A THESIS ON Municipal Finance Challenges and Prospects A Case of Municipal Corporations of Gujarat

NAME OF THE GUIDE PROF. ANJANA VYAS (PhD)

NAME OF THE STUDENT Swapneel Vaijanapurkar (IP 2112)

DISSERTATION 2013-14

Faculty of Planning and Public Policy, Cept University, Ahmedabad-09

UNDERTAKING

I, Mr. Swapneel Rajendra Vaijanapurkar, the author of the thesis titled Municipal Finance Challenges and Prospects, hereby declare that this is an independent work of mine, carried out towards partial fulfillment of the requirements for the award of Masters Degree in Planning with specialization in Infrastructure Planning at the Faculty of Planning, CEPT University, Ahmedabad. This work has not been submitted to any other institution for the award of any Degree/Diploma.

Date

26-03-2014 Ahmedabad

Name of Student: Swapneel Vaijanapurkar Code No. : IP 2112

Place :

Signature:

ACKNOWLEDGEMENT

This Dissertation would have been incomplete without the help and cooperation of a number of people. I take this opportunity to express my sincere gratitude. I am indebted to my Guide Professor Anjana Vyas because without her periodic guidance and inspiration, the work of this nature would not have been possible.

I would like to thank Dr. Ravikant Joshi for his valuable comments on the work. I would also like to thanks Chief account officer of Vadodara Municipal Corporation Mr. Santosh Tiwari and Mr. I.G Patel, Deputy Director Statistics at Gujarat municipal finance board for providing me the necessary data. I am deeply grateful to all my senior officers of Gujarat Industrial Development Corporation especially Mr. Janak Gamit (Executive Engineer, I/c Superintending Engineer), Mr. Arun Patel (Deputy Executive Engineer) and Mr. Kaushik Gamit (Sr. Addl. Assistant Engineer) for extending cooperation and providing necessary facilities during the course of my study. With their support completion of this thesis completion would not have been possible. On a personal note I would like to express my deepest gratitude to my parents for helping me sail through all odds. I would like to thank my sweet little sister Sampada who stood by my side all the ways throughout the completions of thesis and my best friends Mihir and Swapnil for their ceaseless support and for the precious time they spent for me, going through may draft report, data collection and suggesting the necessary correction.

I humbly acknowledge Krishna, Manan, Sankalp and all my group of friends at CEPT University, Ahmedabad for their help and support at different stages of this work.

Forever grateful,

Swapneel Vaijanapurkar Infrastructure Planning Faculty of Planning and Public Policy, Cept University, Ahmedabad.

DISCLAIMER
This document describes work undertaken as part of a program of study at the Faculty of Planning and Public Policy, CEPT University, Ahmedabad. All views and opinions expressed therein remain the sole responsibility of the author, and do not necessarily represent those of the institute.

EXECUTIVE SUMMARY
There has been a substantial growth in the GDP of Indian economy over the past two decades. The credit for this high growth goes to the macroeconomic policies which the country has adopted. This growth is followed by a shift from traditional agro based economy to urban based economy such as manufacturing and financial services. The contribution of the primary sector to the GDP was 22% in 2011 which was more than 50% in 1960s. Thus the base of the economy has shifted from villages to the cities. Urbanization shifts people from low productivity rural employments to higher productivity non-agricultural employments such as manufacturing and financial services. The urban areas are now contributing 58 percent of the gross domestic product. These areas were contributing just 46 percent of net domestic product in 1990. It is expected that by 2030, urban areas will contribute to more than 70% of the GDP. Thus urban areas will act as engines of economic growth. Although the total urban population increased more than 11 fold between 1901 and 2001 the increase in the number of towns has been steady across the decades. So it is clear that the population growth is concentrated in cities and the growth in urban population is happening due to expansion of cities in all direction and not because of addition of new smaller towns. Because of 74th CAA functions and responsibilities of municipal corporations have increased considerably without commensurate enhancement of their resource base. Both urbanization and decentralization are mounting strain on the fiscal position of Municipal Corporation to provide civic infrastructure facilities and services. Apart from this the city level attractiveness for the investments is affected by the quality of infrastructure in the cities. If the local infrastructural services such as municipal roads, street lighting, water supply and drainage are well established, it has a positive and significant effect on city-level attractiveness

to investment. But in order to construct these local infrastructural services and to access the wide gamut of funds that are available through market borrowing, the balance sheets of the municipal corporations need to be healthy.

Thus the study of municipal finance becomes important especially the municipal finance of cities. Gujarat is the most urbanized state in the country. It would be second highest urbanized state after Tamilnadu in 2030. As per the Mckinsey urban awakening report, Gujarat will be the second highest contributor to the GDP of nation after Maharashtra in 2030. Moreover in the list of top 15 cities contributing to the GDP of the country three cities are from Gujarat which are Ahmedabad, Surat and Vadodara. Thus Municipal corporations of Gujarat will be playing an important role for economic development of state and their fiscal health becomes an important area to study. The present study Municipal Finance Challenges and Prospects thus focuses on municipal corporations of Gujarat. The entire study is divided into three parts. First part looks at the overall status of municipal finances in the state of Gujarat. The second part, which is further divided into three sub parts focuses on selection of case cities, overall finances analysis of municipal budgets in case cities and evaluating the levels of under spending done by the municipal corporations on core urban infrastructural services. The third part analyses the factors which are responsible for under spending done by the municipal corporations and giving recommendations to improve the fiscal performance.

The first part of the study aims at assessing the fiscal position of municipal corporations of Gujarat. The fiscal position of Municipal corporations is assessed for the period of five years (2007-08 to 2011-12).

Overall status of Municipal finances

For this part of study seven out of the eight municipal corporations of Gujarat are considered. As the municipal corporation of Gandhinagar is newly formed, it would lack of time series data for analysis and hence it is excluded from the present study. The study begins with a cross sectional analysis of municipal corporations of Gujarat looking at the income and expenditure sides. Income side analysis looks at various aspects of revenue income such as Average annual growth rate of per capita tax income and revenue income, dependency and decentralization.

While the expenditure side analysis looks at the relative shares of expenditure on establishment, operation and maintenance expenditure and capital expenditure. The expenditure side analysis also tries to calculate the average cost recovery ratio in provision of various infrastructural services through the use of proxy indicators.

The second part is subdivided into three parts i.e. selection of case cities, overall finances analysis of municipal budgets in case cities and evaluating the levels of under spending done by the municipal corporations on core urban infrastructural services.

Selection of Case Cities For selecting the case cities, the rationale is to select one municipal corporation from each class of population size in the state of Gujarat. Apart from the population size, the income and expenditure of the municipal corporations on per capita basis and the geographical spread of the study areas have been kept in mind while selecting the case cities. Thus the following parameters were used to select the towns: 1. Population 8

2. Per Capita income and expenditure 3. Geographical Spread Municipal corporations in which are selected for analysis using the above mentioned parameters are Ahmedabad Municipal Corporation, Vadodara Municipal Corporation and Jamnagar Municipal Corporation.

Overall financial Analysis A detailed investigation into their revenue income of the municipal corporations reveals that the share of tax sources is 26-30%, non tax sources is 13-15% while the grants constitute about 57-59% in the total revenue income for the last five years. This implies that the municipal corporations are heavily dependent on the state government for grants.

Bigger municipal corporations like Ahmedabad are more dependant ion grants than smaller municipal corporations like Jamnagar. Moreover the income through taxes is higher in smaller municipal corporations.

In revenue expenditure side analysis, establishment expenditure varied from 40-55%, while the operation and maintenance expenditure varied from 2030%. It was found that the establishment expenditure in smaller municipal corporations like Jamnagar is higher than bigger municipal corporations like Ahmedabad.

The sources of capital income are own, loan and grants. The smaller municipal corporations are totally dependent on grants for capital investments with less own source contribution compared to larger municipal corporations which have a significant own source contribution.

The urban roads, water supply and waste water and drainage are the infrastructure sectors which on which most of the capital expenditure are done by the case cities.

The infrastructure assessment in the selected cities indicates that the coverage of urban infrastructure is found to be nearly sufficient for the existing population sparing the case of Jamnagar. Under spending Amount of expenditure incurred by a local body is an indirect indicator of the quality of the services offered by that local body to its citizens. A comparison of municipal spending with the Zakaria Committee norms and norms given by high powered expert committee, after revising them to the current period, reveals the level of under-spending by the ULBs.

As per Zakaria committee norms, the under-spending recorded in the case cities varied from 83% in Ahmedabad to 82% in Vadodara and 80% in Jamnagar. The average level of under-spending for all the municipal

corporations selected for the study works out to be 81%. Comparing the levels of municipal expenditure with the norms given by HPEC, the under spending levels are 96% for Ahmedabad, 93% for Vadodara and 97% for Jamnagar.

Thus the aggregate levels of under spending as per Zakaria committee is 82% while if we compare it the norms laid down by High powered expert committee it is 94%. From the analysis it is evident that the levels of spending as far below than what is desired as per Zakaria committee report and HPEC.

The third and the final part of the study look at the factors which are responsible for these under spending levels of the cities. Factors responsible for under spending From the analysis and literature review, the factors which contribute to this high under spending done by the cities are identified as low cost recovery ratio for the services rendered high dependency on grants from state and central government and higher levels of decentralization.

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LIST OF ABBREVATIONS

ADB AMC AUWSP CAA CFC CUR FIRE (D) GDP GMFB HUDCO IDSMT JNNURM JMC ORR NIUA NIPFP PT SFC UIDSMT

Asian Development Bank Ahmedabad Municipal Corporation Accelerated Urban Water Supply Programme Constitution Amendment Act Central Finance Commission Capital Utilisation Ratio Financial Institutions Reform and Expansion (Debt) Gross Domestic Product Gujarat Municipal Finance Board Housing and Urban Development Corporation Limited Integrated Development of Small and Medium towns Jawaharlal Nehru National Urban Renewal Mission Jamnagar Municipal Corporation Operating Revenue Ratio National Institute of Urban Affairs National Institute of Public Finance and Policy Property Tax State Finance Commission Urban Integrated Development of Small and Medium towns

ULB USAID VMC

Urban Local Body United State Agency for International Development Vadodara Municipal Corporation

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Table of Contents
1. Introduction .........................................................................................................19 1.1. 1.2. 1.3. 1.4. 1.5. Brief Background ........................................................................................19 Importance of Municipal finance to cities ..................................................21 Rationale .....................................................................................................22 Research Problem .......................................................................................26 Key research questions and objectives .......................................................27 Research Questions .............................................................................27 Objectives ...........................................................................................27

1.5.1. 1.5.2. 1.6.

Scope and limitation ...................................................................................28 Scope ...................................................................................................28 Limitation............................................................................................28

1.6.1. 1.6.2. 1.7. 2.

Methodology ...............................................................................................29

Literature Review................................................................................................30 2.1. Resources of Local Bodies..........................................................................30 Revenue Base of Municipalities .........................................................30 Expenditure Domain of Municipal corporations ................................31 Principles of Tax Assignment .............................................................31 Imbalance of Revenues and Responsibilities ......................................33 Indian Studies on Municipal Finance..................................................34

2.1.1. 2.1.2. 2.1.3. 2.1.4. 2.1.5. 2.2.

Urban development Institutions ..................................................................36 Urban development & urban housing department ..............................36 Gujarat municipal finance board (GMFB) ..........................................37 Gujarat housing board .........................................................................37 Gujarat urban development company .................................................37 Gujarat urban development mission (GUDM)....................................37

2.2.1. 2.2.2. 2.2.3. 2.2.4. 2.2.5. 2.3.

Schemes for urban development .................................................................39

2.3.1. Urban infrastructure development scheme for small and medium towns (UIDSSMT) ..............................................................................................39 2.3.2. 3. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) ......40

Cross sectional Analysis of Municipal corporations of Gujarat .........................44 3.1. Revenue performance .................................................................................44 Per capita total receipt .........................................................................45 Growth of per Capita total tax revenue ...............................................46

3.1.1. 3.1.2.

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3.1.3. 3.1.4. 3.1.5. 3.1.6. 3.2.

Growth of per Capita revenue income ................................................47 Composition of tax and non tax revenue of top performers................48 Decentralisation ..................................................................................50 Dependency.........................................................................................51

Expenditure performance ............................................................................52 Level of revenue expenditure ..............................................................52 Relative shares of Expenditure ...........................................................53 Quality of expenditure ........................................................................54 Cost Recovery .....................................................................................55

3.2.1. 3.2.2. 3.2.3. 3.2.4. 4.

Assessment of Municipal finances in case cities ................................................57 4.1. Selection of Cases .......................................................................................57 Population ...........................................................................................57 Per Capita Income and Expenditure....................................................58 Geographical Spread ...........................................................................59

4.1.1. 4.1.2. 4.1.3. 4.2.

Case 1: Ahmedabad Municipal Corporation ...............................................61 Municipal Finance Scenario of Ahmedabad Municipal Corporation .62 Revenue Income - Ahmedabad Municipal Corporation .....................63 Revenue Expenditure Ahmedabad Municipal Corporation .............65 Capital Account Ahmedabad Municipal Corporation......................66

4.2.1. 4.2.2. 4.2.3. 4.2.4. 4.3.

Case 2: Vadodara Municipal Corporation ..................................................68 Municipal Finance Scenario of Vadodara Municipal Corporation .....69 Revenue Income Vadodara Municipal Corporation ........................70 Revenue Expenditure Vadodara Municipal Corporation .................72 Capital Account Vadodara Municipal Corporation .........................73

4.3.1. 4.3.2. 4.3.3. 4.3.4. 4.4.

Case 3: Jamnagar Municipal Corporation ...................................................75 Municipal Finance Scenario of Jamnagar Municipal Corporation .....76 Revenue Income Jamnagar Municipal Corporation .........................78 Revenue Expenditure Jamnagar Municipal Corporation .................79 Capital Account Jamnagar Municipal Corporation..........................80

4.4.1. 4.4.2. 4.4.3. 4.4.4. 4.5.

Comparative Analysis .................................................................................83 Growth Trend in Income and Expenditure .........................................83 Operating Revenue Ratio (ORR) ........................................................85 Capital Utilisation Ratio (CUR) ..........................................................86

4.5.1. 4.5.2. 4.5.3.

Figure 4-22: Capital utilisation Ratio .........................................................................88

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5.

Status of urban infrastructure ..............................................................................89 5.1. Water supply ...............................................................................................89 Water utilisation factor .......................................................................89 Population covered with piped water supply ......................................90 Per capita water supply .......................................................................91

5.1.1. 5.1.2. 5.1.3. 5.2. 5.3. 6.

Sanitation ....................................................................................................92 Solid Waste Disposal ..................................................................................93

Under spending ...................................................................................................94 6.1. Zakaria Committee norms...........................................................................94 Overall under spending .......................................................................96 Sectoral under spending - Ahmedabad ...............................................97 Sectoral under spending - Vadodara ...................................................98 Sectoral under spending - Jamnagar ...................................................98

6.1.1. 6.1.2. 6.1.3. 6.1.4. 6.2.

HPEC Norms ............................................................................................100 Overall under spending .....................................................................102 Sectoral under spending - Ahmedabad .............................................103 Sectoral under spending - Vadodara .................................................104 Sectoral under spending - Jamnagar .................................................104

6.2.1. 6.2.2. 6.2.3. 6.2.4. 7.

Conclusions .......................................................................................................106 7.1. 7.2. 7.3. 7.4. Overall Fiscal Trend .................................................................................106 Revenue Income .......................................................................................107 Revenue Expenditure ................................................................................107 Under spending .........................................................................................107 Dependency and under spending ......................................................108 Decentralisation and under spending ................................................108 Cost Recovery and under spending...................................................109

7.4.1. 7.4.2. 7.4.3.

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List of Tables
Table 1-1 Average Annual Growth Rate of GDP ............................................ 19 Table 2-1 Tax Assessment ............................................................................... 32 Table 2-2Vertical Imbalances in selected countries ........................................ 33 Table 2-3 Eligible Cities .................................................................................. 41 Table 2-4 Funding Pattern ............................................................................... 42 Table 2-5 Eligible Sectors ................................................................................ 43 Table 3-1 Composition of Income ................................................................... 49 Table 3-2 Classification of top and bottom performers ................................... 49 Table 3-3 Relative shares of Expenditure ........................................................ 54 Table 4-1: Population Categories given by Zakaria Committee ...................... 57 Table 4-2: Population of Municipal Corporations of Gujarat .......................... 58 Table 4-3: Income and Expenditure Statement of Ahmedabad Municipal Corporation ...................................................................................................... 62 Table 4-4 Trends in the share of revenue income of Ahmedabad Municipal Corporation ...................................................................................................... 64 Table 4-5 Expenditure details of Ahmedabad Municipal Corporation ............ 65 Table 4-6 Capital Income details Ahmedabad Municipal Corporation ........... 66 Table 4-7: Income and Expenditure Statement of Vadodara Municipal Corporation ...................................................................................................... 70 Table 4-8 Trends in the share of revenue income of Vadodara Municipal Corporation ...................................................................................................... 71 Table 4-9 Expenditure details of Vadodara Municipal Corporation ............... 72 Table 4-10 Capital Income details Vadodara Municipal Corporation ............. 73 Table 4-11: Income and Expenditure Statement of Jamnagar Municipal Corporation ...................................................................................................... 77 Table 4-12 Trends in the share of revenue income of Jamnagar Municipal Corporation ...................................................................................................... 78 Table 4-13 Expenditure details of Vadodara Municipal Corporation ............. 79 Table 4-14 Capital Income details Jamnagar Municipal Corporation ............. 81 Table 4-15 : Growth Trend in Income (CAGR of 17 Years Period) ............... 83 Table 4-16 : Growth Trend in Expenditure (CAGR of 17 Years Period) ........ 84

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Table 4-17 : Operating Revenue Ratio ............................................................ 85 Table 4-18 : Capital Utilisation Ratio .............................................................. 87 Table 5-1 : Water Utilisation Factor ................................................................ 89 Table 5-2 : Solid Waste Collection and Generation in the selected cities (2012/13) .......................................................................................................... 93 Table 6-1 Projected Zakaria Committee norms for case cities ....................... 95 Table 6-2 Actual spending by the selected cities ............................................. 96 Table 6-3 Under spending levels of the cities. ................................................. 96 Table 6-4 Overall under spending levels of the cities...................................... 97 Table 6-5 HPEC norms for case cities .......................................................... 101 Table 6-6 Actual spending by the selected cities ........................................... 102 Table 6-7 Under spending levels of the cities. ............................................... 102 Table 6-8 Overall under spending levels of the cities.................................... 103

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List of figures
Figure 1-1 Sectoral Contribution to the economy............................................ 19 Figure 1-2 Split of Urban Rural Economies. .................................................. 20 Figure 1-3 Growth pattern of Ahmedabad and Surat City............................... 23 Figure 1-4 Five states most likely to be more than 50% Urbanized ................ 25 Figure 1-5 GDP of Top 13 Indian Cities in 2030 ............................................ 25 Figure 2-1 Conventional Sources of municipal Finance.................................. 30 Figure 3-1 Per Capita Total receipt .................................................................. 45 Figure 3-2 Average Annual Growth rate of Tax Revenue ............................... 46 Figure 3-3 Average annual growth rate of Revenue Income ........................... 47 Figure 3-4 Average annual growth rate of Population..................................... 48 Figure 3-5 Income Composition ...................................................................... 49 Figure 3-6 Decentralization Ratio .................................................................... 50 Figure 3-7 Dependency Ratio .......................................................................... 51 Figure 3-8 Per capita Total Expenditure .......................................................... 53 Figure 3-9 Composition of Expenditure .......................................................... 55 Figure 3-10 Average annual growth rate of Population................................... 56 Figure 4-1 Per Capita Total Receipts ............................................................... 59 Figure 4-2 Per Capita Total Expenditure ......................................................... 59 Figure 4-3 Locations of Municipal corporations of Gujarat ............................ 60 Figure 4-4 Trends in Revenue account: AMC ................................................. 63 Figure 4-5 Share in Revenue Income Trends: AMC ....................................... 64 Figure 4-6 Components of Revenue Expenditure for Ahmedabad Municipal Corporation ...................................................................................................... 65 Figure 4-7 Components of Capital Income: AMC .......................................... 67 Figure 4-8 Capital Expenditure on core urban services: AMC........................ 67 Figure 4-9 Trends in Revenue Account: VMC ................................................ 70 Figure 4-10 Share in Revenue Income Trends: VMC ..................................... 71 Figure 4-11 Components of Revenue Expenditure for Vadodara Municipal Corporation ...................................................................................................... 72 Figure 4-12 Components of Capital Income: VMC ........................................ 74 Figure 4-13 Capital Expenditure on core urban services: VMC...................... 74

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Figure 4-14 Trends in Revenue Account: JMC ............................................... 77 Figure 4-15 Share in Revenue Income Trends: JMC....................................... 78 Figure 4-16 Components of Revenue Expenditure for Jamnagar Municipal Corporation ...................................................................................................... 80 Figure 4-17 Components of Capital Income: JMC .......................................... 81 Figure 4-18 Capital Expenditure on core urban services: JMC ....................... 82 Figure 4-19: Growth trends in Income............................................................. 83 Figure 4-20: Growth trends .............................................................................. 84 Figure 4-21: Operating Revenue Ratio ............................................................ 86 Figure 4-22: Capital utilisation Ratio .............................................................. 88 Figure 5-1 Population Covered with piped water ............................................ 90 Figure 5-2 Water Supplied ............................................................................... 91 Figure 5-3 Coverage by sewerage system ....................................................... 92 Figure 6-1 Sectoral Under spending: Ahmedabad ........................................... 97 Figure 6-2 Sectoral under spending: Vadodara ............................................... 98 Figure 6-3 Sectoral under spending: Jamnagar ................................................ 99 Figure 6-4 Sectoral under spending: Ahmedabad .......................................... 103 Figure 6-5 Sectoral under spending: Vadodara ............................................. 104 Figure 6-6 Sectoral under spending: Jamnagar .............................................. 105 Figure 6-4 Dependency and under spending ................................................ 108 Figure 6-5 Decentralization and under spending ........................................... 109 Figure 6-6 Cost Recovery and under spending .............................................. 109

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1. Introduction
1.1. Brief Background
There has been a substantial growth in the GDP of our country over the period of time. India has been able to achieve an average growth rate of over 5% in past 20 years. The reasons for such successful performance can be attributed to the macroeconomic policies the country has adopted. This progress has been accompanied with a substantial shift in the economic base from traditional agro based economy to urban based economy such as manufacturing and financial services.

Year 1971-1981 1981-1991 1991-2001 2001-2011 Average

Average annual growth rate of GDP 3.2 5.4 5.6 7.5 5.4

Table 1-1 Average Annual Growth Rate of GDP (Om Prakash Mathur)
Sectoral contribution to the economy
100 80 60 40 20 0

Primary

Secondary

Tertiary

Figure 1-1 Sectoral Contribution to the economy

2000/012010/11

1950/511959/60

1960/611970/71

1970/711980/81

1980/811990/91

1990/912000/01

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(Mukherjee) Thus the base of the economy has shifted from villages to the cities. Urban areas act as engines of economic growth for the country. Urbanization shifts people from low productivity rural employments to higher productivity nonagricultural employments such as manufacturing and financial services. The urban areas are now contributing 58 percent of the gross domestic product. These areas were contributing just 46 percent of net domestic product in 1990.

A split of Rural and Urban Economies

Rural Urban

46

54

58

69

54

46

42

31

1990

2001

2008

2030

Figure 1-2 Split of Urban Rural Economies.

(National Institute of Rural Development)

According to the 2011 census, India has a population of 1210 million. The number of people living in urban areas of India was 2.6 crores in 1901 which was 10.8% of the total population which has now increased to 37.7 crores in 2011 which is around 37.7% of the total population. With the increase in urban population, there is a need to improve and increase the urban facilities in those areas. Urban centers contribute around 50% to the GDP of India, and this contribution is likely to grow. But the recognition that cities have a lions share in promoting economic development and the prioritization of the municipal sector to manage the process of urban growth has proceeded very slow.

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1.2. Importance of Municipal finance to cities

There has been an increasing recognition of the contribution of urbanization to the economic growth. Thus strengthening of the fiscal position of the municipal corporations through various reforms is a key component in the Government of Indias development agenda.

Moreover a strong municipal finance system is necessary for successful functioning and administration of Indias urban policy. Over the past twenty years, numerous initiatives have been taken to brace municipal institutions.

1. They include the 74th Constitution Amendment Act, 1992, A Constitutional status for municipalities Functional reform aimed at an enlarged role for municipalities

2. Amendment to the Income Tax Act, 1961 to allowing municipalities to issue tax-free bonds Market based financing of municipal services

3. Jawaharlal Nehru National Urban Renewal Mission (JNNURM). Incentives for municipalities to undertake reform of property taxation and user charge system Public-private partnership in the provision of municipal services Tenure security for slum dwellers Reform of the urban land and property market Disclosure and transparency in municipal functioning

If the local infrastructural services such as municipal roads, street lighting, water supply and drainage are well established, it has a positive and significant effect on city-level attractiveness to investment. Moreover for the construction of these local infrastructural services and to access the wide gamut of funds that are available through bilateral and multilateral financial institutions, the balance sheets of the municipal corporations need to be healthy.

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Thus municipal finance affects the level of investments in the city.

1.3. Rationale
Why Planners should study municipal finance? Planning is often described making a plan which can be created for both short term and long term. Planning can be of various forms. Planning has several branches which includes urban and regional planning, environmental planning which deals with management of natural resources and its protection, urban transportation planning which deals with development and management of the urban and regional transportation system etc.

Generally, most of the planners spend their entire time thinking on technical requirements of the process in which they work.

For example, planning for an urban transportation can be challenging. Traffic flows need to be studied. Multi-modal integration need to be considered. In most of the cases planning activities have a financial dimension that is not as well understood by planners. Activities undertaken by planners can affect the revenues and expenditures of urban local bodies in many ways. The financial aspects and implications of the planning are not well understood by the planners. It is a general belief that planners do the physical planning activities such as zoning administration, chartered accountants make budgets and financial operation plans etc.

However planners can increase the probability of their plan getting implemented if they better understand how municipal budgets and related financial mechanisms work. Thus knowledge of municipal finance can act as a bridge between urban infrastructure plans and projects.

(Jack R Huddleston)

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Why this study focuses on Municipal Corporation? Municipal corporations are larger forms of urban local bodies. They act as major economic hubs for the state. Although the total urban population increased more than 11 fold between 1901 and 2001 the increase in the number of towns has been steady across the decades. So it is clear that the population growth is concentrated in cities and the growth in urban population is happening due to expansion of cities in all direction and not because of addition of new smaller towns. Apart from this the industrial development is also concentrated in areas around the corporation cities of Ahmedabad, Surat, Vadodara, Bhavnagar, Rajkot and Jamnagar to continue overtime. The growth of cities has added an additional burden on the finances of the city and its stressed infrastructure services. (Rakesh Mohan and Shubhagato Dasgupta)

Figure 1-3 Growth pattern of Ahmedabad and Surat City

From the study of growth pattern of top two municipal corporation of the state it is evident that the growth has been due to enlargement of existing cities and not because of addition of new towns.

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Why this study focuses on Municipal Corporation of Gujarat? Reason I

Since its inception in the year 1961, Gujarat has distinguished itself as a leading industrial state in the country. Beginning from the traditional textile base, it has diversified into fields like chemicals, petrochemicals, dyes & dye intermediates, pharmaceuticals, engineering, food processing, agro-based industries, dairy, edible oils etc.

In spite of the industrial incentives for the backward regions have been an element in the States industrial policy these were not found to be fiscally sound. The focus of industrial development is concentrated in areas around the corporation cities of Ahmedabad, Surat, Vadodara, Bhavnagar, Rajkot and Jamnagar and the same is assumed to continue overtime.

(H.M. Shivanand Swamy)

Reason II As per the Mckinsey urban awakening report Gujarat would be having urban GDP of 16494 Billion Rupees by 2030. Second highest in terms of Urban GDP contribution after Maharastra which is 26660 Billion Rupees. Ratio of Urban GDP to the total GDP would be 77%, which would be highest in the country

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Five States most likely to be more than 50 % Urbanised 67 53 44 Scenario - 2008 66 44 Scenario - 2030 58 37 57 36 52

Tamilnadu

Gujarat

Maharastra

Karnataka

Punjab

Figure 1-4 Five states most likely to be more than 50% Urbanized

Reason III

Out of Top 13 cities contributing to the GDP of India in 2030, three cities happen to be from the state of Gujarat. Gujarat presently contributes about 7% to the GDP of India (2013) and the contribution is likely to increase in future. For sustaining this urban based growth, the municipal corporations need to be more efficient in the service delivery and managing the budgets.

GDP by 2030 (Billion USD)

296 265 169 127 76 73 68 67

53

37

35

24

15

Figure 1-5 GDP of Top 13 Indian Cities in 2030

(India's Urban awakening report: Building inclusive cities and sustaining growth)

Keeping in mind the above situations, Gujarat becomes important case to study.

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1.4. Research Problem

The 74th Constitutional Amendment Act was an effort towards empowerment of urban local bodies through functional devolution. However, it listed only the expenditure responsibilities of municipalities, without specifying any sources of revenue for the same.

Because of the unevenness in functions and finances, there is higher dependence of urban local bodies on respective state governments which in turn results in higher dependence of state government on central government.

The reasons why municipal finance is not growing in line with the growth of population and economy is:

1. Lack of income elasticity: The growth of municipal revenues does not match the increase of incomes or economic activities.

2. Lack of buoyancy: Revenues fall behind the tax base. For example, in case of property taxation, the rising property values are not captured in the tax demand because properties are rarely revalued on an annual basis, in most countries revaluation is completed only every five years.

3. Control by higher level governments: There is absence of autonomy of municipalities in fixing the tax base, rate structure, and enforcement procedure.

4. Inefficient financial management: This is an internal factor contributing to municipal finance problems. Lack of qualified staff, inefficient and poorly maintained records, inability of managing services in a cost-effective manner, etc. are factors leading to lack of management and availability of data in a consolidated manner.

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The net result is deprivation of sizeable proportion of urban population from core urban services such as water supply, sanitation, primary health, street lighting, primary education, etc. This has led to marked worsening in the standard and quality of life of urban residents.

To cater to the issues of provision of basic services & civic infrastructure and maintaining the same; the Urban Local Bodies need to have a sound financial system. As per Indian infrastructure report on a per capita basis, the spending levels of municipalities on per capita basis are about 130 per cent lower compared with the established norms and standards.

Hence, there is a need to understand and critically examine the municipal finances of the cities and the factors affecting the same.

1.5. Key research questions and objectives

1.5.1. Research Questions

1. How is the performance of municipal corporations of Gujarat in terms of fiscal efficiency indicators?

2. Is there any under spending in provisioning of basic infrastructural services and what are the causing this factors responsible for this?

3. What are the factors responsible for this under spending?

1.5.2. Objectives 1. To examine the trends in major sources of income and expenditures of Municipal Corporation and assess their fiscal position for the period of five years (2007-08 to 2011-12).

27

2. To calculate the level of under spending on basic infrastructural services such as street lighting, urban roads, storm water drainage, water supply, drainage and sanitation.

3. To develop relationship between under spending and various income and expenditure side indicators.

1.6.

Scope and limitation

1.6.1. Scope

The proposed study will focus on three municipal corporations of different sizes out of seven Municipal corporation of the state i.e. Ahmedabad, Surat, Vadodara, Rajkot, Jamnagar, Bhavnagar and Junagadh1.

1.6.2. Limitation 1. The present study doesnt consider other urban local bodies such as Class I, II, III and IV municipalities in the state. 2. The study will be limited to the secondary data availability from different agencies of state government and Budget documents from the respective Municipal Corporation website.

As the municipal corporation of Gandhinagar is newly formed, it would lack of time series data for analysis and hence it is excluded from the present study.

28

1.7.

Methodology
Step Sources

Objective

To examine the trends in Calculating the revenue Secondary data major sources of income side and expenditures and expenditure Gujarat state

from finance and

of side performance.

commission literature review.

Municipal

Corporation

and assess their fiscal position for the period of five years.

To calculate the level of To compare the capital Secondary data under spending on basic and infrastructural operations

from

and budgets of respective Municipal corporations

services maintenance

such as street lighting, expenditures done by and literature review. urban roads, storm water the selected municipal drainage, water supply, corporations with the drainage and sanitation. norms laid down by Zakaria committee after doing projections.
To develop a relationship To conduct a regression Inferences from literature between under spending analysis between income and various income and and expenditure indicators and under spending.

suitable

expenditure side indicators

29

2. Literature Review
2.1. Resources of Local Bodies
2.1.1. Revenue Base of Municipalities

The conventional sources of municipal revenue are mainly grouped into: Own Sources: It includes the tax and non-tax sources. The state

legislations govern the tax to be levied by urban local bodies. Some nontax sources are fees, rents, user charges, etc. Amongst the various taxes, most common type of tax is property tax and also stable source of income for majority urban local bodies in the country. Transfers: It includes transfers, in form of grant from higher level of governments Loans/ Borrowings: Borrowings from governments, financial institutions, donors international agencies etc. are included in this category. Own Sources of Revenue

(Om Prakash Mathur, Sanjukta Ray)

Figure 2-1 Conventional Sources of municipal Finance

30

In the current times, a new area of municipal revenues has come up in the form of Market borrowings and it includes borrowings from sources of the capital market through commercial projects, etc.

The taxes that state legislations can levy depend only on the respective acts of ULBs within a State.

2.1.2. Expenditure Domain of Municipal corporations The expenditure done by the municipal corporations is classified into two components i.e. revenue expenditure and capital expenditure. The further bifurcation of revenue expenditure is done into Establishment Operation and maintenance Interest payment on loans

In the same way the capital expenditure can be bifurcated into Capital formation costs Repayment of principle.

Officially Municipal governments are required are governed by the mandates of having a have a balanced budget.

2.1.3. Principles of Tax Assignment

(Musgrave, Richard A.) In his report stated that Central government should levy those taxes which are suitable for economic stabilization. Central government should assign Progressive re-distributional taxes. Lower-level governments such as urban local bodies should tax only those activities which have low mobility amongst the jurisdictions.

31

Table 2-1 Tax Assessment S. No . 1 2 3 4 Customs Corporate Income Personal Income Wealth taxes (incl. capital, inheritances) 5 6 7 Payroll Value Added Tax Resource Taxes: Rent (profit) Tax Royalties/ Fees Alcohol, tobacco Gambling, betting Lotteries 8 Taxation of Bads Carbon Motor Fuels Congestion Tolls Parking Fees 9 Motor Vehicles Registration Driver's License 10 11 12 13 14 Business Taxes Excises Property Tax Land Tax User Charges P P P P P P N, P, L P P P P P P N, P, L P P P P P P N, P, L N N, P, L N, P, L L N N, P, L N, P, L L N N, P, L N, P, L L N P, L N, P P, L P, L N P, L N, P P, L P, L N P, L N, P P, L P, L N, P N N, P N N, P N N N N N N N N, P, L N, P N N N N Tax Type Determination of Tax Base Tax Rate Collection and Administration

Note: N = National or Central, P = Provincial or State, L = Local

Source: Broadway (2000) (P. K. MOHANTY, B. M. MISRA, RAJAN GOYAL, P. D. JEROMI)

32

2.1.4. Imbalance of Revenues and Responsibilities It is found that the central government allocates more functions to the state government but the resources allocated to carry out function are very less. Same is the case between the state and local government. The responsibilities allocated by the state government to the local government far exceed the finances allocated.

This vertical imbalance is present not only in India but over major countries of world as given in table below. It is evident that local governments are unable to carry out the functions assigned to them because of insufficient resources.

Table 2-2Vertical Imbalances in selected countries Share of sub-national government (per cent) Country In total public expenditure 1990 Argentina Brazil France India Italy Kenya Malaysia South Africa United Kingdom United States 46.3 35.3 18.7 51.1 22.8 4.4 20.2 20.7 29 42 1997 43.9 36.5 18.6 53.3 25.4 3.5 19.1 49.8 27 46.4 In total tax revenue 1990 38.2 30.9 9.7 33.8 3.6 2.2 3.7 5.5 5.9 33.8 1997 41.1 31.3 10.8 36.1 6.5 1.9 2.4 5.3 3.6 32.9

The term used above i.e. sub national government indicates two tiers of government which is there is the countries of India and United States, while in United Kingdom there is only one tier of sub national government.

33

2.1.5. Indian Studies on Municipal Finance

National institute of public finance conducted a study of two ninety three urban local bodies in India which were spread over the seven States: Andhra Pradesh, Assam, Kerala, Gujarat, Punjab, Maharashtra, and West Bengal. The study recognized the issues related to imbalances in terms of function and finances both horizontally and vertically. It was also highlighted in the study that there was an insufficient utilization of existing resources by urban local bodies.

(Om Prakash Mathur) In his report provided a structure for municipalities to evaluate their creditworthiness for tapping the rising but increasing capital market for urban infrastructure financing. The paper discussed the amendments which are desired in the legal framework within which municipal corporations borrows money from the market. In this report four municipal corporations were selected for study i.e. Agra, Allahabad, Bangalore and Vadodara

Mathur and Thakur studied the financial position of the urban local bodies. The study included a review of financial management of municipalities and anticipated load on state government finances due to implementation of the State Finance Commission recommendations.

The study highlighted that the size of municipal sector, in terms of revenues, was only three percent of the resources that are raised by the governments. It was also found that the levels of municipal expenditure on core urban infrastructural services are much less than those prescribed by the Zakaria committee report.

(P. K. MOHANTY, B. M. MISRA, RAJAN GOYAL, P. D. JEROMI) In their report found that finances of urban local bodies in India are grossly inadequate. The expenses levels of municipalities were nearly 130 per cent lesser as compared to the standards. Own revenues of municipalities are inadequate to meet the expenditure of revenue account. 34

The revenue-expenditure gap is predominantly elevated in states like Madhya Pradesh, Rajasthan, Uttar Pradesh and West Bengal. All the above study conducted on municipal finance can be broadly clubbed into four types Type I: Those which analyze the finances of municipalities these studies are in the nature of updating of municipal finance data in order to determine whether the finances have improved or deteriorated.

Type II: Those which examine the specific aspects of municipal finances, e.g., nature of the intergovernmental transfer system, property taxation, local finance data systems, and municipal borrowings. Type III: Those which are aimed at estimating the level of under-spending on municipal infrastructure and services and the financial requirements for the same. Type IV: Those focusing on analyzing the reports of the Central Finance Commissions, and the State Finance Commissions especially the revenuesharing methodology formulated by them. The present study is a combination of type I and III as it studies the municipal finance data over the period of time and also accesses the levels of under spending if any.

35

2.2. Urban development Institutions

The state government has diverse ministries and a range of departments for suitable administration of all sectors in the state. Subsequent details focuses on ministries, which are doing a noteworthy role in functioning and organization of urban areas of the state.

2.2.1.

Urban development & urban housing department

The state government constitutes urban development & urban housing department (UD&UHD) in July 1983 to gear up planned growth in the state. Along with it, the department also declares & monitors various schemes and programmers for upgrading urban areas and for welfare of citizens of the state.

The state government constitutes urban development and area development authorities and also selected municipalities as the area development authorities. All of them work under the urban development & urban housing department.

Some of the organizations and subsidiary associations which function under the department are:

1. The directorate of municipalities 2. Gujarat housing board 3. Gujarat slum clearance board 4. Gujarat urban development mission 5. The Gujarat town planning and valuation department 6. Gujarat municipal finance board 7. Gujarat urban development company limited

As the present thesis focuses on municipal corporations, we have excluded the Directorate of municipalities from the present study.

36

The information focuses on departments, which are performing a noteworthy role in carrying out functions and managing of urban areas of the state are as under.

2.2.2.

Gujarat municipal finance board (GMFB)

Gujarat municipal finance board was established in 1979 under legislation passed by the government of Gujarat. The main goals of GMFB are: Encouraging urban local bodies (ULBs) to provide civic facilities. Bring about administrative effectiveness and discipline Advising ULBs to augment financial resources through taxation Augmenting financial capital to ULBs To arrange institutional finance for ULBs

2.2.3.

Gujarat housing board

The Gujarat housing board was established on 1st May 1960 as a result of splitting of Bombay state. The Gujarat housing board takes responsibilities like the housing activities in the state according to the provisions of the Gujarat housing board act, 1961.

2.2.4.

Gujarat urban development company

GUDC was formed to assist urban development by assisting the state government and accessible agencies in formulation of policy, institutional capacity building and project execution.

2.2.5.

Gujarat urban development mission (GUDM)

With the objective of supporting urban renewal and urban infrastructure development along with achieving better standards of living in all major cities and towns the Gujarat urban development mission (GUDM) is established

37

Several other departments which are included in development and management of urban areas are Women & child development department Forest & environment Industries & mines Information & broadcasting Health & family welfare Social welfare & tribal development

38

2.3. Schemes for urban development

2.3.1. Urban infrastructure development scheme for small and

medium towns (UIDSSMT) A. Background

The Urban infrastructural development scheme for small & medium towns focuses on improvement of infrastructure in small cities and in a planned manner. It is a continuation of the earlier government schemes i.e. integrated development of small and medium towns and accelerated urban water supply programme. B. Aim 1. Create durable public assets and give quality oriented services in cities & towns. 2. Improvement of infrastructure development through public private partnership. 3. Encouragement of development which is conducted in planned manner for the development of cities and town

C. Important features of the schemes The period of the scheme is seven years starting from year 2005-06. The state level nodal agency (SLNA) for plans under this scheme is Gujarat urban development mission (GUDM). The committee assigns greater priority to projects of

Supply of water (also includes de-salination plants) and sanitation Road network Constructing and improving the drains / storm water drains Sewerage and solid waste management

39

D. Financial Provisions

The sharing of funds is on base of the ratio of 80:10:10, where 80 and 10 are the shares between central government & state government. The balanced 10% has to be raised through project implementation agencies. E. Preparation & submission of proposal

The urban local body will have to identify sectors which need to be given priority, and prepare detailed project reports and submit it to state level nodal agency. Also, state level nodal agency of the state has to help ULBs in preparation of project proposals.

2.3.2.

Jawaharlal

Nehru

National

Urban

Renewal

Mission

(JNNURM)

A. Background

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) scheme was launched on 3 December 2005 for a period of seven years (200512) with a designed out lay of Rs 50,000 crores as an supplementary central assistance (ACA) to state governments for 65 selected cities which includes 35 cities with more than population of 10 lakhs, state capitals and 30 particular cities of religious, sightseer or historic importance. It is a innovative idea to increase the infrastructure of the significant Indian cities.

The renewal program has 2 sub-missions namely:

1. Sub-Mission for Urban Infrastructure and Governance (UIG): Ministry of Urban Development will administer this through the SubMission Directorate for Urban Infrastructure and Governance.

40

2. The main thrust of it will be on infrastructural projects relating to water supply and sanitation, solid waste management, sewerage, road network, redevelopment of old city areas and urban transport

3. Sub-Mission for Basic Services to Urban Poor (BSUP): This submission will be administered by the Ministry of Urban Employment and Poverty .The main thrust of the this would be on integrated improvement of slums through projects like providing shelter, basic services and other related civic facilities with a viewpoint to provide utilities to the urban poor. B. Objectives The chief objective of the operation is to create economically productive, wellorganized, equitable and responsive cities.

C. Cities Eligible for Assistance under JNNURM Primarily total 63 cities were selected under this operation. The JNNURM will be giving support for infrastructural development in the eligible cities/ Urban Agglomerations (UAs) across the many states in the country and these cities/ UAs have been chosen as per the following criteria:

Table 2-3 Eligible Cities

Category of City ( as per 2001 census ) Cities/ UAs with 4 million plus population Cities/ UAs with 1 million plus but less than 4 million population Selected Cities/ UAs (State Capitals and other cities/ UA of religious/ historic and tourist importance) Total 63

Case A B

No. Of cities 7 28 28

(Source: Overview of the Policy, JNNURM)

41

D. Eligible Sectors and Projects for Assistance

Table given below represents all the eligible sectors and projects included under the sub missions i.e. sub mission for Urban Infrastructure and Governance and sub mission for Basic Services to Urban Poor .

E. Financial Provisions

Under JNNURM, cities are classified in 3 categories case A, B and C as discussed in section 3.5. Funding outline, as decided by central government, is different for all three types of cities. Under sub mission of UIG for case A cities 50% of sum project cost will be contributed by the ULB and remaining 50% amount of total project cost will be contributed by central and state. Likewise for other cases and for both the sub mission % share by state and central government and by ULB agencies is decided. It has is given in the table below.

Table 2-4 Funding Pattern

UIG Case Category Of City Grant Centre State ULB/ Grant

BSUP State/ ULB/ Parastatal

Parastatal Centre

A B

> 4 million 1-4 million Selected cities < 1

35 50

15 20

50 30

50 50

50 50

million

80

10

10

80

20

(Source: Overview of the Policy, JNNURM)

Note: Percentage is with respect to the total project cost.

42

Table 2-5 Eligible Sectors

Sr. No Urban Infrastructure and Governance (UIG) Basic Services For Urban Poor (BSUP) Integrated development of slums, 1 Urban renewal 2 housing and development of infrastructure projects in slums in the identified cities. Water supply (including desalination plants) and sanitation Sewerage and solid waste management. Construction and improvement of drains and storm water drains. Projects involving development, improvement, and maintenance of basic services to the urban poor. Slum improvement and rehabilitation of projects. Projects on water supply, sewerage, drainage, community toilets, and baths etc. Projects for providing houses at Urban transportation including 5 roads, highways, expressways, MRTS, and metro projects. affordable cost for slum dwellers, urban poor, economically weaker sections (EWS) and lower income group (LIG) categories. 6 Parking lots and spaces on PPP basis. Development of heritage areas Prevention and rehabilitation of 8 soil erosion and landslides only cases of special category states where such problems are common 9 Preservation of water bodies. Operation and Maintenance of assets created under this component. Convergence of health, education and social security schemes for urban poor. Civic amenities like community halls, child care centres etc. Construction and improvement of drains and storm water drains. Environmental improvement of slums and solid waste management.

10

It is redevelopment of inner (old) city areas, shifting of industrial and commercial establishments, replacement of old water supply, sewerage and drainage pipes etc

43

3. Cross sectional Analysis of Municipal corporations of Gujarat

The revenue and expenditure part of Municipal Corporation are analyzed in terms of growth rate and other general indicators. Though the borrowed fund plays an important role in the development of urban infrastructure, it is not examined in this analysis as only few big municipal corporations of Gujarat like Ahmedabad and Vadodara have actually gone to market and made the borrowing. Therefore debt sustainability is excluded in this primary analysis.

3.1. Revenue performance

According to (Nallathiga) the ability of a municipality to generate revenue depends upon an array of factors:

Fiscal powers delegated to local government Tax efforts of municipal government itself and Transfers out of sharable pool of revenue by the state government to local government.

The revenue performance of the municipal corporation can be gauged through following two groups of indicators:

Group I 1. Growth of per capita total Income

Group II 5. Shared tax/gross tax revenue (decentralization ratio) 6. Grants/total expenditure (dependency ration)

2. Growth of per capita total tax Income 3. Growth of per capita revenue Income

4. Composition of tax and non tax revenue of top performers

44

3.1.1. Per capita total receipt Good level of per capita total income, which includes revenue as well as capital income is essential for the provision of core urban infrastructural services by a municipal corporation as per the criteria laid down by the Zakaria committee and HPEC report. In the absence of strong income from internal sources, the poorly performing ULBs have to augment their revenue by improving the levy and collection of taxes and utilize new taxes to strengthen the fiscal position

Owing to the lack of time series data for all Municipal Corporation of the state in terms of revenue income and capital income, the incomes for the year 2011-12 is taken as a reference for this analysis. The average per capita income of the municipal corporations of Gujarat for the year 201112 is 4303 Rs/Capita.

It is evident that Ahmedabad, Vadodara, Rajkot and Jamnagar have fared well in terms of per capita total -revenue receipt, while Surat and Bhavnagar have below average. Junagadh is having the least per capita total revenue income for the year 2011-12.

Per Capita Total Receipt

7000 6000 5000 4000 3000 2000 1000 0

Rs

Rs/Capita Average

Municipal Corporation

Figure 3-1 Per Capita Total receipt

45

3.1.2. Growth of per Capita total tax revenue

Good growth of tax revenue is a main indicator which reflects the strength of a municipal corporation to undertake service provisioning responsibilities.

Octroi has been abolished in the municipal corporations of Gujarat since the year 2007-08. Since then, the state government has been providing octroi compensation grant to municipal corporations. After the abolition of octroi the most buoyant revenue source, property tax has become the main revenue source for municipal corporations of Gujarat.

AAGR of Tax Revenue

25 20 Percentage 15 10 5 0 Growth Rate Average

Municipal Corporation

Figure 3-2 Average Annual Growth rate of Tax Revenue

For calculating the growth rate of per capita Tax revenue the data of three years i.e. 2008-09, 2009-10 and 2010-11 have been analyzed, because the previous data had revenue from octroi included in the tax income which was subsequently abolished. It is clear that Rajkot is having the highest growth rate of tax revenue followed by Ahmedabad and Junagadh.

Vadodara is having the least average annual growth rate of Tax revenue. As Vadodara has shown a low tax revenue growth, it is imperative that Vadodara municipal corporation take a full assessment of own tax revenue sources, levy method and collection efficiency. Municipal Corporation with low growth

46

rates have to make every effort to perform well on these parameters in order to provide a continuous better financial performance and improved service delivery.

3.1.3. Growth of per Capita revenue income The growth of per capita revenue receipts is an indicator of strong situation of the finances of a ULB. Though high growth rate of revenue income is desirable, higher dependence on grant is not recommended in any case.

For calculating the growth rate of per capita revenue income the data of five years i.e. 2006-07 to and 2010-11 have been analyzed. Bhavnagar is having the highest growth rate of per capita revenue income, while Surat registered a new growth rate in per capita revenue income.
AAGR of Revenue Income
25 20 15 Percentage 10 5 0 -5 -10 Municipal Corporation Growth Rate Average

Figure 3-3 Average annual growth rate of Revenue Income

The reason for the negative growth rate of total revenue receipt in Surat Municipal Corporation is that the population growth rate has surpassed the growth rate of revenue income. The population growth rate is 13.75% per annum against the state average growth rate of 8%. On the other hand, growth rate of revenue income is 6.75% per annum.

47

AAGR of Population
Junagadh Jamnagar Bhavnagar Rajkot Vadodara Surat Ahmedabad 0 2 4 6 8 Percentage 10 12 14 16

Figure 3-4 Average annual growth rate of Population

From the previous analysis it was clear that the Bhavnagar municipal corporation had a below average growth rate in terms of growth of Tax receipt, but it is showing high growth rate of revenue income. Such situation is to increased growth rate of grants, which is not desirable in any case.

3.1.4. Composition of tax and non tax revenue of top performers

For calculating the composition of income, total income from the sources such as general tax, water tax, professional tax, fees and user charges for the period of five years i.e. 2006-07 to 2010-11 is considered. The municipal corporations having average and above average contribution of theses own tax and non tax resources are combined to form a group of top three municipal corporations while the others are clubbed to form a group of bottom four Municipal Corporation.

48

Ahmedabad

Bhavnagar

Vadodara

Jamnagar

Junagadh

Own Tax General Tax Water Tax Professional Tax Non Tax Fees and User Charges 6 5 1 0.48 0.59 0.35 0.05 2.00 14 4 2 6 4 2 4 2 1 3 1 0.27 1 0.47 0.04 1 1 0.10 0.32 0.03 0.05 5.00 2.00 1.00

Table 3-1 Composition of Income

Top Three All Gujarat Average Municipal Corporation (Above Average) General Tax Water Tax Professional Tax Fees and User Charges 5% 2% 1% 2% Ahmedabad Surat Vadodara Bottom Four Municipal Corporation (Below Average) Rajkot Bhavnagar Jamnagar Junagadh

Income Component

Table 3-2 Classification of top and bottom performers

Income Composition
9 8 7 6 5 4 3 2 1 0 General Tax Water Tax Professional Fees and User Tax Charges

Percentage

Top Three M.C Bottom Four M.C

Income Components

Figure 3-5 Income Composition

Average

Rajkot

Surat

49

3.1.5. Decentralisation

Decentralization ratio refers to the allocation of autonomy in decision-making with respect to the finances of the municipal corporation. Revenue decentralization ratio is measured by ratio of municipal corporations per capita revenue to State per capita revenue receipt. Because of the lack of time series data, the decentralization ratio is calculated considering 2011-12 as a base year. The average

decentralization ratio for Municipal Corporation of Gujarat is 0.2. Higher decentralization makes the municipal corporation to rely on state government to some extent in sharing the revenues, particularly in the absence of well established sharing formula and strict adherence made to them by the state government. Thus it is undesirable to have high decentralization ratio.

Decentralisation Ratio
0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00

Ratio

Ratio Average

Municipal Corporation

Figure 3-6 Decentralization Ratio

Except Rajkot and Junagadh all municipal corporation have high decentralization ratio.

50

3.1.6. Dependency The dependency is a share of grants in the revenue income. The Municipal Corporation which display a high dependency on grants, reflects their weak base of own revenues.

The cause of such high dependency needs a detailed study, but it appears that they have been inefficient in mobilizing tax revenues and lack the buoyant tax sources. Average dependency for Municipal Corporation of Gujarat is as high as 49%. Ahmedabad, Surat and Bhavnagar represent high level of dependency.

Dependency Ratio
80 70 60 50 40 30 20 10 0

Percentage

Dependency Average

Municipal Corporation

Figure 3-7 Dependency Ratio

51

3.2. Expenditure performance

Expenditure performance of Municipal Corporation can be analyzed from the set broad indicators of:

1. Level of revenue Expenditure 2. Share of expenditure components Capital, Maintenance and Establishment. 3. Quality of Expenditure 4. Cost Recovery

(Nallathiga)

3.2.1. Level of revenue expenditure

The level of expenditure has major effect on the finances of the municipal corporations. The revenue expenditure, which mainly comprises of expenditures on establishment i.e. staff salaries and administration and maintenance, is important, as it is related to the provision of urban infrastructural services and their subsequent maintenance. However, very high proportion of the revenue expenditure in total expenditure can be harmful to the expansion of capital resources and generation of potential revenue streams.

Owing to the lack of time series data for all Municipal Corporation of the state, the expenditures for the year 2011-12 is taken as a reference for this analysis. The average per capita expenditure of the municipal corporations of Gujarat for the year 2011-12 is 4113 Rs/Capita.

52

Per Capita Total Expenditure

7000 6000 5000 4000 3000 2000 1000 0

Rs

Rs/Capita

Average

Municipal Corporation

Figure 3-8 Per capita Total Expenditure

It is evident that Ahmedabad, Vadodara, Rajkot and Jamnagar have fared well in terms of per capita total -revenue expenditure, while Surat and Bhavnagar have below average. Junagadh is having the least per capita total revenue expenditure for the year 2011-12.

3.2.2. Relative shares of Expenditure The breakup of expenditure for any municipal corporations will reflect the importance which a municipal corporations gives to various component of expenditure i.e. establishment, operation and maintenance and expenditure on construction of new assets.

It is advisable to have lesser establishment expenditure but a very low establishment will affect the service delivery. In the same way low capital expenditure will affect the quality of life of the city residents but a very high capital expenditure will have a financial implication and the Municpla Corporation will require a support from higher tiers of government in form of grants.

Expenditures for the year 2011-12 are taken as a reference for this analysis.

53

Municipal Corporation Ahmedabad Surat Vadodara Rajkot Jamnagar Junagadh

Establishment Expenditure (%) 40 37 32 21 46 52

Operation and Maintenance Expenditure (%) 7 11 14 21 13 13

Capital Expenditure (%) 37 38 44 58 24 25

Table 3-3 Relative shares of Expenditure The above table represents a relative share of expenditure components of Municipal Corporation. It indicates that municipal corporation of Junagadh has unsustainably high portion of establishment expenditure (more than 50% of total expenditure), which affects the finance and service delivery. The expenditure breakup for Bhavnagar Municipal Corporation has not included due to unavailability of data. Similarly Junagadh and Jamnagar have abysmally low capital expenditure (25% and less of total expenditure), which is equally detrimental to health of civic finances and long term sustainability. It is therefore necessary to develop certain guidelines and norms for Municipal Corporation towards spending on capital and its maintenance and reforming the staffing pattern.

3.2.3. Quality of expenditure

The municipal legislation of any city defines the basic functions which lie within the purview of urban local body. The respective legislation details out the types of services a ULB has to provide the residents of the city. These services are of two types viz. obligatory and discretionary.

Every municipal corporation should focus their primary attention to providing obligatory services like water supply, waste water and drainage services street

54

lights, solid waste management and primary health care. An unnecessary high spending on non-discretionary items like transportation, education, parks and roads is not highly desirable unless the municipal corporation has successfully achieved a substantial amount of spending on discretionary items. .
Composition of Expenditure
Percentage of total revenue Expenditure

9 7 6

4
3

Expenditure on Expenditure on Expenditure on Expenditure on Expenditure on Water Supply Street Lighting Drainage and Solid waste Maintaining Sanitation Disposal Community Assests

Figure 3-9 Composition of Expenditure

For computing the expenditure composition the total expenditures done by the municipal corporations over the period of five years i.e. 2006-07 to 2010-11 over core urban services is considered. It is found that Drainage and sanitation, solid waste disposal has been accorded less priority in the expenditures of the Municipal Corporations.

3.2.4. Cost Recovery Cost recovery ratio is very important for a municipal corporation or any other urban local body as it is related to the self sustainability of the city. It is very intricate to measure the cost recovery for various urban infrastructure sectors such as water supply, waste water and solid waste management. Hence the ratio of user charges to revenue expenditure incurred is used as a proxy indicator.

55

Cost recovery is an important component in the service delivery especially where there is a scope of identifying the beneficiaries of the project and cost can be recovered from them.

Apart from this some other options such as public private partnership can be explored for reducing the costs.
Cost Recovery Ratio
10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

Percentage

Ratio

Average

Municipal Corporation

Figure 3-10 Average annual growth rate of Population

The average cost recovery ratio for Gujarat State is 3%. The municipal corporations of Vadodara, Rajkot and Ahmedabad represent a low cost recovery ratio.

56

4. Assessment of Municipal finances in case cities

4.1. Selection of Cases The major target of the study is to select one municipal corporation from each class of population size in the state of Gujarat and analyze its budgets. Along with the population the geographical spread of the study areas have been kept in mind while selecting the case cities. Parameters showing the income and expenditure of the municipal corporations on per capita basis by are considered along with the above mentioned parameters of population and geographical spread. Thus the following parameters were used to select the towns: 4. Population 5. Per Capita income and expenditure 6. Geographical Spread

4.1.1. Population A group of benchmark indicators both for construction of new urban infrastructure facility and its subsequent maintenance was given by Zakaria committee in 1964. These norms are different for different class of cities based on the population size.
Category of cities AA A B Population Size Greater than 20 Lakh 5-20 Lakh 5 Lakh and Below

Table 4-1: Population Categories given by Zakaria Committee

57

Below table gives the classification of the cities of Gujarat as per the categories given by Zakaria committee. For the purpose of study one city is be selected from each category.
Sr. No. City Population (2011 Census) 1 2 3 4 5 6 7 Ahmedabad Surat Vadodara Rajkot Bhavnagar Jamnagar Junagadh 5895080 4833830 1712699 1323384 601374 532597 350597 AA AA A A A B B Category

Table 4-2: Population of Municipal Corporations of Gujarat

4.1.2. Per Capita Income and Expenditure

As the data for capital income is not available for all the municipal corporations over a span of five years, the incomes and expenditures for the year 2011-12 is taken as a reference for the preliminary analysis for selection of case cities.

It is evident that Ahmedabad, Vadodara and Jamnagar have performed well both in terms of per capita total -revenue receipt and per capita revenue expenditure for the year 2011-12.

Also Ahmedabad is AA category city, Vadodara is A class city and Jamnagar is a B category city as the bifurcation of the city given by Zakaria committee norms. Thus these cities are most suitable to be selected for analysis.

58

Per Capita Total Receipt 7000 6000 5000 4000 3000 2000 1000 0

Rs

Rs/Capita Average

Municipal Corporation

Figure 4-1 Per Capita Total Receipts

Per Capita Total Expenditure

7000 6000 5000 4000 3000 2000 1000 0

Rs

Rs/Capita
Average

Municipal Corporation

Figure 4-2 Per Capita Total Expenditure

4.1.3. Geographical Spread

Using above reference location wise three municipal corporations has been selected Ahmedabad represent North Gujarat, Vadodara represent a mix of central and south Gujarat and Jamnagar represents Saurashtra.

59

(Performance Assesment System)

Figure 4-3 Locations of Municipal corporations of Gujarat

Thus from this preliminary analysis of the all the municipal corporations and keeping in mind the geographical spread and populations, three municipal corporations are selected. These municipal corporations are as under:

Ahmedabad Municipal Corporation Vadodara Municipal Corporation Jamnagar Municipal Corporation

The budget data of municipal corporations are available from the websites of respective corporations and through secondary data collections from the websites of the respective municipal corporations. The data for the period of five year period i.e. from 2008/09 to 2012/13 are considered for the analysis.

60

4.2. Case 1: Ahmedabad Municipal Corporation

The city of Ahmedabad was established in 1411 AD as a walled city on the eastern bank of the river Sabarmati. Presently Ahmedabad is the seventh largest metropolis in India and the largest in city in the state in terms of population.

Historically Ahmedabad has been one of the most vital centres of trade and commerce in

western India. The city was as once the of

famous

Manchester

India because of its textile industry. It had nearly 66 mills employed which a

workforce of over one hundred

thousand persons. There are three major industrial

estates within its municipal limits. It is also a major industrial and financial city contributing about 14% of the total investments in all stock exchanges in India and 60% of the total productivity of the state.

Ahmedabad is blessed to have several scientific and educational institutions of national, regional and global significance. The city has a great architectural tradition which is reflected in many exquisite monuments, temples and modern buildings.

61

(Maps of India)

Demographic Indicators Population (2011) Decadal growth rate of population Area sq km Density per sq km No. of Households Sex ratio Literacy Rate

Ahmedabad 5570585 58 449 12407 1136854 897 89.6

(Census of India, 2011)

4.2.1. Municipal Corporation

Finance

Scenario

of

Ahmedabad

Municipal

Table 4-3: Income and Expenditure Statement of Ahmedabad Municipal Corporation 2008-09 2009-10 2010-11 2011-12 2012-13 Amount in Rs. lakhs Revenue Income Revenue Expenditure Revenue Surplus/ deficit Capital Income Capital Expenditure Capital Surplus/ deficit Total Income Total Expenditure Total Surplus/ deficit 155416 91045 64371 83630 103119 -19489 239046 194164 44882 158093 115600 42493 230019 230019 0 388112 345619 42493 189930 132279 57651 114394 126991 -12597 304324 259270 45054 214212 156383 57829 136874 122649 14225 351086 279032 72054 257011 182774 74237 181551 181551 0 438562 364325 74237

Source: AMC Budgets

The city of Ahmedabad holds a special status in its own revenue sources for efficient way of functioning. It has shown operating surplus, in spite of its

62

developmental activities. The corporation has shown a surplus in revenue account. It shows the citys ability to generate surpluses amid the favourable environment and flexible environment and flexibility in the tax structure. But at the same time there is a deficit in capital accounts over the last five years (F.Y. 2008/09 to 2012/13).
Trends in Revenue Account
300000 250000 200000 150000 100000 50000 0 2008-09 2009-10 Revenue Income 2010-11 2011-12 2012-13

Revenue Expenditure

Figure 4-4 Trends in Revenue account: AMC

The revenue account has shown significant surpluses over the years. It represented an upward trend from Rs. 64371 lakhs in 2008/09 to Rs. 74237 lakhs in 2012/13, while the capital account has recorded deficit during the same period indicating transfer of revenue surplus for assets creation on a regular basis, which is a positive feature.

4.2.2. Revenue Income - Ahmedabad Municipal Corporation The bifurcation of revenue income shows that 48-62% contribution to the revenue income was through revenue grants. However, these grants have been on a declining trend from 62% in 2008-09 to 48% in 2012-13. Tax revenue constituted around 23-29% of the total revenue income. Non tax revenue composed 15-22% of the revenue income. However, an increase in the non tax revenue has been seen in the past few years.

63

Table 4-4 Trends in the share of revenue income of Ahmedabad Municipal Corporation 200809 200910 201011 201112 2012-13 CAGR (%)

(All values in Rs. Lakhs) Tax Revenue Non Tax Revenue Total of own
58375 56944 83129 95720 132811 35490 22885 41139 15805 50917 32212 62235 33485 75703 57108

21 26

sources Assigned revenue/ grants/ contributions Total

155416 158093 189930 214212 257011 97041 101149 106801 118492 124200

23

6 16

Source: AMC Budgets

Share in Revenue Income Trends

Tax Income Non Tax Income Grants

62

64

56

55

48

15 23 2008-09

10 26 2009-10

17 27 2010-11

16 29 2011-12

22 29 2012-13

Figure 4-5 Share in Revenue Income Trends: AMC

Own sources constitute around 50% of the total revenue income in 2012/13. The share of own sources in the revenue income has seen a rise from 38% to 51% for the past five years i.e. from 2008-09 to 2012-13.

64

4.2.3. Revenue Expenditure Ahmedabad Municipal Corporation

Around 40-42% income is spent on the salaries, allowances and pension, which is well above the reasonable range. Operation and Maintenance expenses account for 17-19% of the revenue expenditure, which is comparatively low and can affect the health of the created infrastructural assets. Debt serving has reduced from 8% in 2008/09 to 2% in 2012/13. Table 4-5 Expenditure details of Ahmedabad Municipal Corporation

2008Details 09

200910

201011

201112

201213

Amount in Rs. Lakhs Establishment Administration Operation and Maintenance Loan Charges (interest & Repayment) Programs and Other Expenditure Revenue Expenditure
35874 2379 17113 6883 28096 90344 51296 2768 20415 6390 34704 115573 61122 3365 23225 1445 45790 134946 70710 4980 29403 2380 71458 178930 77182 5000 30801 3903 65888 182774

Source: AMC Budgets

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Establishment Administration Programs and Other Expenditure Loan Charges (interest & Repayment) Operation and Maintenance

2008/09

2009/10

2010/11

2011/12

Figure 4-6 Components of Revenue Expenditure for Ahmedabad Municipal Corporation

2012/13

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4.2.4. Capital Account Ahmedabad Municipal Corporation Income from own sources has a significant share in capital income which suggested funds from revenue account being transferred to capital account which is a good sign. Own sources contributes about more than 40% of the Capital income. But there has been a gradual decline in the capital income from own sources over the years. Thus dependence on grants has increased. Grants constitute around 30-55% of the total capital income. The rest is made up from loans. The major portion of the grants comes from JnNURM and Swarnim Jayanti Mukhyamantri Saheri Vikas Yojna.

Note: For this analysis budgeted capital income and their breakup are considered as the breakup of actual income is not available. The actual capital income and budgeted may differ.

Table 4-6 Capital Income details Ahmedabad Municipal Corporation

Components

200809

200910

201011

201112

201213

All values are in Rs. lakhs Own Loans Grants Other Income and Balances Total Capital Income 79200 0 32329 13019 124547 83125 39160 47417 10387 180088 97900 16000 56936 6786 177622 75633 16000 70700 852 163185 77300 0 98521 5730 181551

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Capital Income Breakup

Own Sources 28 23 71 49 Loan Grants

29 0

33 9

44 10

56 0 44

57

47

2008/09

2009/10

2010/11

2011/12

2012/13

Figure 4-7 Components of Capital Income: AMC Capital Expenditure If we take a glimpse at the capital expenditure on core urban services, than it is evident that urban roads has always remained priority in capital expenditure followed by water supply and waste water and drainage. The city spent least on solid waste management and storm water drainage.
Capital Expenditure
50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

Rs in Lakhs

2010-11 2011-12 2012-13

Urban Sector

Figure 4-8 Capital Expenditure on core urban services: AMC

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4.3. Case 2: Vadodara Municipal Corporation

Vadodara is formed along the bank of the river Vishwamitri. In the seventh century, the Chalukya rulers established their administrative headquarters in the new area which was known as Vadapadraka. Marathas established their rule in the 18th century. The Marathas fortified City, and constructed a gate known as the Mandvi Gate in 1734 A.D, which is a symbol of the beginning of Maratha rule. Peshavas, Gaekwads and the British had frequent internal clashes. Finally British established their rule in 1830 A.D. and there was attainment of political stability. The City of

Vadodara, popularly known as Baroda, owes its prosperity in the 19th Century to Sayajirao Maharaja III.

During this period major transportation link established. was

Mumbai Vadodara

and were

connected by rail in 1870 opening up the region to other parts of the country. Industry, trade and commerce were given due encouragement.
(Maps of India)

Vadodara has been growing as an administrative, commercial, and educational centre. The establishment of IPCL and Gujarat Refinery has transformed the 68

economic setting in Vadodara. The phenomena of industrial growth have attracted many rural residents to the City. Almost 70 to 80% of the industries spread in Vadodara are located within the urban fringe.

However, there has been a decline during the last 2 decades. The city is not attracting migration population which suggests that in employment opportunities. there is a decline

Demographic Indicators Population (2011) Decadal growth rate of population Area sq km Density per sq km No. of Households Sex ratio Literacy Rate

Vadodara 1666703 28 149 11186 340143 923 92.37%

(Census of India, 2011)

4.3.1. Municipal Finance Scenario of Vadodara Municipal Corporation

The Corporation has maintained a trend in its revenue surplus for the past 05 years but the amount of surplus is reducing. This reflects the fact that the Corporation has been inconsistent in its performance. Actual surpluses have decreased from Rs. 20013 lakhs in 2008/09 to Rs 12710 lakhs in 2012/13. Over the period of Five years from 2008-09 to 2012-13 the Revenue Income of Vadodara Municipal Corporation increased by 35% while the Revenue

Expenditure has increased by 84%. It is a clear indication that the expenditure is growing at a much faster rate in Vadodara than incomes. Income CAGR Expenditure CAGR : 8% : 16%

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Table 4-7: Income and Expenditure Statement of Vadodara Municipal Corporation 200809 200910 201011 201112 201213

All values are in Rs. lakhs Revenue Income Revenue Expenditure Revenue Surplus/ Deficit Capital Income Capital Expenditure Capital Surplus/ Deficit Total income Total expenditure Total Surplus/ Deficit 49457 29444 20013 35864 41113 -5249 85321 70557 14764 56126 40911 15215 39049 44435 -5386 95175 85346 9829 53569 44996 8573 30853 38564 -7711 84422 83560 862 56378 50304 6074 46237 39871 6366 102615 90175 12440 66825 54115 12710 53602 50635 2967 120427 104750 15677

Trends in Revenue Account

80000 70000 60000 50000 40000 30000 20000 10000 0 2008-09 2009-10 Revenue Income 2010-11 2011-12 2012-13

Revenue Expenditure

Figure 4-9 Trends in Revenue Account: VMC

4.3.2. Revenue Income Vadodara Municipal Corporation The revenue sources of VMC are tax, non-tax sources, and transfers including grants. VMCs total revenue account receipts have increased at a CAGR of around 10% between 2008-09 and 2012-13.

70

The only contributor to growth in revenue income is non tax income, which has grown at a CAGR of around 31% and has increased its share in total revenue income from around 8% in 2008-09 to 15% in 2012-13. Thus own sources constitute around 36% of the total revenue income in 2012/13.

Table 4-8 Trends in the share of revenue income of Vadodara Municipal Corporation 200809 200910 201011 201112 2012-13 CAGR (%)

(All values in Rs. Lakhs) Tax Revenue Non Tax Revenue Total of own sources Assigned revenue/ grants/ contributions Total 28384 33499 32075 49457 56126 53569 31294 56378 29163 66825 10 1 21073 22627 21494 25084 37662 15700 16132 16412 5373 6495 5082 18749 6335 21930 15732 9 31 16

Source: VMC Budgets

Decline in transfers, including grants, indicates a strengthening of VMCs financial position.

Share in Revenue Income Trends

Tax Income Non Tax Income Grants

57 11 32 2008-09

60 12 29 2009-10

60 9 31 2010-11

56 11 33 2011-12

44 24 33 2012-13

Figure 4-10 Share in Revenue Income Trends: VMC

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4.3.3. Revenue Expenditure Vadodara Municipal Corporation

Establishment expenses involve the general administration expenses on salaries, allowances, employee welfare, etc. besides pension and gratuity amounts. Establishment expenses are also incurred on public works, services, etc. Due to the implementation of the5th Pay Commission, establishment expenses had grown. The Share of the establishment expenditure varies from 52% to 58%.

200809 Establishment Administration Operation and Maintenance Programs and Other Expenditure Loan Charges (interest & Repayment) Revenue Expenditure (Total) 4661 102 29444 14823 299 9559

200910 23112 154 10579 6849 217 40911

201011 26002 156 10757 7890 191 44996

201112 28741 276 12392 8304 591 50304

201213 31787 287 15049 6006 986 54115

Source: VMC Budgets

Table 4-9 Expenditure details of Vadodara Municipal Corporation

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008/09 2009/10 2010/11 2011/12 2012/13

Programs and Other Expenditure Loan Charges (interest & Repayment) Operation and Maintenance Administration Establishment

Figure 4-11 Components of Revenue Expenditure for Vadodara Municipal Corporation 72

Operation and Maintenance expenses account for 28% to 32% of the revenue expenditure which is greater than the amount spent by Ahmedabad Municipal Corporation. High expenditure on O&M is good for the health of the created infrastructural assets. Most of the expenses under this head are accounted for by the fuel charges for public safety, water supply, and conservancy services. There has been a steady increase in the operations and maintenance expenses share in total revenue expenditure over the past few years.

Debt serving has increased from 0.3% in 2008/09 to 1.8% 2012/13. Other expenses include expenses on primary education and contingencies. The revenue grants received from the state government are utilized for the same purpose and are accounted for under this head.

4.3.4. Capital Account Vadodara Municipal Corporation

Components

2008-09

2009-10

2010-11

2011-12

2012-13

All values are in Rs. lakhs Own Loans Grants JnNURM Grants (C:S) Total Capital Income 17331 0 3935 14598 35864 8907 0 12788 17354 39049 16439 0 6732 7682 30853 18010 0 16770 11457 46237 16381 0 30543 6678 53602

Source: VMC Budgets

Table 4-10 Capital Income details Vadodara Municipal Corporation The capital income coming from JnNURM as a centre and state share has reduced from 41% in 2008-09 to merely 12% in 2012-13 as the JnNURM is approaching its completion stage. The capital income coming from the sources i.e. own, loan and grants sources are highly fluctuating.

73

The statistics show that there were no loans used for generating capital income as in case of Ahmedabad which is proposing to use tax free bond for generating capital income.
Capital Income Breakup
Own 11 33 41 44 48 23 2008-09 2009-10 2010-11 53 JnNurm Grant 22 25 25 12 39 2011-12 31 2012-13 Grants

36

57

Figure 4-12 Components of Capital Income: VMC Capital Expenditure

Capital Expenditure
25000 Rs in Lakhs 20000 15000 10000 5000 0 2010-11 2011-12 2012-13

Urban Sector

Figure 4-13 Capital Expenditure on core urban services: VMC

A review of capital expenditure on core urban services shows that storm water drainage and urban roads has been given priority by Vadodara Municipal Corporation followed by water supply, waste water and drainage. Alike Ahmedabad the city spent least on solid waste management.

74

4.4. Case 3: Jamnagar Municipal Corporation Jamnagar city is located in Jamnagar district, in the Gujarat state. The city was built up to a large extent by Maharaja Kumar Shri Ranjitsinhji in the 1920s. The city was known as Nawanagar at that time. The city is situated to the south of the Gulf of Kutch. Jamnagar has blessed to have Reliance Industries, India's largest private company which established the world's largest oil refinery near the village of Moti Khavdi in Jamnagar. Other companies include Essar Oil refinery which is located near the town of Vadinar.

Thus Jamnagar is popularly known as 'Oil City of India'.

Because of advantage with respect to the vast hinder land which comprises of Central & North, India, and also due to closeness to the Gulf countries, Jamnagar has a special status of most favored Port among the exporters & Importers.

75

Also Jamnagar is having the base stations of all three wings of Defence i.e. Army, Navy and Air force because of the strategic location which is close to foe Pakistan. (Maps of India) The city Jamnagar is having all weather Intermediate Sea port, i.e. Bedi Port, through which various merchandise is imported and exported. The

commodities that are exported from the port as are Bauxite, soya Meal extraction, and Ground nut extraction. On the other hand the imports are coal, fertilizer and other items.

Demographic Indicators Population (2011) Decadal growth rate of population Area sq km Density per sq km No. of Households Sex ratio Literacy Rate

Jamnagar 529308 6 33.7 15706 108022 916 82.58%

(Census of India, 2011)

4.4.1. Municipal Finance Scenario of Jamnagar Municipal Corporation The Jamnagar municipal Corporation has maintained a very depressing trend in its revenue surplus for the past 05 years. The Jamnagar municipal corporation has a deficit revenue budget which reflects the fact that the Corporation has been inconsistent in its performance. However the revised budget of 2012-13 shows an optimistic picture with a budgeted surplus projected around 279 Lakhs. Over the period of Five years from 2008-09 to 2012-13 the Revenue Income of Jamnagar Municipal Corporation increased by Expenditure has increased by 81%. 88% while the Revenue

76

The expenditure is growing at same pace as income, because of which there is a continuous revenue deficit highlighted in the municipal budgets. Table 4-11: Income and Expenditure Statement of Jamnagar Municipal Corporation

200809

200910

201011

201112

201213

All values are in Rs. lakhs Revenue Income Revenue Expenditure Revenue Surplus/ Deficit Capital Income Capital Expenditure Capital Surplus/ Deficit Total income Total expenditure Total Surplus/ Deficit -186 5657 4489 1169 13113 12131 983 -109 6966 7437 -471 15602 16182 -580 -1045 6625 5556 1069 16861 16837 24 -1379 5013 1907 3106 14714 12986 1727 279 7090 3493 3597 21158 17281 3877 7456 7642 8636 8745 10236 11281 9700 11080 14067 13788

Source: JMC Budgets

Trends in Revenue Account

16000 14000 12000 10000 8000 6000 4000 2000 0 2008-09 2009-10 Revenue Income 2010-11 2011-12 2012-13

Revenue Expenditure

Figure 4-14 Trends in Revenue Account: JMC

77

4.4.2. Revenue Income Jamnagar Municipal Corporation Table 4-12 Trends in the share of revenue income of Jamnagar Municipal Corporation Components 200809 200910 201011 CAGR (%)

All values are in Rs. lakhs Tax Revenue Non Tax Revenue Total of own sources Assigned revenue/ grants/ contributions Total 3010 1213 4223 5328 9551 3537 1682 5219 7736 12955 3751 1779 5530 9926 15456 12 21 14

36 27

Share in revenue income trends

Tax Non Tax Grants State

56

60

64

13 32 2008-09

13 27 2009-10

12 24 2010-11

Figure 4-15 Share in Revenue Income Trends: JMC

As the details of income break up for the last two years is not available, the data for only three years is considered for analysis. Own sources constitute around 36% of the total revenue income in 2010/11. The share of own sources in the revenue income remained more or less constant for the years under study.

78

The split of revenue income shows that 56-64%contribution to the revenue income was through revenue grants.

These grant share shown a rising trend from 56% in 2008-09 to 64% in 201011 which is undesirable. Tax revenue constituted around 24-32% of the total revenue income. Tax income has also shown a declining trend. Thus

condition of finances in Jamnagar Municipal Corporation can be considered as critical. Non tax revenue composed around 13% of the revenue income.

4.4.3. Revenue Expenditure Jamnagar Municipal Corporation

As the details of revenue expenditure are not available for the period of five years which are selected for the study, we have analyzed data for two years i.e. 2012/13 and 2013/14 for which the data was available. Data for two years is the budgeted expenditure and not the actual one, which is incurred by the municipal corporation. Components 2012-13 2013-14

All values are in Rs. lakhs Establishment Administration Operation and Maintenance Loan Charges (interest & Repayment) Programs and Other Expenditure Total 7845 214 3045 210 2015 13328 8981 230 4308 199 3449 17167

Source: JMC Budgets

Table 4-13 Expenditure details of Vadodara Municipal Corporation Around 52-60% income is spent on the salaries, allowances and pension, which is well above the reasonable range.

79

The amount spent on establishment is highest in Jamnagar amongst all three Municipal Corporations. Operation and Maintenance expenses account for just 25% of the revenue expenditure. Debt serving is about 1-2% of the revenue expenditure.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2012/13 2013/14 Establishment Programs and Other Expenditure Loan Charges (interest & Repayment) Operation and Maintenance Administration

Figure 4-16 Components of Revenue Expenditure for Jamnagar Municipal Corporation

4.4.4. Capital Account Jamnagar Municipal Corporation Though the revenue account shows a deficit, the capital account shows large surplus accumulated because of improper utilization of grants. Jamnagar is highly dependent on grants for capital income. Own sources contribute to just 3-6% of the capital income.

80

2010-11

2011-12

2012-13

2013-14 (B)

Capital Income Own Loan Grant Total 1048.11 0 5657.55 6705.66 181.42 0 6908.88 7090.3 351.27 0 11085.72 11436.99 1213.91 0 18280.3 19494.21

Capital Expenditure Own Loan Grant Total 994.74 212.29 5001.91 6208.94 328.47 0 3164.46 3492.93 295.34 0 7148.68 7444.02 1163.05 0 1583.95 2747

Surplus/Deficit Own Loan Grant Total 53.37 -212.29 655.64 496.72 -147.05 0 3744.42 3597.37 55.93 0 3937.04 3992.97 50.86 0 16696.35 16747.21
Source: JMC Budgets

Table 4-14 Capital Income details Jamnagar Municipal Corporation

Capital Income Breakup

Own Loan Grant

84

97

97

94

16 3 2010-11 2011-12 3 2012-13

6 2013-14 (B)

Figure 4-17 Components of Capital Income: JMC

81

Capital Expenditure

Capital Expenditure
1600 1400 1200 1000 800 600 400 200 0 Rs in Lakhs

2010-11 2011-12 2012-13

Urban Sector

Figure 4-18 Capital Expenditure on core urban services: JMC A review of capital expenditure on core urban services shows maximum capital expenditure is made on water supply followed by street lighting. All the other sectors have been given less priority by Jamnagar Corporation.

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4.5. Comparative Analysis Financial indicators such as growth trend in income and expenditure, Operating Revenue Ratio (ORR) and Capital Utilization Ratio (CUR) have been used here for the comparative analysis of the cities.

4.5.1. Growth Trend in Income and Expenditure Growth trend in income and expenditure of all three cities has been compared by means of comparing their Compound Annual Growth Rate (CAGR) of 17 years period. Following table represents the same. Table 4-15 : Growth Trend in Income (CAGR of 17 Years Period)
Major Heads Revenue Income Capital Income Total Income Ahmedabad 12.56% 21.85% 15.07% Vadodara 9.91% 36.91% 13.86% Jamnagar 9.81% 22.77% 12.07%

Growth Trends (Income)

40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Ahmedabad Municipal Corporation Vadodara Municipal Corporation Jamnagar Municipal Corporation

Percentage

Revenue Income Capital Income Total Income

Municipal Corporations

Figure 4-19: Growth trends in Income As shown in Table 1 Ahmedabad has shown highest growth rate in revenue income, while Vadodara shows highest growth rate in capital income.

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Ahmedabad has highest growth rate in total budget size during past 17 years. In all the three cities growth rate of capital income is significantly high than that of revenue income and this is due to capital grant received by the ULB from the state and the central government under various schemes. Table 4-16 : Growth Trend in Expenditure (CAGR of 17 Years Period)

Major Heads Revenue Expenditure Capital Expenditure Total Expenditure

Ahmedabad 11.46% 22.30% 14.91%

Vadodara 9.88% 34.96% 14.27%

Jamnagar 10.41% 11.17% 10.56%

Growth Trends (Expenditure)

40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Ahmedabad Municipal Corporation Vadodara Municipal Corporation Jamnagar Municipal Corporation

Percentage

Revenue Expenditure Capital Expenditure Total Expenditure

Municipal Corporation

Figure 4-20: Growth trends As shown in above table and figure, growth rate of total expenditure of Ahmedabad city is highest amongst all. In revenue expenditure also growth rate of Ahmedabad city is highest. While and in case of growth rate of capital expenditure Vadodara is ahead. This show in Vadodara City Corporation has spent more amount of money in development activities which is good sign for the city.

84

4.5.2. Operating Revenue Ratio (ORR)

Operating Revenue Ratio is the ratio of revenue expenditure to revenue income and it represents financial self sustainability of ULB. Sound financial management is required to keep this ratio below unity. To assess and to compare financial self sustainability of all three ULBs comparison of their operating ratio over the period of time has to be done. Following table shows the same. Table 4-17 : Operating Revenue Ratio Operating Revenue Ratio of Selected Municipal corporation Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Average Ahmedabad 0.83 0.86 0.88 0.92 1.00 1.00 0.95 0.81 0.75 0.70 0.65 0.65 0.59 0.73 0.70 0.73 0.71 0.79 Vadodara 0.81 0.83 0.96 0.99 0.95 1.01 0.96 0.96 0.85 0.83 0.69 0.59 0.60 0.73 0.84 0.89 0.81 0.84 Jamnagar 0.90 0.81 0.91 1.02 0.86 1.02 0.97 0.89 0.80 1.00 1.24 1.09 1.02 1.01 1.10 1.14 0.98 0.99

Ahmedabad has shown sound financial management throughout the study period. AMCs operating ratio has remained below unity throughout the study

85

period. VMC also has managed to keep its operating ratio below unity in almost all the years except one year (i.e. year 2001-02). But the operating ratio of the JMC has been highly fluctuating and is above unity for half of the years during the study period.

As Ahmedabad and Vadodara are JnNURM mission cities, it is evident that during the JnNURM period much capital expenditure was done, while the revenue expenditure had been accorded less priority. Thus Ahmedabad and Vadodara show a low operating ratio for the period of 2006-07 to 2011-12 compared to Jamnagar which is a non mission city.
Operating Revenue Ratio
1.4 1.2 1.0 Ratio 0.8 0.6 0.4 0.2 0.0 Ahmedabad Municipal Corporation Vadodara Municipal Corporation Jamnagar Municipal Corporation Average

Year

Figure 4-21: Operating Revenue Ratio

4.5.3. Capital Utilisation Ratio (CUR) Capital Utilisation Ratio is the ratio of capital expenditure to capital income and it indicates capacity of ULB to utilise its capital funds. If CUR is above unity then it indicates that capital expenditure is greater than capital income which means operating surplus has been diverted to capital account and which is sign of good health of ULB. And if CUR is below unity then it suggests that either capital income has been used in revenue expenditure or local body is not 86

carrying out its capital development efficiently despite of having operative surplus. Following table shows comparison of CUR of all the three cities.

Except for Ahmedabad, the average CUR for rest of the two cities is above unity. In the case of Vadodara in year 1997-98 CUR was very high which suggests unplanned expenditure of the corporation while in 2001-02 CUR was very low. Except for one year, Vadodara has performed better amongst the all it has maintained consistence ratio throughout. The CUR in case of Jamnagar is highly fluctuating.

Table 4-18 : Capital Utilisation Ratio Capital Utilization Ratio of Selected Municipal corporation Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Average Ahmedabad 0.94 0.34 0.89 1.62 0.87 0.70 1.82 0.76 0.56 0.56 0.76 0.99 1.23 1.00 1.11 0.90 1.00 0.94 1.15 1.14 1.25 0.86 0.94 1.15 0.79 1.07 0.84 0.38 0.49 1.10 Vadodara 1.19 4.25 1.00 1.00 1.04 0.27 0.92 1.07 0.70 0.96 Jamnagar 2.41 1.90 1.49 1.67 0.95 2.00 1.04 1.40 1.03 0.91

87

Data for two year -2006/07 & 2007/08 of Capital income and Expenditure are not available for city of Vadodara and Jamnagar. Thus the CUR has not been worked out for these years.
Capital Utilisation Ratio (CUR)
4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

Ratio

Ahmeabad Municipal Corporation Vadodara Municipal Corporation Jamnagar Municipal Corporation Average

Year

Figure 0-1: Capital utilisation Ratio

88

5. Status of urban infrastructure

For assessing the status of urban infrastructure, we have chosen water supply, sanitation and Solid waste management, out of core urban infrastructure services.

5.1. Water supply The Master Plan has also recommended on an average, coverage of 90 per cent of the urban population by protected water supply. Some broad indicators which we have used to estimate the efficiency and effectiveness of the municipal corporation to its citizens in terms of water supply are as follows. 1. Water utilization factor 2. Population covered with piped water supply 3. Per Capita water supply

5.1.1. Water utilisation factor

The water utilization factor is an important parameter which tells about the capacity of water sources - surfaced or underground. This is one of the most striking features of the water management in the municipal corporations. City Installed water Capacity (MLD) Water Available to consumers (MLD) Ahmedabad Vadodara Jamnagar 1260 402 120 855 271 68 68 67 56 Water Utilization Ratio (%)

(Performance Assesment System)

Table 5-1 : Water Utilisation Factor

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Unavailability of stand by pump sets and inadequate operational and maintenance of the system are the major factors for low utilization of water sources in most cases of the municipal corporations.

5.1.2. Population covered with piped water supply Population coverage by piped water supply is the mainly important indicator to examine the levels of water supply. The basic objective of any municipal corporation should be better population coverage with superior quality of water, even on the cost of less per capita water supply.

Population Covered by piped water suppy

100 90 80 70 60 50 40 30 20 10 0 Ahmedabad Vadodara Cities Jamnagar

Percentage

2001 2006 2012

Figure 5-1 Population Covered with piped water Jamnagar has shown a drastic improvement in terms of population covered with piped water supply. On the other hand Ahmedabad and Vadodara have shown reduction in coverage, which is because of population increase. Big cities like Ahmedabad and Vadodara have to keep a pace with the growth of the city in terms of provision infrastructure to maintain a n acceptable standard of living.

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5.1.3. Per capita water supply

Some minimum set of values are provided by the Central Public Health and Environmental Engineering Organization (CPHEEO), which are ranging from 125 to 200 liters per capita per day for the cities with more than 50000 population. Report given by the Zakaria committee suggests the minimum water supply ranging from of 157 to 270.0 liters per day per capita.

The National Master Plan of India has recommended water supply standard in the range of 70 to 250 liters per capita per day (LPCD) with an average supply of 140 LPCD irrespective of the population size of the city.

Water supplied (LPCD)

2001 2006 2011 204 157

167 135

185

180

190

80

80

Ahmedabad

Vadodara Figure 5-2 Water Supplied

Jamnagar

Vadodara is having the highest water supply per capita which is 204 lpcd. The growth in per capita water supplied in Jamnagar is noteworthy over the period time. The selected municipal corporations qualify the minimum criteria of water supply as the Zakaria committee norms i.e. 157 lpcd.

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5.2. Sanitation Like water supply, specific norms for sewerage and solid waste management have not been given in any in any physical plans. Many cities do not have a sewerage system and have to depend on site sanitation systems. The

sufficiency of sewerage system depends on the water consumed for industry, domestic and other purposes. According to Zakaria Committee Report (1963), 90 percent of industrial water consumed and 80 percent of per capita water supply in residential areas is to be considered as sewage flow.
Coverage by Sewarage system
100 90 80 70 60 50 40 30 20 10 0 Ahmedabad Vadodara Municipal Corporations Jamnagar

Percentage

2001 2006 2011

Figure 5-3 Coverage by sewerage system Over the period of ten years, it can be inferred that the coverage by sewerage network has deteriorated in Ahmedabad. The immense improvements are found in case of Vadodara. The coverage in Jamnagar has remained more or less constant. Basically, adequate sewerage network is needed to have an evaluation of environmental hygiene of any city. A partial or complete absence of any organized sewage disposal function in major urban areas can provoke the sanitary situation.

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5.3. Solid Waste Disposal

Solid wastes consists of dry refuse such as dust, food wastes, metals, plastics or glass, kitchen wastes, discarded clothing and furnishings, garden wastes etc. In developed countries, solid wastes may also contain heavy articles like unused cars, televisions, refrigerators, music Systems, etc. In most cities of India, solid waste management is ineffective because the systems adopted are primitive, tools and equipment outdated and inadequate & manpower productivity is low. Processing and treatment of waste is inadequate and final disposal is done in unscientific dumpsites which are posing problems of ground and water contamination and air pollution.

Table 5-2 : Solid Waste Collection and Generation in the selected cities (2012/13) Cities Solid Waste Per Day (tones) Generation Ahmedabad Vadodara Jamnagar 3880 3500 5800 Collection 2420 3150 5000 Collection efficiency (%) 62.37 90.00 86.20

Source : (Performance Assesment System) Solid waste collection system in Vadodara is found to be most efficient compared to other two cities. It is imperative that Ahmedabad takes serious steps in the direction of solid waste collection as it has very low collection efficiency.

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6. Under spending
Municipal corporations are forced by legal mandates of balanced budgets and they are also not granted permission by State Governments to incur debt or have a deficit budget. Municipal bodies cannot run into deficit and their revenue income must surpass revenue expenditure while presentation of budgets. There is every possibility that municipal corporations might be manipulating or compressing its expenditure in order to meet the statutory requirement of the balanced budgets. Therefore, the surplus shown in the balance sheets cannot be termed as a genuine surplus. However, revenue expenditure is not objectionable, if a good proportion of this goes for operation and maintenance of civic infrastructure provided by the municipal corporations. Hence the evaluation of municipal corporations needs to be done in different way, making use of another set of parameters. These parameters are normative benchmarks which characterize the minimum level of expenditure that the municipal corporation is required to incur, in order to make sure a minimum standard of living to the residents.

6.1. Zakaria Committee norms

A set of expenditure norms, both for creating new assets, and for their maintenance were calculated by the Zakaria Committee for core urban services. These expenditure norms for service provision (capital) as well as operation & maintenance (O&M) are differ from city to city based on the population sizes.

The Zakaria committee used 1960-61 as a base year for O & M cost estimates which can be updated to the present year. This method looks to be more appropriate as the committee had collected the corresponding income and expenditure data of the municipalities for the year 1960-61.

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The values were projected to the 1996-97 time period by development research group, reserve bank of India. The values are projected from 1996/97 time period to 2011/12 time period for all the three different class of cities selected for the study. The desired expenditure criterias for six core urban infrastructural services i.e. water supply, waste water and drainage, urban roads, storm water drainage, street lighting and firefighting for three major class of the city are covered by this study. By comparing the actual levels of expenditure done by the municipal corporations on these services with the desired norms, after revising them to the present period, would disclose the levels of under spending by the particular municipal corporation. The value of under spending has been worked out using the following formula Under-spending value (%) = Average Zakaria Norm Per capita Expenditure
Average Zakaria Norm

Table 6-1 Projected Zakaria Committee norms for case cities Sectors Fire Fighting Street Lighting Urban Roads Storm water Drainage Water Supply Waste water and Drainage Total Ahmedabad Capital O M 52 773 2088 1057 1675 1932 7578 17 103 75 0 369 417 981 Vadodara Capital OM 98 644 1804 747 1211 1675 6179 14 97 62 0 349 407 928 Jamnagar Capital OM 66 567 1057 670 1209 1417 4986 10 85 46 0 335 318 795

The above table gives the prescribed spending norms for various case cities selected for studies. All the above values are in rupees on per capita basis.

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6.1.1. Overall under spending Table 6-2 Actual spending by the selected cities Sectors Fire Fighting Street Lighting Urban Roads Storm water Drainage Water Supply Waste water and Drainage Total Ahmedabad Capital O M 27 28 504 52 215 266 1093 9 60 11 0 169 72 321 Vadodara Capital O M 18 44 257 26 192 169 707 4 108 66 0 238 125 541 Jamnagar Capital O M 21 20 499 0 144 122 806 3 70 21 0 227 8 329

The actual expenditures made by the cities on core infrastructure services like fire fighting; street lighting, urban roads, storm water drainage, water supply and drainage are given in the table. The values are worked out taking the average expenditure, both capital and operation and maintenance for three year time period i.e. 2009/10 to 2012/13. Comparing the above values with the desired norms will give the level of under spending of the city.

Table 6-3 Under spending levels of the cities.

Sectors Fire Fighting Street Lighting Urban Roads Storm water Drainage Water Supply Waste water and Drainage Total

Ahmedabad Capital O M 49 96 76 95 97 89 88 49 42 86 0 54 83 67

Vadodara Capital O M 82 93 86 96 91 91 90 69 -10 -8 0 32 69 42

Jamnagar Capital O M 69 96 53 100 88 91 84 69 19 54 0 32 98 59

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The above table gives the under spending levels of the cities. It can be found that Vadodara is highly under spending in terms of Capital expenditure (89%), while Ahmedabad is under spending highest on operation and maintenance expenditure (67%). Per Capita Revenue Expenditure Rs. per capita 1413 1248 1134

City

Average Zakaria Norm Rs. per capita

Under spending Level as % of norm 83% 82% 80%

Ahmedabad Vadodara Jamnagar

8558 7107 5781

Table 6-4 Overall under spending levels of the cities. Thus comparing the under spending levels all the cities it is evident that under spending levels are highest in Ahmedabad. 6.1.2. Sectoral under spending - Ahmedabad

Ahmedabad
2500 Per Capita Spending 2000 1500 1000 500 0 Fire Fighting Street Lighting Urban Roads Storm water Drainage Water Waste Supply water and Drainage Norms Actual

Sectors

Figure 6-1 Sectoral Under spending: Ahmedabad The Ahmedabad city is performing worst in case of street lighting and storm water drainage with under spending levels more than 90% respectively in both the cases.

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Though under spending is not desired the, the city has least under spending on firefighting, urban roads and water supply, which indicates good level of services offered to the citizens.

6.1.3. Sectoral under spending - Vadodara The aggregate level of under spending is less in case of Vadodara compared to Ahmedabad. The city has spent least on waste water drainage with under spending levels more than 70%. The city has spent considerable amount on street lighting and urban roads, thus meeting the criteria of prescribed spending on operation and maintenance but it has not meet the capital investment required.

Vadodara
Per Capita Spending 2500 2000 1500 1000 500 0 Fire Street Fighting Lighting Urban Roads Storm Water water Supply Drainage Waste water and Drainage Norms Actual

Sectors

Figure 6-2 Sectoral under spending: Vadodara 6.1.4. Sectoral under spending - Jamnagar

The aggregate level of under spending is least in case of Jamnagar compared to both the cities. The city hasnt spent any amount on storm water drainage since past three years thus the levels of under spending on storm water drainage are 100%. Similarly the under spending levels on waste water and drainage are 93%.

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The city has spent considerable amount on urban roads and water supply as these sectors show a low under spending percentage.
Jamnagar
Per Capita Spending 2000 1500 1000 500 0 Fire Street Fighting Lighting Urban Roads Storm Water water Supply Drainage Waste water and Drainage Norms Actual

Sectors

Figure 6-3 Sectoral under spending: Jamnagar

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6.2. HPEC Norms

The Zakaria Committee (1963) encompassed the five of core urban infrastructure sectors, i.e. water supply, sewerage, storm water drains, urban roads, and street lighting. The committee report didnt include sectors such as storm water drains, urban transport, traffic support infrastructure, and street lighting.

The report prepared by High powered expert committee popularly known as HPEC included all the other sectors which were missed out by the Zakaria committee. In the process of detailed estimate preparation the high powered expert committee has made the use of various service delivery standards which were given by the urban development ministry. The differential investment required by the cities is also considered by classifying them into six different categories based on the population size.

The per capita capital investment which is required by a particular class of a city is obtained through the sample project data of JnNURM mission and its submissions. First sub mission is urban infrastructure and governance and the second sub mission which is urban infrastructure development scheme for small and medium size town. HPEC has made separate estimates of operations and maintenance (O&M) requirements. The O&M expenditure is considered for the estimation exercise includes the cost of O&M of physical assets, staff, and related administrative cost for the respective sectors. The O&M computation takes into account both the cost of O&M of existing assets as well as of new assets that will be created over the20-year period. It does not include debt servicing, margins for operators in case of private party involvement, and depreciation.

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The under-spending value has been worked out by taking the ratio of difference between the per capita revenue expenditure and norms suggested by HPEC to the average HPEC norms i.e. Under-spending value (%) = Average HPEC Norm Per capita Revenue Expenditure
Average HPEC Norm

Table 6-5 HPEC norms for case cities Sectors Street Lighting Urban Roads Storm water Drainage Water Supply Waste water and Drainage Total Ahmedabad Capital O M 2491 90 23460 421 4140 62 900 269 1831 32822 797 1639 Vadodara Capital OM 1660 55 23460 421 4140 62 393 189 2679 32332 613 1340 Jamnagar Capital OM 1258 54 29325 527 5178 78 410 135 3411 39582 491 1285

The above table gives the prescribed spending norms for various case cities selected for studies. All the above values are in rupees on per capita basis.

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6.2.1. Overall under spending Table 6-6 Actual spending by the selected cities Sectors Street Lighting Urban Roads Storm water Drainage Water Supply Waste water and Drainage Total Ahmedabad Capital O M 28 504 52 49 215 849 60 11 4 116 169 359 Vadodara Capital O M 29 682 610 52 437 1811 108 66 18 54 238 483 Jamnagar Capital O M 20 499 0 56 144 719 70 21 0 10 227 328

Compared to Zakaria committee norms the expenditure norms on fire fighting are not prescribed by the HPEC group. So the under spending is calculated on only five urban infrastructural services. The actual expenditures made by the cities on core infrastructure services like; street lighting, urban roads, storm water drainage, water supply and drainage are given in the table. The values are worked out taking the average expenditure, both capital and operation and maintenance side for three year time period i.e. 2009/10 to 2012/13. If we compare it with the desired norms given by HPEC committee we will get the level of under spending of the city.

Table 6-7 Under spending levels of the cities.

Sectors Street Lighting Urban Roads Storm water Drainage Water Supply Waste water and Drainage Total

Ahmedabad Capital O M 99 98 99 95 88 97 34 97 94 57 79 78

Vadodara Capital O M 98 97 85 87 84 94 -96 84 71 72 61 64

Jamnagar Capital O M 98 98 100 86 96 98 -29 96 100 92 54 74

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The above table gives the under spending levels of the cities. It can be found that Jamnagar is highly under spending in terms of Capital expenditure (98%), while Ahmedabad is under spending highest on operation and maintenance expenditure (78%). Per Capita Revenue Expenditure Rs. per capita 1209 2294 1046

City

Average HPEC Norm Rs. per capita

Under spending Level as % of norm 96 93 97

Ahmedabad Vadodara Jamnagar

34461 33672 40867

Table 6-8 Overall under spending levels of the cities. Thus comparing the under spending levels all the cities it is evident that under spending levels are highest in Jamnagar in overall terms. 6.2.2. Sectoral under spending - Ahmedabad

Amhedabad
30000 Per Capita Spending 25000 20000 15000 10000 5000 0 Street Lighting Urban Roads Storm water Drainage Sectors Water Supply Waste water and Drainage Norms Actual

Figure 6-4 Sectoral under spending: Ahmedabad The Ahmedabad city is not performing well in case of urban roads and storm water drainage with under spending levels more than 97% respectively in both the cases.

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Though under spending is not desired the, the city has least under spending on water supply and waste water and drainage, which indicates good level of services offered to the citizens.

6.2.3. Sectoral under spending - Vadodara The aggregate level of under spending is less in case of Vadodara compared to Ahmedabad both in terms of capital as well as operation and maintenance expenditure. The city has spent least on urban roads with under spending levels more than 97%. Though the O&M expenditure of street lighting is more than required, the capital expenditure lags the prescribed expenditure norms by 98%. The city has spent considerably on water supply, waste water and drainage and storm water drainage, so the spending on operation and maintenance on these sector is good but it has not meet the capital investment required in any case.

Vadodara
30000 Per Capita Spending 25000 20000 15000 10000 5000 0 Street Lighting Urban Roads Storm water Drainage Sectors Water Supply Waste water and Drainage Norms Actual

Figure 6-5 Sectoral under spending: Vadodara

6.2.4. Sectoral under spending - Jamnagar

The aggregate level of under spending is highest in terms of capital expenditure required in case of Jamnagar compared to both the cities. The city

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hasnt spent any amount on storm water drainage since past three years thus the levels of under spending on storm water drainage are 100%. Even though city has spent considerable amount on urban roads and waste water and drainage as these sectors show a high under spending percentage which is up to 98%.It is important to note that O&M on both the sector is good.

It concluded that spending scenario in Jamnagar is worse than rest of the two cities
Jamnagar
35000 30000 25000 20000 15000 10000 5000 0 Street Lighting Urban Roads Storm water Drainage Sectors Water Supply Waste water and Drainage Per Capita Spending

Norms Actual

Figure 6-6 Sectoral under spending: Jamnagar

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7. Conclusions
Overall resource gaps of municipal corporations as seen from municipal budgets are not very large except for the case of Jamnagar city which shows significant deficits in the revenue account.

From the case study of three municipal corporations of Gujarat state it can be stated that, considerable changes in the fiscal trends of ULBs have been observed over the period of time (from year 1996/97-2012/13), especially after in case of Ahmedabad and Vadodara because of implementation of JnNURM mission.

7.1. Overall Fiscal Trend

Overall status of AMC and VMC is that its revenue account has remained in surplus throughout the study period and ORR has also remained below unity. But in case of JMC it has worsened during the period 2006-07 to 2011-12 from 1.24 to 1.14 due to sudden increase in revenue expenditure. Though revenue account of VMC has remained in surplus for five years it will go in deficit in the future scenario. This is due to higher CAGR of revenue expenditure than that of revenue income. Capital account of both AMC and VMC has remain in deficit throughout most of the years of the study period and CUR has also remained above unity which suggests that revenue surplus has been diverted to capital account for the development activities which is good sign for the city. While case of Jamnagar is completely contradictory. It had a good track record of CUR remaining positive, but during the study period of 2008/09 to 2012/13 the CUR is below unity indicating that the city is not been able to utilise the allocated funds properly.

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7.2. Revenue Income In case of all the three ULBs severe reduction in own source of local bodies has taken place due to abolition of octroi and dependency of municipal corporations on grants in lieu of octroi has increased. Property tax has become main source of income for all the ULBs and though property tax has become very important source of revenue income due to abolition of octroi. Thus improvement in the collection efficiency of PT tax is very important.

7.3. Revenue Expenditure

Establishment expenditure and administrative expenditure together constitute a major component of revenue expenditure in the case of all the three municipal corporations ranging from 35% to 52% and due to implementation of 6th pay commission establishment expenditure has increased drastically during last three years of study period.

7.4. Under spending

In spite of the fact that the condition of urban infrastructure in selected case cities is nearly qualifying the criterias given by CPHEEO and other organizations, the spending levels of the municipal corporations on core urban services is far below what is desired. At an overall level the under spending levels are averaged at 82% as per Zakaria committee norms and 94% as per HPEC.

It is found that the under spending done by the municipal corporations is because of the various factors such as dependency, decentralization and low cost recovery. The following graph highlights the issue of under spending showing the relation and its strength with the causal factors.

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7.4.1. Dependency and under spending

Dependency v/s Underspending

80 70 60 Dependency 50 40 30 20 10 0 79 80 81 82 83 84 Series1 Linear (Series1) y = 11x - 853 R = 0.716

Underspending

Figure 7-1 Dependency and under spending The coefficient of determination for the regression analysis between two series i.e. under spending v/s dependency is around 0.7. This indicates that there is a noteworthy relationship between the two parameters.

Thus as the dependency levels of the city increases i.e. more the city is dependent on grants more are the under spending levels.

7.4.2. Decentralisation and under spending Higher decentralization makes the municipal corporation to depend on state government for sharing the revenues, particularly in the absence of well established sharing formula and strict adherence made to them by the state government. Thus it is undesirable to have high decentralization ratio.

Thus it is undesirable to have high decentralization ratio. The above figure shows that higher is decentralization higher is the under spending.

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Decentralisation v/s Underspending

0.4 0.35 Decentralistion 0.3 0.25 0.2 0.15 0.1 0.05 0 79 80 81 82 83 84 Series1 Linear (Series1) y = 0.03x - 2.14 R = 1

Underspending

Figure 7-2 Decentralization and under spending

7.4.3. Cost Recovery and under spending

Cost Recovery v/s Underspending

6 5 Cost Recovery (%) 4 3 2 1 0 79 80 81 82 83 84 Series1 Linear (Series1) y = -1.5x + 124.9 R = 0.75

Underspending

Figure 7-3 Cost Recovery and under spending

The scattered diagram above indicates a negative and a relatively strong relationship between under-spending and cost recovery Rank correlation is 0.75. Thus higher is the cost recovery, lower is the under spending.

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The reasons for poor financial health of urban local bodies are factors like delegation of revenue powers, dependency of ULB for resources on upper tiers of government, low levels of decentralization and low cost recovery.

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