The municipal corporations in India will be starved for funds and face an annual shortfall of Rs10,000 crore to provide for even the core urban services unless there is a complete overhaul in the revenue earning system of these entities, according to a report by the Reserve Bank of India (RBI).

The RBI report has projected an investment requirement of Rs63,000 crore per annum towards urban infrastructure in the country during the 10-year period between 2004-05 and 2013-14. However, this does not include the need for "redistributive functions like urban poverty alleviation".

The report, Municipal Finance in India - An Assessment, the study has been carried out under the aegis of development research group (DRG), a cell constituted in RBI's department of economic analysis and policy. The study has covered 35 metropolitan municipal corporations in the country.

The average investment requirement of Rs63,000 crore per annum will be about 2.2 per cent of the GDP at 2004-05 prices. Currently, the report says, the total revenue of these urban local bodies is a meagre 0.75 per cent of the GDP compared to 4.5 per cent for Poland, 5 per cent for Brazil and 6 per cent for South Africa.

The shortfall in resources is on account of "vertical imbalance" as well as the nature of municipal bodies' own operations. The mismatch between the functions and finances of the urban local bodies explains the vertical imbalance. The report said, "Out of 18 functions to be performed by the municipal bodies in India, less than half have a corresponding financing source".

The taxes and user charges of the urban local bodies in India are "grossly inadequate" to meet the expenditure needs of these municipal entities", the report notes.

It has been noticed that the spending by all municipal bodies is lower than required for providing a minimum level of civic amenities. The extent of under-spending varied between 30.78 per cent in case of Pune to 94.43 per cent in case of Patna. Municipal corporations in Bihar and Uttar Pradesh have the highest level of under-spending, while those in Gujarat and Maharashtra are among the best performers.

Based on per capital spending on core services by metropolitan municipal corporations, the study indicates that the level of under-spending on an average works out to about 76 per cent. The report suggests that the urban local bodies have considerable scope for debt financing as the current backlog and the infrastructure growth needs in cities and towns "far exceeds the resources at the disposal of the municipal corporations".

The report opines that though India does not face an "urban explosion", however, the absolute magnitude of the urban population is itself so large that the issues of shelter, civic amenities, public health and social security are "too colossal to be ignored by national authorities".

The report projects that till 2013-14 the country will require an investment of Rs325,010 crore towards urban basic services, Rs253,700 crore for mass urban transport services and Rs49,500 crore for road infrastructure services. 

The RBI report advocates that the problems of municipal finance in India need to be addressed in a holistic manner through comprehensive reforms. It said, "The issues of lack of clarity, consistency and predictability in expenditure assignment and revenue assignment need to be addressed. In particular, the system of taxes, user charges, inter-governmental transfer and borrowings in respect of urban local bodies needs to be reviewed for their adequacy and suitability to match the expenditure needs".

Emphasising on the function-finance mapping to ensure that each function performed by a municipal corporation is backed by a corresponding finance source, the report pointed out that the revenues and expenditure have to be carefully matched by "reforming property tax, using land by adopting 'user pay', 'beneficiaries pay', and 'polluters pay' principals linking individual services with user charges and collective services with benefit taxes".

Stressing the need to ease the borrowing restrictions on urban local bodies, the report prescribed that urban infrastructure could be financed through "municipal bond markets, specialised municipal funds and public-private partnership".

Suggesting that the expenditure management, professionalisation of staff and efficiency in services of municipal coporations should be improved, the report further said the accounting and budgeting systems of urban local bodies should be toned up with disclosure of adequate information by these entities to public at regular intervals.