rbi: Time to put on city fiscal lights

Indian cities are financially emaciated. They are unable to generate the resources needed to provide quality infrastructure and services to their citizens. Thus spake RBI‘s maiden report on municipal finances. India‘s urban population is estimated to reach 80 crore in 2050 from 37.7 crore in 2011. Plenty of funds are needed, to put it mildly. But municipal revenues and expenditures have stagnated at around 1% of GDP for over a decade. Today, municipalities rely on grants and loans from the Centre and states, and borrowings from financial institutions. Their total revenue receipts stood at ₹1,41,517 crore (2019-20 BE), or 0.72% of state GDP, with less than a third of the funds locally raised. Innovative financing is desperately needed.

Municipalities need a proper fiscal base and the political will to make use of the base. RBI believes that municipal bonds (munis) could be a credible option for sustainable resource mobilisation. Preferably, munis must become an asset class for long-term investors such as pension and insurance funds looking for stable returns. Property taxes are a lucrative source against which municipalities can issue bonds to raise resources. Raising property tax rates will shore up revenues. Property owners and politicians must realise there are no free lunches. Electricity tax is in order, but as part of GST.

Creating and running efficient towns calls for fixing urban planning and governance – improved planning to build infrastructure that is resilient and administration that does away with ad hocism. Civic bodies must be empowered to make decisions and have the necessary personnel and finances to make the city liveable. In other words, they must be made accountable for the state of their city.