RBI report on Municipal Finances proposes ‘Alternative Sources of Financing’

On Thursday, the Reserve Bank of India (RBI) released the Report on Municipal Finances, which is the first-ever comprehensive analysis of Municipal finances.

The rapid growth of urbanisation in India has not been accompanied by a corresponding increase in urban infrastructure, which is reflected in the performance of the urban local bodies, especially MCs, the report said.

The size of the municipal budgets in India is much smaller than peers in other countries. The revenues are dominated by property tax collections and devolution of taxes and grants from upper tiers of government, resulting in a lack of financial autonomy, RBI said. MCs’ committed expenditure in the form of establishment expenses, administrative costs, and interest and finance charges is rising, but capital expenditure is minimal.

Municipal Corporations (MCs) mostly rely on borrowings from banks and financial institutions and loans from Centre and State governments to finance their resource gaps in the absence of a well-developed market for municipal bonds. The Report explores ‘Alternative Sources of Financing for Municipal Corporations’ as its theme asserting that the municipal corporations (MC) in the country need to explore different innovative bond and land-based financing mechanisms to augment their resources.

RBI has been publishing general government statistics of India since 1980-81, but they cover the combined fiscal positions of the union and state governments only, due to the absence of consolidated data on local governments comprising municipal corporations (MCs), municipalities/Nagar panchayats and Panchayati Raj institutions.  “In order to fill this gap, this maiden report on Municipal Finances is being published this year, with the objective of making it a regular annual publication,” said RBI. The availability of local government statistics will also help improve the coverage and sectoral classifications of India’s Flow of Funds (FoF) accounts, it added. “Hereafter, general government statistics published by the RBI will include municipal finances, incorporating MCs that account for around 70 per cent of the finances of urban local bodies in India, and all efforts will be made to expand this coverage on an ongoing basis. With this initiative, India will progressively align with the G20 Data Gaps Initiative, commencing from the year of its G20 Presidency” said RBI in its report.

The full report is accessible on the Reserve Bank’s website (www.rbi.org.in).

Source: RBI Report on Municipal Finances