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Fiscal Health of Selected Indian Cities

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  • Simanti Bandyopadhyay

    (NIPFP)

  • M. Govinda Rao

Abstract

The paper aims to assess the fiscal health of five urban agglomerations (UAs) in India viz. Delhi, Hyderabad, Kolkata, Chennai, and Pune. Our sample consists of five corporations and sixty three smaller Urban Local Bodies (ULBs) dispersed in thirteen districts of five major states. The main objective of the paper is twofold. First, to review the status of revenue generation and expenditure responsibilities of the constituent ULBs. Second, to assess the magnitudes of their fiscal gaps by estimating the expenditure needs and revenue capacities and give some useful recommendations to reduce these gaps. Data on ULB finances for the financial year 2004-05 collected through surveys are used for the analysis. For estimation of expenditure needs the updated financial norms on the selected services specified by Zakaria Committee are used as benchmarks. For revenue capacity estimations Gross City Products (GCPs) are estimated from non-agricultural components of the District Domestic Products (DDPs). Revenue capacities are estimated by applying a tax-to-GCP ratio, which is higher than that existing in a ULB by a politically feasible margin, on the estimated GCPs. The main findings suggest that excepting five small ULBs in Hyderabad, the others are not in a position to cover their expenditure needs by their present revenue collections. All the UAs have unutilised potentials for revenue generations but with the exception of one UA i.e, Hyderabad, all the others would fail to cover their expenditure needs, even if they realise their revenue potentials. In all the UAs, except Chennai, bigger corporations are more constrained than the smaller ULBs. Besides, concrete evidence in support of the efficiency of parastatal agencies in sharing the burden of responsibilities cannot be established. The paper recommends better utilisation of own revenue handles of the cities, by improved administration of the property taxes, implementation of other taxes, and collection of user charges. The option of state governments to allow the local bodies piggybacking a small proportion on their VAT collections can also be explored. Another way to reduce the fiscal gap would be to earmark a portion of the sales proceeds from land and housing by state governments sold through their development agencies for improvement in the infrastructure of the cities. The paper also recommends that the State Finance Commissions (SFCs) should develop appropriate norms for estimating expenditure needs based on which transfers from the state to local governments can be decided.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22970.

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Date of creation: Jan 2009
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Handle: RePEc:eab:develo:22970

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Keywords: Expenditure Needs; Revenue Capacity; Fiscal Gap;

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References

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  1. Roy Bahl, 1999. "Implementation Rules For Fiscal Decentralization," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper9901, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Mills, Edwin S. & Price, Richard, 1984. "Metropolitan suburbanization and central city problems," Journal of Urban Economics, Elsevier, Elsevier, vol. 15(1), pages 1-17, January.
  3. Peter Mieszkowski & Edwin S. Mills, 1993. "The Causes of Metropolitan Suburbanization," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(3), pages 135-147, Summer.
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Cited by:
  1. Simanti Bandyopadhyay, 2012. "Performance Evaluation of Urban Local Governments: A Case for Indian Cities," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1232, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. M. Govinda Rao & Richard M. Bird, 2010. "Urban Governance and Finance in India," Governance Working Papers, East Asian Bureau of Economic Research 21851, East Asian Bureau of Economic Research.
  3. Richard M. Bird & M. Govinda Rao, 2012. "Coping with Change: The Need to Restructure Urban Governance and Finance in India," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1203, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Shah, Anwar, 2012. "Grant financing of metropolitan areas : a review of principles and worldwide practices," Policy Research Working Paper Series, The World Bank 6002, The World Bank.
  5. Simanti Bandyopadhyay, 2013. "Property Tax Reforms in India: A Comparison of Delhi and Bangalore," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1321, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  6. Roy Bahl, 2012. "Metropolitan City Finances in India: Options for A New Fiscal Architecture," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1233, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  7. Simanti Bandyopadhyay, 2013. "Estimating Fiscal Health of Cities: A Methodological Framework for Developing Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1319, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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