Published in: 
Saturday, May 31, 2003

Across the world there is an increasing trend towards urbanization accompanied by a shift in the nature of economy from agriculture and industry to services. Demographers project that bulk of population growth in developing countries will be in urban areas. In 2002 there were 17 mega cities with 10 million plus population in the world and this figure is expected to grow to 21 by 2015. What is remarkable is the fact that excepting for four of them, all the rest are in the developing world!

In India, according to the 2001 census, there are 27 cities with a million plus population (just the cities excluding metropolitan areas) and it is projected that 40 % of the country’s population will be in urban areas by 2025. Millions of new immigrants pour into these cities every year attracted by the economic opportunities and access to better education and health care facilities. Most of these cities are growing so fast that the existing infrastructure is woefully inadequate to meet the needs of the burgeoning population. In this context it would be instructive to examine urban governance and the fiscal position of cities.

While it is well recognized across the world that state and federal governments should play only an enabling role and should not have a direct role in governing cities, exactly the opposite is happening in India. We continue to function in a highly centralized setup, where most of the power and authority is with the state government. For example, in Hyderabad some of the essential services like water supply and sewerage, public transport and city planning and development are completely out of the purview of the city government and are directly administered by the state.

Most of the Indian cities derive the bulk of their income from local property taxes and discretionary transfers from the state and/or union government. Their own resources barely cover the staff salaries and are hardly left with anything for investing in infrastructure or essential services. Only a few cities like Mumbai, Pune and Ahmedabad have access to a much larger resource base through Octroi (entry tax). But such taxes lead to massive corruption and create barriers to markets and are not desirable. In India, the union and state taxes together amount to 15 % of the GDP. In fact, even the union tax share of GDP has fallen from 9.3 % 7 years ago to 8.7 % now. Compare this with the US, where local governments alone raise and spend about 14 % of the GDP, and we begin to comprehend the crisis in our public finances.

This fiscal imbalance can be redressed in two ways:

a. First, a link should be clearly established between the taxes that a citizen pays and the services s/he gets in return. This link is difficult to establish in a centralized setup. Only when the service delivery is decentralized can the citizen see the link between his taxes and his well-being and will be more than willing to bear the additional tax burden.

b. The stakeholders in a city i.e. citizens should be empowered directly to handle issues at the local level. For example, consider the case of Industrial Estates in AP. In mid 90’s industrial townships were empowered to raise taxes and manage their own affairs. They are required to remit 30 % of taxes to the municipality and are free to utilize the rest in whatever manner they deem fit. It resulted in much higher tax compliance, better infrastructure and services for these Industrial municipalities. It only proved that governance can be improved significantly with the involvement of stakeholders. The Constitution of India provides for a similar mechanism for empowerment of citizens in urban areas through formation of ward committees. These ward committees should be fully empowered to control all issues that could be handled at the ward level such as street lighting, sanitation, drainage, road maintenance, schools, dispensaries, parks, markets, playgrounds etc. All the staff in respect of these duties should be under the control of the ward committee and it should be empowered to collect taxes and retain a significant portion of it (poorer wards could retain 100%, while richer wards could keep up to 50 % of the taxes collected transferring the rest to a central pool).

If our cities have to survive and serve as engines of growth, they should be well equipped to handle the needs of a fast burgeoning population, which in turn requires that they be well governed and self-reliant.