{"id":57000,"date":"2025-10-16T18:55:13","date_gmt":"2025-10-16T13:25:13","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=57000"},"modified":"2025-10-18T13:18:37","modified_gmt":"2025-10-18T07:48:37","slug":"fiscal-challenges","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/16-10-2025\/fiscal-challenges","title":{"rendered":"Fiscal Challenges of Indian Municipalities"},"content":{"rendered":"\n<p><strong>Syllabus: GS2\/ Governance<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Urban India drives <strong>nearly two-thirds<\/strong> of the national GDP but remains financially weak, with municipalities controlling less than one per cent of tax revenue.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Concerns over Fiscal Architecture of Municipalities<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>The 74th Constitutional Amendment Act (1992)<\/strong> empowered Urban Local Bodies (ULBs) to perform 18 functions listed in the <strong>12th Schedule<\/strong>, including water supply, waste management, and public health.\n<ul class=\"wp-block-list\">\n<li>However, the corresponding <strong>financial devolution has been weak<\/strong> and inconsistent across States, resulting in a situation where responsibility is decentralised but revenue is not.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Dependency on Higher-Level Transfers: <\/strong>Cities increasingly rely on tied and scheme-based grants, such as under the Smart Cities Mission or AMRUT, limiting local flexibility and innovation.<\/li>\n\n\n\n<li><strong>Weak Own-Revenue Base:<\/strong> Property tax, user fees, and local cesses form the backbone of ULB revenues but together constitute only 20\u201325% of potential municipal income.\n<ul class=\"wp-block-list\">\n<li>Inefficient valuation, political resistance to rate revisions, and low collection efficiency further erode fiscal capacity.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Impact of GST: <\/strong>Before GST, cities collected revenue through <strong>octroi, entry tax, advertisement tax, and local surcharges<\/strong>, which together formed about 19% of total municipal income.\n<ul class=\"wp-block-list\">\n<li>GST subsumed these taxes, depriving municipalities of independent revenue sources.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#fff2cc\"><tbody><tr><td><strong>What are the constitutional provisions?<\/strong><br>&#8211; <strong>Article 243X:<\/strong> Authorises State Legislatures to empower municipalities to levy, collect, and appropriate taxes, duties, tolls, and fees.<br>&#8211; <strong>Article 243Y:<\/strong> Mandates the <strong>State Finance Commission (SFC)<\/strong> to recommend measures for distributing State revenues between the State and municipalities and to review their financial position.<br>&#8211; <strong>Article 280(3)(c): <\/strong>Empowers the <strong>Central Finance Commission (CFC)<\/strong> to recommend measures to augment State Consolidated Funds for municipal finances based on SFC recommendations.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Municipal Bonds: The New Frontier of Local Finance<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Municipal bonds are debt instruments issued by Urban Local Bodies (ULBs) such as municipal corporations or councils to raise money from investors. However, their success depends on deeper structural reforms.<\/li>\n\n\n\n<li><strong>Current Challenges:<\/strong>\n<ul class=\"wp-block-list\">\n<li><strong>Flawed Credit Rating System: <\/strong>When agencies rate a city\u2019s financial health, they often ignore regular grants and transfers from the State or Centre. This makes cities appear weaker than they actually are, reducing their ability to attract investors.<\/li>\n\n\n\n<li><strong>Low Credibility of Cities: <\/strong>Many cities don\u2019t have strong financial records or proper audits. Investors hesitate to buy bonds because they fear the city may not be able to repay the money on time.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Way Ahead<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Adopt Global Best Practices:<\/strong> In countries like <strong>Denmark, Sweden, and Norway, <\/strong>municipalities have the authority to <strong>levy local income tax<\/strong>, ensuring direct accountability between citizens and local governments.<\/li>\n\n\n\n<li><strong>Recognise Transfers as Legitimate Income:<\/strong> Grants and shared taxes must be treated as part of city income to build credible balance sheets.<\/li>\n\n\n\n<li><strong>Reform Credit Ratings: <\/strong>City ratings should factor in governance quality, transparency, and citizen participation, not just narrow financial metrics.<\/li>\n\n\n\n<li><strong>Enable Fiscal Innovation:<\/strong> Municipalities should be allowed to earmark a portion of GST compensation or their State tax share as collateral for bond issuance.<\/li>\n<\/ul>\n\n\n\n<p><strong>Source: <\/strong><a href=\"https:\/\/www.thehindu.com\/news\/national\/why-is-the-fiscal-architecture-of-municipalities-flawed-explained\/article70168668.ece#:~:text=Promised%20compensatory\" target=\"_blank\" rel=\"noopener\"><strong>TH<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p><strong>Context<\/strong><\/p>\n<li class=\"ms-5\">Urban India drives nearly two-thirds of the national GDP but remains financially weak, with municipalities controlling less than one per cent of tax revenue.<\/li>\n<p><\/p>\n<p><strong>Concerns over Fiscal Architecture of Municipalities<\/strong><\/p>\n<li class=\"ms-5\">The 74th Constitutional Amendment Act (1992) empowered Urban Local Bodies (ULBs) to perform 18 functions listed in the 12th Schedule, including water supply, waste management, and public health.<\/li>\n<li class=\"ms-5\">However, the corresponding financial devolution has been weak and inconsistent across States, resulting in a situation where responsibility is decentralised but revenue is not.<\/li>\n<li class=\"ms-5\">Dependency on Higher-Level Transfers: Cities increasingly rely on tied and scheme-based grants, such as under the Smart Cities Mission or AMRUT, limiting local flexibility and innovation.<\/li>\n<li class=\"ms-5\">Weak Own-Revenue Base: Property tax, user fees, and local cesses form the backbone of ULB revenues but together constitute only 20\u201325% of potential municipal income.<\/li>\n<p><a href=\"https:\/\/www.nextias.com\/ca\/current-affairs\/16-10-2025\/fiscal-challenges\" class=\"btn btn-primary btn-sm float-end\">Read\u00a0More<\/a><\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-57000","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/57000","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=57000"}],"version-history":[{"count":2,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/57000\/revisions"}],"predecessor-version":[{"id":57032,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/57000\/revisions\/57032"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=57000"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=57000"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=57000"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}