Funds devolution from state governments to ULBs: The case of Karnataka

By Anand Sahasranaman, IFMR Finance Foundation

The revenue share between state governments and ULBs is determined by the State Finance Commissions (SFCs) which are set up by state governments every 5 years. In essence, the mandate of the SFC is to determine:

  1. the principles of distribution to rural and urban local governments the net proceeds of the taxes, duties, tolls and fees levied by the state
  2. taxes, tolls and fees which may be assigned to rural and urban local governments
  3. grants-in-aid to rural and urban local governments from the consolidated funds of the state

In Karnataka, the third SFC was instituted to provide recommendations for the period 2008-09 to 2012-13. The report assessed the current state of ULBs in the state and developed the formula for determining the devolution of funds over this five year period.

SFC analysis of ULBs in Karnataka (2002-03 to 2006-07) reveals the following:

  1. 7.35% of all ULBs2 run a deficit, but the trend is most pronounced for City Corporations (CCs), where 33% run deficits.
  2. Across ULB types, per capita income of ULBs is greater than per capita expenditure by a factor of 2.59 (in 2006-07)
  3. Grants from state government (specific and general) contribute to 61% of overall ULB revenue, but there is a clear trend of increasing dependence on grants as we move to the smaller ULBs; grants contribute 59% of CC and City Municipal Council (CMC) revenues, while amounting to 63% and 71% in case of Town Municipal Council (TMC) and Town Panchayat (TP) revenues respectively. However, grants per capita show a declining trend as we move to smaller ULBs, except for the case of TPs, which have significantly higher values than CMCs and TMCs.
  4. Of own-revenue sources, property tax forms the most significant lever, at 15.7% of total revenue; again significance drops as we move to smaller ULBs – CC (20.4%), CMC (16%), TMC (12%) and TP (9.2%). Property tax per capita also shows a declining trend as we move to smaller ULBs.
  5. Salaries and allowances form the largest chunk of expenditure (31.9%) and expenditure per capita across ULBs
  6. There is a positive association between per capita expenditure and per capita revenue. Additionally, population (-,+) and literacy (+,+) are significantly (at the 99% confidence level) correlated with variations in per capita revenue and per capita expenditure respectively.

In terms of the trends in devolution of funds from the state government over the period of the pervious SFC, the report notes the following:

  1. Overall revenue of the state increased at an increasing rate from 2002-03 to 2007-08
  2. In the same period, devolutions to rural and urban local governments also grew, but at a much lower rate than the state government revenues

Based on this analysis, the SFC recommended the following:

  1. 33% of the Net Own Revenues (NOR) of the state to be shared with rural and urban local governments
  2. The criteria for determining the share of funds to rural and urban local governments was to be as follows:
  3. Based on these criteria, the split between rural and urban local governments of the total devolved amount worked out to 70:30. This meant that 23% of the NOR was to be devolved to rural local governments and 10% of NOR to urban local governments.
  4. The 10% NOR devolved to ULB’s was to be split into 3 components as follows:

The complete SFC report is available here.

1-All data, tables and charts taken from the Report of the Third State Finance Commission, Government of Karnataka
2-There are four types of ULBs in Karnataka: City Corporations (CC), City Municipal Councils (CMC), Town Municipal Council (TMC) and Town Panchayats (TP)

  • anuj

    very informative and useful; to know how city finances originate, are managed and prioritized (or not). I hope to read more and in-depth. thanks for writing and sharing this.