What This Latest RBI Report Says About Fiscal Health Of India’s Municipal Corporations

A new report from the Reserve Bank of India (RBI) delves into the finances of 232 municipal corporations (MC) from 2019-20 to 2023-24, analysing their revenue and expenditure patterns, dependency on state and central government transfers, and exploring avenues for sustainable revenue generation. 

This report becomes important at a time India is seeing an increasing demand for high-quality public services in its urban areas, as its urban population surges. That in turn brings renewed and a sharper focus on the financial health and sustainability of municipal corporations. 

Urban Contributions and Fiscal Imbalances Among Municipal Corporations

India’s urban areas contribute to around 60 per cent of the nation’s GDP, according to the NITI Aayog. Despite being essential service providers in urban areas, MCs face substantial financial constraints, relying heavily on transfers from state or central governments. 

This reliance restricts their operational autonomy. 

For instance, MCs are tasked with critical public services like water supply, sanitation, roads, health, and education, yet they generated only a modest revenue share — 0.6 per cent of GDP in 2023-24 — compared to central (9.2 per cent) and state (14.6 per cent) governments.

The revenue account of MCs remains in surplus, yet these surpluses are highly concentrated among a few corporations. The top 10 MCs, including those in Maharashtra, Karnataka, and Gujarat, represent over 58 per cent of India’s total municipal revenue receipts. 

In states like Maharashtra, MCs enjoy a surplus of Rs 11,104 crore, while others, such as Kerala and Uttar Pradesh, face significant deficits, with Kerala posting a projected deficit of Rs 789 crore for 2023-24.

Revenue Generation: Own Sources vs. Dependence on Transfers

Municipal revenue in India is generated from three primary sources:

• Own tax revenue

• Own non-tax revenue

• Transfers from state and central governments 

Property taxes, a major component of own tax revenue, account for around 16 per cent of total revenue receipts and over 60 per cent of MCs' own tax revenue. 

In 2023-24, property tax revenue was budgeted at Rs 32,450 crore, with significant contributions from states such as Karnataka (53.8 per cent), Telangana (50.3 per cent), and Tamil Nadu (44.3 per cent). Property tax shares in overall revenue receipts are notably high in Himachal Pradesh and Karnataka, where they contribute 38 and 28 percentage points, respectively. 

Own non-tax revenue includes fees, user charges, and income from investments, making up around 32 per cent of total municipal revenue. A large portion of this revenue, specifically from user charges, amounted to Rs 34,426 crore in 2023-24, with the top MCs deriving 33.3 per cent of their revenue receipts from non-tax sources.

Transfers from state and central governments also play a crucial role, comprising 28.7 per cent and 2.5 per cent of total revenue receipts, respectively, in 2023-24. 

The post-GST period has heightened reliance on these transfers, creating a shift in revenue composition. States differ in their approach to compensating MCs for GST-related revenue losses; for example, Maharashtra provides compensation, while other states allow local taxes on activities such as entertainment. 

This concentration of revenue sources among a few major MCs has created fiscal imbalances across regions. Delhi’s MCs reported the highest ratio of revenue receipts to the state’s total revenue at 34.5 per cent, followed by Maharashtra at 14.1 per cent and Gujarat at 7.8 per cent, reflecting the varying levels of financial autonomy across states.

Expenditure Trends: Rising Capital Investment and the Structure of Municipal Spending

The total expenditure by MCs, encompassing both revenue and capital spending, increased from 1.2 per cent of GDP in 2019-20 to 1.3 per cent in 2023-24. Capital expenditures have gained prominence, signalling an increased investment in infrastructure. 

Capital expenditure, which comprises investments in long-term assets such as buildings, roads, and bridges, rose from 56.1 per cent of total municipal spending in 2019-20 to 61.5 per cent in 2023-24. This shift marks a growing focus on infrastructure development and urban expansion to accommodate rising urban populations.

On the revenue expenditure side, the majority of spending is directed toward operational costs. Establishment expenses — covering salaries, pensions, and administrative costs — make up over 50 per cent of revenue spending. MCs in states like Uttar Pradesh and Maharashtra reported significant per capita capital expenditures of Rs 11,532 in 2023-24, with Maharashtra leading in absolute terms at Rs 63,371 crore. 

Borrowing Trends and Bond Financing

Municipal borrowing offers an additional revenue avenue for urban development. Borrowings from financial institutions rose substantially from Rs 2,886 crore in 2019-20 to Rs 13,364 crore in 2023-24, comprising about 5.2 per cent of total municipal receipts. Odisha and Telangana MCs reported the highest borrowings relative to their revenue, with figures of 14.4 per cent and 15.1 per cent, respectively.

Municipal bond financing also shows potential as an alternative funding source for urban projects. Bonds enable MCs to tap into financial markets for long-term project financing. 

The initial phase of municipal bond growth (1995-2005) saw Indian MCs raise over Rs 1,325 crore, and recent years have witnessed renewed interest, particularly in green bonds. These bonds finance environmentally sustainable projects, underscoring MCs' commitment to sustainable urban development.

Opportunities and Barriers to Strengthening Own Source Revenue (OSR)

The RBI report underscores the pressing need to augment OSR to reduce dependency on government transfers and enhance financial independence. Own-source revenues remain underdeveloped for Indian MCs, especially in comparison to municipal bodies in other emerging economies. 

OSR enhancements could include:

• Property taxes can be boosted through measures like Geographic Information System (GIS) mapping to maintain updated records

• Introduction of digital payment options

• Effective property valuation methods

• Improving billing practices

• Organising recovery camps 

MCs could explore user fees, rental income from municipal properties, and earnings from public assets to diversify income streams and reduce dependency on higher government tiers.

State Finance Commissions

The RBI report emphasises the need for regular State Finance Commissions (SFCs) to recommend timely and equitable transfers to MCs, creating a rule-based fiscal framework. 

This shift toward a formalised financial structure would enable MCs to plan urban development initiatives more effectively without being solely dependent on central and state government grants.