By: Vishal R & Kala S Sridhar

Bengaluru’s civic governance is quite typical of Indian cities. Recently, the Karnataka High Court directed the city’s municipal body, the Bruhat Bengaluru Mahanagara Palike (BBMP), to fill up all potholes on the city’s roads. BBMP struggled to conform to this order, while commuters are still required to wade through stretches called ‘roads’. It is clear that if entirely dependent on taxes and user fees, the resources needed for urban development are not adequate in India.

In China, land reforms in 1988 generated revenue for local governments to invest in infrastructure, and provided benefits from enabling land development. The reform of the tax assignment system in 1994 shifted more revenues to Beijing, while shifting more expenditure responsibilities to local levels of government, increasing their need to develop extra-budgetary funding through development fees.

Subsequent reforms in 1997 and 2002 incentivised subnational governments — provinces, prefectures, counties and townships — to take control over their revenue sources to finance their expenditures. The reforms led to a sharp increase in both central and subnational fiscal revenue, with a large portion of the central revenue being transferred to the subnational level in the form of transfer payments.

Local governments in China finance expenditures through a combination of on-budget revenue shared with the central government and ‘formal off-budget’ revenue. The latter is agreed on by Beijing, but not shared and reported. Local governments also receive revenue from non-authorised fees and taxes. Among the revenue on which local governments have control over, a number of off-budget revenue sources are used for infrastructure financing, such as land leasing, development fees and asset income.

In 2007, the State Council of China required all land leasing revenues to be shown as part of on-budget accounts. The state council also ordered that all municipalities retain land-leasing revenues in a declining reserve for three years; honour the revenue-sharing arrangement whereby 5-10% of land-leasing revenue was sent to Beijing; local governments are allocated a portion of their land-leasing revenues to land reclamation and protection; and all land, including industrial land, are leased through public auction or open tenders.

In China, Urban Development and Investment Companies (UDICs), wholly owned subsidiaries set up by local governments to hold infrastructure-related assets, have become the main way to obtain financing for infrastructure from banks, with the local government guaranteeing that they will use all their revenue-raising power to repay the loans. The use of UDICs, and the practice of selling land for development to complement limited local governments revenues and pay for investment in the provision of local services, has allowed Chinese cities to dramatically increase the provision of infrastructure and services and accommodate a fast pace of urbanisation.

The major revenue source for city governments in India is property tax. There are a number of attempts to lease land by urban development authorities in India, to monetise the asset, as astudy for the 13th Finance Commission found. But these have not translated into substantial gains for municipal bodies.

Given this, Indian cities should capitalise on property taxes and user charges to increase their revenues substantially. There are many non-paying and unassessed properties in Indian cities, which need to be brought into the tax net. Further, scarce resources such as water need to be metered.

While government departments need to make more attempts to rise to the occasion to deliver, citizens’ awareness of rights, most importantly their responsibilities, will go a long way in improving Indian cities and make them liveable.