On Monday, the Pune Municipal Corporation made ₹200 crores from the sale of municipal bonds – the first tranche of a ₹2,300-crore fund for a 24/7 water supply project that it hopes to raise in the next five years. This is the first time in 14 years that municipal bonds have been sold in India, and they were oversubscribed as they received 1,200 subscriptions – the maximum number ever received by a municipal corporation in India. Given the current state of municipal finance in the country, this is impressive.

In India, municipality earnings come from tax and non-tax revenue, revenue shared with the state, grants-in-aid from the Central and state governments, and loans among others. Most of these civic bodies are cash-strapped and heavily dependent on the state and Central governments for funds – their other main source of revenue being property tax. Last year, 54% of the revenue earned by the Bruhat Bengaluru Mahanagara Palike came from grants it received from the state and Centre.

Even with the revenue sources they have, municipalities in India have done little to make full use of them. For instance, the Bengaluru corporation, with a total budget outlay of Rs 9,247 crores, is losing over Rs 500 crores in revenue every year simply by not charging for parking within the city.

This makes the Pune corporation’s decision to be more self-reliant and utilise its resources efficiently all the more commendable.

What Pune did right

The civic body got a nudge in this direction two years ago when the Maharashtra government abolished local body tax – which is imposed by civic bodies on the entry of goods into their areas for consumption, use or sale. The Pune corporation, which relied heavily on this local body tax, had to change its approach to raising revenue.

To claim Central assistance under the Jawaharlal Nehru National Urban Rejuvenation Mission, municipal corporations were expected to improve their accounting systems, city planning functions, property tax collection, user charges and basic services for the urban poor (slum-dwellers). Therefore, the Pune corporation, along with other municipalities, shifted to an internationally accepted accrual accounting system to ensure better financial management.

Of the various reforms the Pune corporation has carried out since 2015, there are three that can be replicated by other municipalities to improve their financial health.

  • First, the Pune corporation made it easier for citizens to pay property tax by opening payment kiosks across the city and putting relevant information online. It also started a voluntary disclosure scheme for citizens to declare their property for taxation without penalty. This improvement in customer services helped increase property tax collection.
  • Second, it shifted to an accounting system based on double-entry accrual principles in 2015. This methodology prevented fraud and reduced errors. To ensure accountability, the municipal chief auditor was tasked with checking financial transactions regularly. Improving the standards of its financial records helped the corporation attract private investment.
  • Third, it raised civic taxes like water tax and user charges on public services to ensure the economic base for the services was covered. It raised water charges for 2016-2017 by 12% and plans to increase it every year till 2020-2021 by 15%. This would lead to a 96% hike from existing rates. Going by the plan provided by Pune municipal commissioner Kunal Kumar, the corporation will continue on this path by increasing the share of user charges in the next five years. This is a welcome move as there is no better way to ensure optimal use of scarce natural resources like water.

The importance given to user charges is also evident from how the bonds will be repaid. According to Kumar, debt servicing for the bonds will come from two streams of revenue: user charges and property tax. A large section of payments to investors will be made using the property tax collected. But this will soon be substituted with the user charges collected, according to the plan.

The money raised from the bonds will be used for a water metering project, which, in turn, will help improve the collection of water tax and user charge on water. Finally, the increase in user charge will ensure it bears a higher proportion of the burden to service the debt than property tax.

Self-reliant cities

The reforms carried out by the Pune corporation are a positive move for municipal fiscal health in the country. It is reassuring to see greater focus on making cities self-dependent under new schemes such as the Smart Cities Mission to develop over 100 cities, and the Atal Mission for Rejuvenation and Urban Transformation to improve quality of life through better civic amenities and infrastructure creation. As required by these schemes, private rating agencies in March rated 94 Indian cities for private investment, giving an indication of financial health and fiscal management at the city level.

Pune is among the highest ranked municipal corporations in India, as are New Delhi and Navi Mumbai. Now that New Delhi has also announced plans to raise revenue using private funds, it should only be a matter of time before Navi Mumbai and the rest of urbanised India catch up.

Devika Kher is a policy analyst at The Takshashila Institution and the Programme Manager for their Graduate Certificate in Public Policy course.