As Covid-19 puts India’s largest cities under strain, municipalities must rethink finance strategies

As Covid-19 sweeps through India, the outbreak has been most intense in the country’s largest cities. The pandemic has put India’s urban public health systems under stress, both infrastructurally and economically. In addition, the municipal finance systems that support the activities necessary to fight the pandemic on the local level have also been put under pressure.

Municipalities in India raise finances through a variety of sources: they generate their own revenues from property tax, stamp duty, entertainment tax and other local cesses; they get grants from the state and Central government, they take loans from banks and other institutions as well as by raising municipal bonds. They also have revenues from sundry sources such as rents from entities that use public premises, unclaimed security deposits, fines from contractors who fail to fulfil contracts and more.

In line with the trend in big cities around the world, property tax dominates the revenue basket of India’s local governments – accounting for almost 60% of their revenues.

Mismatch between revenues, responsibilities

Public Finance experts say that municipal expenditure should be consistent with the revenues raised. But in India, out of the 18 functions assigned to municipal governments by state governments, less than half have been allotted a corresponding financing source. Due to this mismatch between revenues and responsibilities, the finances of urban local governments are declining, according to the Indian Council for Research on International Economic Relations report on the State of Municipal Finance in India in 2019.

According to the report, in 2017-’18, property taxes contributed about 1% of GDP for the members of the Organisation for Economic Cooperation and Development. But the corresponding figure in India was only 0.15%..

Given the deteriorating municipal finance revenue generation amidst the Covid-19 outbreak, municipalities must urgently rethink fiscal policy.

These are some of the strategies by which municipalities could scale up revenues based on mobilising own-source revenue and accessing the debt market. These strategies include land-based financing tools, property taxation changes and capital market-based solutions.

Land-value capture

“Land-value capture” is a financial tool that has long been used to raise revenues for urban infrastructure development in states such as Maharashtra, Gujarat and Haryana. This means that any increase in land value owing to public investments, urbanisation or civic involvement is taxed to fund infrastructure and service delivery.

The crux of the land-value capture strategy lies in appropriating public benefits from land readjustments, such as when agricultural land is opened to planned development. Benefits could also be obtained from “exactions” when a developer builds public utilities as enumerated by municipal governments. This could also come from public investment. All this leads to an increase in land value, demonstrating the social function of the land as an essential collective good.

Developing countries like China and Brazil have successfully implemented land-value capture techniques to fund their public systems. The Value Capture Finance Policy Framework (2017) discusses the different types of land-value capture tools adopted in India.

Maharashtra initiatives

Maharashtra implements land-value capture in various forms such as land value tax, a betterment levy that municipalities charge property owners for specific projects through the Mumbai Metropolitan Regional Development Authority, fees for granting development permissions and by charging a premium for relaxing the rules on how much exactly a developer can build.

The Greater Hyderabad Municipal Corporation uses alternate forms of land-value capture like taxing vacant land and taxing land devoid of buildings or agriculture. Gujarat has implemented land pooling systems to pool parcels of land and reconstitute them after development.

Revenue from property tax has been declining over the past few years. This is due to several factors, such as undervalued properties, the lack of current data on taxable properties and non-compliance.

As part of Jawaharlal Nehru National Urban Renewal Mission, Bengaluru had adopted tax reforms through the use of Geographic Information System technology to track and collect property data. It has assessed values using the unit area value method, which is “based on the expected returns from the property depending on the location and usage of the property”.

The rate of property tax collection could be improved by updating municipal tax registers and property revaluation, along with imposing taxes on non-compliers and wilful defaulters.

Accessing debt market

Debt financing through debt market instruments like municipal bonds and pooled finance allows future repayment of immediate borrowings that could be used for current expenditure. Municipal bonds are debt securities issued by municipal bodies to finance their capital expenditure. Investor confidence could be increased by floating municipal bonds that are linked to the corporation’s performance on delivering services like education, healthcare, water and sanitation and infrastructure. These bonds are usually devoid of any security in the form of any bank or state government guarantee.

In 1998, Ahmedabad Municipal Corporation first issued taxable, tax-free, and pooled finance bonds. In 2020, Ahmedabad issued such bonds for the fifth time and raised Rs 200 crores for infrastructure development.

Municipalities also raise funds as pooled finance, a technique typically followed by their counterparts in the developed nations. Pooled financing, a form of aggregation of funds from different investors, allows funds to be raised from the markets and distributed among different local bodies based on their project requirements. Municipal corporations in Tamil Nadu have successfully pooled together to access the capital markets for funding their water and sewerage projects.

Furthermore, municipal governments can also explore the options of public-private partnerships and Corporate Social Responsibility funds. The strategy of municipal corporations entering such partnerships not only helps incorporate private sector efficiencies to finance projects but also facilitates public access to subsidised private establishments.

Innovative mechanisms such as land-based financing tools, property taxation reforms and capital market-based solutions could help municipalities gain fiscal autonomy, especially in the wake of the coronavirus pandemic.

Aparna Raj C is a PhD candidate at the Centre for Policy Studies at IIT Bombay, studying business-society relationships.

Manav K is a PhD candidate at Centre for Policy Studiesat IIT Bombay, studying affordable housing policy and housing rights in India.