Fiscal Gaps in Indian Cities: The cases of Bengaluru and Mumbai

PhD Student: Sukanya Bhaumik

Tutor: Prof. Kala S. Sridhar

Bangaluru (India) Centre for Research in Urban Affairs
Institute for Social and Economic Change



Indian municipal bodies are amongst the weakest in the world in terms of access to resources, revenue-raising ability and financial autonomy. The ratio of municipal revenues to gross domestic product (GDP) at factor cost in India was estimated at 1.03 per cent for 2014-15, compared to South Africa (6.0 per cent) and Brazil (7.4 per cent). Not only is the country’s municipal sector small compared to international benchmarks, but municipal bodies in India have been subject to significant erosion in their fiscal autonomy over time.  In 2014-15 the municipal tax-GDP ratio stood at 0.33 per cent as against the combined ratio (central plus state) tax-GDP ratio of 17 per cent.

The precarious state of municipal finance in India is a matter of concern, because as cities drive growth and productive employment, they also generate public finances for socio-economic development In 2015, urban areas with 31 per cent of the population contributed to 62 to 63 per cent of India’s GDP. This contribution will rise to about 75 per cent by 2021. However, cities will not be able to perform their fundamental role as engines of economic growth and structural transformation unless their municipal finances are strengthened.

Indian municipal bodies are in many ways stuck in a state of low output due to high expenditure needs and low revenue capacities. The high expenditure needs in cities is due to increased functional responsibilities, huge demand and high cost of service provisioning. Low tax base, poor collection efficiency, low fiscal autonomy etc. are the reasons for the low revenue-raising capacities. The gap between the two (expenditure needs and revenue capacity) is defined as fiscal gap, which is the key reason for the poor quality of services across municipal bodies in India.

There are several endogenous and exogenous factors that are the causes of the fiscal gaps in Indian cities, this paper will examine each of these factors. The expenditure need of cities depends on the services that are provided by the local government and the costs associated to provide these services. This research attempts to assess the expenditure needs of the two Indian cities of Bangalore and Mumbai as both these cities have distinct functional responsibilities and economic specializations. The expenditure needs will be assessed using two approaches: Unit Cost Method and Regression model approach.

Revenue capacities of municipal bodies are defined by what the body is capable of raising as opposed to what it is actually raising. It is determined by ‘income from own source revenue (OSR)’, most importantly it includes the potential income from all untapped sources. This paper assesses the revenue capacity of the municipal bodies of Bangalore and Mumbai, theBBMP (Bruhut Bengaluru Mahanagara Palike) and MCGM (Municipal Corporation of Greater Mumbai) from property taxes (ward-wise), advertisement tax and other charges (for multiple services). The thesis will assess the current income, collection efficiency for each of these sources and make simulations of BBMP and MCGM’s income potential.

Finally, the thesis will document best practices and make policy recommendations for BBMP and MCGM to narrow the existing fiscal gaps.