Karnataka Municipalities Act, 1964: Funds – Part II

By Vishnu Prasad, IFMR Finance Foundation

Continuing from our earlier post that looked at the function and functionaries of the Karnataka Municipalities Act, 1964, this post looks at the Funds facet of the Karnataka Municipalities Act, 1964, which is the enabling legislation for the 74th Constitutional Amendment Act in Karnataka. The posts are part of our Municipal Finance blog series.


The Figure below provides a break-up of what taxes, fees and other forms of own revenue generating cess or duties, municipal councils can impose under the Karnataka Municipalities (KM) Act.

Under the KM Act, the State government and the municipal council have the power to suspend or prohibit the levy of ‘objectionable’ taxes. However, the council’s order to reduce, suspend or abolish a tax is subject approval by the State government. Additionally, the State government may also require the municipal councils to impose new taxes.

Property Tax

Property Tax is the single largest source of own revenue for most ULBs. The KM Act specifies the property tax that shall be levied for different classes of buildings and land:

  1. Commercial building at such percentage not being less than 0.5 percent and not more than 2 per cent of taxable capital value1 of the building
  2. Residential building and buildings other than commercial- 0.3 to 1 per cent of taxable capital value of the building.
  3. Vacant land under 1000 sq. meters- 0.1-0.2 per cent of taxable capital value
  4. Vacant land 1000-4000 sq. meters- 0.025-0.05 per cent of taxable capital value
  5. Vacant land above 4000 sq. meters- 0.01-0.02 per cent of taxable capital value

The Act also specifies that the property tax levied should be enhanced by 15 percent once in every three years (commencing from 2005-2006).

Property tax cannot be levied on certain types of land and buildings like places set apart for public worship, choultries, ancient monuments, charitable hospitals and dispensaries, hospitals and dispensaries maintained by railway administration, burial and cremation grounds, government lands set apart for free recreational purposes etc.

Municipal Fund

The Municipal Fund of a ULB is composed of money received by or on behalf of the municipal council by virtue of the provisions of the KM Act. Money can be taken out of the municipal fund beyond what has been specified in the budget only for specific purposes like the acquisition of land, construction, maintenance, repair for the purpose of obtaining supply of water, providing the supply of electricity, establishing slaughter houses or places for the disposal of night soil or sewage or carcasses of animals, for drainage works, providing mechanically propelled transport ,setting up of dairies or farms for the supply and to promote the health, safety or convenience of the inhabitants

The municipal council can deposit any surplus funds at interest with a government savings bank, or with the sanction of the state government in any scheduled bank or a central co-operative bank in the State or in public securities2.

A municipal council may borrow money with the previous sanction of the Government from the Government or from any bank, corporation or person, money required for constructing any work of a permanent nature or for acquisition of land. In such cases, the State government will specify conditions regarding security, the rate of interest and repayment.

Budget and Auditing

The Chief Officer has to present the budget of the municipal council on or before the fifteenth of January each year with detailed estimates of income and expenditure for the ensuing financial year. The budget estimate needs to make allowance for the following:

  1. Suitable provisions for all services mandated by the KM Act
  2. Payment of interest and principal on loans for which the council is liable
  3. All payments due to the State government (for public works carried out by the State government and contribution towards expenses of Karnataka Municipal Administrative Services)
  4. Allow for a balance that it is required to meet establishment charges covering three months

The State government holds the power to modify the budget in order to bring it in compliance with the provisions of KM Act.

The law also requires that the account of the council be audited every year and an audit report submitted. The audit report should contain:

  1. Every payment which appears to be contrary to law;
  2. The amount of any deficiency or loss which appears to have been caused by the gross negligence or misconduct of any person;
  3. The amount of any sum received which ought to have been but is not brought into account by any person, and
  4. Any other material impropriety or irregularity in the accounts

(The entire act may be accessed here.)

1 – The taxable capital value of the vacant land shall be equivalent of fifty percent of the market value guidelines of properties published of the land notified by the Government under section 45B of the Karnataka Stamp Act, 1957.
2 – “public securities” are defined as,—
(a) securities of the Government of India,
(b) securities of the Government of Karnataka, or of any other State Government,
(c) debentures or other securities for money issued by or on behalf of any local authority in exercise of the powers conferred by a law in force in the State, or
(d) a security expressly authorized by any order which the Government makes in this behalf


Karnataka Municipalities Act, 1964: Functions & Functionaries – Part I

By Vishnu Prasad, IFMR Finance Foundation

This post and the next one look at the Karnataka Municipalities Act, 1964, which is the enabling legislation for the 74th Constitutional Amendment Act in Karnataka. The two posts look at 3 main features of the Act- functions, functionaries and funds. The current post speaks about the first two features.


The Karnataka Municipalities Act, 1964 (KM Act) comprises 17 chapters, 380 sections and 13 schedules. The founding objective of the Act was to have a uniform law for the governance of Municipal Councils in the State, which were governed until then by seven different enactments. The initial Act aimed to govern both City Municipalities and Town Municipalities as the provisions were in most case common and it was seen as convenient to have a single enactment for both kinds of Municipalities. The Act was later amended in 1994 (Amending Act 36 of 1994) to bring it in conformity with the provisions of the 74th Constitutional Amendment Act (CAA), 1992.

While the City Municipal Councils (CMC), Town Municipal Councils (TMC), Town Panchayats (TPs) and Notified Area Committees (NACs) are governed by the KM Act, the larger City Corporations (CCs) are governed by the Karnataka Municipal Corporations Act (KMC Act), 1976. The Table below provides a category-wise breakup of ULBs in the state.


The KM Act mentions 23 obligatory functions, 2 special functions and 35 discretionary functions of municipal councils. The 23 obligatory functions contain most functions devolved under the 74th CAA (for more on this see our earlier blog post).

The 2 special functions are:

  1. Providing special medical aid and accommodation for the sick in time of dangerous disease; and taking such measures as may be required to prevent the outbreak of the disease;
  2. Giving relief to and establishing and maintaining relief works in times of famine or scarcity.

The 35 discretionary functions include specific functions like planting and maintaining roadside and other trees; taking statistics and granting rewards for information which may tend to secure the correct registration of vital statistics; maintenance of an ambulance service and broad functions like the promotion of public health or child welfare; provision of transport facilities within the municipal area and revival or promotion of cottage industries.


The Most important functionary at the ULB is the Municipal Council. Every municipal council is headed by the President and Vice-President. The Municipal Council consists of:

  1. Councilors, elected by the people under their jurisdiction
  2. Not more than five persons nominated by the Government from amongst the residents of the municipal area and who are,
    • (i) Persons having special knowledge and experience in municipal administration or matters relating to health, town planning or education, or
    • (ii) Social workers.
  3. Members of the State Legislative Assembly, representing a part or whole of the municipal area whose constituencies lie within the municipal area
  4. The members of the Council of States and members of the State Legislative Council registered as electors within the municipal area

In addition to the Municipal Council, ULBs also have a Standing committee that deals with the following subjects:

  1. Taxation, finance and appeals;
  2. Public health, education and social justice;
  3. Town planning and improvement;
  4. Accounts

Every municipal council has a Chief Officer who is appointed by the Director of Municipal Administration. The Chief Officer functions as the executive head of the municipal council. The duties of the Chief Officer include:

  1. Taking prompt steps to remove any irregularity pointed out by the auditor
  2. Reporting to the President, the Standing committee and the Municipal Council all cases of fraud, embezzlement, theft or loss of municipal money or property
  3. Supplying any return, statement, estimate, statistics, account, or report or a copy of any document in his charge called for by the municipal council or the standing committee
  4. Exercising supervision and control over the acts and proceedings of all officers and servants of the municipal council in matters of executive administration and in matters concerning the accounts and records of the municipal council

The powers of the Chief Officer include granting and issuing licenses and permissions which may be granted by the municipal council; suspending or withholding any of the issued license; receiving and crediting to the municipal fund all fees payable for licenses; entering (on behalf of the municipal council) into contracts and inviting tenders for the execution of any approved work.

A municipal council may also appoint one or more Health Officers whether temporarily or permanently, the officers being officers of the Department of Public Health.

The Director of Municipal Administration (subject to the control and orders of the Government) acts as the chief controlling authority in respect of all matters relating to the administration of the KM Act. For example, the Deputy Commissioner has the power to suspend the execution of orders of municipal councils if the order is deemed unlawful or is likely to lead to a breach of peace. The Director of Municipal Administration may also take steps to prevent extravagance in the employment of the municipal councils. In addition, the state government has the power to dissolve municipal councils under circumstances where the municipal council persistently makes defaults in the performance of the duties imposed on it or exceeds, abuses its power or refuses to carry out the directions given to it under the provisions of the KM Act.

(The entire act may be accessed here.)


JNNURM: Brief Overview of the Mission – Part II

By Vaibhav Anand, IFMR Capital

Continuing from our earlier post on JNNURM, this post discusses the progress made during JNNURM-I, key lessons learnt from the mission and the proposed features of the next phase of the Mission, JNNURM-II.

JNNURM-I was envisaged as a reform-driven planned development of cities. However, the mission degenerated, to an extent if not completely, to a funding source for stand-alone urban infrastructure projects with funding delinked from reforms. The implementation status of key mandatory reforms across the states and identified cities has not been encouraging:

  • Only 11 out of 30 states/UTs, audited by CAGi, have transferred all functions, as per the 74th CAA, to the ULBs
  • Nearly 33% of ULBs/parastatals have not implemented the accrual based double entry accounting method
  • More than 40% of ULBs have failed to meet the 85% coverage of Property Tax by 2010-11
  • Out of 39 cities audited by CAG, only seven cities have implemented the user charge collection mechanism for water supply (only five cities have done this for solid waste management system)
  • Rent control law reforms and stamp duty rationalization has not been implemented by all the states

The total allocation of funds by the Central Government for the Mission was revised to INR 660.8 bn in 2009 from the initial allocation of INR 500 bn. During the Mission (from 2005 to 2012), only 60% of the allocated funds were released. Further, only 9% of the 2815 approved projects were completed during this period.

Key lessons from JNNURM-I

  1. Lack of integrated planning at city and regional level: It was expected that the City Development Plan (CDP) would ensure that projects were identified based on an integrated plan and a long term vision for the city development. However, CDPs ultimately reduced to just the investment plans for various haphazardly selected stand-alone infrastructure projects
  2. Lack of participation in planning: Not all ULBs were involved in the preparation of development plans; CDPs were prepared either by the state or the city development authorities in little or no consultation with the ULBs in many cities. Further, the preparation of Detailed Project Reports (DPRs) was done with limited interaction with the stakeholders.
  3. Exclusion of peri-urban areas: The development of peri-urban areas (suburban and countryside areas) was not included in the Mission and didn’t find mention in the development plans. This has led (and is leading) to the unstructured development around the city boundaries resulting in expensive modifications at a later date.
  4. Process Heavy and Lack of coordination: The Mission was process heavy and tedious with the involvement of many governing and sanctioning bodies, advisors and consultants. This resulted in a significant lack of coordination and delayed decision making for the state officials.
  5. Failure to adopt service level benchmarks in designing and appraising the approved projects resulted in sub-optimal quality of service delivery.
  6. Lack of adequate capacity: Implementation of reforms at the state and ULB/parastatal level suffered severely due to the lack of adequate capacity at the development planning, financial management and project management.
  7. Lack of differential approach towards reforms: The Mission adopted a one-size-fits-all approach for the reform implementation across the states and identified cities, which resulted in significant mismatch in the progress of reform implementation across states.
  8. Delay in the implementation of 74th CAA and incomplete devolution of financial powers to ULBs further deterred the ability of ULBs to leverage the funding assistance provided under the Mission.

Proposed JNNURM-IIii

The Committee to facilitate the redesigning of the second phase of JNNURM, JNNURM-II, was formed by the MoUD and Planning Commission in Sept, 2011. The committee was chaired by Sh. Arun Maira (Member, Planning Commission) and other members of the JNNURM steering committee and the state governments. The proposed structure and features of JNNURM-II discussed in the following section are based on the report submitted by the Committee in March, 2012.

Proposed JNNURM-II: Key features

  • Duration: 10 years (JNNURM-I was 7 years long)
  • Transition period of 2 years beginning 2012-13 to complete the approved projects under JNNURM-I and to implement the pending reforms as the state and ULB level. During this period the following would be ensured:
    • Complete JNNURM-I sanctioned projects
    • Centre, state and ULBs to undertake capacity building reforms
    • Municipal Cadres to be established
    • Development Plan and Financial Plan to be finalized (refer next section for details)
    • Audit of ULB’s financial statements for at least 3 years up to 2011-12
    • Base level reforms to be completed
  • Nature of scheme: State Sector with Additional Central Assistance (ACA) (same as JNNURM-I)
  • JNNURM-II will be an umbrella scheme with various submissions: Rajiv Awas Yojna (RAY), slum rehabilitation in areas outside RAY, Urban Infrastructure and Governance (UIG), capacity building
  • Submissions/sub-schemes discontinued: UIDSSMT, BSUP, IHSDP
  • Schemes merged: MoUD’s UID for Satellite Towns, RAY (Funding aspect to be governed by the guidelines approved by Cabinet)
  • Division of financial assistance for JNNURM-II
    • Base funds- 80% [available on completion of all mandatory reforms]
    • Capacity building funds- 10% [funds available for capacity building even during the reform implementation during the transition period]
    • Incentive funds- 10% [available on completion of ‘incentive’-linked difficult reforms]

Proposed JNNURM-II: Key objectives and Strategies

The chief objective of the second phase remains the reform linked development however significant stress is on identifying internal resources of fund, leveraging the Mission assistance using the idiosyncratic strengths (i.e. tourism, carbon credits, solid waste recycling, etc) of the cities, empowering ULBs, participatory and transparent governance, effective management of land resources, and pro-poor service delivery.

One of the Implementation strategies of JNNURM-II is to build adequate capacity, including the development and training of municipal cadres. Other key strategies include:

  • Stress on planned development of cities: The CDPs and DPRs have given way to a ‘Development Plan’ (DP) which will be a vision document with a 10 year perspective. It would include project sequence, timelines, intended outcomes, monitor-able milestones based on the service level benchmarks developed by MoUD.
  • Simplification of the processes by resolving overlapping domains and making the governance more efficient
  • Ensuring the accounting reforms at ULBs. Further the ULBs to make 10-year financial plans (FP)
  • Adoption of service level benchmarks to monitor and appraise the project outcomes
  • Planned development of small towns and peri-urban areas
  • Ironing out the distortions in land market
  • Stress on innovation and learning across the urban system to build on the internal resources and strengths of the cities

The complete report of the committee on the proposed design of JNNURM-II is available here.

i – Performance report of JNNURM by CAG India: Read here
ii – Report of the Committee on JNNURM-II (available at http://jnnurm.nic.in/wp-content/uploads/2012/08/Final.pdf)


JNNURM: Brief Overview of the First Phase of the Mission – Part I

By Vaibhav Anand, IFMR Capital

This post, along with the next one, provides a brief overview of the JNNURM-I, key lessons learnt from the mission and the proposed structure of the next phase of the Mission, JNNURM-II

JNNURM-I: Introduction

Jawaharlal Nehru Urban Renewal Mission-I (JNNURM-I or the Mission), launched by the government of India in December 2005, was the largest, and first if its kind, mission-led urban development initiative with an estimated provision of Rs. 50,000 crore. The initial duration of the Mission was seven years beginning from the year 2005-06i.

JNNURM-I aimed to encourage reforms and fast track planned development of identified citiesii. The Mission identified 65 cities/urban agglomerations (UAs), called ‘mission cities’, which were eligible for assistance for infrastructure development. A list of mission cities and the selection criteria is available on the Mission’s website (http://jnnurm.nic.in/). The main aim of the Mission was to promote reforms in urban governance and service delivery and provide reform-linked financial assistance for the planned infrastructure development of the mission cities.

Mission and Institutional Framework

JNNURM-I comprised two sub-missions which focussed solely on the 65 mission cities:

(a) Urban Infrastructure and Governance (UIG) administered by the Ministry of Urban Development (MoUD)
(b) Basic Services for Urban Poor (BSUP) administered by the Ministry of Urban Employment and Poverty Alleviation, now known as Ministry of Housing and Urban Poverty Alleviation (MoHUPA)iii

Further, the Mission had two sub-schemes: (i) Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT), and (ii) Integrated Housing and Slum Development Programme (IHSDP) which focused on all urban centres under the discretion of the state governments.

Going bottom-to-top, the State Level Nodal Agencies (SLNA) were responsible for inviting and appraising the projects before recommending to the State Level Steering Committee. Further, the financial assistance for the sanctioned projects was to be disbursed to the ULBs through SLNAs. They also had responsibility to manage and monitor the performance of the projects and reform implementation under the Mission. At state level, the project proposals were reviewed and prioritised by the State Level Steering Committee.

At the central level, there were two project appraisal bodies: the Technical Advisory Group (TAG) and the Central Sanctioning and Monitoring Committee (CSMC). National Steering Committee, chaired by the minister of UD and co-chaired by the minister of HUPA, provided the overall policy oversight and guidance.

Mission Strategy

JNNURM envisaged achieving the objectives of reform-linked planned urban development through the following strategy:

a) Formulation of the City Development Plan (CDP) by each mission city: The CDP was expected to be an integrated vision document for the cities which would include the policies, reform programmes and strategies, and financial plans. Infrastructure projects for the cities were to be identified based on the CDPs.
b) Preparation of the Detailed Project Report (DPR): The ULBs/parastatals were required to prepared DPRs for all the projects identified based on the CDPs. The DPRs would ensure that projects were well planned. The DPRs were expected to have details on the financial and operational viability and the environmental impact of the project among other things.
c) JNNURM Assistance and Leveraging of Funds: Financial assistance, in terms of grant or loans, from the central and state governments was to be provided to the ULBs through designated SLNAs. Further, it was expected that the nodal agencies and ULBs/parastatals would leverage these funds through external borrowings on the basis of credibility built on the financial and governance reforms under JNNURM.

Eligible Sectors and Projects

A comprehensive list of the sectors and projects eligible to receive assistance under the two submissions (UIG and BSUP) is available at the Mission website. Key sectors and projects included water supply and sanitation, solid waste management, urban transportation, development of slums, and projects to ensure basic services to the urban poor.

Reforms under the Mission

JNNURM-I was designed as a reform-linked investment mission to ensure the financially sustainable development of the urban centres through efficient governance, better infrastructure and improved service delivery. The Mission led a significant import on reform agenda which is divided into mandatory and optional reforms.

Key mandatory reforms were:

• Adoption of accrual based double entry accounting system by all ULBs
• Property tax reforms at ULB level(collection efficiency to at least 85% by 2012-13)
• Implementation of the 74th Constitutional Amendment Act by the state
• Repeal of Urban Land Ceiling and Regulation Act (ULCRA) and Rent Control Act
• Rationalization of Stamp Duty

A comprehensive list of the mandatory and optional reforms is available at the Mission website.

(Next post will discuss the current status of reforms and projects under JNNURM-I, key lessons from the Mission, and the proposed structure of JNNURM-II)

i – JNNURM-II has proposed a transition period two years in addition to the original tenure of seven years to complete the existing projects and to implement the reforms mandated under JNNURM-I
ii – Source: JNNURM Overview available at (http://jnnurm.nic.in/wp-content/uploads/2011/01/PMSpeechOverviewE.pdf)
iii – A series of fissions and fusions led to the current structure of MoUD and MoHUPA. http://mhupa.gov.in/ministry/index2.htm provides an interesting read on this


Summary of Report on Indian Urban Infrastructure and Services (2011) – Part II

By Vishnu Prasad, IFMR Finance Foundation

As part of our series on Municipal Finance, in this concluding part of our two part review of the Report on Indian Urban Infrastructure and Services (2011), we look at the Report’s recommendations on urban governance reform and financing urban infrastructure.

Urban governance reforms

The Report identifies three broad areas of reforms in urban governance- administrative reforms, service delivery reforms and fiscal reforms1.

Administrative Reforms

The Report suggests major administrative reforms “for bringing about greater efficiency in the management of infrastructure assets, delivery of urban services, and improvement in conditions for the poor so that Indian cities can provide a better quality of life, generate a better environment for growth, and be inclusive.2

i. Autonomy in city management
The Report recommends greater functional and fiscal autonomy for Urban Local Bodies (ULBs) so that they can effectively carry out the functions mandated under the 74th Constitution Amendment Act (CAA). It also recommends strengthening capacity at the ULB level by creating a municipal cadre and lateral hiring of professionals to the cadre.

ii. Empowered mayors with effective devolution
The executive head of a city is the Municipal Commissioner, who is deputed by and accountable to the state government. As a part of increasing autonomy of cities, the report recommends creation of single-point accountability through direct election of the mayor by residents of the city and creation of a unified command structure under the Mayor.

iii. One Ministry for Urban Affairs and Housing
The problem of urban poverty and housing for low-income households is closely interlinked to the problem of urban development. Solutions to these problems lie in an integrated planning framework which focuses on building urban infrastructure for all and ensures delivery of urban services of the same standard to all. City plans cannot be developed in isolation of the transport, housing needs of low-income households and planning through different departments under two ministries can be inefficient.

iv. Convergence of institutional responsibilities
One of key reasons for poor urban service delivery in India is the fragmented institutional set-up of cities. The report recommends convergence of responsibilities (intra-departmental responsibilities and coordination with a state and central governments) under an empowered mayor. This will lead to a holistic approach in infrastructure building and service delivery.

Service Delivery Reforms

i. Corporatization of urban services
Corporatization of services helps in ring-fencing the finances of an entity which is responsible for the delivery of specific services and protecting it from multiple populist demands3 ” In this institutional framework, the corporatized entity can follow modern management practices while being accountable to the ULB. The Nagpur Municipal Corporation has made a start by creating a dedicated company for overseeing its water provision, waste water treatment and disposal functions.

ii. Coming together to deliver
In certain situations, it might be optimal for smaller ULBs to come together and provide services. The report envisions the creation of joint entities involving multiple ULBs for discharge of such functions. However, such entities must be made accountable to the ULBs through service level agreements.

iii. Public-Private Partnerships
The report recommends using PPPs as an effective instrument to deliver better services. Well-structured PPPs can provide both efficiency and financial gains for ULBs. However, there are a number of deterrents to the entry of private firms in urban service provision- commercial non-viability of projects, inability of ULBs to generate a robust internal revenue base, inertia to move towards new ways of service delivery etc.

iv. Regulatory regime for urban services
The report recommends setting up of urban utility regulators for all urban services to monitor progress of plans, recommend tariff structures, monitor quality of services and advise the state government. The report also suggests a benchmarking exercise to compare municipal performance indicators, done by a Reform and Performance Management Cell (RPMC) at the state and central government levels.

v. Accountability and Citizen participation
Citizen Participation needs to be strengthened to create ‛citizen owned, citizen paid, and citizen managed’ cities. Setting up of Ward Committees and AreaCommittees is an important first step. The Public Disclosure Law and Community Participation Law are important tools for driving transparency and accountability in governance. Additionally, the report endorses setting up of a Local Body Ombudsman that addresses corruption and efficiency issues and State Councils of Local Self-government headed by the Chief Minister of each state with Mayors and Municipal Chairpersons as members to discuss issues of local self-government.

vi. E-governance
By doing away with the discretionary powers vested in a few officials, e-Governance cuts at the roots of corruption and inefficiency. For example, geographical information system (GIS) can be used to improve urban land management and make it more transparent. The report suggests development of an IT cadre at the ULB level and appointment of a Chief Information Officer for larger cities for strengthening capacity.

Fiscal Reforms

i. Financial reporting, disclosures, and audits
ULBs must adopt transparent budgeting practices based on double-entry bookkeeping, performance reporting, cost accounting and auditing in order to be accountable to their citizens and also to become market-worthy so as to attract capital for investment. The Report also proposes a Market Worthiness Disclosure Standard (MWDS), which should require cities to report data in a regular and timely manner. MWDS envisages the following reports to be prepared by ULBs and made available on their websites over time:

• Cash flow statement, and key financial ratios;
• Net revenue dynamics including economic data for predicting expenditures and institutional arrangements that affect both revenue prospects and expenditure commitments; and
• City management capacity covering aspects like staff, institutional framework, and information flow.

ii. Fiscal devolution
The 74th Constitutional Amendment Act did not provide for a ‛municipal finance list’ in the Constitution to match the municipal functions listed, thereby signaling an incomplete devolution package and leaving the issue of financial devolution to state governments. It only envisaged State Finance Commissions (SFCs) to devolve funds from state to local governments. Table 1 provides a more detailed discussion on fiscal devolution.

Financing Urban Infrastructure

In the previous post, we noted that the Report estimates investment for urban infrastructure over the 20-year period from 2012 to 2031 to be Rs 39.2 lakh crore (at 2009-10 prices). It proposes a three pillar framework for financing this expenditure:

i. Securing the revenue base of ULBs through ‛exclusive taxes’ and a guaranteed and predictable share of ULBs in tax revenue of state governments
ii. New Improved JNNURM (Jawaharlal Nehru National Urban Renewal Mission) from the Government of India
iii. External Sources of Finance: Through reforms in governance and financing ULBs can begin to move away from a weak financial base towards a framework which enhances the creditworthiness of the ULBs and improves their ability to generate and leverage revenue surpluses for accessing market funds.

Table 1 captures some of the important aspects of the proposed funding framework.

The projected Municipal Revenue and Expenditure (as a percentage of GDP) over the proposed 20 year period is given in Table 2 below:

In order to finance their deficits, ULBs will have to resort to market borrowings (pooled finance, municipal bonds, institutional finance, etc.) and new project execution mechanisms like PPP, and land-based financing instruments.

1 – For a detailed discussion on problems of urban governance and service delivery in India, see the first part of this review and our post on Municipal functionaries. The Municipal Functionaries post also discusses capacity strengthening reforms.
2 – Page 92, Chapter 4, Report on Indian Urban Infrastructure and Services (2011)
3 – Page 98, Chapter 4. Report on Indian Urban Infrastructure and Services (2011)


Summary of Report on Indian Urban Infrastructure and Services (2011) – Part I

By Vishnu Prasad, IFMR Finance Foundation

Continuing our series on Municipal Finance in India, we review two recent developments- Report on Indian Urban Infrastructure and Services (2011) and JNNURM. This blog post summarizes the report’s finding on three key themes- Urbanization in India: Characteristics and Challenges, Urban Service Delivery and Investments for Urban Infrastructure.

Urbanization in India: Characteristics

The Report identifies three trends that characterize urbanization in India (up to 2001):

  • i. Structural transformation and decelerating urban population growth: India’s rapid economic growth has entailed a structural transformation in the economy such that the share of agriculture in GDP has declined from 34% in 1983-84 to 15% in 2009-10. During the same period, the share of services has burgeoned from 40% to 57% while the share of industry has remained constant. Structural transformation is typically associated with rapid urbanization as labour moves from low-productivity agriculture to high-productivity industry and services, which are typically located in urban areas. However, the Indian experience shows that there was only a moderate dip in the share of agriculture in total employment (agriculture still employs 52% of the workforce (2004-05)). Since employment was being generated in high-skilled sectors like IT, banking and telecom, it did not draw labour from rural areas. This led to a decelerating growth in India’s urban population- from 3.2% in the 1980s to 2.8% in the 1990s. However, a turnaround of this trend is expected for the year 2001-11. UN estimates suggest that urban population will be larger than their rural counterparts by 2045.
  • ii. Low levels of Migration: Although urban-rural productivity differentials have increased since 1993-94, this has not led to a commensurate increase in migration as Lewis and Harris-Todaro models have predicted. For reasons cited in the previous section, rural-urban migration accounted for only 21% of the total increase in urban population in 1991-2001. However, with urban India poised to generate 70% of all new jobs in India over 2010-30, the trend of low rural-urban migration is set to be reversed.
  • iii. Prevalence of Urban poverty: Even though urban poverty ratio has declined by half from 1973-74 to 2003-04, urban service deprivation and shelter poverty continue to be pressing problems for urban India. An environment of poor access to basic services, public health and other human development inputs perpetuates poverty in urban India. Heavily distorted land markets, an inadequate regulatory regime safeguarding property rights and absence of a strategy for inclusion of urban poor exacerbate the problem of shelter poverty. This is visibly manifested in the mushrooming of slums in urban areas. As of 2001, almost a quarter of India’s urban population lived in slums.

Urbanization in India: Challenges

The Report outlines the following challenges for urbanization in India:

  • i. Agglomeration vs. Congestion: Cities tend to exhibit agglomeration economies due to close proximity of firms to skilled labour, informational spillovers between individuals and firms, access to institutions and localization externalities. On the other hand, in the absence of robust urban infrastructure, congestion diseconomies in the form of traffic congestion, pollution and environmental degradation, deterioration in civil services etc. set in. India needs to tackle the challenge of maximizing agglomeration economies while minimizing the impact of congestion diseconomies.
  • ii. Creating synergy with rural development: In 2009-10, cities and towns are estimated to have contributed 62% to total GDP. As this growth continues, India needs to ensure that there are synergetic linkages with the rural economy, particularly agriculture. With boundaries of urban settlements being increasingly blurred and technology bridging the rural-urban divide, policies must aid rural poor in accessing the fruits of urban growth.
  • iii. Small cities and towns: India’s urban growth has been largely concentrated in ‘big cities’ (50 cities with population over 1 million account for 42.3% of urban population). The period of growth of big cities has also witnessed the slowing down of India’s towns. The slower growth of towns has “implications for how the urbanization challenge needs to be managed. The 3984 Class II and smaller towns with population of less than 100,000 in India also have very different levels of managerial and governance systems compared to larger Class I and metropolitan cities. Hence, interventions for preparing our cities will need to distinguish between the challenges and capacities of larger cities versus the smaller towns in the country.1

Urban Service Delivery

The Report reviews the current state of urban service delivery in India and attributes the negligent state of service delivery to four factors that are discussed below. The Report also recommends new service delivery norms and standards for urban areas in India.

State of Urban Service Delivery

Table 1 below provides a glimpse of the Report’s compilation on the dismal state of urban service delivery.

Factors for poor urban service delivery2

  • i. Inadequate investments in urban infrastructure: ULBs in India are heavily dependent on fiscal transfers from the higher tiers of government, which tend to be inadequate considering the needs of Indian cities. Mohanty et al. (2007) shows that for 35 municipal corporations, there was, on average, under-spending of 76 per cent on capital investments necessary to meet minimum standards of services.
  • ii. Poor maintenance of assets: The low spending on O&M of existing assets has further contributed to the problem of service delivery. Salaries and wages account for 54 per cent of the total municipal expenditure, on average.
  • iii. Fragmented institutional set up: The multiplicity of agencies with overlapping jurisdictions and fragmented roles and responsibilities has been a major factor in the poor delivery of urban services.
  • iv. Capacity constraints: Municipal administration has typically suffered from overstaffing of untrained, unskilled manpower on the one hand and shortage of qualified technical staff and managerial supervisors on the other.

Service Delivery Standards and Norms

A summary of service delivery standards and norms recommended by the Report are provided in Table 2 below:

Investment for Urban Infrastructure

The Report estimates Investment for urban infrastructure over the 20-year period from 2012 to 2031 to be Rs 39.2 lakh crore (at 2009-10 prices). This includes:

i. Rs 34.1 lakh crore for asset creation, out of which the investment for the eight major sectors is Rs 31 lakh crore;
ii. Rs 4.1 lakh crore for renewal and redevelopment including slums; and
iii. Rs 1 lakh crore for capacity building.

The relative shares of the eight major sectors are provided in Figure 1 below. Investments on urban roads form the bulk of the investments (55.8%) followed by urban transport and water supply (14.5% and 10.4%).

The capital expenditure estimates by city size class are given in Table 3 below.

1 – Page 16, Chapter 1. Report on Indian Urban Infrastructure and Services (2011)
2 – For a detailed discussion, see our previous posts in the Municipal Finance in India series


Municipal Finance – Functionaries

By Vishnu Prasad, IFMR Finance Foundation

Following the posts on Functions of ULBs and Municipal Funds, this post provides an overview of functionaries at ULBs, explains why the poor urban service delivery mechanism is rooted in weak staff capacity and disjointed institutional set-up and concludes with recommendations for strengthening capacity building.

Overview of Functionaries

Urban Local Bodies (ULBs) in most states of India fall within the purview of the Department of Urban Affairs or Department of Urban Development. In this post, we take the example of Karnataka to illustrate the executive set-up of ULBs. Of all ULBs in Karnataka, only the city corporation of Bangalore, Bruhat Bangalore Mahanagara Palike (BBMP) functions directly under the Urban Development Department (UDD). All other ULBs function under three wings of the Department: Municipal Administration, Town Planning and Urban Land Transport. Each wing is headed by a Director. In addition, many boards and authorities with specific responsibilities also function under the department. For example, the Karnataka Urban Water Supply and Sewerage Board, Karnataka Urban Infrastructure Development and Finance Corporation, Bangalore Metro Rail Corporation etc. fall under the purview of UDD.

The ULB councils consist of Corporators (City Corporation) or Councillors (Other ULBs), who are directly elected by the people. The elected corporators or councillors elect a Mayor or President, who presides over the meetings of the council. In addition, ULBs have Standing Committees to deal exclusively with functions like taxation, finance and appeals; public health, education and social justice; town planning and improvement and accounts etc.

The Commissioner or Chief Officer is the executive head of the ULB. Figures 1 and 2 below illustrate the executive set-up of city corporations and ULBs.

Dismal state of urban service delivery

As previous posts in this series have pointed out, municipal bodies in India are characterized by a high level of under-spending. India needs to make substantial investments on urban infrastructure in order to bridge the current gap in service delivery (Rs. 39.2 lakh crores over the next 20 years according to The Report on Indian Urban Infrastructure and Services (2011)). However, this forms only a partial explanation of the dismal state of urban service delivery.

Weak staff capacity of ULBs limits the ability of ULBs to discharge functions mentioned in the 74th Constitution Amendment Act (CAA). Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has exposed the lack of capacity at the local government level to prepare and implement projects (like preparing City Development Plans) and carry out mandated reforms. As the Report on Indian Urban Infrastructure and Services (2011) notes, ULBs suffer from over-staffing of unskilled, untrained manpower and paucity of technical staff and managerial supervisors.

The fragmented institutional framework of municipal governance makes concerted action of service delivery problematic. For instance, Agarwal (2006) describes how responsibilities related to urban transport are discharged; strategic and policy functions are carried out by state-level transport departments, planning and regulation by either a government agency or a public agency and actual operation are carried out by either a public agency or a private agency. Coordination between these multifarious agencies takes place only through the office of the Chief Secretary, Chief Minister or State Cabinet. We now turn to recommendations for reforming service delivery at the ULB level.


The Report on Indian Urban Infrastructure and Services (2011) has several recommendations for strengthening the capacity of functionaries including:

  1. Earmarking 2.5% of total capital expenditure for capacity building
  2. Setting up five Indian Institutes of Urban Management to provide state of the art training in urban related areas
  3. Creating a Reform and Performance Management Cell (RPMC) to provide technical assistance in planning, finance, operations and monitoring of urban programmes to state governments and ULBs
  4. Developing a dedicated IT Cadre with a Chief Information Officer for larger cities
  5. Creating a Municipal Cadre with expertise in city and regional planning and allied areas

As the Report notes, “The governance reforms outlined … require a radical change in the old ways of doing business at all levels of government.” The success of future programmes like New Improved JNNURM (NIJNNURM) hinges on reforms that build institutional and human resource capacity.


  1. Agarwal, O. P. Urban Transport. In India Infrastructure Report. Oxford University Press. 2006
  2. Ahluwalia, Isher Judge. Report on Indian Urban Infrastructure and Services. High Powered Expert Committee (HPEC) for estimating the investment requirements for urban infrastructure services. March 2011
  3. Mohanty, P.K et al. Municipal Finance in India: An Assessment. Development Research Group,Reserve Bank of India. December 2007
  4. Mukhopadhyay, P. Whither Urban Renewal? Economic and Political Weekly, Vol. 41, No. 10, pp. 879-884. Mar. 11-17, 2006
  5. Audit Report (Panchayat Raj Institutions and Urban Local Bodies), Karnataka 2009-10


Municipal Finance – Funds

By Vishnu Prasad, IFMR Finance Foundation

As part of our series on Municipal Finance, this blog post discusses the present state of municipal finances by taking an in-depth look at municipal revenue and expenditure in India.

Municipal Revenue

According to the Thirteenth Finance Commission, in 2007-08, municipal revenue constituted 0.94% of GDP (at market prices) in India. This is well below that of other emerging economies like Brazil and South Africa, where corresponding figures are 5% and 6% respectively.

The main sources of municipal revenues can be boxed under the following categories:

  1. Tax revenues
  2. Non-tax revenues
  3. Assigned (shared) revenue
  4. Grants-in-aid
  5. Loans
  6. Other receipts.

Broadly, they can be categorized as own revenue (tax revenue and non-tax revenue) and other revenue (shared revenue, grants-in-aid, loans and other receipts). Table 1 lists out sources of revenue under each revenue head.

Figure 1 below shows the flow of funds (mentioned in Table 1) to ULBs from Government of India, State Governments and citizens.

Figure 2 shows the components of municipal revenue for 2007-08. Own tax and own non-tax (non-tax revenue) comprise 52.94% of total municipal revenue. Assignments, devolutions and grants-in-aid from the state government form 71% of other revenue.

Figure 3 shows the share of own revenue and other revenue in total revenue for the period 2002-03 to 2007-08. The share of own revenue has been declining over the time period; from 63.48% in 2002-03 to 54.94% in 2007-08.

Municipal Expenditure

Municipal expenditure can be classified into two categories: capital expenditure and revenue expenditure.

Further, revenue expenditure comprises:

  1. Establishment expenditure
  2. Administrative expenditure,
  3. Operations and maintenance expenditure, and
  4. Interest payments on loans

Capital expenditure comprises:

  1. Expenditure on capital formation and
  2. Principal repayment.

Figure 4 shows that revenue expenditure makes up the bulk (60.46%) of India’s municipal expenditure despite its falling share in total expenditure over time. Mohanty (2007) also finds that establishment and administrative expenditure make up 36% of total expenditure in a study of 35 Municipal Corporations. Figure 3 shows that the share of capital expenditure in total expenditure has increased from 27.45% in 2002-03 to 39.54% in 2007-08, while the share of revenue expenditure has decreased from 72.55% to 60.46% during the same time period.

Current State of Municipal Finance

Mohanty (2007) finds that municipal corporations in India are characterized by sound fiscal health and high levels of under-spending. This is due to statutory obligations that restrict expenditure of ULBs to resources available and limit the access of ULBs to debt. The study finds that the level of under-spending on core services (as compared to the norms set by the Zakaria Committee) is 76%. Reasons for under-spending by ULBs can be divided into exogenous and endogenous reasons. Exogenous reasons include over-dependence of ULBs on upper tiers of government for resources and inadequate delegation of revenue raising powers to ULBs.

The Report on Indian Urban Infrastructure and Services (2011) points out that the 74th Constitutional Amendment Act did not create for a separate ‛municipal finance list’ to match the municipal functions listed, hence making an ‛incomplete devolution’ package. Endogenous reasons include inefficient tax administration, low cost recovery and poor quality expenditure. The Report also projects that investment requirement on urban infrastructure over the next 20 years is Rs. 39.2 lakh crores.

As Figure 3 shows, there is a declining trend in share of own revenue in total revenue. As the Report notes, “The overall average does not convey the gravity of the situation in many municipal bodies where ULBs are virtually reduced to becoming state government departments since even the salaries are paid by state governments.” Mohanty (2007) points out that there is high positive correlation between under-spending and dependency ratios (share of grants a Municipal Corporation receives in relation to total expenditure). High dependency ratios and declining own revenue shares have been an impediment to ULBs accessing municipal debt markets. Till date, there have been 22 bond issues (Taxable-9, Tax-free-11 and Pooled bonds-2) in India, mostly met with partial success. These bonds have been able to raise Rs. 1224 crores. Small and medium ULBs are unable to access the municipal debt markets due to their weak balance sheets and high cost of transactions. Tamil Nadu and Karnataka have issued pooled bonds by combining many ULBs.

Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was launched in December 2005 with the aim to encourage reforms and expedite the planned development of identified cities. The Mission consists of four programs- Scheme for Urban Infrastructure and Governance (UIG) and the Scheme for Basic Services to the Urban Poor (BSUP) for funding basic urban services and urban infrastructure in identified cities and Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT) and the Integrated Housing and Slum Development Programme (IHSDP) covering non-Mission cities and towns with the aim of providing basic entitlements and services to all including the urban poor. As of December 2010, the Mission had released funds equal to Rs. 28650 crores. Funding for the project is conditional on a set of mandatory reforms, accompanied by a set of optional reforms. However, JNNURM faced a trade-off between creating a moral hazard (by disbursing money to ULBs that had not undertaken reforms) and letting important infrastructure projects languish. Consequently, most ULBs have not undertaken even the mandatory reforms and the moral hazard has dis-incentivised ULBs from accessing debt markets for funding.


  1. Ahluwalia, Isher Judge. Report on Indian Urban Infrastructure and Services. High Powered Expert Committee (HPEC) for estimating the investment requirements for urban infrastructure services. March 2011
  2. Mohanty, P.K et al. Municipal Finance in India: An Assessment. Development Research Group,Reserve Bank of India. December 2007
  3. Report of the Thirteenth Finance Commission (2010-2015). Finance Commission, India. December 2009

Functions of the Urban Local Bodies (ULBs)

By Vaibhav Anand, IFMR Capital

(This is the second post in the series of posts on the Municipal Finance Scenario in India. In this post, we discuss the functions devolved to ULBs as per the 74th Constitutional Amendment. We also discuss briefly the capabilities of ULBs to carry out these functions successfully.)

The 74th Constitutional Amendment Act (CAA)I incorporated provisions for devolution of certain powers and functions to Urban Local Bodies (ULBs). Section 243W of the 74th CAA aimed at devolving the responsibility for local economic development and social justice. The Twelfth Schedule of the Constitution lists the specific functions under economic and social development that are best devolved to ULBs.

Given the importance of functions and responsibilities entrusted to the local self-governments, the issues relating institutional structure of ULBs gain tremendous significance. These structures are not uniform across states or even metropolitan (or district) areas, and are plagued with political and administrative problems. These shortcomings make the successful execution of devolved functions a challenging task for the local bodies.

We discuss here some of the functions listed in the Twelfth Schedule of the Constitution and the ability of ULBs to carry out these functions successfully.

I. Urban planning including town planning &
II. Regulation of land-use and construction of buildings: Typically the above two functions fall under the purview of the development authority of the city (e.g. Delhi Development Authority (DDA), Bangalore Development Authority (BDA). However, the responsibilities are sometimes shared with multiple authorities (i.e. industrial development authorities, regional development authorities) within a metropolitan region. This multiplicity of authorities and lack of coordination among them make decision making and implementation of public infrastructure and services extremely difficult.

III. Planning for economic and social development: The definition and scope of this function is fairly wide, open ended and to an extent, unwieldy. Social and economic development programmes require sound integrated planning which requires resources and expertise which the most of the ULBs seem not to have endowed with. The HPEC Report on Indian Urban Infrastructure and Services has clearly stressed the need of the appropriate capacity building at local bodies’ level.

IV. Roads and bridges: This function is typically shared by multiple bodies- city development authorities, municipalities and the public works departments (PWDs). However, an integrated planning is essential to ensure that city roads and urban building/housing plans are properly aligned. The lack of coordination among multiple authorities involved often makes it difficult to formulate and implement an integrated plan.

V. Water supply for domestic, industrial and commercial purposes: This is a function that is most appropriately by ULBs. The current state of urban water supply is quite dismal with billing and collection of only 20% of supplied water and Operations &Maintenance cost recovery of 30 – 35%. Also, the connection coverage in urban areas is low (65%) as compared to other developing countries (91% in China, 86% in SA and 80% in Brazil). Again, in some states the urban service delivery is the responsibility of parastatals (state government’s statutory agencies) that are not answerable to ULBs and only to state governments. ULBs, answerable to their smaller jurisdiction, have little control on these parastatals that operate on a larger scale; this complicates incentive structures, leading to poor outcomes.

VI. Public health, sanitation conservancy and solid waste management: Public health, contrary to its significance for social and economic development of the country, is not supported by a consistent institutional structure (each state has a different structure) and policy framework (the last two National Health Policies were made in 1983 and 2002) at the centre or state level. It is highly program driven with the centre government responsible for funding and planning, and state government for implementation. Health care is largely financed by private pockets. As of 2001-02, the share in health financing of the local governments, state and central government was 2.2%, 14.4% and 7.2%II. With dwindling finances of ULBs and the extent of intervention required, it is not clear that this is a mandate that ULBs are well equipped to handle.

Solid waste management comprises of various steps- collection, segregation, transportation, disposal and recycling. These activities are normally carried out by different bodies. Though the current status of solid waste management is dismal (with less than 40% disposal and less than 1% recycling), it accounts for the 25-50% of ULB’s total expenditureIII, and is also a function that is best performed by ULBs.

VII. Slum improvement and up-gradation: Typically falls under the purview of the housing boards and the city development authority. However, similar to the social and economic development functions, it is a challenging task and little exists in terms of a policy framework or planning.

VIII. Urban poverty alleviation: Such a broad mandate with the level of coordination and extent of intervention required again bring to question whether ULBs are the appropriate level of government to discharge this responsibility.

Other functions listed in the Twelfth Schedule are mentioned below. The devolution of some of these functions (e.g. fire services, providing urban amenities, burial & cremation grounds etc) to ULBs is justified as these functions may be best performed by local governments. However, some functions pertaining to social and economic development are either very wide in scope or there is little policy framework to guide ULBs to plan and execute them.

IX. Fire services
X. Urban forestry, protection of the environment and promotion of ecological aspects
XI. Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.
XII. Provision of urban amenities and facilities such as parks, gardens, playgrounds
XIII. Promotion of cultural, educational and aesthetic aspects.
XIV. Burials and burial grounds; cremations, cremation grounds and electric crematoriums.
XV. Cattle pounds; prevention of cruelty to animals.
XVI. Vital statistics including registration of births and deaths.
XVII. Public amenities including street lighting, parking lots, bus stops and public conveniences.
XVIII. Regulation of slaughter houses and tanneries.

To conclude, the devolution of functions to the local bodies could meet its intended end only with a commensurate devolution of powers, political freedom and revenues by the state governments. Further, without the administrative, institutional and financial reforms, and capacity building, the local-governments may not be able to execute their functions successfully.

I – Link to the 74th CAA- http://indiacode.nic.in/coiweb/amend/amend74.htm
II – Financing and Delivery of Health Care services in India, MOHFW, 2005
III – HPEC Report on Urban Infrastructure, 2011


Data Analytics

By Vishnu Prasad, IFMR Finance Foundation

This post is part of our series on the current state diagnostic step.

At the end of the cadastral mapping and surveying process, our local team had produced detailed maps of physical infrastructure for every street in Srirangapatna, 256 household surveys (5% of the town’s households) and 12 unique business surveys. Our next challenge was to translate this high quality data into meaningful analysis and visually intuitive formats.

As we pondered over the various options, it occurred to us that the best way to represent our analysis was to do it spatially. Using Quantum GIS (Geographic Information Systems), an open source GIS application that is essentially MS Excel with the added dimension of spatiality, we created maps that made our analysis visually appealing and easy to comprehend.

For example, our data depicting garbage collection across the wards which looked like this:

was transformed into:

As we looked at these maps, their many advantages over conventional modes of analysis became apparent. We realized that in the map above, Ganjam (wards 16-23, on the right side) had trash collection rates that were much lower than Srirangapatna Fort Town (wards 1-15, to the left). Spatial representation of the analysis brought out many aspects that would not have been readily apparent otherwise.

We could also run analytics such as the one below:

This map shows all properties with a specified distance of the nearest streetlight. Analytics such as these became vital in determining access (proximity) to infrastructure across Srirangapatna. For example, the spatial representation of our analysis shows that slums are very often worst hit in terms of access to infrastructure.

Having created maps using Quantum GIS software, a freeware available online, we overlaid these on Google Maps. You can access all the data from our cadastral mapping on the maps section of our website.

Our household surveys gathered socio-economic data over 10 sectors: Work Habits, Transportation, Shopping, Drinking Water, Sanitation, Solid Waste, Electricity, Housing, Finance and Technology. The analysis produced reports that included comparisons across metrics between Srirangapatna Fort Town and Ganjam, and wards with and without slums.

We also produced comprehensive ward level reports like the one below which shows data for Ward No. 20.

Since the completion of the report, we have shared our results with the ward council of Srirangapatna TMC. The ease with which they understood our analysis (despite the fact that no one in our team speaks Kannada) has validated the approach that we have taken to represent our results.

We will now use these representations in our visioning exercises with citizens on the future of Srirangapatna.