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  • 8/8/2019 Mid-Term Exam - URP0509


    Urban Management & Urban Governance

    1 | P a g eAvinash Y. Kumar


    School of Planning

    CEPT University


    Faculty: Prof. Anjana Vyas / Dr. Dinesh Mehta

    Mid-Term Examination

    Date: 8th Oct 2010

    1. Critically examine the State Municipal Finance System in India.


    The State level Municipal Finance system could be viewed as as macro- scale of viewing the situation

    of Municipal administration in terms of the financial aspect. As per the 74th

    CAA 1992 which

    identified enormous responsibilities for the urban local governments. Besides the 18 items listed as

    municipal responsibilities in the Twelfth Schedule of the Constitution, the Legislature of a State, by

    law, can assign any tasks relating to:

    (i) The preparation of plans for economic development and social justice; and

    (ii) The implementation of schemes as may be entrusted to them.

    For strengthening the finances of urban local governments, two positive features were provided in

    the 73rd and 74th Amendments to the Constitution:

    a. A provision for the constitution of State Finance Commissions (SFCs) every five years (Article

    243-I as per the 73rdAmendment) and (b) amendment of Article 280 of the Indian

    b. Constitution by inserting section 3(C) which requires the Central Finance Commission (CFC)

    to suggest measures needed to augment the consolidated fund of the states to supplementthe resources of municipalities devolved on the basis of the respective SFC


    However, the progress in the implementation of SFC recommendations in several states has not

    been very encouraging. The CFC has also grappled in making recommendations of resource transfer

    to local governments in states. However, in the absence of authentic data, successive CFCs have

    made recommendations for the transfers of funds for local bodies on ad hoc basis.

    The following illustration gives us a picture of the Fiscal dependency of ULBs in the State Municipal

    Finance Framework.

    Municipal Corporations; Municipalities; Town Area Committees; Notified Area Committees

  • 8/8/2019 Mid-Term Exam - URP0509


    Urban Management & Urban Governance

    2 | P a g eAvinash Y. Kumar


    Municipal corporations - from the ULBs mentioned above, usually exercise a good degree of fiscal

    autonomy and powers as they have a larger population and tax base, and deal with state

    governments directly. Municipalities with smaller jurisdictions have to deal with the state

    governments through the district collectors. As the revenue collectionand sharing procedure differs

    by state government, exploring these intergovernmental fiscal relationships, procedures, and

    mechanisms may provide important insights into the limited access of ULBs to resources. In India,

    ULBs are 3rd

    tier administrative divisions, responsible for providing basic infrastructure and services

    in cities and towns.

    Meanwhile, state governments have made municipal laws grounded in the 74th CAA of 1992, and

    each state has varying degrees of conformity with the legislation in terms of what are obligatory or

    discretionary functions of municipal bodies within each state.

    These differences tend to create certain deviations from the principles of efficient allocation of

    resources across different levels of the governmental administration functions; i.e., under the theory

    of fiscal federalism, certain roles and functions are better placed in the lower tiers of government

    while some can be more efficiently delivered by higher levels of government. Thus, it is equally

    important to study whether:

    i. Service provision and revenue generation and collection remain within the same jurisdiction,

    ii. Efficient resources are allocated according to the economic principles of municipal financing.

    Typical Structure at State Level

    Source: Urban (Municipal)Management Structure in India presentation: Prof. Ravikanth Joshi

  • 8/8/2019 Mid-Term Exam - URP0509





    nt & Urb

    n Go



    3 | P a g eA



    u r


    2 Des ribes

    stemofmuni ip l go

    ern n ein Indi andissues asso iated withit


    The sys

    e !"

    # $ % c % & al gove ' $ ance in India is broadly de"

    ined under the provisions of the landmark


    Constitution Amendment Act of1992 whichestablished the following threecategories of urban

    local bodies (

    Nagar nigam (Muni) ipalCorporation)

    Nagar palika (Muni0 ipalit1


    Nagar panchayat (Cit2

    Coun3 il)

    As per the provisions of this Act, it was re 4 uired that municipal areasshall be declared having regard

    to the population of the area, the density of population therein, the revenue generated for local

    administration, the percentage of employment in non-agricultural activities, the economic

    importance or such other factors as may bespecified by thestate government by public notification

    for this purpose 5

    In 1992, a major step towards the decentralization and empowerment of local governments in India

    took place with the enactment of74th Constitutional Amendment Act. The Amendment calls for

    greater responsibilities and authorities for local governments by recognizing it as a third tier

    government. Some of the important aspects include 6

    Planning for economic and social development and role of municipal government in

    implementation of urban poverty alleviation projects

    Increased responsibility for urban planning at the district and metropolitan levels

    Greater authority to mobilize and using of resources

    This Act further provides that thereshall be7

    i. A Nagar Pan8 hayat for transitional areas i.e. an area in transition from rural to urban,

    ii. A Muni9 ipalCoun9 il for a smaller Urban area and

    iii. AMuni@ ipalCorporation for a larger urban area (Mathur 1999b).

    Most stateshave amended their municipal laws in conformity with the CAA. However, variations are

    found in the definition ofsmall and large urban areas, as well as in transitional areas.

    As per Census of India 1991, there are3255 Urban Local Bodies (ULB)s in thecountry A classified into

    four major categories of

    MuniB ipal corporations


    (i.e. - Municipal council, municipal board, municipal committee)

    Town area committees

    Notified area committees



    Partially NominatedBodies

  • 8/8/2019 Mid-Term Exam - URP0509


    UrbanManagement& UrbanGoD


    4 |P a g e A


    inash Y. Kumar


    The municipal bodies of India arevested with a long list of functions delegated to them by thestate

    governments under the municipal legislation. These functions broadly relate to public health,

    welfare, regulatory functions, public safety, public infrastructure works, and development activities.


    Schedule of Constitution (Article 243 w) provides an illustrative list of18 functions that may

    beentrusted to the municipalities. Besides thesame traditional core functions of municipalities, it

    also includes development functions for e.g. - likeplanning for Economic development and Social

    justice. Somestateshave amended their municipal laws to add additional functions in the list of

    municipal functions assuggested in the twelfthschedule.

    There is a lot of difference in the assignment ofobliF G torH

    and I iP

    Q retionarH

    functions to the

    municipal bodies among thestates. Whilesomestates find certain functions as obligatory, these are

    discretionary functions in other states.

    It needs to be noted that among all urban local governments, municipal corporationsenjoy a greater

    degree of fiscal autonomy and functions although the specific fiscal and functional powers vary

    across the states, these local governmentshave larger populations, a more diversified economic

    base, and deal with


    e state governments directly. On th

    e oth


    and, municipalitiesh

    ave lessautonomy, smaller jurisdictions and have to deal with the state governments through the

    Directorate of Municipalities or through thecollector of a district. These local bodies aresubject to

    detailed supervisorycontrol and guidance by thestate governments.

    In terms offiscal federalism, functions whose benefits largelyconfine to municipal jurisdictions and may

    be termed as theessentially municipal functions. For valid reasons, certain functions ofhigher authorities

    are appropriate to beentrusted with the Municipalities as if under principal-agent contracts and may be

    called agency functions that need to be financed by intergovernmental revenues. Thus instead of

    continuing the traditional distinction between obligatory and discretionary functions the municipal

    responsibilities may be grouped into essentiallymuniR iS

    al, jointand agencyfunctions.

  • 8/8/2019 Mid-Term Exam - URP0509


    UrbanManagement& UrbanGoT


    5 |P a g e A


    inash Y. Kumar


    3. ElaboratetheprocessofFinancialAnalysis; Financial Forecasting andpreparationofFinancial

    Operating Plan


    Financial Analysis refers to an assessment of theviability, stability andprofitabilityo