Cities at Crossroads: Setting cities free

Cities at Crossroads: Setting cities free

The unwillingness of the system to devolve responsibility and funding to the city level is a major failure. Alongside Amrut and the Smart Cities Mission, we need to urgently spell out the dimensions of institutional reform

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It is now almost 25 years since the 74th constitutional amendment mandated that state governments transfer to the local governments a set of specified functions.

Most people are aware that if Indian cities are to provide a reasonable quality of life for their residents and a better investment climate for investors, it will require massive investments in urban infrastructure. Lack of funding is usually perceived to be the principal constraint in achieving this objective. What many people fail to realise is that even if funds were somehow made available, it would not lead to well-designed and well-managed infrastructure and improvement in public service delivery unless there is fundamental reform in the institutions that govern the planning and management of cities within the Indian federal regime.

The ability to finance large investments is itself dependent on reforms. For example, reform in the form of setting user charges for the delivery of a public service to cover at least the operation and maintenance cost of the infrastructure asset, including debt servicing, would yield a revenue model that assures repayment of the loans raised from the capital market. If equity is brought in by a private partner in a public-private partnership project, then the user charge must cover a return on such investment. However, city governments are not allowed to raise user charges (while protecting the poorest by cross-subsidising) without approval from the state government.

Similarly, the reform of assigning to urban local governments the function of urban planning, including town planning, would provide them with the opportunity of activating a market for land use change. This would help them to unlock land value as they go about the business of land zoning and appropriating a part of the consequent appreciation in the value of land for financing urban infrastructure.

The systems of public service delivery in Indian cities and towns are very fragmented and highly inefficient. The report of the high powered expert committee on urban infrastructure and services (HPEC 2011) had recommended administrative and institutional reforms designed to overhaul the system, for example, a unified command under an empowered and accountable mayor, a municipal regulator for bringing a degree of professionalism in the pricing of urban services, and use of e-governance and e-enabled smart technologies for better efficiency. But there has been little action on the wide-ranging recommendations.


Successful attempts at e-governance in cities such as Hyderabad, Bangalore, Pimpri-Chinchwad and Surat are helping to create an environment for grievance redressal and better service delivery, but the demonstration effect on other cities has been slow. The demand for good governance is typically confronted by lack of capacity as cities grapple with unprecedented tasks of preparing various plans and projects to seek funding under national missions.

The experience of the JNNURM (Jawaharlal Nehru National Urban Renewal Mission), which ran its course from 2005 to 2014, highlights the importance of reforms if Indian cities are to be transformed. The government of India’s financial support under the JNNURM was made conditional on both the state government and the urban local government committing to specific reforms in urban planning, finance and management. The expectation was also that with reforms, state governments and urban local governments will be able to attract additional finance from the private sector. While some cities made serious effort at reform, better service delivery as well as private finance came only when the state governments were willing to reform, devolve funds and build capacity of their urban planners and city managers. I had highlighted some success stories, for example, Amravati and Malkapur for water, Alandur, Surat and Jaipur for wastewater treatment, Pune and Pammal for solid waste management, as “Postcards of Change” in this newspaper. But the wider canvas remains bleak.

The unwillingness of the system to devolve responsibility and funding to the city level is a major failure. It is now almost 25 years since the 74th constitutional amendment mandated that state governments transfer to the local governments a set of specified functions. While many functions have been devolved, a major omission has been that of urban planning, including town planning — the golden goose — which has been retained by most state governments.

The constitutional amendment itself was flawed in that it only required the state governments to set up state finance commissions that would spell out the principles for sharing/ devolving a part of the revenue of the state government. The state finance commissions have not followed the high standards set by the Central Finance Commission, and they have not been able to challenge state-level political resistance to devolving funds to urban local governments.

The share of municipal own revenues in their total revenue was at a low of 53 per cent in 2007-08 and declined further to 51 per cent in 2012-13. As of now, property tax is a major source of revenue for these governments, but both the rates and exemptions are set by the state government. One way of reducing dependence on the state government for discretionary funds would be to create a Municipal Finance List in the Constitution that should specify taxes that are exclusively in the domain of local governments.

Ideally, the opportunity provided by the GST, which is the most efficient tax (because it does not cascade and its destination principle promotes India as a common market), should be used to constitutionally ensure that state governments share a pre-specified percentage of their revenue from GST with local governments. The structure of the
GST would remain two-tiered but the revenue allocation would be three-tiered. Guaranteed devolution of GST will significantly reduce uncertainty in the finances of urban local governments and provide them with a basic cushion of financing to discharge their constitutionally assigned responsibilities. Since devolution through GST is highly unlikely given the current political mood, reforms in urban planning, finance and management become even more important to mobilise resources and improve service delivery in Indian cities.

In June 2015, the government of India launched a number of major national missions for urban rejuvenation, including Amrut (Atal Mission for Rejuvenation and Urban Transformation) and the Smart Cities Mission. Amrut, a successor of the JNNURM, with funding conditional on reforms, is effectively a Centrally sponsored scheme with an outlay of Rs 50,000 crore over a five-year period. Its challenge will lie in enforcing the conditionality of reforms, precisely the area where the JNNURM failed. The Smart Cities Mission, with a commitment of Rs 48,000 crore over a five-year period for 100 cities, focuses on high-tech infrastructure to provide smart solutions for Indian cities. The government of India has explicitly admitted that a significant part of the funding for these missions will have to come from the state governments and the private sector. This makes reform indispensable. The sooner we spell out the dimensions of institutional reform alongside the high-tech infrastructure plans, the closer we will be to delivering a better quality of life in our cities and a better investment climate for investors.