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CHAPTER - III
FINANCES OF URBAN LOCAL BODIES IN INDIA
3.1 Introduction
Public finance is a specialized subject concerning public policy wherein principle of
finance, policy and economics are often applied with respect to the finances of
governments- primarily central (or federal) and provincial (or state) governments given
the importance of these two tiers of governments, in terms of both power and finances,
the enquiry of public finance has primarily confined to finance of these governments
and interflows together with institutional aspect and so is the research on theory and
practice. Local government finance, a sub stream of public finance pertains to the
finances of local government in both rural and urban areas in relation to the upper tiers
of governments i.e. federal and state governments (Nallathiga, 2008).
The finances of urban local bodies (ULBs) have been assuming much greater
importance with the urban areas increasingly becoming important in terms of not only
population share but also economic growth. With the municipalities/ Municipal
Corporations acting as centres of government of urban areas, urban local government
finance is also referred to, sometimes, as municipal finance in India. However, the
performance (both physical and financial) of urban local government may vary between
the municipalities (of cities) and Municipal Corporation of larger urban agglomerations
as well as amongst themselves (Nallathiga, 2008).
Thus, municipal finance is about the revenue and expenditure decision of
municipal governments. It covers the sources of revenue that are used by municipal
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government such as taxes (property, income, sales, and excise taxes), user fees and
intergovernmental transfers. It includes ways of financing infrastructure through the use
of operating revenues and borrowing as well as charges on developers and public
private partnership. Municipal finance also addresses issues around expenditure at the
local level and accountability for expenditure and revenue decisions including the
municipal budgetary process and financial management (UN Habitat, 2009).
Finances of ULBs or urban public finance broadly relates to the evolution and
structure of finance of local governments, and the array of fiscal relations of local
governments. However, given the existence of ULBs in the tiered structure of
government and there interface with the citizens, the inquiry of urban public finance
also includes the dimensions like institutional arrangement and decision making and
fiscal management, reform and accountability, transparency and gap financing. The
state of ULBs in India is slightly better as a whole compared to the Panchayti Raj
institutions (PRIs). Here too, there is a great deal of heterogeneity with some doing
rather well (specially the municipal corporation) whilst other smaller municipal
councils increasing their dependency on the higher government even to deliver the
local public goods and services. This is explained by the fact the the Indian economic
growth in recent times has been driven by urban areas and with reforms some of the
ULBs have been able to help themselves improve their situation (Pethe, Mishra and
Rakhi, 2004).
The constitution of India ordains that India is a federation of states and union
territories, with residual legislative powers vesting in the central government. The
constitution, in its 7th schedule, assigns the powers and functions of the centre and
states. The schedule specifies the exclusives powers of the centre in the union list,
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exclusive powers of the states in the state list, and those falling under the joint
jurisdiction in the concurrent lists. The constitutional assignment of the tax powers in
India follows the principal of separation i.e.; the tax handles are exclusively assigned
either to the centre or to the states. Most of the broad based and the productive tax
handles have been assigned to the centre, including income taxes, wealth taxes from
non agriculture sources, corporation tax, taxes on production (excluding those on
alcoholic liquor, opium, hemp and other narcotics) and custom duties. States taxes
include taxes on agriculture income and wealth, taxes on the transfer of properties
(Stamp duties and registration fees) Taxes on motor vehicles, taxes on the
transportation of goods and passengers, sales tax on goods, excises on alcoholic
beverages, entertainment tax, taxes on professions, trades, callings and employment,
properties tax and taxes on the entry of goods in to a local area for consumption, use or
sale (Octroi). The centre has also been assigned all residual powers of taxation
(Venkatachalam, 2007).
The constitution of India specifies the taxes to be divided between the central
and state governments but it does not specifies the revenue base for ULBs. Further the
constitutional amendment act (CAA) is not specific about the types of taxes that ULBs
should have but on the other hand the power for determining the revenue base of ULBs
typically consists of their own resources (Tax and non tax revenues), shared revenues,
state grants and loans from state governments and market borrowing. In spite of the
variation in the figures compiled by different agencies, for want of a uniform
accounting and reporting framework, it is evident that municipal revenues has generally
had limited buoyancy (Vaidya, 2009).
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3.2 74th Constitutional Amendment Act
Municipal institution in India has a history of over three hundred years. These refer
ULBs comprising Municipal Corporations, municipalities and nagar panchayats.
However, the constitution did not make local self government in urban areas a clear cut
constitutional obligation. As consequence of inadequate constitutional provision for
local self government, democracy in municipal governance was not stable. As a result,
many urban local bodies become weak and were not able to perform effectively. In this
context, 74th CAA came in to force in June, 1993. The main provision include
constitution and composition of of ward committees, reservation of seats, duration of
municipally, powers and functions, finances, finance commission, elections, district
metropolitan planning committees etc. The 74th CAA expect that ULBs will assume
responsibilities for urban planning, water supply, social and economic planning, slum
up gradation, public health etc. However, the CAA did not lay down revenue base for
ULBs and power to determine the revenue base continue to remain with state
government. Study of implementation of 74th CAA in various states showed that some
states have performed better than others. An important observation is that while there
has been full compliance in respect of provision, such as constitution of three types of
ULBs, reservation of seats, and constitution of SFC, the same cannot be said for other
provisions, namely constitution of the ward committees, district planning committees
and metropolitan planning committees. Many states have not transferred functions,
funds and functionaries. Revenue powers of ULBs are often not in consonance. There
is also no consistency about term, powers and methods of election of Mayors. In most
of the states, mayors do not have executive powers as they are vested with
commissioners (Vaidya, 2009).
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Recent years following the constitution’s 74th amendment have witnessed
extraordinary interest in the role of municipal government in financing urban
infrastructure and services and enhancing the quality of India’s socio-economic ethos.
Much of the interest owes itself to the provision in the amendment act, which point
towards a larger role for municipalities in the country’s developmental affairs and a
corresponding provision that suggests larger fiscal space for them. The former is
incorporated in schedule 12 of the constitution, which lists out 18 subjects and
functions considered appropriate for municipalities. According to the schedule 12,
municipalities in India are an appropriate tier for such subjects such as urban planning
including town planning, planning for economic and social development, urban forestry
and protection of the environment and promotion of the ecological aspects, slum
improvement and up gradation, and urban poverty alleviation. Upon fuller
implementation, schedule 12 will exercise a major impact on the functional profile of
municipalities and their role in the counties in the socio-economic development.
Issue relating to the fiscal space are embodied in article 243 Y of the constitution
under which the state governments are required to constitute, once every five years a
finance commission. The finance commission of states are required to review the
financial position of the municipalities and make recommendation to the governor as
to-
1. The principal which should govern.
(a) The distribution between the state and the municipalities of the net proceeds
of the taxes, duties, tolls and fees leviable by the state, which may be
divided between them under this Act and the allocation between the
municipalities at all levels of their respective share of such proceeds
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(b) The determination of the taxes, duties, tolls and fees which may be assigned
to, or appropriated by the municipalities.
(c) The grants-in-aid to the municipalities from the consolidated fund of the
state.
2. The measures needed to improve the financial position of the municipalities,
and
3. Any other matter referred to the finance commission by the governor in the
interest of sound finance of the municipalities.
The provision of the constitution which has been incorporated in to the state
municipal statute alters the fiscal relation between the municipalities and state
governments. The three features of this provision are worth noting (a) it provide a
review of financial provision of municipalities once every five years (b) it recognizes
the need for and provides for a revenue sharing arrangement between the municipalities
and state government (c) it gives option to municipalities to explore and experiment
with measures that would improve their finances.
Yet another change which impact on the fiscal profile of municipalities lies in
the amendment of article 280 and the insertion of a sub-clause (3) (c), which requires
the finance commission set up under the provisions of article 280, to recommend
measures needed to augment the consolidated fund of a state to supplement resources
of the municipalities in the state on the basis of the recommendation made by the
finance commission of the state. The significance of this provision lies in the fact that
the central government which has thus for channelled assistance to municipalities only
via the centrally sponsored scheme and related development programme and which had
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rarely made any direct assessment of the finances of municipalities has, under the
constitution, been permitted to provide supplementary assistance for municipalities
over and above what the finance commission of a state might recommend. Pursuant to
this provision, the tenth finance commission recommended for the period 1996-2001, a
sum of 1000 crores for municipalities, the 11th finance commission covering a five year
period beginning from 2001 recommended an amount of Rs. 2000 crore, and allocated
the same between states on the basis of a fivefold criteria. The 12th finance commission
has a provided a sum of Rs5000 crore for municipalities for a period of five years
beginning from 2005 ( Mathur, 2006).
3.3 Urban Local Bodies in India
The urban local bodies (ULBs) in India were firmly conferred the status of democratic
institution of self government only in 1992, with the passing of 74th constitutional
amendment act (CAA), although their existence predated the British colonial era
(Venkatachalan, 2007). The structure of the urban government is different from that of
rural bodies, in that there is no tier system. There are three types of urban local bodies
with different sizes. From municipal corporation (which do have smaller units such as
wards within them) down to municipalities and then town and notified area
communities, but the latter are not component of municipal corporations (Singh, 1997).
However, urban areas with population over five lakhs and last three year’s average
annual incomes over Rs 300 million are classified as Municipal Corporation, and those
with population over 30000 and income over Rs 5 million as municipalities. This land
mark 74th CAA provide for direct election to the general bodies of their local bodies
headed by a mayor and consisting of elected councillors (Venkatachalan, 2007).
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As per the TFC reports, India has as many as 3842 ULBs, of which 139 are
municipal corporations 1595 are municipalities and 2108 are nagar panchayats (THFC,
2009). Others includes smaller ULBs such as nagar panchayats, town panchayats,
notified areas committees municipal councils, town areas committies, city and town
municipal councils, town committees, notified area councils, municipal boards, notified
area authorities (Pradhan, 2002).
3.4 Urbanization in India
With increasing attention being paid to India’s economy after the impressive surge of
the country’s top industrial corporate on the global economic scene, a new perspective
has emerged on the urbanization in the sub-continent. It now focuses on the
metropolitization process associated with the opening up of the economy and the
concomitant high economic growth (Denis and Kamla, 2011).
Thus, urbanisation is an index of transformation from traditional economies to
modern industrial one. It is progressive concentration of population in urban unit.
Quantification of urbanisation is very difficult. It is a long term process. Urbanisation is
a process of switch from spread out pattern of human settlements to one of
concentration in urban centres (Dutta, 2009).
The onset of modern and universal process of urbanisation is relatively a recent
phenomenon and is closely related with industrial revolution and associated economic
development. Historical evidence suggests that urbanisation process is inititable and
universal. Currently, developed countries are characterized by high level of
urbanisation and some of them are in five stage of urbanisation process and
experiencing slowing down of urbanisation due to host of factors. A majority of the
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developing countries, on the other hand started experiencing urbanisation only since the
middle of 20th century.
Thus, urbanisation is both a driver and consequence of economic growth.
Expansion of economic activities and industrialisation lead to evolution of cities as
growth centre. This urban centre facilitate sustained economic growth in three major
ways- through the real estate sector, by raising productivity of output and employment,
through the financial sector, by mobilising and channelling saving and allowing
accumulation of wealth in the form of urban real estate, and through fiscal flows,
providing major share of government tax revenue. The development of an urban area is
also closely linked with the rural economy for exchange of goods, services, labour,
capital, information-technology and social transaction. If properly managed, the
process of urban development provides the key to overall and national regional
development (Prem and Govil, 2008).
In India, about 285 million people who are living in urban areas of India which
is the second largest urban population in the world (Census, 2001). The urban
population is expected to rise to around 38 % by 2026. India has to improve its urban
areas to achieve objectives of economic development. Huge investment is required in
India’s urban sector. Since public fund for these services are inadequate, ULBs have to
look for innovative approaches for financing and management of urban services
however most critical factor for introducing these innovation are a healthy municipal
revenue base and good urban governance. In response to urban problems, the
government of India launched a reform-linked urban infrastructure investment project,
jawahar lal Nehru Urban Renewal Mission (JNNURM) (Vaidya, 2009). The increase in
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urban population has been due to natural population increase, reclassification of new
town, and rural- urban migration (Pradhan, 2002).
Table 3.1
Trends in Urbanization
Year Urban population (in millions)
Urban population to total population (%)
Growth over previous decade (%)
1981 159.5 23.3 46.1
1991 217.6 25.7 36.4
2001 285.4 27.8 31.2
Source: http://urbanindia.nic.in.
The level of urbanisation is widely diverse across states. As of 2001, India has
4378 towns and cities, with 3393 class one towns with a population of one lakh or more
(table-2) 401 class second town with a population of between 99999 to 250000 and
subsequently.
Table -3.2
Town and Urban Agglomeration by Class
Class Population size Number
Class i 100000 and above 393
Class ii 50000-99999 401
Class iii 20000-49999 1151
Class iv 10000-19999 1344
Class v 5000-9999 888
Class iv Less than 5000 191
Unclassified 10
All classed 4378 Source: Census 2001, Government of India
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Projected Urban Population
The registrar general of India has projected total urban population in India and states. It
is interesting to know that 67 percent of total population growth in India in next 25
years is expected to take place in urban areas. Urban population expected to increase
from 285 million in 2001 to 534 in 2026 (table-3)
Table-3.3
Projected Urban Population
Items 2001 2011 2021 2026
Total population (mllions)
1028.61 1192.50 1339.74 1399.83
Urban population (millions)
285.4 357.94 432.61 534.80
Urban (%) 27.82 30.02 32.29 38.21
Total AEGR(%) 1.48 1.32 1.23 1.16
Urban AEGR(%) 2.24 2.07 2.50 1.89
Source: Population Projection for India 2001-26, Registrar General of India, 2006
AEGR- Annual Exponential Growth Rate
Table-3.3 presents the projected urban and total population in India during
2011, 2021 and 2026, the total increase in population; fifty per cent during the period is
likely to occur in seven less developed states namely UP, MP, Rajasthan, Bihar,
Chhattisgarh, and Jharkhand. On the other hand the major increase in urban population
during above mentioned period is to take place in states of UP, Maharashtra,
Tamilnadu, and Gujarat and these will contribute over 45 % of urban population over
next 25 years (Vaidya, 2009).
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3.5 Functional Domain of Municipalities
In our constitution, matters of local public sphere are enumerated in the state list
because the unit states were expected to constitute local bodies and assign them the
tasks, functions and responsibilities and empower them with adequate resources so that
the local bodies could look after the task assigned to them. Since the unit states fail to
perform these jobs adequately, the state of India stepped in. The amendment involved a
uniform pattern of local bodies across the country with little spoke in details, suggested
some of the functions/ responsibilities/ task for devolution/delegation. If already not
devolved/ delegated, and exhorted that state legislature to endow the local bodies with
such power, authority and recourses as may be necessary for carrying out such
functions. In respect of schedule 5th and 6th areas the parliament has yet extend the
provision to urban local bodies (Chaubey, 2005).
The 74th amendment provides for a schedule of functions (schedule 12) i.e.,
considered appropriate for the ULBs. The list reproduced else-were, envisage the ULBs
should assume responsibilities for such functions as planning for social and economic
development, urban poverty alleviation, urban planning and regulation of land use,
slum improvement and urban forestry, in addition to their additional role as entities for
supplying basic infrastructure and services. The list is discretionary. It is the
discretionary nature of the list that led many to interpret that the reallocation of
schedule 12 responsibilities between state and municipalities is a matter for the state to
be determined, given that the states in India are at different stages of development and
given the uneven capacities and under take additional responsibilities, the incorporation
of schedule 12 function and their defacto transfer is an evolutionary and incremental
process (Mathur and Petersone, 2006).
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Present Status of Functional Domain
All major states have assigned to their urban local bodies the responsibilities of
1. Public health, sanitation, conservancy and solid waste management(item 6 of
schedule 12, item 6 of state list of schedule 7).
2. Provision of urban amenities and facilities such as parks, gardens, and play
ground (item 12 of schedule 12, item 18 of state list and item 20 of concurrent list
in schedule 7).
3. Burials and burial grounds, cremation and cremation ground and electric
cremations (item 14 of schedule 12, item 30 of concurrent list in schedule 7).
4. Vital statistics including registration of birth and deaths (item 16 of schedule 12,
item 30 of concurrent list in schedule 7).
5. Regulation of slaughter houses and tanneries (item 18 of schedule 12, item 15 of
state list in schedule 7).
While the last two regulatory in nature, the middle on is a serious problems only in
metropolis.
All most all the state have assigned to their urban local bodies, the responsibilities of
6. Urban forestry, protection of environment and promotion of ecological aspect
(item 8 of schedule 12, item 6 of state list in schedule 12) major exception being
Delhi.
7. Water supply for domestic, industrial and commercial purposes (item 5 of
schedule 12and 17 of state list schedule 12).
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8. Roads and bridges (item 4 of schedule 12 and item 13 of state list in schedule
in 7).
9. Cattle ponds and prevention of cruelty to animals (item 15 of schedule 12 and
item 15 of state list of schedule 12).
10. Public amenities including street lighting, bus stops and public conveniences
(item 17 of schedule 12 and item 5 of state list and item 20 of concurrent list in
schedule 7).
With few exceptions, the states have assigned
11. Safe-guarding of the interest of the weaker section of the society including the
handicapped and mentally retarded (item 9 of schedule 12 and item 9 of state
list and item 16 of concurrent list of schedule 7), and
12. Promotion of cultural, educational and aesthetic aspect (item 13 of schedule 12
and item 12/ 33 of state list and item 25 of concurrent list in schedule 7).
It should be noted that matters that need to be locally dispensed with are all part of the
state list. As there could hardly be a uniform division of functions and powers- both
listed in the same list, they were advisedly enumerated in the state list so that a given
state could take a contextual decision (Chaubey, 2005)
In practice, therefore, it is unrealistic to simply transfer their functions to ULBs by a
stroke of the pen. At the same time, it is fundamental to decentralisation for ULBs to
participate in the planning decision that effect their future development and future
services responsibilities (Mathur and Peterson, 2006)
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Fiscal Powers of Urban Local Bodies
The fiscal powers of ULBs have typically comprised property taxes (49), a tax on the
entry of goods in to local areas for consumption, use and sell known as octori (52),
advertisement taxes (55), taxes on non motorised vehicles (57), entertainment taxes
(55), taxes on animals and boats (58), and taxes on profession, trades, calling and
employment (60). The general postulates underline the assignment of the fiscal power
is that the revenue from these taxes should be adequate to meet the operational
expenditure of ULBs, however, given the relative inflexibility and low buoyancy of
many of these taxes and the defaulting in adjusting in local tax rate, state governments
have traditionally used a system of grants-in-aid and tax sharing arrangements for
bridging the revenue gap faced by the ULBs. In addition to grant and tax sharing the
state government utilises the instrument of specific purpose grant, often extensively, for
advancing state level goals and mandates. It is important to note that unlike in centre
state fiscal relations which are clearly set out, the state municipal acts do not provide
for transfer to ULBs or do so under specific circumstances. Transfers are thus
determined in an ad-hoc manner (Mathur and Peterson, 2006).
3.6 Growth of Expenditure
In order to comprehend the fiscal pressures generated by demographic, economic and
physical growth of the metropolitan cities of India, the trend in, and the patterns of,
both revenue and capital expenditures need to be studied in detail. A cursory look at the
data presented in many tables ostensibly reveals manifold increase in expenditure over
the years. In the following pages trends in expenditure and its growth rate are analysed
for understanding the actual growth in relation to population and price changes.
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Table-3.4
Expenditure of Urban Local Bodies (ULBs) in India
Year Total
Expenditure
(Rs in Crore)
Revenue
Expenditure
(Rs in Crore)
Capital
Expenditure
(Rs in Crore)
% Growth
Rate of Total
Expenditure
% Growth
Rate of
Revenue
Expenditure
% Growth
Rate of
Capital
Expenditure
% Share of Rev.Exp.to Total Expenditure
% Share of Capital Exp. Total Expenditure
1992-93 25070.51 17160.55 7909.55 - - 68.45 31.54
1993-94 35673.16 23955.72 11717.44 42.29 39.59 48.14 67.15 32.84
1994-95 40857.08 28774.34 12082.73 14.53 20.11 3.11 70.42 29.57
1995-96 47143.47 31373.8 15769.66 15.38 9.03 30.51 66.54 33.45
1996-97 79212.05 35823.78 43388.27 68.02 14.18 175.13 45.22 54.774
1997-98 151308.42 50084.81 101223.6 91.01 39.80 133.29 33.10 66.89
1998-99- 12034.95 9059.47 2975.47 -92.04 -81.91 -97.06 75.27 24.72
1999-
2000
14451.67 10690.3 3761.36 20.08 18 26.41 73.97 26.02
2000-01 15743.05 11665.88 4077.17 8.93 9.12 8.39 74.10 25.89
2001-02 15914.29 12204.78 3709.51 1.08 4.61 -9.01 76.69 23.30
2002-03 13997.02 10671.63 3325.4 -12.04 -12.56 -10.35 76.24 23.75
2003-04 23317.17 16627.95 6689.22 66.58 55.81 101.15 71.31 28.68
2004-05 27590.69 19074.88 8515.81 18.32 14.71 27.30 69.13 30.86
2005-06 30407.23 19776.03 10631.20 10.20 3.67 24.84 65.03 34.96
2006-07 36789.71 23513.68 13276.04 20.99 18.89 24.87 63.91 36.08
2007-08 47025.53 28431.45 18594.08 27.82 20.91 40.05 60.45 39.54
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India,
The above table 3.4 shows that total expenditure of ULBs has two components
i.e., revenue expenditure and capital expenditure. Table shows the yearly data of total
expenditure, revenue expenditure, capital expenditure and its percentage growth rate in
different years. During the entire period of the study (1992-93 to 2007-08), total
expenditure has increased from Rs25070.51 crore in 1992-93 to Rs47025.53 crore in
2007-08, revenue and capital expenditure have increased from Rs17160.95 crore in
1992-93 to Rs28431.45 crore and from Rs 7909.55 to 18594.08 crore respectively
during the referred period. Table also highlights the huge ups and downs in the volume
of expenditure as well as in the percentage change over the previous year. For instance,
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total expenditure of ULBs has increased by 42.29% in 1993-94 over the previous year
and 91.01% in 1997-98 over the previous year. The very next year there was a dramatic
fall in the expenditure of ULBs by 92.04%. Out of the two components of expenditure
of ULBs, revenue expenditure experienced major decline and fluctuations may be due
to overemphasis of the government on capital expenditure. The expenditure trend in
ULBs indicates towards the reliance of ULBs for funds on upper tier governments.
The analysis of table also indicates that on the one hand, the volume of revenue
expenditure of ULBs is increasing continuously, but on the other hand, the share of
revenue expenditure to total expenditure of ULBs is decreasing in comparison to
capital expenditure where both total capital expenditure and its share are increasing.
The increment in share of capital expenditure in total expenditure of ULBs is due to the
hike in the allocation of funds on developmental works such as construction of new
roads, water project etc. by government.
The percentage growth rate in many years should imply a rising level of
services. It cannot be denied that the levels of services have increased over the years.
However, a deeper analysis of factors behind a high percentage increase reveals that the
major proportion of increase in expenditure because of enormous growth in expenditure
on establishment and payment to the water supply and sewerage disposal undertaking
as water charges as well as arrears for consumption of water by the general wing and
the disposal of sewerage
Per Capita Expenditure of ULBs in India
Public expenditure is inevitably related with population for whom it is incurred. Total
expenditure does not give an indication of actual level of services being provided per
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person. Per capita expenditure provides very close figure of an exact analysis of service
levels.
Table-3.5
Per Capita Expenditure of ULBs in India
Year Population (Crore)
Per Capita Total Expenditure ( in Rupees)
Per Capita Revenue Expenditure ( in Rupees)
Per Capita Capital
Expenditure ( in Rupees)
1992-93 22.96 1091.92 747.42 344.49 1993-94 23.59 1512.21 1015.50 496.71 1994-95 24.24 1685.52 1187.06 598.46 1995-96 24.9 1893.31 1259.99 633.31 1996-97 25.58 3096.63 1400.46 1696.17 1997-98 26.28 5757.55 1905.81 3851.73 1998-99- 27 445.73 335.53 110.20
1999-2000 27.74 520.96 385.37 135.59 2000-01 28.5 552.38 409.32 143.05 2001-02 29.27 543.70 416.97 126.73 2002-03 30.08 465.32 354.77 110.55 2003-04 30.9 754.60 538.12 216.47 2004-05 31.74 869.27 600.97 268.29 2005-06 32.61 932.45 606.44 326.01 2006-07 33.5 1098.20 701.90 396.29 2007-08 34.42 1366.22 826.01 540.21
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India
The above table 3.5 shows the trend of per capita expenditure of total
expenditure, revenue expenditure, and capital expenditure of ULBs during 1992-93 to
2007-08. For the purpose of calculating the per capita expenditure, the census data on
population under ULBs has been used for the years 1991 and 2001. For the years
between the census counts, the estimated population has been intrapolated on the basis
of census data.
The table 3.5 shows a higher per capita expenditure during 1992-93 to 1997-98.
After 1997-98, the per capita expenditure recorded a heavy fall in all types of
expenditures of ULBs. During 1998-99 to 2007-08, the revenue expenditure of ULBs
shows an increasing trend. The higher per capita revenue expenditure as compared to
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capital expenditure of ULBs is mainly due to a heavy expenditure on establishment
expenditure i.e. salary, pension etc.
The information on the extent of availability of resources for ULBs in major
states has been presented in table 3.5 .It can be seen from the table that per capita
expenditure of ULBs at all India level was Rs 552.38 in 2000-01 which rose to Rs
1366.22 in 2007-08.
The table 3.6 shows that out of the ten selected states , six states shows a
highest per capita expenditure above the national level namely, Maharashtra(3451.54)
followed by up (2027.63), Gujarat (1865), AP (1702.55) Karnataka (1670.74), and MP
(1479.21), remaining four states shows a PCE less than the national level in 2007-08.
Table also indicate that during 1993-94 to 1997-98, the PCE of Maharashtra and AP
was very high in comparison to other states. It is evident that among all the ULBs of
selected states for which data could be available, the ULBs of Andhra Pradesh and
Maharashtra has continued to have the highest per capita expenditure between 1993-94
to 1997-98.
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Table 3.6
Per Capita Expenditure of Urban Local Bodies of Selected States
AP GUJRAT HARYANA KARNATKA MP MAHARASHTRA RAJASTHAN TAMIL
NADU
UP WEST
BENGAL
ALL
INDIA
1993-94 11681.28 336.87 705.62 164.25 227.56 3146.71 148.09 286.95 147.87 152.58 1512.21
1994-95 13961.99 376.06 600.23 164.04 252.24 3136.35 158.81 313.15 151.65 152.38 1685.52
1995-96 13807.88 420.90 579.97 198.81 283.07 4665.90 203.94 328.96 145.93 170.49 1893.31
1996-97 20129.61 464.10 897.74 243.55 358.70 9594.32 253.64 414.66 211.94 203.81 3096.63
1997-98 21217.85 549.64 649.52 268.57 393.30 27642.60 273.88 513.07 188.15 179.76 5757.55
1998-99 378.63 921.32 314.30 445.06 729.42 664.50 433.79 572.49 221.78 350.82 445.73
1999-2000 485.33 1192.55 322.77 542.94 905.01 734.72 400.20 639.01 253.57 441.84 520.96
2000-01 476.38 1114.04 331.32 550.53 928.60 903.05 468.03 660.69 272.46 430.40 552.38
2001-02 568.71 984.85 348.87 519.33 691.47 976.31 510.15 598.46 293.74 368.18 543.70
2002-03 671.14 654.1 150.12 330.46 756.94 490.64 524.82 736.09 315.94 424.84 465.32
2003-04 796.78 1076.75 316.65 700.11 454.92 1862.03 506.08 829.47 470.11 556.41 754.60
2004-05 1066.27 1136.90 395.55 1158.30 797.40 2037.40 562.62 852.71 468.90 625.07 869.27
2005-06 1064.18 1310.05 555.06 1149.19 900.49 2150.71 635.78 873.22 467.74 756.32 932.45
2006-07 1241.036 1552.464 639.53846 1333.1208 1202.242 2618.71 697.47 947.47 465.44 829.90 1098.20
2007-08 1702.553 1865.517 760.97561 1670.7465 1479.217 3451.54 787.84 1119.82 2027.63 922.76 1366.22
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India, Census Report 2001, Government of India
96
97
The analysis of per capita expenditure indicates that the growth in expenditure
in relation to population increases has not been adequate. Even though there is positive
growth in per capita expenditure, to a great extent, it is because of the greater increase
in the volume of non-development expenditure like the establishment expenditure.
3.7 Growth in Revenue
Growth in expenditure and hence the augmentation of civic services is inevitably
dependent upon the growth in revenue income of a civic authority. An elastic and
buoyant source of revenue provides the much needed funds at an increasing rate for
financing the provision of services. Having analysed the trends in expenditure, the
growth in revenue receipts is analysed for comprehending the relationship between
expenditure and revenue and the nature of revenue base and financial mobilisation of
the ULBs in India,
Table 3.7 presents the yearly data on total revenue of ULBs in India and
its internal sources of revenue, and it also indicates the percentage growth rate over the
years. During the entire period of study from 1992-93 to 2007-08, total revenue of
ULBs and their internal source of revenue i.e. own tax, non-tax, own revenue, and other
revenue are continuously increasing. During 1992-93 to 2007-08, total revenue, own
tax revenue, own non-tax revenue, own revenue and other revenue have increased from
Rs5162.53, 2638.90, 957.50, 3596.41, and 1566.11 crore to Rs44429.05, 15277.72,
8243.66, 23521.38, and 20907.67 crore respectively. The table also indicate that there
are some ups and downs in total revenue as well as percentage growth over the years.
For instance, in 1997-98 the total revenue of ULBs shows a percentage growth rate of
17.95% over the previous years, and the very next year in 1998-99, it declined by -
5.45%. Out of the components of internal sources of revenue of ULBs, the own revenue
98
and other revenues shows a major contribution to total revenue as compared to tax and
non-tax revenue of ULBs. The lower contribution of tax and non-tax is mainly because
of the weak levy and collection of taxes.
Table -3.7
Total Revenue Receipts of Urban Local Bodies in India
Year Total
revenue (Rs in Crore)
Own tax (Rs in Crore)
Own non tax (Rs in Crore)
Own revenue (Rs
in Crore)
Other revenue (Rs
in Crore) 1992-93 5162.53 2638.9 957.5 3596.41 1566.11
1993-94 6059.68
(17.37)
3175.49 (20.33)
1166.32 (21.80)
4356.16 (21.12)
1717.87 (9.69)
1994-95 7686.9
(26.85)
3900.65 (22.83)
1316.57 (12.88)
5632.34 (29.29)
2062.52 (20.06)
1995-96 8733.17
(13.61)
4454.5 (14.19)
1484.45 (12.75)
6404.25 (13.70)
2343.73 (13.63)
1996-97 10325.25
(18.23)
5100.84 (14.50)
1746.63 (17.66)
7373.75 (15.13)
2979.36 (27.12)
1997-98 12178.78
(17.95)
5891.69 (15.50)
2127.25 (21.79)
7599.37 (3.05)
3608.13 (21.10)
1998-99- 11514.64
(-5.45)
4755.52 (-19.28)
2117.9 (-0.43)
6873.42 (-9.55)
4641.22 (28.63)
1999-2000 13172.96
(14.40)
5151.01 (8.31)
2228.84 (5.23)
7379.86 (7.36)
5793.1 (24.81)
2000-01 14581.04
(10.68)
5617.57 (9.05)
2642.95 (18.57)
8260.52 (11.93)
6320.52 (9.10)
2001-02 15149.2
(3.89)
5885.81 (4.77)
2874.35 (8.75)
8760.16 (6.04)
6389.04 (1.08)
2002-03 12596.5
(-16.85)
4941.18 (-16.04)
2419.11 (-15.83)
7360.28 (-15.98)
5236.22 (-18.04)
2003-04 23111.52
(83.47)
9704.73 (96.40)
4735.09 (95.73)
14440.71 (96.19)
8670.81 (65.59)
2004-05 26755.78
(15.76)
10861 (11.91)
5424.89 (14.56)
16285.89 (12.77)
10469.89 (20.74)
2005-06 31662.98
(18.34)
12152.38 (11.89)
6082.81 (12.12)
18235.19 (11.96)
13427.79 (28.25)
2006-07 37422.34
(18.18)
14198.03 (16.83)
6632.02 (9.02)
20830.05 (14.22)
16592.29 (23.56)
2007-08 44429.05
(18.72)
15277.72 (7.60)
8243.66 (24.30)
23521.38 (12.96)
20907.67 (26)
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India
Note: figure in the parenthesis bracket indicate percentage growth rate over the previous years.
99
The uneven growth in revenue is chiefly because of the fact that in certain years
share of the ULBs in assigned taxes and the grants to it are not released in time. Hence,
when these are released in the next year or a couple of years after, the revenue receipts
of the ULBs increases suddenly.
The internal sources consist of taxes and rates, fees, rents, and other sundry
municipal revenues. The analysis of internal sources of revenue of the ULBs has
revealed that the ULBs has been overwhelmingly depending up on the external sources
(grants, assigned taxes, transfer from central governments) of income which is not
welcome trend either for local autonomy or for ensuring an effective fiscal planning at
the local level. This is chiefly due to the fact that the nature and type of the sources of
internal revenues vary at great deal between the ULBs and other civic authorities.
Apart from their own revenue sources, i.e., tax and non-tax revenue sources, the
municipal corporations depend upon funds from central governments. These funds are
primarily intended to compensate for the mismatch of functions and finance. Most of
the ULBs receive financial support in the form of revenue grants from state
governments, transfer from finance commission, and assignment and devolution from
central government to meet current expenses. Similarly, capital grants are also provided
for meeting project related expenditure.
Table 3.8 shows the external source of revenue or transfer of funds from central
government to ULBs which comprises assignment plus devolution, transfer of funds
from EFC/TFC and grants-in-aid. Table shows that the all three components are
increasing from 1998-99 to 2007-08. During 1998-99 to 2007-08, assignment plus
devolution increases from Rs2208.32 crore to Rs. 9171.11 crore where grants-in-aid
increases from Rs. 1807.86 to Rs. 5676.25 crore, the TFC/THFC grants also increases
100
Table-3.8
Transfer from Central Government to ULBs in India
Year A+D (Rs in Crore)
Transfer from TFC/THFC (Rs in Crore)
Grants-in -Aid (Rs in Crore)
1992-93 - - -
1993-94 - - -
1994-95 - - -
1995-96 - - -
1996-97 - - -
1997-98 - - -
1998-99 2208.32 - 1807.86
1999-2000 2646.6 (19.84)
- 2251.21 (24.52)
2000-01 2981.84 (12.66)
- 2239.24 (-0.53)
2001-02 2744.63 (-7.95)
- 2671.65 (19.31)
2002-03 2228.9 (-18.79)
276.5 2075.97 (-22.29)
2003-04 4172.18 (87.18)
378.43 (36.86)
2164.46 (4.26)
2004-05 4580.08 (9.77)
442.45 (16.91)
3062.92 (41.50)
2005-06 6092.26 (33.01)
766.95 (73.34)
4104.34 (34.00)
2006-07 7338.9 (20.46)
1025.49 (33.71)
4514.44 (9.99)
2007-08 9171.11 (24.96)
869.02 (-15.25)
5676.25 (25.73)
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India
Note: A+D= Assignment + Devolution
from Rs. 276.5 crore to Rs. 869.02 crore. The table also indicate that there is some
increasing and decreasing trend in revenue as well as percentage growth rate over the
previous years. For example, in 2003-04, the assignment plus devolution shows a
higher growth rate of 87.18% over the previous years and it suddenly decline in very
next year with a lower percentage growth of 9.77%. Like this, TFC/THFC also shows a
101
lower percentage growth rate of 16.91% in 2004-05, and the next year it increases of
73.34%. The sudden increase or decrease of these sources of revenue of ULBs is due to
the change in policy regarding the ULBs.
An analysis of these external sources of revenue indicate that after 2002-
03,there has been an increase in external sources because of heavy allocation of funds
to the ULBs and the dependency of ULBs on external sources has also been growing.
Table 3.9 provides some basic information relating to own revenue receipts as
percentage of total expenditure in selected states during 1993-94 to 2007-08.
The table pointed out that expenditure of Maharashtra’s ULBs met from own
sources is highest(72.75 percent) followed by Gujarat(56.14 percent), Rajasthan (46.99
percent), West Bengal(41.29 percent), Haryana (35.04 percent), Tamil Nadu (34.25
percent), and Karnataka (31.93 percent) .On the other hand the lowest financing from
own sources was recorded in Uttar Pradesh (4.71 percent) and Madhya Pradesh (9.21
percent).
The functional domain of the ULBs consists of a mix of activities which involve
different quantum and types of expenditure. In terms of the statutory provisions, ULBs
are expected to perform functions which broadly be divided in to civic functions .The
civic functions comprise in the main provision of drinking water, drainage and
sanitation, solid waste management, preventive health care etc. Maintenance functions
include maintenance of building and common property resources.
Table 3.10 pointed out that own revenue as percentage of total revenue was
recorded highest in Maharashtra (76.07 percent) followed by Gujarat(61.54 percent) ,
97
Table3.9
State-Wise Own Revenue of ULBs as Percentage of Total Expenditure
( in percentage)
1993-94 1994-95 1995-96 1996-97 1997-98
1998-99 1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
AP 0.76 0.70 0.86 0.68 0.82 64.08 52.18 64.42 60.97 60.80 48.33 50.89 59.50 47.93 44.21
GUJRAT 83.61 90.67 97.08 94.77 85.21 72.57 62.70 66.93 72.73 74.61 76.21 82.65 76.80 75.22 56.14
HARYANA 22.58 29.40 32.77 19.98 30.23 77.93 81.00 62.124 59.17 94.01 80.58 73.33 50.93 58.48 35.04
KARNATKA 56.40 48.55 39.93 39.86 36.41 70.00 49.37 44.09 49.07 56.48 59.02 37.62 36.47 28.74 31.93
KERALA 57.44 56.50 56.49 46.88 41.79 31.47 36.64 45.47 46.19 50.87 46.50 45.12 44.14 38.57 37.33
MP 41.34 40.73 20.24 21.47 23.84 39.49 37.78 39.02 48.19 49.49 25.41 11.71 11.70 10.17 9.21
MAHARASHTRA 22.66 25.80 19.80 10.97 3.38 73.00 64.65 60.23 58.86 49.68 86.21 86.17 87.97 84.25 72.75
RAJASTHAN 4142.36 4334.96 124.21 110.66 114.72 34.89 16.15 17.57 24.91 23.59 29.59 33.08 40.84 40.98 46.99
TAMIL NADU 44.41 51.77 58.36 48.56 52.62 41.10 45.15 47.40 54.03 46.60 38.71 39.66 37.99 36.97 34.25
UP 28.35 27.75 32.08 23.53 28.44 25.11 23.63 24.64 27.66 28.96 20.11 20.24 20.37 20.51 4.71
WEST BENGAL 17.44 18.42 17.98 16.42 19.76 39.53 33.78 36.79 54.10 60.21 53.13 46.18 40.02 45.77 41.29
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India
10
2
97
Table3.10
State-Wise Own Revenue of ULBs as Percentage of Total Revenue
( in percentage)
1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-
03
2003-
04
2004-05 2005-
06
2006-
07
2007-
08
AP 45.53064 46.86 49.66 50.73 52.85 67.53 66.26 68.99 69.30087 64.61 46.54 49.16 52.12 49.74 58.45
GUJRAT 69.21 70.41 78.74 80.40 67.97 79.27 74.55 73.55 76.32 77.05 79.33 77.08 74.76 76.92 61.54
HARYANA 70.41 70.90 66.88 42.17 58.39 80.72 82.27 48.97 74.37 71.65 74.44 76.71 54.12 57.77 33.52
KARNATKA 56.05 44.05 43.81 47.66 38.95 51.86 46.49 39.25 40.59 63.07 52.15 46.18 40.02 31.46 34.16
KERALA 70.38 68.97 59.51 47.60 43.64 56.46 64.52 68.39 69.61 68.62 40.86 37.40 39.06 39.68 39.52
MP 47.68 47.72 26.05 26.83 30.59 49.86 47.70 50.74 45.40 50.58 20.77 9885.80 13.22 10.94 11.56
MAHARASHTRA 93.87 90.97 90.57 90.15 70.39 71.04 68.46 72.64 73.63 61.41 83.75 79.99 80.85 77.78 76.07
RAJASTHAN 2789.47 2692.53 72.41 73.86 74.54 33.02 15.70 17.24 22.73 23.29 30.37 32.75 38.87 37.10 39.49
TAMIL NADU 56.30 59.13 60.14 54.59 53.76 47.15 50.52 49.95 60.10 48.36 43.59 45.43 41.15 38.91 38.41
UP 30.17 28.97 29.59 27.61 27.48 25.64 26.27 25.80 28.16 92.87 28.60 27.45 18.25 18.22 14.81
WEST BENGAL 23.90 8.74 9.08 8.33 8.18 47.97 30.60 35.16 38.07 52.2 56.12 54.20 47.61 54.59 51.70
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India
10
3
97
Table3.11
Per Capita Revenue of Urban Local Bodies of Selected State during 1993-94 to 2007-08
(In rupees)
AP GUJRAT HARYANA KARNATKA MP MAHARASHTRA RAJASTHAN TAMIL NADU
UP WEST BENGAL
ALL INDIA
1993-94 195.02 406.92 226.35 165.26 197.33 759.74 219.91 226.35 138.95 111.34 218.84
1994-95 209.11 484.23 248.93 180.78 215.32 889.69 255.68 274.18 145.24 321.06 249.98
1995-96 239.12 518.89 284.20 181.24 220.03 1020.09 349.85 319.25 158.24 337.59 308.71
1996-97 271 547.08 425.27 203.69 287.01 1167.80 380.00 368.82 180.63 401.78 341.40
1997-98 332.56 689.07 336.26 251.06 306.60 1327.36 421.52 502.20 194.67 433.86 392.89
1998-99 359.28 843.41 303.46 600.74 577.77 682.86 458.29 499.09 217.17 289.06 451.06
1999-2000 382.22 1003.01 317.77 576.56 716.83 693.81 411.52 571 228.05 487.68 415.09
2000-01 444.81 1013.78 420.26 618.48 714.21 748.75 476.81 626.95 260.19 450.32 462.20
2001-02 500.41 938.55 277.55 627.91 734.03 780.46 559.02 538.09 288.55 523.13 498.15
2002-03 631.58 633.38 196.96 295.92 740.62 396.88 531.69 709.29 98.52 490.05 503.63
2003-04 827.47 1034.44 342.78 792.33 556.65 1916.62 492.95 736.73 330.46 526.72 407.65
2004-05 1103.72 1219.06 378.11 943.50 604.60 2194.72 568.25 744.40 345.87 532.62 728.15
2005-06 1214.68 1345.69 522.44 1047.32 796.86 2339.98 668.01 806.08 522.03 635.83 820.47
2006-07 1195.91 1518.23 647.35 1217.89 1118.04 2836.54 770.59 900.26 523.91 695.92 945.16
2007-08 1287.70 1701.83 795.56 1561.43 1178.98 3300.84 937.5 998.65 645.35 736.98 1087.22
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India, Census Report 2001, Government of India
10
4
105
Andhra Pradesh (58.45 percent),West Bengal (51.70 percent) , Rajasthan (39.46
percent), Tamil Nadu (38.41 percent), Karnataka (34.10 percent), and Haryana (33.52
percent). The lowest percentage recorded in Madhya Pradesh (11.56), and Uttar
Pradesh (14.18 percent).
Table 3.11 presents an analysis of per capita revenue of all the ULBs in the ten
selected states shows that it ranged from Maharashtra 3384.84 rupees to Uttar Pradesh
645.35 rupees ,where as all India per capita revenue was 1087.22. It may be observed
from the table that out of ten states only five states have recorded the per capita revenue
more than the per capita revenue at national level and in the remaining states, it is lower
than the national average in 2007-08.
The lower per capita revenue of ULBs is due to the weak collection of taxes and
lower allocation of funds by central government which is insufficient to meet the
demand services by citizen in urban areas.
3.8 Fiscal Mismatch
The analysis of fiscal mismatch between own revenue and total expenditure of ULBs
present very interesting picture and shows that ULBs are facing a huge deficit and their
own resources are very low to meet out the emerging fiscal needs. Table 3.12 shows
that the fiscal mismatch between own revenue and total expenditure of ULBs at all tiers
in Andhra Pradesh and Maharashtra is high during 1993-94 to 1997-98. Both states
show a heavy decline in fiscal mismatch because of increase in central fund and their
own resources. Later it increased in almost all the selected states .Table indicates that in
2007-08, the highest fiscal mismatch recorded in UP with Rs 7786.03 crore followed
by Maharashtra Rs 4739.16 crore, Tamil Nadu Rs 27.78 crore, Karnataka
97
Table3.12
Fiscal Mismatch of Selected States during 1993-94to 2007-08
(Rs in Crore)
1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
AP 21446.1 26064.28 26146.22 38584.75 41242.43 270.61 468.75 347.42 459.39 552.38 876.83 1130.98 943.85 1440.8 2146.58
GUJRAT 85.01 55.77 20.01 40.72 140.59 449.81 813.98 696.18 520.87 332.05 524.96 416.09 662.48 861.55 1881.6
HARYANA 245.81 199.15 191.04 366.37 240.18 38.83 35.56 76.55 89.74 5.93 42.41 75.94 204.24 207.1 405.31
KARNATKA 107.42 129.97 188.67 237.26 283.47 226.96 478.27 550.88 483.94 270.36 550.79 1423.4 1474.6 1966.24 2422.39
KERALA 58.11 64.29 70.02 116 158.66 332.09 317.74 250.93 263.18 285.75 262.98 275.25 314.56 409.55 478.33
MP 206.89 233.19 352.17 442.22 473.22 701.68 900.83 911.58 576.68 619.31 553.06 1154.52 1311.97 1781.79 2229.17
MAHARASHTRA 8103.46 7981.41 13209.19 31091.15 100155.9 692.38 1033.65 1472.42 1694.72 1073.95 1149.92 1298.66 1228.74 2020.64 4739.16
RAJASTHAN -6465.35 -7465.4 -56.3 -31.93 -48.8 350.2 429.52 509.25 517.12 557.34 509.55 553.41 567.89 637.95 668.11
TAMIL NADU 336.54 330.71 310.88 501.25 593.13 852.98 918.29 945.12 775.75 1147.63 1540.19 1615.42 1765.21 2018.36 2576.78
UP 312.53 329.8 305.24 510.49 433.54 548.1 652.58 708.31 747.96 807.97 1385.85 1409.8 1433.83 1457.73 7786.03
WEST BENGAL 248.15 249.86 286.65 354.31 305.77 458.22 643.68 609.36 386.99 393.86 618.02 813.98 1115.85 1129.46 1381.44
Source: Reports of 11th, 12th and 13th Central Finance Commission, Government of India
10
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107
Rs. 2422.39 crore ,MP Rs 2229.17 crore, AP Rs 2146.58 crore and in Gujarat Rs1881.6
crore. On the other hand ,the lowest fiscal mismatch recorded in Haryana Rs405.31
crore followed by Rajasthan Rs668.11 crore ,West Bengal Rs1381.44 crore .Table also
shows an interesting fact that during 1993-94 to 1997-98 ULBs in Rajasthan shows a
surplus status.
The above analysis shows that there is a huge fiscal mismatch between own
revenue and total expenditure at all tiers of the ULBs.It means that the own financial
resources of ULBs are highly inadequate to meet out the fiscal needs. Even though the
financial devolution has been ensured to the local bodies, these bodies face fiscal
deficit. The reason behind this fiscal deficit is that the revenue of ULBs is not
increasing the same proportion as to increase in expenditure. Another reason is that the
functions which are performed by ULBs are more and the funds and revenue from
internal sources are not sufficient to meet these functions. Thus, there is a need to
reconsider the devolution criteria and transfer of resources to the ULBs for their fiscal
needs.
Borrowing plays an important role in development finance. In India, the
development expenditures of both central and states governments are largely met from
borrowed funds. Many states government intended to provide this facility to their
ULBs.