Independent Research and Policy Advocacy

Funds devolution from state governments to ULBs: The case of Karnataka

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The revenue share between state governments and ULBs is determined by the State Finance Commissions (SFCs) which are set up by state governments every 5 years. In essence, the mandate of the SFC is to determine:

  • The principles of distribution to rural and urban local governments the net proceeds of the taxes, duties, tolls and fees levied by the state
  • Taxes, tolls and fees which may be assigned to rural and urban local governments
  • Grants-in-aid to rural and urban local governments from the consolidated funds of the state

In Karnataka, the third SFC was instituted to provide recommendations for the period 2008-09 to 2012-13. The report assessed the current state of ULBs in the state and developed the formula for determining the devolution of funds over this five year period.

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4 Responses

  1. This is an interesting post Anand. I wonder if you can share though what your own analysis suggests — is what is happening good or not good? And, what is the way forward and why?

    1. Thanks Nachiket.

      A couple of observations:

      1. Despite 20 years of decentralisation post the 73rd and 74th amendment, we still see a high level of dependence on revenues from state governments. Even in a state like Karnataka, which is widely regarded as one of the front-runners on urban reforms, we find that City Corporation budgets are comprised of 60% devolved revenues. The situation is dire as we go to the smaller cities.This need not be the case, considering even the extant powers of ULBs in generating revenues. Critical revenue levers like property taxes are under-performing on account of multiple reasons: property tax valuation techniques, outdated property registers, low collection efficiencies, opacity in property prices etc.While cities like Bangalore have seen some improvement on this front, most other cities lag. It is of fundamental importance that cities get their property tax and user charge levers working well, so that they can become more sustainable.

      2. If we look at how devolved revenues flow is designed, it is clear that most of the spending (upto 60%) is directed by the state government. It is only in the residual portion of the devolved revenues (40%) that ULBs can exercise their judgment and spend as they deem appropriate considering local needs. Without much leeway in spending decisions on local infrastructure, ULBs will be unable to meaningfully respond to local needs.

      The most pressing need is to get cities to generate more revenues internally and not be overly reliant on devolved revenues. This becomes all the more critical in view of the Isher Ahluwalia committee’s estimation that Rs 40 lakh crores of investment in urban infrastructure and service delivery over the next 20 years.

      We will be discussing internal revenue generation with a partiuclar focus on Srirangapatna and explore how a small city could look to be more self-reliant.

      1. I just read it. The response may be too late :). Some really good thoughts.

        I have a few points to add – I think the issue is not just related to devolution, it is related to frangibility. This gets reflected even in center state fund devolution as well as in state to local body devolution. Some how we have got into a centralization mindset – leading to inability to appreciate the competence and ability of people at local levels to sort out their problem given enough funds and tools.
        The general tendency has been to plan centrally with probably limited understanding of the diverse conditions and needs, straight jacket the programme with very specific actions and then provide funds – this may sound good if the assumption is that lower levels in the governance do not have the expertise and knowledge to tackle their problem, but end up in wasting the money for wrong purposes – I say this with the experience of doing centrally sponsored e-governance projects as well by working with the state governments.

        1. Thanks Mr. Hegde. You are right in pointing out out that higher levels of government do not have the necessary local knowledge to make meaningful decisions on meeting local needs. Local governments should be doing a whole lot more in this regard.

          However, it is important to remember that it not in the interest of state governments to devolve too much autonomy to local bodies as this could over time chip away at the power of state governments. Therefore, we see this relationship where the state governments interests are best served by having local governments spend devolved funds and specific program grants rather than push own revenue generation by local governments. As a consequence, local governments tend to look up at state governments for their legitimacy rather than at their own citizens.

          Despite this, it is possible to argue that many local governments are even today in a position to generate much greater own revenues through property taxes and user fees. If more of them were to start doing this, we could possibly see a virtuous cycle of local governments responding to citizen needs and citizens demanding much more of local governments.

          As the Isher Ahluwalia Committee finds, India needs to raise upwards of Rs 40 lakh crore to invest in infrastructure and service delivery over the next 20 years. The inescapable need for cities to access more market funding will require improvements own revenue generation and could kick-start this virtuous cycle.

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