Municipal corporations under severe strain as revenues sink: RBI Report

The third-tier of government urban local bodies and municipal corporations have "come under severe strain, forcing them to cut down expenditures and mobilise funding from various sources", the State Finances 2021-22 report by the Reserve Bank of India (RBI) noted.

The survey found that revenue lost for municipal corporations was more during the second wave, with 22 per cent of them reporting revenue loss of more than 50 per cent in the second wave compared with 16 per cent in the first wave.

The RBI conducted an online qualitative survey of 141 municipal corporations between July and August 2021 and studied the budgetary data on the 20 largest municipal corporations that account for around 60 per cent of revenue and 55 per cent of expenditure of all municipal corporations. 

The RBI report emphasises that the diversion of the municipal corporation funds may have severe consequences for the financial sustainability of cities in the short to medium term. It impacted their ability to provide services to local communities as municipalities and gram panchayats implemented pandemic-related duties. 

There is a need to reinforce the financial autonomy of civic bodies, strengthen their governance structures and financially empower them, the report said. 

The RBI analysis found that municipal corporations worked with a fall in revenues and increased expenditure. Both village panchayats and urban municipal corporations struggled for funds, the RBI report said.
 

The survey found that up to 98 per cent of respondents faced financial challenges, including an increase in expenditure, decline in revenue collection, and lack of fund disbursements from the state governments during the second wave of the pandemic. 

An earlier World Bank study had estimated that local authorities globally would lose around 15-25 per cent of revenues in 2021. 

About 70 per cent of municipal corporations reported a decline in revenue, and 71 per cent reported an increase in expenditure.

In addition, municipal corporations had to cut core expenditures for the COVID-19 response. 

The RBI also analysed the budgets of 20 large municipal corporations. "Before the onset of the pandemic, the consolidated revenue balance of the municipal corporations was in surplus. Budgetary data relating to 20 large municipal corporations indicates that their combined revenue surplus declined in 2020-21, with many of them recording either a fall in the revenue surplus or an increase in the revenue deficit," the study said.
 

The decline in surplus was more pronounced than the increase in deficit, it said. 

According to the survey, municipal corporations mobilised additional funding from sources such as borrowing, grants from the states and the centre, reserves, municipal deposits in state disaster response funds, issuances of COVID-19 bonds, donations and contributions. 

Around 43 per cent of the respondents to the survey reported the use of grants from the state governments to meet pandemic-related funding. 19 per cent of the survey respondents reported withdrawing from reserve funds to meet the resource gap. About 6 per cent of surveyed corporations borrowed from state governments and another 2 per cent borrowed from banks.

Five corporations responding to the survey also issued bonds to finance COVID-19-related expenditure. 

The RBI report concluded that the local governments suffered from insufficient budgets, overreliance on funds from upper tiers of government, lack of access to new sources of revenue and limited autonomy, which the COVID-19 crisis amplified. This, especially at a time, when the responsibilities of local governments towards the delivery of public services have increased tremendously, the report added.