India - Choking Urban India

The top 20 cities of India, according to the latest data from NCAER-Future Capital Research, account for just 10 per cent of the country’s population, but contribute about 30 per cent to its total income and as much as 60 per cent to its surplus income. Yet, they’re being choked to death. The most obvious example, of course, is the regular monsoon-induced choking that floods up-market apartment blocks and roads in even the toniest parts of these cities. Contrast this with the new face of urban China with its awe-inspiring display in Beijing during the Olympics opening ceremony and the disparity becomes even starker. The real choking of India’s urban dream, however, emanates from elsewhere — from a chokehold on their finances by the central and state governments. Of course it’s true that municipalities across the country are inefficiently run (Delhi’s storm water drains are invariably cleaned during the monsoon rains), that they charge too little for the services they deliver (around 10 per cent of the cost), and that they spend far too little of their budgets on capital expenditure (about 12 per cent of the total spend across all municipal bodies). But the bigger problem is that the municipal authorities simply do not have enough money to spend. According to a study of municipal finances by the Reserve Bank of India’s Development Research Group, the aggregate income of municipal corporations is around 0.75 per cent of India’s GDP, while their share in overall tax revenues is around 60-70 per cent. Contrast this low income share in India with around 4.5 per cent in Poland, 5 per cent in Brazil and 6 per cent in South Africa, it becomes clear why urban India presents a picture of decay.
With around 380 million more persons likely to be added to India’s urban spaces over the next 40 years, to use the NCAER-Future Capital Research numbers again, it’s not surprising that the 73rd and 74th amendments to the Constitution sought to fix this by ensuring that State Finance Commissions (SFC) were set up every five years. The logic was unexceptionable. If the state finances aren’t healthy, how can those of the municipal bodies under them be? In addition, Article 280 of the Constitution was amended to ensure that the Central Finance Commission suggested measures to augment the states’ resources so that municipalities were able to get their fair share of taxes. Much of this, sadly, has remained only on paper and according to the RBI’s study even if the municipalities are able to raise their revenue collection efforts, the highest they can get to is around one per cent of GDP. Even this, though, will be an uphill task. To give one example, Delhi moved to a unit-area method of calculating house taxes some years ago. The idea was that this tax rate would rise in keeping with the city’s development needs, exactly as it does in major cities abroad. The rate, however, has remained unchanged over the years. In contrast to this stagnant revenue picture, the average investment requirement of all municipal bodies is about 2.2 times what they get from taxes. The RBI has used expenditure norms developed by the Zakaria committee way back in the 1960s and has updated them for price changes. The results it has come up with are shocking. The average per capita under-spending ranges from around 30 per cent for Pune to a whopping 94 per cent for Patna. Unless a way is found to allow local authorities raise more revenues and ensure increased grants and transfers from the centre and the states, urban India is going to choke even more. Given that half of India’s population will be urban in the next few decades and that the bulk of the country’s earnings and wealth generation will continue to come from here, maintaining the status quo is a recipe for disaster.