Economic Survey 2016-17: Chapter-14: From Competitive Federalism To Competitive Sub-Federalism: Cities As Dynamos

In this chapter, the survey has focussed on “urbanization” and “competitive sub-federalism” with respect to cities and districts of the country. It has also discussed the challenges faced by Urban local bodies. The summary of this chapter is as follows:

Need to study the changing dynamics of urbanization

There is a need to study the changing dynamics of urbanisation in India because  urbanization will define the trajectory of Indian development. The exodus of rural Indians into the cities over the coming decades will pose tremendous challenges for government, particularly the municipalities who will be primarily  responsible for providing the services that the new migrants  and established residents will need. Success in overcoming these challenges will be vital if the nation is to seize the opportunities that migration to the centres of economic activity can create.

Understanding Competitive sub-federalism

Competition between states is becoming a powerful dynamic of change and progress, that dynamic must extend to competition between states and cities, and between cities. Hence broadening the dynamism-laden competition between states to encompass the cities is what is called competitive sub-federalism. Cities that are entrusted with responsibilities, empowered with resources, and encumbered by accountability can become effective vehicles for unleashing dynamism so that to competitive federalism India can add, and rely on, competitive sub-federalism.

Zipfs law and India

The Zipfs law claims that the city with the largest population in any country is generally twice as large as the next-biggest; three times the size of the third biggest, and so on. In other words, the nth ranked city would be 1/nth the size of the largest city. This law holds true for many countries but not so for India because larger cities and smaller cities are unusually small in India.

Why the large cities are unusually small in India?

• One explanation might be that their infrastructure is overburdened.
• Another is that India is land scarce relative to most countries, discouraging migration particularly because distorted land markets render rents unaffordable.
• By 2050, its land-to-population ratio will have declined fourfold relative to 1960, and India will be amongst the most land-scarce countries in the world.

Challenges Faced by Urban Local Bodies

The primary responsibility for development of urban areas lies with the state governments and the municipal corporations, municipalities and nagar panchayats, commonly known as urban local bodies (ULBs). The key challenges faced by Urban local bodies include Poor governance capacities, Large infrastructure deficits and Inadequate finances.

Poor Governance Capacities

• Cities do not have a single city government or a local self-government, leading to functional overlap.
• Fragmentation of responsibilities and service delivery across a gamut of institutions: the municipality, state departments (Police, PWD, Health, Education, Housing), and parastatal agencies or civic agencies reporting directly to the state government.
• There are also transparency/ accountability issues, as even the most basic information on ULBs finances and quality of basic services is lacking.

Large infrastructure deficits

• Every Indian city faces serious challenges related to water and power supply, waste management, public transport, education, healthcare, safety, and pollution.
• As per the ranking of global cities based on urban infrastructure (State of World Cities 2012/13), New Delhi and Mumbai are placed at 47th and 50th positions, showing comparatively lower levels of infrastructure in these cities.

Inadequate finances

According to the High Powered Expert Committee (HPEC) appointed by the Ministry of Urban Development (MoUD), about Rs. 39 lakh crore (at 2009-10 prices) was required for creation of urban infrastructure over the next 20 years. To address this infrastructure deficit would require huge resources.

Resource mobilization Problems of ULBs

The Fourteenth Finance Commission (FFC) has recommended a grant of around Rs. 87,000 crore to the municipalities for the period 2015-20, constituting assistance of around Rs. 500 per capita per annum on average. The rest of the required funds would have to come from local resources. They key difficulties in raising fund by local bodies are as follows:

• The 74th amendment, leaves it to the discretion of state legislatures to devolve finances so that ULBs can fulfil these functions. Twenty-five years on, there are glaring inter-state disparities in term of devolution of functional and financial powers to the ULBs. Some states have not even allowed the municipalities to levy property taxes.
• While property tax is the most important
• constituent of own revenues, there are problems of low coverage, low rates, low collection efficiency, and lack of indexation of property values, making it a non-buoyant source of revenue
• ULBs by and large have not been able to levy adequate user charges to cover even the operation and maintenance costs.
• Issuing municipal bonds has been challenging owing to the poor state of ULB finances and governance.

Empowering ULBs financially

The analysis shows that municipalities that have generated more resources have been able to deliver more basic services. The states should, therefore, empower cities to levy all feasible taxes.  Municipalities also need to make the most of their existing tax bases. There is a need to adopt the latest satellite based techniques to map urban properties. The Government should leverage the Indian Space Research Organization (ISRO)/ National Remote Sensing Agency (NRSA) to assist ULBs in implementing GIS mapping of all properties in the area of a ULB.

Apart from power to impose tax there need to be efficiency in tax collection and level of economic activity in the area which will help in realizing more revenue.

Dilemma in devolution of fund with respect to political economy challenge

Higher level bodies (state governments) needing to cede power and sharing resources are daunting. Hence there are two options. Firstly, the Finance Commissions should take cognizance of this political economy challenge identified by and allocate even more resources to ULBs or Secondly, to respect the sovereignty of states and hope that they will themselves be forthcoming in decentralizing down – fiscally and governance wise  commensurate with the needs of urbanization.

Data and transparency

MoUD should give greater priority to compile and publish comprehensive data on ULBs and urban sector. ULBs should be more tightly linked to comprehensive and updated data disclosure and transparency by ULBs. NITI Aayog should compile comparative indices of municipalities’ performance annually based on the actual accountability and administrative capacity to deliver the core public services.