«Metropolitan City Finances in India: Options for A New Fiscal Architecture Roy Bahl International Center for Public Policy Working Paper 12-33 ...»
A particularly difficult issue will be how to stem the tide of demands for city-state status, e.g., Kolkata, Chennai, Hyderabad, Bangalore, and others. Most large urban areas in India probably feel discriminated against and many would see this new governmental arrangement as a way to reduce the flow of money from their tax base to support services provided elsewhere. Others may argue for a change in their governance status in order to capture rents. In countries where the fiscal architecture has been changed dramatically, subnational governments have succeeded in changing their status in order to gain some advantages from the intergovernmental transfer system. Indonesia is an example.
(Hofman and Kaiser, 2003)
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The cost of government might increase with the creation of state level cities, at least in the initial period. For example, a “residual “state of Maharashtra would be smaller and with less expenditure responsibility, so it should be able to reduce government employment and overhead. But such costs are sticky downward. On the other hand, a new city- state might increase its spending dramatically to address a backlog of unmet needs, but the cost increases might be held back by the requirement of more selffinancing.
While revenues do not match expenditure needs at any level of Indian government, a particularly critical problem has emerged in the case of large cities where infrastructure is inadequate and promises to grow more so with expected high rates of migration. In recent years, the federal government has recognized the urban government finance problem with programmatic assistance and policy advice, but state governments have been slow to follow this lead. It would be fair to say that a coherent strategy for metropolitan finances has not been implemented. The approach continues to be one of muddling through with various policies that have independent effects at the margin, rather than with a comprehensive strategy that involves a fundamental change in the fiscal architecture.
The implementation of a comprehensive metropolitan fiscal strategy is a possibility for India, but it would be politically difficult and would involve some costs that might be unacceptable on social as well as economic grounds. Such a strategy would have the objective of making the metropolitan cities more financially self-sufficient, and giving them more control over their budgets. It might have three legs: redrawing metropolitan government boundaries, assigning more revenue raising powers to metropolitan governments than to other local governments, and limiting transfers to metropolitan governments to those that are designed to address externalities and equity concerns.
Metropolitan City Finances in India: Options For A New Fiscal Architecture 27 In many respects, India operates as a traditional federalism with state governments controlling the fiscal powers of third tier local governments. While municipalities have been empowered in terms of their expenditure responsibilities, there has been little movement by state governments to implement a strategy that would give them more budgetary self-sufficiency.
Some large metropolitan areas could be converted to city-states, i.e., be given state government status. This would create a taxing district that is roughly coterminous with the labor market area, and the metropolitan government would have access to all state government tax bases and user charge bases. Revenue raising powers would be extended to include all present state government taxes.
Independence in revenue raising powers would be extended to motor vehicle taxes and various forms of development charges, and the metropolitan local government would have freedom to raise user charges to whatever rate they chose. The revised JNNURM would grow in size and be the major intergovernmental transfer in the revenue system.
Note: Data reported are unweighted averages for the 2000s for years in which data are reported.
a. The number in parenthesis shows the number of countries included in the comparison.
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