Municipal finance in focus: How India can empower its urban local bodies

The latest manifestation of negotiating life in the metro is being witnessed in Bengaluru, which is still to come to terms with last weekend’s 131 mm rainfall in 24 hours, bringing many parts of the city to its knees. As usual, this has prompted calls for bold plans in urban planning and governance, and need for increasing the capital allocation to improve urban infrastructure.

The demand to strengthen urban local bodies (ULBs) is not new. Financial empowerment of ULBs has been a long-standing concern. They are restricted in self-generating revenues and largely dependent on transfers from the states. The 74th Constitutional Amendment Act (CAA), 1992, recognised ULBs as the ‘third tier of government’. However, not much has happened since. India’s municipal revenue as a share of GDP has remained constant at 1% since 2007-08. This, compared to that of other developing nations like Brazil and South Africa where it is 7.4% and 6%, respectively.

Fiscal stress has affected the finances of all tiers of government. However, the local governments have been hit the hardest. RBI’s November 2021 report, ‘State Finances: A Study of Budgets of 2021-22’ (, estimates that local authorities lost 15-25% of their revenue in 2021, making it difficult to sustain their current level of service delivery. A survey of 141 ULBs shows that 70% of them experienced a decline in revenue, and 71% an increase in expenditure.

The low and deteriorating level of delivery of urban services needs to be addressed urgently. Cities contribute about 63% of India’s net domestic product (NDP). Hence, deterioration in service delivery levels will impact their growth potential. The question policymakers need to ask is whether there are ways of improving service delivery without spending more.

Spending efficiently is the key. By comparing expenditure and service delivery on solid waste management (SWM) for 27 major municipalities for 2016, we tested two hypotheses:

Is lack of funding a binding constraint for ULBs to improve service delivery?

How much is the sensitivity of higher spending to improving service delivery?

We found 19 out of the 27 cities spend more than the benchmark amount. Nine of these 19 cities spend at least 1.5 times more. Yet, none has the expected perfect score in terms of cleanliness. Also, only 23% of variation in cleanliness performance across cities is explained by how much a city spends.

On an average, bigger cities spend much more on SWM without any meaningful difference in terms of better service delivery. Cities with a population of more than 5 million spent on average ₹728 per capita a year, compared to ₹480 and ₹419 for cities with a population of 1-5 million and below 1 million, respectively.

The respective cleanliness performance, as captured by Swachh Survekshan, is not that different for these classes of cities. Cities with more than 5 million population on an average scored 1,378 marks (out of 2,000); cities with a population of 1-5 million scored 1,262, and those with less than 1 million, 1,168. So, while cities with more than 5   million population spent almost 70% higher per person relative to cities with less than 1 million people, their outcome was better only by 17%.

Brihanmumbai Municipal Corporation (BMC), one of the richest municipalities with the highest per-capita expenditure on SWM, spent ₹1,234 per capita in 2016, which increased to ₹1,320 in 2020. Yet, the city saw a substantial decrease in its cleanliness score – from 77% in 2016 to 54% in 2021.

Prima facie, non-monetary factors such as public-private partnership (PPP), citizen engagement and stable leadership go a long way in achieving better service delivery without demanding more funds. Indore, for example, has been ranked No 1 in the Swachh Survey over the last five years. One of the distinctive features is that Indore’s mayor has remained the same over this entire duration. Also, Municipal Corporation of Nawanshahr in Punjab achieved 100% waste segregation at source within a year of its behavioural change campaign in 2017.

The ministry of housing and urban affairs (MoHUA) has realised the salience of these factors. The November 2021 Survekshan includes PPPs and citizen engagement in its parameters for ranking cities. The aim of giving importance to citizen engagement is to encourage ULBs to collaborate with private bodies and citizens to be more efficient in providing SWM services.

GoI, in collaboration with NITI Aayog and some champion states, should conduct pilot exercises to come up with an annual report on expenditure and outcomes across all states and cities with above 1 million people in the next 2-3 years. This will usher a new level of accountability in service delivery, where ULBs could lead the way.