October 11, 2020The Intersectioneconomics

Local governments must raise their own revenues

The post-pandemic fiscal crunch should cause municipalities, gram panchayats and state governments to start thinking about generating revenues from under-used public assets.

Mint This is from The Intersection column that appears every other Monday in Mint.

Driving into Bengaluru’s city centre a couple of weeks ago after several months of working from home, I was pleasantly surprised to see well-demarcated parking spaces, electronic signs and payment kiosks along MG Road. Brihat Bengaluru Mahanagara Palike (BBMP), our municipal corporation, had finally implemented a modern paid parking system, albeit only along a few major roads in the central business district. This being Bengaluru (the original home of the we have an app for that” meme), the system allows you to discover available parking lots on your smartphone and pay the fees online.

The BBMP expects this system, implemented as a public-private partnership, to earn an annual income of ₹31.56 crore for the next ten years. That’s not a lot, but not bad either, considering that it was earning nothing from the public asset in the past. A few years ago, my colleagues at Takshashila estimated that the city could earn over ₹500 crore a year, or around 5% of BBMPs approximate annual budget, if it were to implement paid parking on just one side of a mere 3% of Bengaluru’s roads. Clearly, parking fees alone have the potential to be a significant part of the corporation’s budget. Indeed, there is a moral case for the government to implement paid parking—free parking is effectively an unthinking transfer of public wealth to an undeserving rich person. A car owner gets ₹30 per hour in implicit subsidy for every hour he parks on the public road, for no good reason. That’s not counting the economic costs of congestion and pollution arising from the overuse of an underpriced good. Contrary to popular belief, India’s municipal corporations are doing a public disservice by permitting free parking.

In fact, it is time for municipalities, gram panchayats and state governments to start thinking about generating revenues from unused or under-used public assets. The ongoing proceedings at the Goods and Services Tax (GST) Council with regard to the compensation cess are an indicator of the times to come, as expenditure commitments, slowing growth and shrinking fiscal space put pressure on state government budgets, and in turn, on the budgets of municipal corporations and panchayats. A combination of geopolitical uncertainties and post-pandemic economic revival imperatives will require the Union government to spend more on defence, health, education and social welfare. With the economy expected to shrink almost 10% in real terms this fiscal year, and stage a slow recovery thereafter, tax revenues will take years to recover. State governments, for their part, will have to spend more on health and social welfare. With falling revenues from GST, excise, stamp duties, registration fees, motor vehicle and fuel taxes, they too will be hard pressed to transfer funds to the third tier of government. Given that three-fourths of the revenues of municipalities in most states are transfers, this portends an overall degradation in the most basic services that citizens receive.

While state governments and municipal corporations must fight for every rupee they are constitutionally entitled to, they are also obliged to raise revenues from the tax base and public assets that they already have. The truth is that the public finances of states and local governments show a shocking level of inefficiency and wastefulness in terms of meeting their revenue potential.

My colleagues Sarthak Pradhan and Pranay Kotasthane have found that while Maharashtra raises 70% of its revenue requirement from taxes, five states in India are not able to raise even 30%” and that even high-income states such as Haryana, Punjab, Maharashtra and Karnataka have a lot of scope for improvement” in terms of own revenues as a percentage of gross state domestic product. Municipal revenues in India have stagnated at a meagre 1% of gross domestic product, less than half of which are raised by municipalities.

Bengaluru, for instance, collects only 20% of its property tax potential. So, as much as state and local governments rightly complain about the need for greater devolution, it is also true that they are inefficient and often unwilling to collect the taxes that they ought to.

Furthermore, governments must pay more attention to non-tax revenues by making better use of public assets. Land is perhaps the most ubiquitous asset in the hands of any government. It is, as exemplified by the case of parking, also the most inefficiently utilised. Over a decade ago, the public transport company in Bengaluru built multi-storey office buildings over its bus stands in prime commercial locations in the city. After some hiccups, it has been earning a steady rental income from them. It is this kind of thinking that municipalities must adopt: public assets must not be allowed to idle.

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In fact, when the government fails to extract economic value, other actors step in. For instance, it is not uncommon for self-appointed parking operators to charge” you for parking in a public space. The proceeds then feed into a shadow economy and strengthen a nexus between local political operators, corrupt officials and criminal elements. Political economy is one of the chief reasons why state and local governments are unable to put public assets to better use. Lack of expertise and political direction are some others. The current fiscal crisis presents an opportunity for states, municipalities and panchayats to shake up the status quo and get their public finances in better shape. It will require chief ministers to initiate the process.

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