Urban Local Body Finances: A Comprehensive Overview

Urban Local Body Finances in India: A Primer

Introduction

Municipal Corporations (MCs) are the backbone of urban local governance in India. They provide essential civic services such as water supply, sanitation, roads, lighting, public health, and urban infrastructure. Their finances come from three main sources:

1. Own revenues: Taxes (primarily property tax) and non-tax income like user charges, fees, rent, and interest.

2. Intergovernmental transfers: Devolution and grants from state and union governments, including Finance Commission grants, assigned revenues, and compensations.

3. Capital receipts: Scheme grants for infrastructure projects, loans, and limited issuance of municipal bonds.

While a national push for audited and publicly accessible accounts has improved transparency, differences in accounting formats across states and cities still make comparisons difficult.

Core Metrics and Their Importance

Certain financial indicators reveal the fiscal strength and autonomy of urban local bodies:

• Own revenue share – Measures fiscal independence and capacity for self-financing.
• Transfer dependence – Indicates vulnerability to higher-tier government budgets.
• Capital receipts and capital expenditure – Reflect the ability to invest in new infrastructure and expand services.

Property tax accounts for approximately 69%–71% of total own tax revenue, with larger cities showing higher per capita collections and better buoyancy. Non-tax revenues (fees and user charges) make up around 21%–25% of total income, where efficient pricing and collection practices significantly influence performance. However, more than half of India’s municipal corporations still report revenue deficits.

Capital Receipts and Capital Expenditure

Capital receipts—mainly scheme grants, loans, and bonds—are largely grant-based, accounting for around 70% of the total, particularly among smaller MCs (≈82%). Larger cities, meanwhile, rely more on secured loans (≈22%).

Municipal bonds remain limited in scale due to low credit ratings and narrow investor confidence. Capital expenditure is considerably higher in large cities, though much of it appears as “work-in-progress,” reflecting the multi-year nature of infrastructure projects. Roads, bridges, and water-sewer-drainage systems form the largest components of fixed assets.

Practical Reform Priorities

• Property tax modernisation: Introduce GIS-based mapping, ensure universal coverage, conduct annual assessments, review rates regularly, limit exemptions, and enforce compliance effectively.
• User-charge rationalisation: Align tariffs with service quality and recover at least operations and maintenance (O&M) costs while reducing leakages.
• Billing and collection efficiency: Adopt end-to-end digital systems, enable prepaid or ABR models where suitable, maintain quarterly dashboards, and reward high-performing collectors.
• Assigned revenue clarity: Implement predictable, formula-based devolution and ensure timely fund releases.
• Standardised accounts: Adopt NMAM-aligned, function-wise financial reporting to enable comparability and performance benchmarking.
• Capex financing mix: Improve creditworthiness through timely audits, revenue escrow mechanisms, and DSRA norms to gradually expand access to pooled bonds and project loans.
• Expenditure discipline: Control wage and pension liabilities, ring-fence O&M funds for asset upkeep, and limit non-core spending.
• Performance incentives: Link grants to own-revenue effort, cost recovery, and disclosure standards to avoid excessive transfer dependence.

UPSC Angle: Quick Recall

• Constitutional base: 74th Amendment; Article 243X authorises states to empower ULBs to levy taxes.
• Property tax is the fiscal backbone; user charges are the main non-tax income.
• Smaller MCs rely heavily on transfers, while larger MCs generate more from own revenues.
• Coverage ratio indicates fiscal health; many MCs still run revenue deficits.
• Municipal bonds are emerging instruments, but weak credit ratings remain a constraint.

Frequently Asked Questions (FAQs)

1. What are the main income sources of municipal corporations?

Municipal corporations earn through own taxes (mainly property tax), non-tax income (user charges, fees, rent), and intergovernmental transfers from state or central governments. Capital funds come via scheme grants, loans, and limited bonds.

2. Why do smaller cities depend more on transfers?

Smaller cities have a limited tax base, lower per capita incomes, and weaker collection systems. This restricts their ability to generate own revenue, increasing dependence on government devolution and grants.

3. How can cities raise non-tax revenue without burdening citizens unfairly?

Link user charges to actual service cost and quality, offer affordable “lifeline” slabs for low-income groups, curb theft and leakages, and digitise billing to improve collection efficiency rather than merely increasing rates.

4. Why is property tax still underperforming?

Inefficiencies stem from incomplete property coverage, outdated valuations, multiple exemptions, weak enforcement, and manual records. GIS mapping and annual revision cycles can significantly expand the tax base and improve revenue buoyancy.

5. What limits the wider use of municipal bonds?

Low or unrated credit profiles, delayed financial disclosures, unpredictable intergovernmental transfers, and lack of escrowable revenue streams are key obstacles. Strengthening financial reporting and adopting pooled bond mechanisms can help.

6. What indicators show a city’s fiscal health?

Watch for own-revenue growth, coverage of revenue expenditure from own sources, adequacy of O&M spending, capital expenditure pipeline vs. work-in-progress, debt service capacity, and timeliness of audited accounts.

7. How do Finance Commission grants influence city finances?

Finance Commission grants improve liquidity and support service delivery, but over-dependence can reduce the motivation to raise own revenues. Performance-linked grants tied to reforms create better incentives for fiscal responsibility.

8. Why is it important to standardise accounting formats?

Uniform, function-wise reporting builds comparability across cities, tracks service-level cost recovery, and enhances investor confidence—vital for attracting long-term infrastructure investment.

Synopsis

Municipal corporation finances reveal a clear divide: smaller cities depend heavily on transfers, while larger ones rely more on their own revenues—particularly property tax and user charges. Many MCs still struggle to fully cover routine expenditure from own income, leading to persistent deficits. Standardised accounting, property-tax reform, rationalised user charges, stronger collection mechanisms, predictable devolution, and better transparency can strengthen fiscal capacity, unlock credit, and build durable urban infrastructure for India’s growing cities.