Perhaps no other area of government failure is as glaring as urban governance. The rapid pace of urbanisation has placed heavy demands on infrastructure and services while poor governance, obsolete laws, ill-conceived policies and the low capacity of institutions have led to widespread public dissatisfaction.
Inability to protect the citizens from the fury of the monsoon in Mumbai, utter disregard for the law and the connivance and complicity of politicians and bureaucrats in violating land use and building by-laws in Delhi, enormous public discontent on the poor state of roads, water supply and sanitation in all urban agglomerations and the massive discharge of untreated sewerage polluting the river systems by municipalities along the rivers are too serious to be ignored any longer. Indeed, responses of the executive to these problems have been apathetic.
The problems of urban governance are multi-dimensional. In Delhi, it is the utter disregard for the law that has confounded the situation and courts have tried to establish order in the chaotic world of obsolete laws and their poor implementation.
Indeed, the MCD (Municipal Corporation of Delhi) and NDMC (New Delhi Municipal Council) can't even deal with the menace of stray cattle.
In Mumbai, it is the grabbing of open spaces, non-existence of storm water drains and total apathy of the authorities to the problems as they recur every year.
In Bangalore, it is the imperviousness of both politicians and bureaucrats in meeting the basic infrastructure requirements. Indeed, municipal bodies do not respond and people too have become apathetic. We no longer react when the stray cattle take over the functions of traffic policemen, heaps of garbage are strewn around and devoured by stray cattle, there are potholes in roads after every monsoon and roads are under a perpetual state of repair, there are hours of load shedding, and the state of public transport is pathetic, and so on and so forth.
The expenditure on urban infrastructure is one-fourth of the required annual estimate by the Rakesh Mohan Committee in 2001 of about Rs 28,000 crore (Rs 280 billion) and even the expenditure incurred does not provide commensurate services.
What ails the system? The systemic failures are seen in urban governance, administration as well as finance. Even when we focus only on fiscal issues, there are a variety of structural problems. The first is the lack of clarity in functional assignments. Currently, urban service delivery is undertaken not merely by municipal bodies but also by state governments and many independent agencies.
Schedule XII of the Constitution attempts to identify the functions of municipal bodies, but Article 243W states: " the Legislature of a State may, by law endow the municipalities with such powers and authority ... Subject to such conditions as may be specified "
The problems this arrangement creates are: first, many of the activities which should have been in the municipal domain continue with the states; second, even when functions are assigned, states continue to exercise their jurisdiction; third, independent agencies of state governments perform several functions in the local domain and finally the state can impose conditions on the municipal bodies in the exercise of their powers.
In the capital cities, be it Delhi or states, overlapping jurisdictions between various state departments, independent agencies and the urban local bodies have resulted in lack of clarity in the service domain and indulgence in a blame game for the failures.
Conceptually, the assignment of finance should follow functions. This, along with the need to have a strong link between revenue and expenditure decisions for reasons of accountability, requires that municipal bodies should have significant revenue powers.
Reform will have to address both assigning new revenue sources and reform the existing ones. On the former, the property tax assigned to municipalities suffers from several infirmities. While the long-term approach should be to remove the hindrances in the development of organised markets and look at reforms of all laws related to property transactions such as rent control acts and land ceiling acts and stamp duties, in the interim, it may be useful to have an area-based levy, differentiated by location and the quality of construction. This, however, would require periodic revisions.
The check-post-based octroi has no place in the modern fiscal system and its abolition is long overdue. The revenue loss can be made up by local bodies piggybacking a one per cent tax on the VAT (value added tax) turnover at the last point of sale within municipal jurisdictions.
The municipal levy may be collected by the states' VAT departments and the proceeds deposited directly with them. This actually approximates a benefit tax as it is levied on urban consumption.
In many countries proceeds from the sale of land and buildings are an important source of financing urban infrastructure. However, in India, the revenue is appropriated by the state governments by creating separate land and housing development agencies.
In fact, bureaucrats and politicians in urban departments are busy with this activity due to the large sums of money and patronage involved. It is necessary that the proceeds from the sale of land should be clearly earmarked for financing urban infrastructure.
Another major area of reform pertains to the states' transfer system. The problems have been with both the adequacy and appropriateness of allocation. The state finance commissions, except in a few states, have been thoroughly unprofessional and have based their recommendations neither on principles nor on reliable information. Consequently, their recommendations have been largely unimplementable, leading to states adopting arbitrary and ad hoc forms of transfers. Nobody has bothered to collect reliable data on economic, demographic and fiscal variables of municipal bodies. Bringing professionalism into the SFCs (State Finance Commission) is the key to reforming the state transfers.
Planning for urban services takes priority and states should wake up to it. The Expert Group on Decentralised Planning has recommended bottom-up planning from wards and consolidation by the District Planning Committees. This would, however, require setting up a reliable management information system.
It is ironical that in most states, there is no mechanism to collect basic information relating to municipal bodies. The urban departments in the states should take the initiative to collect basic information required for planning.
Notably, there are basic flaws in the urban fiscal system and the reform should aim to get the fundamentals right. The urban renewal mission cannot deal with structural problems. The question is, shall we always require a crisis to wake up and forget about the problem once the crisis wanes?
The author is Director, National Institute of Public Finance and Policy.