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Context

The “State Finances, Study of Budgets of 2021-22” report, correctly identify the role of the city governments in meeting the challenges the pandemic has thrown up, the report also points to the draining of resources.

What the RBI report says about the role of local governments

• The report highlights the frontline role played by the third-tier governments by implementing containment strategies, healthcare.
• Due to this, their finances have come under severe strain, forcing them to cut down expenditures and mobilise funding from various sources.
• Need for functional autonomy: The RBI further commented that the functional autonomy of civic bodies must increase and their governance structure strengthened.
• Empowering financially: This could happen by ‘empowering them financially through higher resource availability.
• The RBI did echo the recommendations of the 15th Finance Commission report on local bodies that emphasised city governance structures and financial empowerment.
• Limited coverage of property tax: The RBI report also highlights the limited coverage of property tax and its failure in shoring up municipal corporation revenues.
• Organisation for Economic Co-operation and Development (OECD) data show that India has the lowest property tax collection rate in the world — i.e., property tax to GDP ratio. 

Issues faced by city governments

• During the pandemic, while leaders from the Prime Minister to Chief Ministers to District Magistrate were seen taking a call on disaster mitigation strategies, city mayors were found missing.
• The old approach of treating cities as adjuncts of State governments continues to dominate the policy paradigm.
• The general approach towards urban empowerment has remained piecemeal in India.
• The first intervention to understand ‘the urban’ (though there are references in the Five Year plans) and plan with a pan-Indian vision took place in the 1980s when the National Commission On Urbanisation was formed with Charles Correa as its chairperson.
• Another important intervention was in the first half of the 1990s with the Constitution 73rd and 74th Amendments. 
• The latter refers to urban reforms — empowering urban local bodies to perform 18 functions listed in the 12th Schedule.
• However, there is no mention of financial empowerment.
• The only exception to the rule has been the people’s plan model of Kerala where 40% of the State’s plan budget was for local bodies (directly) with a transfer of important subjects such as planning, etc.

How to achieve functional autonomy for city government

• This should happen with three F’s: the transfer of ‘functions, finances and functionaries’ to city governments.
• There are nearly 5,000 statutory towns and an equal number of census towns in India.
• Nearly 35% of the population lives in urban centres.
• And, nearly two-thirds of the country’s GDP stems from cities and almost 90% of government revenue flows from urban centres.
• Before value-added tax and other centralised taxation systems, one of the major earnings of cities used to be from octroi.
• But this source of revenue collection was taken away by the State and the central governments.
• Instead, finance commissions recommended grants to urban local bodies based on a formula of demographic profile. 
• In such a situation, it is difficult for the towns to sustain their ability to perform their bare minimum functions, especially with the latest Pay Commission recommendations.
• This has resulted in burdening people more with taxes and further privatisation/outsourcing of the services of the municipalities.
• The often-cited example is how cities in the Scandinavian countries manage their functions well — from city planning to mobility to waste management.
• But the truth is that a chunk of the income tax from citizens is given to city governments.
• A committee formed by the Ministry of Housing and Urban Development to review the 74th constitutional amendment recommended that 10% of income tax collected from the cities was to be given back to them as a direct revenue grant from the central government.

Way forward

• 1] Cities must be treated as important centres of governance, where democratic decentralisation can bring in amazing results.
• There will be transparency and adequate participation of the people.
• 2] Cities should not be considered as entrepreneurship spaces where the sole driving force is to make them competitive to attract investments.
• 3] The resources required for quantitative and qualitative data must be immediately provided to the cities to ensure a disaster risk reduction plan keeping vulnerable communities in mind.
• 4] A piecemeal approach such as the concept of ‘smart cities’ must be shunned altogether.
• This approach further widens the gap between different sets of people.
• 5] Leadership in the cities must be elected for a term of five years. 
• Likewise, the third F, i.e., functionaries, must be transferred to the cities with a permanent cadre.

Consider the question “The functional autonomy of civic bodies must be increased and their governance structure strengthened. This could happen by ‘empowering them financially through higher resource availability’. Comment.” 

Conclusion

Thus, in this exercise by the RBI, the good part is that there has least been a mention of cities, with local bodies as important centres of governance.

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