fiscal powers delegated to local government

Tax efforts of municipal government itself and

Transfers out of sharable pool of revenue by the state government to

local government.

The revenue performance of the municipal corporation can be gauged through

following two groups of indicators:

Group I Group II

1. Growth of per capita total Income 5. Shared tax/gross tax revenue

(decentralization ratio)

2. Growth of per capita total tax Income 6. Grants/total expenditure

(dependency ration)

3. Growth of per capita revenue Income

4. Composition of tax and non tax

revenue of top performers

45

3.1.1. Per capita total receipt

Good level of per capita total income, which includes revenue as well as

capital income is essential for the provision of core urban infrastructural

services by a municipal corporation as per the criteria laid down by the

Zakaria committee and HPEC report. In the absence of strong income from

internal sources, the poorly performing ULBs have to augment their revenue

by improving the levy and collection of taxes and utilize new taxes to

strengthen the fiscal position

Owing to the lack of time series data for all Municipal Corporation of the

state in terms of revenue income and capital income, the incomes for the

year 2011-12 is taken as a reference for this analysis. The average per

capita income of the municipal corporations of Gujarat for the year 2011-

12 is 4303 Rs/Capita.

It is evident that Ahmedabad, Vadodara, Rajkot and Jamnagar have fared well

in terms of per capita total -revenue receipt, while Surat and Bhavnagar have

below average. Junagadh is having the least per capita total revenue income

for the year 2011-12.

Figure 3-1 Per Capita Total receipt

0

1000

2000

3000

4000

5000

6000

7000

Rs

Municipal Corporation

Per Capita Total Receipt

Rs/Capita

Average

46

3.1.2. Growth of per Capita total tax revenue

Good growth of tax revenue is a main indicator which reflects the strength of a

municipal corporation to undertake service provisioning responsibilities.

Octroi has been abolished in the municipal corporations of Gujarat since the

year 2007-08. Since then, the state government has been providing octroi

compensation grant to municipal corporations. After the abolition of octroi

the most buoyant revenue source, property tax has become the main revenue

source for municipal corporations of Gujarat.

Figure 3-2 Average Annual Growth rate of Tax Revenue

For calculating the growth rate of per capita Tax revenue the data of

three years i.e. 2008-09, 2009-10 and 2010-11 have been analyzed, because

the previous data had revenue from octroi included in the tax income

which was subsequently abolished. It is clear that Rajkot is having the

highest growth rate of tax revenue followed by Ahmedabad and Junagadh.

Vadodara is having the least average annual growth rate of Tax revenue. As

Vadodara has shown a low tax revenue growth, it is imperative that Vadodara

municipal corporation take a full assessment of own tax revenue sources, levy

method and collection efficiency. Municipal Corporation with low growth

0

5

10

15

20

25

Pe

rce

nta

ge

Municipal Corporation

AAGR of Tax Revenue

Growth Rate

Average

47

rates have to make every effort to perform well on these parameters in order to

provide a continuous better financial performance and improved service

delivery.

3.1.3. Growth of per Capita revenue income

The growth of per capita revenue receipts is an indicator of strong situation of

the finances of a ULB. Though high growth rate of revenue income is

desirable, higher dependence on grant is not recommended in any case.

For calculating the growth rate of per capita revenue income the data of five

years i.e. 2006-07 to and 2010-11 have been analyzed. Bhavnagar is having

the highest growth rate of per capita revenue income, while Surat registered a

new growth rate in per capita revenue income.

Figure 3-3 Average annual growth rate of Revenue Income

The reason for the negative growth rate of total revenue receipt in Surat

Municipal Corporation is that the population growth rate has surpassed the

growth rate of revenue income. The population growth rate is 13.75% per

annum against the state average growth rate of 8%. On the other hand, growth

rate of revenue income is 6.75% per annum.

-10

-5

0

5

10

15

20

25

Pe

rce

nta

ge

Municipal Corporation

AAGR of Revenue Income

Growth Rate

Average

48

Figure 3-4 Average annual growth rate of Population

From the previous analysis it was clear that the Bhavnagar municipal

corporation had a below average growth rate in terms of growth of Tax

receipt, but it is showing high growth rate of revenue income. Such situation is

to increased growth rate of grants, which is not desirable in any case.

3.1.4. Composition of tax and non tax revenue of top performers

For calculating the composition of income, total income from the sources such

as general tax, water tax, professional tax, fees and user charges for the period

of five years i.e. 2006-07 to 2010-11 is considered.

The municipal corporations having average and above average contribution of

theses own tax and non tax resources are combined to form a group of top

three municipal corporations while the others are clubbed to form a group of

bottom four Municipal Corporation.

0 2 4 6 8 10 12 14 16

Ahmedabad

Surat

Vadodara

Rajkot

Bhavnagar

Jamnagar

Junagadh

Percentage

AAGR of Population

49

Ah

med

abad

Su

rat

Vad

od

ara

Raj

ko

t

Bh

avn

agar

Jam

nag

ar

Jun

agad

h

Av

erag

e

Own Tax

General Tax 14 6 4 3 1 1 0.32 5.00

Water Tax 4 4 2 1 0.47 1 0.03 2.00

Professional Tax 2 2 1 0.27 0.04 0.10 0.05 1.00

Non Tax

Fees and User Charges 6 5 1 0.48 0.59 0.35 0.05 2.00

Table 3-1 Composition of Income

Income

Component

All Gujarat

Average

Top Three

Municipal

Corporation

(Above

Average)

Bottom Four

Municipal

Corporation

(Below

Average)

General Tax 5 % Ahmedabad Rajkot

Water Tax 2 % Surat Bhavnagar

Professional Tax 1 % Vadodara Jamnagar

Fees and User Charges 2 % Junagadh

Table 3-2 Classification of top and bottom performers

Figure 3-5 Income Composition

0123456789

General Tax Water Tax Professional Tax

Fees and User Charges

Pe

rce

nta

ge

Income Components

Income Composition

Top Three M.C

Bottom Four M.C

50

3.1.5. Decentralisation

Decentralization ratio refers to the allocation of autonomy in decision-making

with respect to the finances of the municipal corporation. Revenue

decentralization ratio is measured by ratio of municipal corporations per

capita revenue to State per capita revenue receipt.

Because of the lack of time series data, the decentralization ratio is

calculated considering 2011-12 as a base year. The average

decentralization ratio for Municipal Corporation of Gujarat is 0.2.

Higher decentralization makes the municipal corporation to rely on state

government to some extent in sharing the revenues, particularly in the absence

of well established sharing formula and strict adherence made to them by the

state government. Thus it is undesirable to have high decentralization ratio.

Figure 3-6 Decentralization Ratio

Except Rajkot and Junagadh all municipal corporation have high

decentralization ratio.

0.000.050.100.150.200.250.300.350.40

Rat

io

Municipal Corporation

Decentralisation Ratio

Ratio

Average

51

3.1.6. Dependency

The dependency is a share of grants in the revenue income. The Municipal

Corporation which display a high dependency on grants, reflects their weak

base of own revenues.

The cause of such high dependency needs a detailed study, but it appears that

they have been inefficient in mobilizing tax revenues and lack the buoyant tax

sources. Average dependency for Municipal Corporation of Gujarat is as high

as 49%. Ahmedabad, Surat and Bhavnagar represent high level of

dependency.

Figure 3-7 Dependency Ratio

01020304050607080

Pe

rce

nta

ge

Municipal Corporation

Dependency Ratio

Dependency

Average

52

3.2. Expenditure performance

Expenditure performance of Municipal Corporation can be analyzed from the

set broad indicators of:

1. Level of revenue Expenditure

2. Share of expenditure components Capital, Maintenance and

Establishment.

3. Quality of Expenditure

4. Cost Recovery

(Nallathiga)

3.2.1. Level of revenue expenditure

The level of expenditure has major effect on the finances of the municipal

corporations. The revenue expenditure, which mainly comprises of

expenditures on establishment i.e. staff salaries and administration and

maintenance, is important, as it is related to the provision of urban

infrastructural services and their subsequent maintenance. However, very

high proportion of the revenue expenditure in total expenditure can be harmful

to the expansion of capital resources and generation of potential revenue

streams.

Owing to the lack of time series data for all Municipal Corporation of the

state, the expenditures for the year 2011-12 is taken as a reference for this

analysis. The average per capita expenditure of the municipal

corporations of Gujarat for the year 2011-12 is 4113 Rs/Capita.

53

Figure 3-8 Per capita Total Expenditure

It is evident that Ahmedabad, Vadodara, Rajkot and Jamnagar have fared well

in terms of per capita total -revenue expenditure, while Surat and Bhavnagar

have below average. Junagadh is having the least per capita total revenue

expenditure for the year 2011-12.

3.2.2. Relative shares of Expenditure

The breakup of expenditure for any municipal corporations will reflect the

importance which a municipal corporations gives to various component of

expenditure i.e. establishment, operation and maintenance and expenditure on

construction of new assets.

It is advisable to have lesser establishment expenditure but a very low

establishment will affect the service delivery. In the same way low capital

expenditure will affect the quality of life of the city residents but a very high

capital expenditure will have a financial implication and the Municpla

Corporation will require a support from higher tiers of government in form of

grants.

Expenditures for the year 2011-12 are taken as a reference for this

analysis.

01000200030004000500060007000

Rs

Municipal Corporation

Per Capita Total Expenditure

Rs/Capita

Average

54

Municipal

Corporation

Establishment

Expenditure (%)

Operation and

Maintenance

Expenditure (%)

Capital

Expenditure (%)

Ahmedabad 40 7 37

Surat 37 11 38

Vadodara 32 14 44

Rajkot 21 21 58

Jamnagar 46 13 24

Junagadh 52 13 25

Table 3-3 Relative shares of Expenditure

The above table represents a relative share of expenditure components of

Municipal Corporation. It indicates that municipal corporation of Junagadh

has unsustainably high portion of establishment expenditure (more than 50%

of total expenditure), which affects the finance and service delivery.

The expenditure breakup for Bhavnagar Municipal Corporation has not

included due to unavailability of data.

Similarly Junagadh and Jamnagar have abysmally low capital expenditure

(25% and less of total expenditure), which is equally detrimental to health of

civic finances and long term sustainability. It is therefore necessary to develop

certain guidelines and norms for Municipal Corporation towards spending on

capital and its maintenance and reforming the staffing pattern.

3.2.3. Quality of expenditure

The municipal legislation of any city defines the basic functions which lie

within the purview of urban local body. The respective legislation details out

the types of services a ULB has to provide the residents of the city. These

services are of two types viz. obligatory and discretionary.

Every municipal corporation should focus their primary attention to providing

obligatory services like water supply, waste water and drainage services street

55

lights, solid waste management and primary health care. An unnecessary high

spending on non-discretionary items like transportation, education, parks and

roads is not highly desirable unless the municipal corporation has successfully

achieved a substantial amount of spending on discretionary items.

.

Figure 3-9 Composition of Expenditure

For computing the expenditure composition the total expenditures done by the

municipal corporations over the period of five years i.e. 2006-07 to 2010-11

over core urban services is considered.

It is found that Drainage and sanitation, solid waste disposal has been

accorded less priority in the expenditures of the Municipal Corporations.

3.2.4. Cost Recovery

Cost recovery ratio is very important for a municipal corporation or any other

urban local body as it is related to the self sustainability of the city. It is very

intricate to measure the cost recovery for various urban infrastructure sectors

such as water supply, waste water and solid waste management. Hence the

ratio of user charges to revenue expenditure incurred is used as a proxy

indicator.

76

43

9

Expenditure on Water Supply

Expenditure on Street Lighting

Expenditure on Drainage and

Sanitation

Expenditure on Solid waste

Disposal

Expenditure on Maintaining Community

Assests

Composition of Expenditure

Percentage of total revenue Expenditure

56

Cost recovery is an important component in the service delivery especially

where there is a scope of identifying the beneficiaries of the project and cost

can be recovered from them.

Apart from this some other options such as public private partnership can be

explored for reducing the costs.

Figure 3-10 Average annual growth rate of Population

The average cost recovery ratio for Gujarat State is 3%. The municipal

corporations of Vadodara, Rajkot and Ahmedabad represent a low cost

recovery ratio.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Pe

rce

nta

ge

Municipal Corporation

Cost Recovery Ratio

Ratio

Average

57

4. Assessment of Municipal finances in case cities

4.1. Selection of Cases

The major target of the study is to select one municipal corporation from each

class of population size in the state of Gujarat and analyze its budgets. Along

with the population the geographical spread of the study areas have been kept

in mind while selecting the case cities.

Parameters showing the income and expenditure of the municipal corporations

on per capita basis by are considered along with the above mentioned

parameters of population and geographical spread.

Thus the following parameters were used to select the towns:

4. Population

5. Per Capita income and expenditure

6. Geographical Spread

4.1.1. Population

A group of benchmark indicators both for construction of new urban

infrastructure facility and its subsequent maintenance was given by Zakaria

committee in 1964. These norms are different for different class of cities based

on the population size.

Category of cities Population Size

AA Greater than 20 Lakh

A 5-20 Lakh

B 5 Lakh and Below

Table 4-1: Population Categories given by Zakaria Committee

58

Below table gives the classification of the cities of Gujarat as per the

categories given by Zakaria committee. For the purpose of study one city is be

selected from each category.

Sr. No. City Population (2011

Census)

Category

1 Ahmedabad 5895080 AA

2 Surat 4833830 AA

3 Vadodara 1712699 A

4 Rajkot 1323384 A

5 Bhavnagar 601374 A

6 Jamnagar 532597 B

7 Junagadh 350597 B

Table 4-2: Population of Municipal Corporations of Gujarat

4.1.2. Per Capita Income and Expenditure

As the data for capital income is not available for all the municipal

corporations over a span of five years, the incomes and expenditures for the

year 2011-12 is taken as a reference for the preliminary analysis for selection

of case cities.

It is evident that Ahmedabad, Vadodara and Jamnagar have performed well