Make Real an Urban Legend

Context: India needs empowered cities to nurture elected mayors for top political jobs.

Arguments favouring empowerment of cities:

• Urban Tax Potential: The Economic Survey (2017-18) has estimated house tax potential at Rs 42,160 crore for rural areas and Rs 23,184 crore for urban areas.
  • It suggested property tax rates of zero for houses with one room, 0.1% for two rooms, 0.2% for three, four and five rooms, and 0.3% for six and above rooms.
• Constitutional obligations: under 73rd and 74th Amendment Act.
  • India’s Constitution mandates the appointment of Finance Commissions (FCs) every five years to recommend how central government revenue should be shared with the states.
  • FCs have started recommending a share of revenue as grants to local bodies, rural and urban.
    • The share of urban bodies in devolved funds has risen from 0.78% (11th FC) to 4.3% (in 15th FC).
• Engines of future development: Since the World Bank says 55% of India’s population can be considered urban, decentralisation should focus more on municipalities than rural panchayats.
• Nurturing elected mayors: A good model for this would be Indonesia’s president, Joko Widodo.

Issues specific to city administration:

• Top-down political system: In a first-past-the-post electoral system, few talented new faces can gain enough critical mass to win elections. (Indian political parties tend to represent family dynasties)
• Flawed definition of Census towns: India has ‘villages’ of 10,000 people, while other countries have ‘towns’ with under 1,000 people.
• Downsides of unconditional grants by FC:  Unconditional grants induce local bodies to abolish or reduce their own taxes so that the aim of increasing local body funds is foiled.
  • The 15th FC recommends a mix of unconditional grants and those linked to national priorities like drinking water, water harvesting and sanitation.
• Absence of State Finance Commissions: The 15th FC has castigated many states for not appointing state finance commissions (SFCs) to devolve powers and revenue to local bodies.
  • Many states have not done so because state-level politicians want to monopolise funds.
• Poorly managed: without devolution of funds, administrative and tax powers, many municipalities are superseded by state governments, while others are obliged to follow state-level bureaucracy.
• Low Property Tax: due to vested interests; In many countries, property tax can be 1% or more of market value. In India, it is often 1/100th of this.

Ways to empower Indian cities

• Grants should be matching grants (those linked to local revenue collection): instead of unconditional transfers devised by 15th FC.
  • Property tax collected by cities can be matched by additional grants from central revenue, resistance from vested interest can be overcome.
• Serious reform of property taxes: Based on suggestions of Economic Survey 2017-18
  • Property tax rates of zero for houses with one room, 0.1% for two rooms, 0.2% for three, four and five rooms, and 0.3% for six and above rooms.