Model Answer
0 min readIntroduction
Urban Local Governance (ULG) forms a crucial tier in India’s federal structure, responsible for delivering essential services to a rapidly urbanizing population. However, the effectiveness of ULBs is perpetually hampered by a chronic lack of financial autonomy and a consistent starvation of funds. The 74th Constitutional Amendment Act, 1992, aimed to strengthen ULGs, but the promise of fiscal decentralization remains largely unfulfilled. This inadequacy stems from a complex interplay of factors, including limited revenue-generating powers, dependence on state devolution, and inefficient revenue collection mechanisms, ultimately hindering their ability to perform their mandated functions effectively.
Constitutional and Legal Framework
The 74th Constitutional Amendment Act, 1992, provided constitutional status to ULBs and mandated state governments to devolve financial powers and functions to them. Article 243H specifically deals with the powers, authority, and responsibilities of municipalities. However, the Act doesn’t specify the extent of devolution, leaving it to the discretion of state governments. This has resulted in significant variations across states in terms of financial autonomy granted to ULBs.
Sources of Revenue for ULBs
The revenue sources for ULBs can be broadly categorized into own-source revenues and transferred revenues:
- Own-Source Revenues: These include property tax, water charges, drainage charges, building permits, and fees for various services. However, the contribution of own-source revenues is often limited due to low tax coverage, outdated valuation methods, and political reluctance to revise property taxes.
- Transferred Revenues: These comprise funds devolved by state governments (state finance commission grants, share of state taxes), grants from the central government (centrally sponsored schemes), and loans. ULBs are heavily reliant on these transferred revenues, making them susceptible to the fiscal health of state governments.
Challenges in Financial Autonomy
Weak Property Tax Collection
Property tax is the most significant source of own-revenue for ULBs. However, collection rates are often low due to:
- Outdated Valuation System: Property valuations are often based on outdated rates, leading to underassessment of tax liabilities.
- Poor Tax Administration: Inefficient tax administration, lack of trained personnel, and inadequate GIS mapping hinder effective tax collection.
- Political Interference: Political interference in tax assessment and collection often leads to revenue losses.
Dependence on State Devolution
ULBs are heavily dependent on funds devolved by state governments. State Finance Commissions (SFCs) are mandated to recommend principles governing the distribution of taxes, duties, tolls, and fees between the state and ULBs. However, states often delay the acceptance of SFC recommendations or accept them with significant modifications, reducing the financial autonomy of ULBs. According to the Reserve Bank of India (2018), own revenue sources contribute only around 40% of the total revenue of ULBs, with the rest coming from state and central transfers.
Limited Own-Source Revenue Generation
ULBs often lack the capacity to generate sufficient own-source revenue due to:
- Narrow Tax Base: Limited range of taxes and fees that ULBs are authorized to levy.
- Lack of Commercial Activities: Limited engagement in commercial activities to generate revenue.
- Inefficient Service Delivery: Poor service delivery discourages citizens from paying for services.
Impact of Centrally Sponsored Schemes
While centrally sponsored schemes provide funding for urban development, they often come with rigid guidelines and conditionalities, limiting the flexibility of ULBs in utilizing funds according to their local needs. Furthermore, the focus on project-based funding often neglects the need for sustainable revenue generation.
Comparative Analysis of Financial Devolution (Example)
| State | Percentage of State Own Tax Revenue devolved to ULBs (as per latest SFC recommendations) | Reliance on State Transfers (%) |
|---|---|---|
| Karnataka | 10.5% | 75% |
| Kerala | 12.5% | 65% |
| Rajasthan | 8% | 85% |
(Data as of 2022-23, based on reports from State Finance Commissions)
Potential Solutions
- Strengthening Property Tax Administration: Implementing GIS-based property mapping, revising property valuations regularly, and improving tax collection efficiency.
- Enhancing State Finance Commission Recommendations: Ensuring timely acceptance and implementation of SFC recommendations by state governments.
- Diversifying Revenue Sources: Empowering ULBs to levy additional taxes and fees, such as entertainment tax, advertisement tax, and user charges for services.
- Promoting Public-Private Partnerships (PPPs): Encouraging PPPs for infrastructure development and service delivery to reduce the financial burden on ULBs.
- Capacity Building: Providing training and capacity building programs for ULB officials in financial management and revenue generation.
Conclusion
The lack of financial autonomy continues to be a major impediment to effective urban governance in India. While the 74th Amendment provided a constitutional framework, its full potential remains unrealized due to inadequate devolution of funds and functions by state governments. Addressing this issue requires a concerted effort from all stakeholders – central and state governments, ULBs, and citizens – to strengthen revenue generation, improve financial management, and ensure sustainable urban development. A shift towards greater fiscal decentralization is crucial for empowering ULBs to deliver essential services and improve the quality of life for urban residents.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.