Sorry state of state finances

High Powered Expert Committee estimates requirement of Rs 39 lakh crores for urban infrastructure and a further Rs 20 lakh crores for operations and maintenance (O&;M) expenditure over a period of 20 years (in 2009-10 prices, all estimates exclusive of land acquisition charges).

The funding for the investment requirement envisages significant Urban Local Body (ULB) contribution. And obviously, this assumes immediate, effective reforms. Some of the most radical of envisaged reforms include introducing a ‘Local Bodies Finance List’ in the Constitution and empowering ULBs with ‘exclusive’ taxes including a property taxes, right to sell additional Floor Space Index, entertainment taxes etc. O&;M expenditure should be recovered through user charges.

The current situation is far from the ‘vision’. The three points of divergence that jump out are:

• The Perfunctory State Finance Corporations - SFCs are required which are required to set a formula for the devolution of state revenues to local governments. However, often the recommendations are not implemented. Besides, the recommendations themselves are reportedly prepared with half baked efforts – inadequate technical and financial resources.

• States’ cash management is erratic as is often seen in the surplus parked in 14 days intermediary Treasury Bills (which often has repercussions for the Central Government cash management!) and its drawls from the Small savings pools concentrated in the last quarter of the fiscal year. At the aggregate level state governments carry huge cash surplus which is suspected to be grossly imbalanced at disaggregated levels considering the bond issuances by states continue through the year (despite observed levels of surplus).

• ULB finances are thoroughly battered. Inferred from various examples from the report, user charges recoveries are highly inadequate. Water user charges for example, cover less than 35% of operating costs in India, compared with 100% in Philippines and Cambodia and 64% in Bangladesh. On an average, user charges cover less than 50% of O&M costs.

Rare success stories regarding imposition of user charges in India exist and should be replicated. Gulbarga in Karnataka provides round the clock water to the residents but imposes charges that cover expenditures. International success stories are more abundant.

ULB Finances need to be strengthened as a pre condition for any perceivable step up in urban infrastructure investment and for accessing any forms of external finances. Municipal bond market, which is extremely virtually nonexistent in India, but much needed, can only then be developed.