ASSESSMENT OF MUNICIPAL FINANCE AND

SERVICE DELIVERY:
A CLASS WISE ANALYSIS IN ULBs OF GUJARAT
Thesis submitted in
Partial Fulfillment for
the Award of the Degree of
Master of Urban and Regional Planning
by

Krunal Bhanderi
MURP II-Second Semester (2013-14)

Primary Guide: Ms. Khevna Mistry

Secondary Guide: Dr. Ravikant Joshi

Department of Architecture,
Faculty of Technology & Engineering
The Maharaja Sayajirao University of Baroda,
Vadodara, India
May 2014

Finance is a gun.
Politics is knowing when to pull
the trigger. Mario Puzo

ASSESSMENT OF MUNICIPAL FINANCE AND

SERVICE DELIVERY:
A CLASS WISE ANALYSIS IN ULBs OF GUJARAT
Thesis submitted in
Partial Fulfillment for
the Award of the Degree of
Master of Urban and Regional Planning
by

Krunal Bhanderi
MURP II-Second Semester (2013-14)

Primary Guide: Ms. Khevna Mistry

Secondary Guide: Dr. Ravikant Joshi

Department of Architecture,
Faculty of Technology & Engineering
The Maharaja Sayajirao University of Baroda,
Vadodara, India
May 2014

CERTIFICATE
ASSESSMENT OF MUNICIPAL FINANCE AND SERVICE
DELIVERY: A CLASS WISE ANALYSIS IN ULBs OF GUJARAT
by

Krunal Bhanderi
This Thesis is submitted in partial fulfillment of the requirements for the
Degree of Master of Urban and Regional Planning
at the Department of Architecture
Faculty of Technology and Engineering
The Maharaja Sayajirao University, Vadodara, Gujarat, India

The present work has been carried out under our supervision and guidance.
The contents presented in this Thesis have not been submitted for the award of
any other Degree or Diploma anywhere else.

Primary Guide:
Ms. Khevna Mistry

Secondary Guide:
Dr. Ravikant Joshi

Prof. Shishir Raval

Head of the Department/ MURP Thesis Chair

A.N.Mishra
Dean, Director of the Masters Program
Faculty of Technology & Engineering, The Maharaja Sayajirao University of Baroda

ABSTRACT
The study is focused on financing of municipalities in Gujarat state. An
investigation into their finances reveals that the share of own sources in own
revenue income varies in the range of 22% to 32%during Budget year 2006-07
to 2010-11. This implies that the municipalities are heavily dependent on the
state government for grants. Share of grants received from state govt. varies in
the range of 45% to 70% during Budget year 2006-07 to 2010-11.
Amount of per-capita expenditure incurred by a local body is an indirect
indicator of the quality of the services offered by that local body to its citizens.
This in turn reflects the quality of life of that town. The study assessing financial
sustainability of water supply, waste water & solid waste management services
of municipalities in Gujarat state. Further class of municipality compared with
its key performance indicators viz. coverage, equity in service delivery,
efficiency in service operation, service level indicators.
The rapid pace of urbanization has direct impact on the demand of
urban services. Questions are beginning to be asked if Indian cities will be able
to meet the incremental infrastructure demands that may be generated by the
process of economic liberalization and our institutions has capacity to manage
the growing needs. The state of Gujarat has always been one of the most
urbanized states in the country. Urban centers contribute around 50% to the
GDP of India, and this contribution is likely to grow. The 74th Constitutional
Amendment Act was an attempt towards empowerment of urban local bodies
through functional devolution. However, it listed only the expenditure
responsibilities of municipalities and did not specify any sources of revenue for
the same.
Decentralization and Urbanization are putting increasing pressure on
the fiscal position of Municipalities to provide civic infrastructure facilities and
services, which continues to be amongst the core functions of the Urban Local
Bodies. Hence there is a need to strengthen the finances of the urban local
bodies.
Municipalities in India are confronted with a number of problems, such
as inefficiency in the conduct of business, ineffective participation by the
weaker sections of the population in local governance, weak financial

condition, lack of transparency in the planning and implementation of projects,

etc., which affect their performance adversely.
The study aims at analyzing the trends of municipal finances in the
state of Gujarat with objectives of examining the provisions relating to income
and expenditure of municipalities, assessing the trends in major income
sources and expenditures of municipalities analyzing the fiscal performance of
urban local bodies with respect to fiscal parameters viz. cost recovery and
collection efficiency for water supply, solid waste management and waste
water treatment services.
State

governments determine

the fiscal options of

municipal

governments. Both the expenditure responsibilities and revenue powers of the

municipalities are therefore determined by State governments.

State laws

specify the taxes that municipalities can levy and collect. Constitutionally inbuilt imbalances in functions and finances assigned to various levels of
government reflect in the high dependency of local bodies on state
governments and the latter in turn, on the Central Government for funds. Thus
the municipalities are faced with fiscal stress as a result of which their capacity
to contribute to national development is severely constrained.
Cost recovery is considered to be low priority by most of the urban
local bodies. The urban local bodies are not quick in revising the rates of taxes
while rise in inflation is steep. To affect quick recovery of the taxes positive
measures like introduction of incentives, charging interest for arrears,
maintenance of proper records are required to be considered.
The revenue account can be strengthened by rationalizing the base of
existing taxes and improving their collection efficiency. The total income of
municipalities in Gujarat grew at CAGR of 22% during 2007-08 to 2011-12.
Similarly, the total expenditure has increased at CAGR of 15%. Till 2000-01,
Octroi constituted about 50 percent of the ULBs income.
considered as the most buoyant source of income.

It has been

However, octroi being

conceptually a regressive tax was removed from the municipalities in 2000-01.

Now property tax is being pushed as the most promising source of revenue for
the ULBs and efforts are being made to make relevant reforms to achieve the
same. Share of property tax in total tax revenue income is almost about 50% in
municipalities of Gujarat.

ii

DEDICATION

This thesis is dedicated

To

Dilip Bhanderi, My Father

Who taught me to believe in hard work

Vijaya Bhanderi, My Mother

For being my first teacher

Rupa Bhanderi, My Aunty

For supporting and encouraging me to believe in myself.

iii

ACKNOWLEDGEMENT
This Dissertation would have been incomplete without the help and cooperation of a number of people.
I take this opportunity to express my sincere gratitude to thank my
Advisor and Thesis Guide Ms. Khevna Mistry and Mr. Ravikant Joshi for all
their support, guidance and motivation to help me accomplish my thesis.
Time to time discussions with Mr. Gopal Shah helped me to enhance my
work further. Guidance from Ms. Samriddhi Pathak and Dhruvi Panchal helped
a lot during initial stages of my work. I would like to thank my Jury panel
members for their suggestions and criticism which gave a final touch to my
efforts. I am thankful to thesis committee for their guidance and suggestions in
order to frame and structure the report.
I sincerely acknowledge the support of the officials of Government of
Gujarat, who helped me to understand the puzzle of finance. I express
gratitude to
Mr. A.T.Parmar, Under Secretory, Urban Development Department;
Mr. M.R.Parma, Secretory, Gujarat Municipal Finance Board;
Mr. I.K.Patel, Deputy Municipal Commissioner, AMC;
Mr. Dinesh Chokshi, Member of 3rd State Finance Commission;
Ms. Jeegisha Sheth, Member of Gujarat Municipal Finance Board;
Mr. Dhiren Parmar, Assistant Director, Directorate of Municipality;
Mr. R.B.Patel, Assistant Director, Gujarat Municipal Finance Board;
Mr. Girish saraiya, Chief Officer, Morbi Municipality;
Mr. D.K.Vyas, Chief Officer, Shahera Municipality; for their constant support
and encouragement throughout my research period.
It is incomplete if I miss the opportunity to thank my friend Pinakin for
their support, care and the best time I spent with him and also Shilpi, Bharvish,
Kruti, Vidisha, Swara, Arup, Ashvin, Ramesh & Vijay for all hilarious moments I
had with them throughout two years of this course.
Great encouragement and support from my family have facilitated me to
achieve this milestone of my academic carrier. Herewith I also apologies if by
mistake the citations have some minor errors and if some data has been
missed to cite.

iv

TABLE OF CONTENT
ABSTRACT ....................................................................................................................................... i
DEDICATION ................................................................................................................................. iii
ACKNOWLEDGEMENT .................................................................................................................. iv
TABLE OF CONTENT....................................................................................................................... v
LIST OF TABLES ............................................................................................................................. ix
LIST OF CHARTS & FIGURES .......................................................................................................... xi
LIST OF EQUATIONS .................................................................................................................... xii
ABBREVIATIONS ..........................................................................................................................xiii
1 INTRODUCTION ............................................................................................................. 1
1.1 BACKGROUND TO THE STUDY............................................................................................. 1
1.1.1 URBAN LOCAL BODIES IN INDIA ....................................................................................... 2
1.1.2 STATUS OF ULB FINANCING ........................................................................................... 3
1.2 CASE STUDY OF UNITED STATES .......................................................................................... 4
1.2.1 GRANT FINANCE OF INFRASTRUCTURE ............................................................................... 4
1.3 RESEARCH PROBLEM ....................................................................................................... 6
1.4 RESEARCH OBJECTIVES ..................................................................................................... 7
1.5 RESEARCH QUESTION ...................................................................................................... 7
1.6 RESEARCH DESIGN .......................................................................................................... 7
1.6.1 SCOPE OF STUDY.......................................................................................................... 7
1.6.2 LIMITATIONS............................................................................................................... 8
1.6.3 RESEARCH METHODOLOGY ............................................................................................ 9
1.6.4 STRUCTURE OF THE REPORT .......................................................................................... 10
2 LITERATURE REVIEW ............................................................ ERROR! BOOKMARK NOT DEFINED.
2.1.1 SECTION A: CONCEPT AND PRINCIPLES OF MUNICIPAL FINANCE .... ERROR! BOOKMARK NOT DEFINED.
2.2 IMPORTANCE OF LOCAL PUBLIC FINANCE .................................... ERROR! BOOKMARK NOT DEFINED.
2.3 RESOURCES OF LOCAL BODIES .................................................. ERROR! BOOKMARK NOT DEFINED.
2.3.1 INCOME SOURCE OF MUNICIPALITIES ...................................... ERROR! BOOKMARK NOT DEFINED.
2.3.2 EXPENDITURE DOMAIN OF MUNICIPALITIES .............................. ERROR! BOOKMARK NOT DEFINED.
2.3.3 PRINCIPLES OF TAX ASSIGNMENT ........................................... ERROR! BOOKMARK NOT DEFINED.
2.3.4 CHOICE OF LOCAL TAXES ...................................................... ERROR! BOOKMARK NOT DEFINED.
2.3.5 SOURCES FOR LOCAL BODY FINANCES ..................................... ERROR! BOOKMARK NOT DEFINED.
2.3.6 IMBALANCE OF REVENUES AND RESPONSIBILITIES ...................... ERROR! BOOKMARK NOT DEFINED.
2.3.7 FISCAL DECENTRALIZATION ................................................... ERROR! BOOKMARK NOT DEFINED.

2.3.8 INDIAN STUDIES ON MUNICIPAL FINANCE ................................ ERROR! BOOKMARK NOT DEFINED.
SECTION B: RESOURCES OF MUNICIPAL FINANCE ............... ERROR! BOOKMARK NOT DEFINED.
2.4 ECONOMIC OVERVIEW OF INDIA ............................................... ERROR! BOOKMARK NOT DEFINED.
2.4.1 STATE-MUNICIPAL FISCAL RELATIONS ...................................... ERROR! BOOKMARK NOT DEFINED.
2.5 TAX REVENUE OF MUNICIPALITIES ............................................. ERROR! BOOKMARK NOT DEFINED.
2.6 NON-TAX REVENUE OF MUNICIPALITIES ...................................... ERROR! BOOKMARK NOT DEFINED.
2.7 GRANTS ............................................................................. ERROR! BOOKMARK NOT DEFINED.
2.7.1 GENERAL PURPOSE GRANT ................................................... ERROR! BOOKMARK NOT DEFINED.
2.7.2 SPECIFIC PURPOSE GRANTS ................................................... ERROR! BOOKMARK NOT DEFINED.
2.7.3 STATUTORY OR COMPLEMENTARY GRANTS ............................... ERROR! BOOKMARK NOT DEFINED.
2.7.4 GENERAL CONDITIONS ........................................................ ERROR! BOOKMARK NOT DEFINED.
2.7.5 IMPORTANT CONSIDERATIONS IN THE DESIGN OF GRANTS ............ ERROR! BOOKMARK NOT DEFINED.
2.7.6 PRINCIPLES GOVERNING THE DESIGN OF GRANTS ........................ ERROR! BOOKMARK NOT DEFINED.
2.8 FINANCE FROM INTERGOVERNMENTAL TRANSFERS: STATE TO ULBS .. ERROR! BOOKMARK NOT DEFINED.
2.9 INSTITUTIONAL ARRANGEMENT OF STATE FOR URBAN DEVELOPMENT ERROR! BOOKMARK NOT DEFINED.
2.9.1 URBAN DEVELOPMENT & URBAN HOUSING DEPARTMENT ............ ERROR! BOOKMARK NOT DEFINED.
2.9.2 GUJARAT URBAN DEVELOPMENT MISSION ................................ ERROR! BOOKMARK NOT DEFINED.
2.9.2.1 URBAN INFRASTRUCTURE DEVELOPMENT SCHEME FOR SMALL AND MEDIUM TOWNS (UIDSSMT)
ERROR! BOOKMARK NOT DEFINED.
2.9.2.2 JAWAHARLAL NEHRU NATIONAL URBAN RENEWAL MISSION (JNNURM) ERROR! BOOKMARK NOT
DEFINED.

2.9.2.3 THE DIRECTORATE OF MUNICIPALITIES (DOM)........................ ERROR! BOOKMARK NOT DEFINED.

2.9.2.4 GUJARAT MUNICIPAL FINANCE BOARD (GMFB)...................... ERROR! BOOKMARK NOT DEFINED.
2.9.2.5 ENTERTAINMENT TAX GRANT ............................................. ERROR! BOOKMARK NOT DEFINED.
2.9.2.6 INSTITUTIONAL FINANCE FOR ULBS BY CREATING REVOLVING FUND ......... ERROR! BOOKMARK NOT
DEFINED.

2.9.2.7 GIA TO ULBS FROM PROFESSIONAL TAX ............................... ERROR! BOOKMARK NOT DEFINED.
2.9.2.8 GIA TO LOCAL BODIES FOR ENTERTAINMENT TAX ON CABLE TV/DISK ....... ERROR! BOOKMARK NOT
DEFINED.

2.9.2.9 NATIONAL SLUM DEVELOPMENT PROGRAMME (NSDP) ........... ERROR! BOOKMARK NOT DEFINED.
2.9.2.10 INTEGRATED DEVELOPMENT OF SMALL AND MEDIUM TOWN (IDSMT) .. ERROR! BOOKMARK NOT
DEFINED.

2.9.2.11 AMRUTDHARA YOJANA ................................................... ERROR! BOOKMARK NOT DEFINED.

vi

2.9.2.12 GUJARAT HOUSING BOARD .............................................. ERROR! BOOKMARK NOT DEFINED.

2.9.2.13 GUJARAT URBAN DEVELOPMENT COMPANY ......................... ERROR! BOOKMARK NOT DEFINED.
2.10 MUNICIPAL BORROWINGS .................................................... ERROR! BOOKMARK NOT DEFINED.
2.10.1 STATUS OF MUNICIPAL BORROWING IN INDIA......................... ERROR! BOOKMARK NOT DEFINED.
2.10.2 GUJARAT STATE GOVERNMENT GUARANTEES ON BORROWINGS .. ERROR! BOOKMARK NOT DEFINED.
2.10.3 MUNICIPAL BONDS .......................................................... ERROR! BOOKMARK NOT DEFINED.
2.10.4 TERM LOANS FROM COMMERCIAL BANKS .............................. ERROR! BOOKMARK NOT DEFINED.
2.10.5 TERM LOANS FROM HUDCO .............................................. ERROR! BOOKMARK NOT DEFINED.
2.10.6 INTERNAL BORROWINGS .................................................... ERROR! BOOKMARK NOT DEFINED.
2.10.7 COMBINATION OF BORROWING OPTIONS .............................. ERROR! BOOKMARK NOT DEFINED.
2.11 PUBLIC PRIVATE PARTNERSHIPS.............................................. ERROR! BOOKMARK NOT DEFINED.
2.11.1 CONCEPT OF PUBLIC PRIVATE PARTNERSHIPS .......................... ERROR! BOOKMARK NOT DEFINED.
2.11.2 NEED FOR PUBLIC PRIVATE PARTNERSHIPS ............................. ERROR! BOOKMARK NOT DEFINED.
2.11.3 UNBUNDLING OF SERVICES ................................................. ERROR! BOOKMARK NOT DEFINED.
3 GUJARAT MUNICIPAL SECTOR .............................................. ERROR! BOOKMARK NOT DEFINED.
3.1 MUNICIPAL SECTOR IN GUJARAT .............................................. ERROR! BOOKMARK NOT DEFINED.
3.2 FUNCTIONS AND RESPONSIBILITIES OF ULBS................................ ERROR! BOOKMARK NOT DEFINED.
3.3 EXPENDITURE AND REVENUE ASSIGNMENT ................................. ERROR! BOOKMARK NOT DEFINED.
3.4 ROLE OF STATE FINANCE COMMISSIONS (SFC)............................. ERROR! BOOKMARK NOT DEFINED.
3.4.1 RECOMMENDATIONS OF 1ST STATE FINANCE COMMISSION.......... ERROR! BOOKMARK NOT DEFINED.
3.4.2 RECOMMENDATIONS OF 2ND STATE FINANCE COMMISSION......... ERROR! BOOKMARK NOT DEFINED.
3.5 PROVISION OF GUJARAT MUNICIPALITIES ACT ............................. ERROR! BOOKMARK NOT DEFINED.
3.6 THE MUNICIPAL ACCOUNTING REFORM PROJECT ......................... ERROR! BOOKMARK NOT DEFINED.
3.6.1 OBJECTIVES ...................................................................... ERROR! BOOKMARK NOT DEFINED.
3.6.2 CMAG AS PROJECT MANAGEMENT & TRAINING UNIT (PMTU) ... ERROR! BOOKMARK NOT DEFINED.
3.6.3 STATUS AS OF FEBRUARY 2008 ............................................. ERROR! BOOKMARK NOT DEFINED.
3.7 MAJOR ISSUES ..................................................................... ERROR! BOOKMARK NOT DEFINED.
4 ASSESSMENT OF MUNICIPAL FINANCES ................................ ERROR! BOOKMARK NOT DEFINED.
4.1 INCOME TREND OF MUNICIPALITIES .......................................... ERROR! BOOKMARK NOT DEFINED.
4.1.1 CLARIFICATIONS................................................................. ERROR! BOOKMARK NOT DEFINED.
4.1.2 RELATION BETWEEN INCOME RECEIPTS AND POPULATION SIZE ..... ERROR! BOOKMARK NOT DEFINED.
.Explanations .................................................................................. Error! Bookmark not defined.
CLASSWISE PERCAPITA INCOME (2007-12) ............................................ ERROR! BOOKMARK NOT DEFINED.
Understandings .............................................................................. Error! Bookmark not defined.

vii

TAX INCOME ...................................................................................... ERROR! BOOKMARK NOT DEFINED.

.Interpretations .............................................................................. Error! Bookmark not defined.
NON-TAX INCOME .............................................................................. ERROR! BOOKMARK NOT DEFINED.
.Interpretations .............................................................................. Error! Bookmark not defined.
GRANT RECEIVED FROM STATE GOVERNMENT ........................................ ERROR! BOOKMARK NOT DEFINED.
.Interpretations .............................................................................. Error! Bookmark not defined.
GRANT RECEIVED FROM CENTRAL GOVERNMENT .................................... ERROR! BOOKMARK NOT DEFINED.
Interpretations ............................................................................... Error! Bookmark not defined.
4.2 REVENUE AND CAPITAL INCOME OF MUNICIPALITY ....................... ERROR! BOOKMARK NOT DEFINED.
4.2.1 CLASS WISE SHARE OF REVENUE & CAPITAL RECEIPTS .................. ERROR! BOOKMARK NOT DEFINED.
Interpretations ............................................................................... Error! Bookmark not defined.
4.3 EXPENDITURE TREND OF MUNICIPALITIES ................................... ERROR! BOOKMARK NOT DEFINED.
4.3.1 EXPLANATIONS .................................................................. ERROR! BOOKMARK NOT DEFINED.
4.3.2 RELATION BETWEEN EXPENDITURE RECEIPTS AND POPULATION SIZE .......... ERROR! BOOKMARK NOT
DEFINED.

Observations .................................................................................. Error! Bookmark not defined.

CLASSWISE PERCAPITA EXPENDITURE (2007-12)..................................... ERROR! BOOKMARK NOT DEFINED.
Understandings .............................................................................. Error! Bookmark not defined.
4.4 REVENUE AND CAPITAL EXPENDITURE OF MUNICIPALITY ................ ERROR! BOOKMARK NOT DEFINED.
4.4.1 DETAILED HEADS OF EXPENDITURE OF MUNICIPALITY ................. ERROR! BOOKMARK NOT DEFINED.
4.4.2 CLASS WISE SHARE OF REVENUE & CAPITAL EXPENDITURE (PAYMENT)....... ERROR! BOOKMARK NOT
DEFINED.

4.4.3 OBSERVATIONS ................................................................. ERROR! BOOKMARK NOT DEFINED.

5 ASSESSMENT OF INFRASTRUCTURE AND SERVICE DELIVERY .. ERROR! BOOKMARK NOT DEFINED.
5.1 FRAMEWORK FOR ASSESSMENT OF INFRASTRUCTURE SERVICES ....... ERROR! BOOKMARK NOT DEFINED.
5.2 EQUITY RELATED ASPECTS....................................................... ERROR! BOOKMARK NOT DEFINED.
5.2.1 OBSERVATIONS ................................................................. ERROR! BOOKMARK NOT DEFINED.
5.3 AREA, ACCESS AND COVERAGE OF INFRASTRUCTURE ..................... ERROR! BOOKMARK NOT DEFINED.
5.3.1 OBSERVATIONS ................................................................. ERROR! BOOKMARK NOT DEFINED.
5.4 SERVICE LEVEL AND QUALITY ................................................... ERROR! BOOKMARK NOT DEFINED.
5.4.1 OBSERVATIONS ................................................................. ERROR! BOOKMARK NOT DEFINED.
5.5 FINANCIAL SUSTAINABILITY ..................................................... ERROR! BOOKMARK NOT DEFINED.
5.5.1 OBSERVATIONS ................................................................. ERROR! BOOKMARK NOT DEFINED.
5.6 EFFICIENCY IN SERVICE OPERATION ........................................... ERROR! BOOKMARK NOT DEFINED.

viii

5.6.1 OBSERVATIONS ................................................................. ERROR! BOOKMARK NOT DEFINED.

5.7 ANALYSES OF KEY PERFORMANCE INDICATORS............................. ERROR! BOOKMARK NOT DEFINED.
5.7.1 OBSERVATIONS ................................................................. ERROR! BOOKMARK NOT DEFINED.
5.8 RECOMMENDATIONS: ............................................................ ERROR! BOOKMARK NOT DEFINED.
APPENDICES ................................................................................... Error! Bookmark not defined.
BIBLIOGRAPHY................................................................................ Error! Bookmark not defined.

ix

LIST OF TABLES
Table 1 State Wise Level of Urbanisation (% Urban to Total Population) ..................... 1
Table 2 Projection of Share of Urban Population .......................................................... 1
Table 3 Distribution of Urban Population in Different Classes of ULBs in Gujarat ......... 2
Table 4 Framework for Research Methodology ............................................................ 9
Table 5 Expenditure Domain of municipalities ............... Error! Bookmark not defined.
Table 6 Basic Guidelines For The Design of Local Taxation SystemsError! Bookmark
not defined.
Table 7 Ceiling on State Government Guarantees ........ Error! Bookmark not defined.
Table 8 Function issues and need for partnerships ....... Error! Bookmark not defined.
Table 9 Municipalities in Gujarat (as per 2001 census).. Error! Bookmark not defined.
Table 10 Features of Municipality according to class-wise composition................ Error!
Bookmark not defined.
Table 11 List of Accepted Recommendation of 1st SFC Error! Bookmark not defined.
Table 12 List of Accepted Recommendation of 2nd SFCError!

Bookmark

not

defined.
Table 13 Annual growthrate of income and expenditure of municipalities ............. Error!
Bookmark not defined.
Table 14 Headwise Income receipts of All Municipality.. Error! Bookmark not defined.
Table 15 Classwise Total Income Receipts & Annual Growth Rate of Municipality Error!
Bookmark not defined.
Table 16 Classwise Share of Total Income of all MunicipalitiesError! Bookmark not
defined.
Table 17 Class Wise Per Capita Total Income .............. Error! Bookmark not defined.
Table 18 Class wise Tax Income of Municipalities ......... Error! Bookmark not defined.
Table 19 Share of Each Class in Total Tax Income of MunicipalitiesError!

Bookmark

not defined.
Table 20 Share of Each Component in Total Tax Income of all Municipalities ...... Error!
Bookmark not defined.
Table 21 Classwise Non-Tax Income of Municipalities .. Error! Bookmark not defined.
Table 22 Share of Each Class in Total Non-Tax Income of Municipalities ............ Error!
Bookmark not defined.
Table 23 Share of Each Component in Total Non-Tax Income of all Municipality . Error!
Bookmark not defined.
Table 24 Classwise Grant Received by Municipalities From State Government ... Error!
Bookmark not defined.

Table 25 Share of Each Class of Municipality in Grant Received From State

Government .................................................................. Error! Bookmark not defined.
Table 26 Share of Each Component of Municipalities in Total Grants Received From
GoG .............................................................................. Error! Bookmark not defined.
Table 27 Classwise Grant Received by Municipalities From Central Government Error!
Bookmark not defined.
Table 28 Share of Each Class of Municipalities in Grant Received From Central
Government .................................................................. Error! Bookmark not defined.
Table 29 Share of Each Component of Municipalities in Total Grants Received From
GoI ................................................................................ Error! Bookmark not defined.
Table 30 Categorization of Income Components of MunicipalityError! Bookmark not
defined.
Table 31 Share Of Revenue & Capital Receipts in Class A Municipalities ............ Error!
Bookmark not defined.
Table 32 Share Of Revenue & Capital Receipts in Class B Municipalities ............ Error!
Bookmark not defined.
Table 33 Share Of Revenue & Capital Receipts in Class C Municipalities ............ Error!
Bookmark not defined.
Table 34 Share Of Revenue & Capital Receipts in Class D Municipalities ............ Error!
Bookmark not defined.
Table 35 Share Of Revenue & Capital Receipts in all MunicipalityError! Bookmark not
defined.
Table 36 Share Of Revenue & Capital Receipts in Each ClassError! Bookmark

not

defined.
Table 37 Headwise Expenditure (Payment) of All MunicipalityError!

Bookmark

not

defined.
Table 38 Share of Each Component to Total Expenditure (Payment) of all Municipality
...................................................................................... Error! Bookmark not defined.
Table 39 Classwise Total Expenditure(Payment) & Annual Growth Rate of Municipality
...................................................................................... Error! Bookmark not defined.
Table 40 Classwise Share of Total Expenditure ............ Error! Bookmark not defined.
Table 41 Class Wise Per Capita Total Expenditure (Payment) of Municipalities ... Error!
Bookmark not defined.
Table 42 Categorization of Expenditure Heads of MunicipalitiesError! Bookmark not
defined.
Table 43 Share of Revenue & Capital Expenditure (Payment) in Class A Municipalities
...................................................................................... Error! Bookmark not defined.

xi

Table 44 Share of Revenue & Capital Expenditure (Payment) in Class B Municipalities

...................................................................................... Error! Bookmark not defined.
Table 45 Share of Revenue & Capital Expenditure (Payment) in Class C Municipalities
...................................................................................... Error! Bookmark not defined.
Table 46 Share of Revenue & Capital Expenditure (Payment) in Class D Municipalities
...................................................................................... Error! Bookmark not defined.
Table 47 Share of Revenue & Capital Expenditure (Payment) in all Municipalities Error!
Bookmark not defined.
Table 48 Share of Revenue & Capital Expenditure (Payment) in Each Class of
Municipalities ................................................................. Error! Bookmark not defined.
Table 49 List of Equity Related Aspects Indicators ........ Error! Bookmark not defined.
Table 50 List of Area, Access and Coverage of Infrastructure Indicators .............. Error!
Bookmark not defined.
Table 51 List of Service Levels and Quality Indicators ... Error! Bookmark not defined.
Table 52 List of Financial Sustainability Indicators......... Error! Bookmark not defined.
Table 53 List of Efficiency in Service Operation IndicatorsError!

Bookmark

not

defined.

xii

LIST OF CHARTS & FIGURES

Figure 1 Conventional Sources of Municipal Income ..... Error! Bookmark not defined.
Figure 2 Income and expenditure of municipalities at glanceError!

Bookmark

not

defined.
Figure 3 Classwise Share of Total Income .................... Error! Bookmark not defined.
Figure 4 Class Wise Per Capita Total Income ............... Error! Bookmark not defined.
Figure 5 Share of Revenue & Capital income Receipts of Each ClassError! Bookmark
not defined.
Figure 6 Classwise Share of Total Expenditure ............. Error! Bookmark not defined.
Figure 7 Class Wise per Capita Expenditure ................. Error! Bookmark not defined.
Figure 8 Share of Revenue & Capital Expenditure of Each ClassError! Bookmark not
defined.
Figure 9 Chart of Equity Related Aspects Indicators ...... Error! Bookmark not defined.
Figure 10 Chart of Area, Access and Coverage of Infrastructure Indicators.......... Error!
Bookmark not defined.
Figure 11 Chart of Service Levels and Quality IndicatorsError!

Bookmark

not

Bookmark

not

defined.
Figure 12 Pie Chart of Financial Sustainability IndicatorsError!
defined.
Figure 13 Chart of Efficiency in Service Operation IndicatorsError!

Bookmark

not

defined.
Figure 14 Analyses of Key Performance Indicators ....... Error! Bookmark not defined.
Figure 15 Location of Municipalities and Municipal CorporationsError! Bookmark not
defined.

xiii

LIST OF EQUATIONS
Equation 1 Key Perfomance Indicator ........................... Error! Bookmark not defined.
Equation 2 Equity Related Aspects indicator ................. Error! Bookmark not defined.
Equation 3 Area, Access and Coverage of Infrastructure IndicatorError!

Bookmark

not defined.
Equation 4 Service Levels And Quality indicator............ Error! Bookmark not defined.
Equation 5 Financial Sustainability indicator .................. Error! Bookmark not defined.
Equation 6 Efficiency in Service Operation indicator...... Error! Bookmark not defined.

xiv

ABBREVIATIONS
AUWSP

Accelerated Urban Water Supply Project

C&AG

Comptroller and Auditor General of India

CA

Chartered Accountant

CAA

Constitutional Amendment Act

CAGR

Cumulative Annual Growth Rate

CBO

Community Based Organisation

CMAG

City Managers' Association Gujarat

CSS

Central Sponsored Scheme

GDP

Gross Domestic Product

GMARP

Gujarat Municipal Accounting Reform Project

GMFB

Gujarat Municipal Finance Board

GoG

Government of Gujarat

GoI

Government of India

GOVT.

Government

GUDM

Gujarat Urban Development Mission

HH

Household

HUDCO

Housing and Urban Development Corporation Limited

IDSMT

Integrated Development For Small And Medium Towns

IIR

India Infrastructure Report

JNNURM

Jawaharlal Nehru National Urban Renewal Mission

KPI

Key Performance Indicators

LRTS

Light Rail Transit System

MC

Municipal Corporation

MRTS

Metro Rail Transit System

MSW

Municipal Solid Waste

NGO

Non-Governmental Organisation

xv

PAS

Performance Assessment System

PMTU

Project Management & Training Unit

SFC

State Finance Commission

SLNA

State Level Nodal Agency

SWM

Solid Waste Management

TFC

Twelfth Finance Commission

UD & UHD

Urban Development and Urban Housing Department

UDD

Urban Development Department

UHD

Urban Housing Department

UIDSSMT

Urban Infrastructure Development Scheme for Small and Medium Towns

ULBs

Urban Local Bodies

WS

Water Supply

xvi

INTRODUCTION

1.1

Background to the Study

Urban areas act as engines of economic growth for the country. Urban centers
enable clustering of complementary economic activities, capital and skill,
entrepreneurial talent and innovation, and scale, scope and agglomeration
economies. Urbanization shifts people from low productivity rural pursuits to
higher productivity non-agricultural activities.

Table 1 State Wise Level of Urbanisation (% Urban to Total Population)

State
Andhra
Pradesh
Gujarat
Karnatak
a
Maharas
htra
Tamil
Nadu
All India

1911 1921 1931 1941 1951 1961 1971

10.1 10.2 11.1 13.4 17.4 17.4 19.3

1981
23.3

1991
26.9

2001
27.3

2011
33.5

17.3
11.6

18
13.8

18.2
15.3

21.2
16.9

23.9
23

24.4
22.3

26.6
24.3

29.6
28.9

32.9
30.9

37.4
34

42.5
38.5

15.1

18.5

18.6

21.1

28.8

28.2

25.2

82.8

38.7

42.4

45.2

15.1

15.8

18

19.7

24.3

26.7

30.3

33

34.2

44

48.4

10.2

11

11.8

13.6

16.8

17.5

18.7

27

24.8

27.8

31.1

Source: Census of India

In recent years, most urban areas in the country have witnessed deterioration in
the standard and quality of public life. In almost every urban centre irrespective of
size or class, the availability of basic services declined, and considerable
populations have no access to many of the services and amenities.

Table 2 Projection of Share of Urban Population

State
Andhra Pradesh
Gujarat
Karnataka
Maharashtra
Tamil Nadu
All India

2001
27.3
37.4
34
42.4
44
27.8

2011
33.5
42.5
38.5
45.2
48.4
31.1

2026
34
53
49.3
61
74.8
38.2

Source: Census of India 2001 and 2011, 2026: Based on projections reported in Registrar
General and Census Commissioner (2006)

Indias urban population grew from 30.51 million in 1911 to 377.04 million in 2011,
with the stake of population in cities and towns steadily rising from 10.0 per cent
in 1911 to 31.2 percent in 2011. With the increase in urban population, there is a
need to improve and increase the urban facilities in those areas. Gujarat is one of
1

the most urbanized states in India. Urban centers contribute around 50% to the
GDP of India, and this contribution is likely to grow. As per World Bank, India,
along with China, Indonesia, Nigeria and the United States, will lead the world's
urban population surge by 2050.1
1.1.1

Urban Local Bodies in India

Urban local government in India comprises of municipal corporations, municipal

councils, town area committees, notified area committees and cantonment
boards. The urban local bodies are statutorily responsible for the provision and
maintenance of basic infrastructure and services in cities and towns.

Table 3 Distribution of Urban Population in Different Classes of ULBs in

Gujarat
Year
Municipal corporation
Municipalities
Class A (more than 100,000)
Class B (50,000) to 100,000)
Class C (25,000 to 50,000)
Class D (less than 25,000)
Total of Municipalities
Gujarat Urban Local Bodies

No. of ULBs
2011
8

% of urban to Total
2011
46.4

18
33
45
63
159
166

9.2
7.9
5.3
4.3
26.8
100
Source: Census of India, 2011

ULBs/ municipalities play an important role in the planning and development of

urban areas. However, most studies undertaken to assess the functioning of
municipalities in India point out that the performance of municipalities in the
discharge of their duties has continued to deteriorate over time. It is noted that
municipalities in India are confronted with a number of problems, such as
inefficiency in the conduct of business, ineffective participation by the weaker
sections of the population in local governance, weak financial condition, lack of
transparency in the planning and implementation of projects, etc., which affect
their performance adversely.
With the enactment of the 74th Constitutional Amendment Act 1994, the
municipalities have acquired constitutional status for the first time in the history of
local governments. The important provisions specified in the Act include

Mohanty PK (2007),Municipal Finance in India: An assessment, RBI, Mumbai

constitution of three types of municipalities, devolution of greater functional

responsibilities and financial powers to municipalities, adequate representation of
weaker sections and women in municipalities, regular and fair conduct of
municipal elections, and constitution of Wards Committees, District Planning
Committees, Metropolitan Planning Committees and State Finance Commissions.
1.1.2

Status of ULB Financing

Local government institutions in India, until passage of the 73rd and 74th
Constitutional Amendment Acts, 1992, the only reference in the constitution to
local bodies was in the Directive Principles of State Policy, which stated, The
state shall take steps to organize village panchayats and endow them with such
powers and authority as may be necessary to enable them to function as units of
self-government. The constitutional amendments also contain Schedule XI and
Schedule XII, which comprise a list of functions considered appropriate for
devolution to municipalities.
The 74th Constitutional Amendment Acts, 1992 2, essentially contain provisions
regarding municipalities are briefly followings:
A. Article 243Q: The constitution, composition, and the structure of the
municipalities.
B. Article 243W:

Powers, authority, responsibilities and Institutional

arrangements for planning of economic and social development.

C. Article 243X: Power of municipalities to impose taxes, duties, tolls & fees
are capped by state legislature.
D. Article 243Y: Finance commission constituted under article 243-I shall
review financial position of municipalities and made recommendations to
improve financial position of municipalities.
E. Article 243Z: The state legislature may make provision with respect to
maintenance of accounts by the municipalities and the auditing of such
accounts.

Constitution of India, Part IXA

1.2
1.2.1

Case study of United States3

Grant Finance of Infrastructure

A significant amount of infrastructure finance in many municipalities comes from

conditional block grants from the central government. It is useful to examine the
experiences of other countries with such grants, in particular that of the United
States. In 1966, the Partnership for Health Act combined nine categorical health
grants into one block grant for health. Robbins (1976) and Stenberg and Walker
(1977) analyzed the results of this consolidation, and concluded that the block
grant increased the administrative flexibility of state health officials, even though
state health planning agencies generally did not have a major influence on the
block grant and state health planning agencies located in governors offices had
less influence over the block grant than those located in state health departments.
Most significantly, the new block grant did not generally result in a reordering of
spending priorities, including any changes of infrastructure spending (e.g.,
hospital and other health facility construction). Robbins (1976) and Stenberg and
Walker (1977) argued that the best explanation for the unspectacular effect of
combining several categorical grants into one block grant was that, without an
increase in the amount of the overall amount of the transfer, the new
administrative flexibility given state officials was insufficient to produce a
substantive reordering of program priorities.

More recently, Finegold, Wherry, and Schardin (2004) examined the entire United
States history of block grants, beginning with the Partnership for Health Act in
1966 and extending to: the Safe Streets program, created under the Omnibus
Crime Control and Safe Streets Act of 1968; the Community Development Block
Grant, the Social Services Block Grant, and the Comprehensive Employment and
Training Act Block Grant of the 1970s; the consolidation of 77 categorical grants
into 9 block grants as part of the Omnibus Budget Reconciliation Act of 1981; and
the Personal Responsibility and Work Opportunity Reconciliation Act, the welfare
reform legislation that replaced the Aid to Families with Dependent Children and
related programs with the Temporary Aid to Needy Families (TANF) block grant.
They concluded that funding gradually declined over time for nearly all of the

James Alm (May 2010)working paper 19, wolfensohn center for development

block grants. They also found that Congress typically eroded over time the
flexibility of the block grants by adding restrictions, requiring that a share of funds
be set aside for particular purposes or creating new categorical programs with the
same or related objectives. These restrictions were justified by Congress as an
attempt to deal with misuse or maladministration of the block grants by state and
local governments, but were more likely enacted because of political benefits from
more narrowly targeting the grants to specific constituents. Not surprisingly,
Finegold, Wherry, and Schardin (2004) concluded that block grants work best
when state and local government administrative capacities are strong and already
exist. For example, following implementation of the Reagan block grants, state
officials reported management improvements, including better planning and
budgeting methods, changes in administrative procedures and standardization
across programs, and increased efficiency in the use of state personnel (Peterson
et al. 19 6; GAO 1985). Even so, the GAO (1982) found only a small reduction in
overall administrative costs under the pre- 1981 block grant programs, with
administrative costs increasing in some cases, and few state administrators
claimed savings of more than 5 per cent under the Reagan block grants (Peterson
and Nightingale 1995). Indeed, implementation of new block grants has tended to
be smoothest when states were already responsible for administering the
categorical programs they replaced. Finally, Finegold, Wherry, and Schardin
(2004) reported mixed evidence from other studies that state governments used
the increased flexibility of block grants to redirect spending away from individuals
or communities with the greatest need. The GAO (1982) study of pre-1981 block
grants found the receipt of resources by target populations about the same under
categorical and block grant programs and Peterson et al. (1986) also found no
indications that states had used their flexibility under the Reagan block grants to
directly shift resources from poor or low-income families. However, Bennett and
Perez (1986) found that state allocations to local districts under the education
block grant were based more on enrolment, and less on need, than under the
categorical programs it replaced. In this regard, there was little evidence from any
study that the block grants achieved (where relevant and intended) any change in
infrastructure spending, a result similar to that of Robbins (1976) and Stenberg
and Walker (1977).

1.3

Research Problem

Urban Local Bodies which are responsible for the provision and
maintenance of basic infrastructure and services in cities and towns are
experiencing tremendous fiscal stress even to operate and maintain the
existing services at satisfactory levels.

Demand for basic services, goods and basic infrastructure has been
growing over the years, but at the same time there is no commensurate
increase in their revenue base, which has in fact been depleting constantly.
And thus a huge gap is there between revenue generation and expenditure
requirement.

To address this fiscal stress, some ULBs began borrowings from financial
institutions. However, such borrowings, where possible, have been with the
support of state government guarantees. The extent of market borrowings
is beyond the scope of most of the smaller level ULBs in India; Cost
recovery from infrastructure is very low; this is more so in the case of basic
services mandatorily provided by ULBs.

The financial requirements for bridging the existing gaps and meeting the
increasing demand for basic services are quite large. But there is hardly
any awareness and sensitivity towards the financial sustainability in
providing and managing basic level of services.

The net result is deprivation of substantial proportion of urban population

from core urban services such as water supply, sanitation, solid waste
management, etc. This has led to marked deterioration in the standard
and quality of life of urban residents.

At which density and population size optimum efficiency can be achieved in

operation and maintenance of infrastructure services.

1.4

Research Objectives

Aim:
The study aims at analyzing the class wise fiscal performance with respect
to service delivery in the ULBs of Gujarat.

Objectives:

To understand Financing system of municipalities in Gujarat and to study

the provisions of state/central government to determine the revenue base
of municipalities.

To assess the fiscal position of municipalities by assessing major income

sources and expenditure heads.

To analyze the fiscal performance of urban local bodies with respect to

Service delivery in urban area.

To suggest measures for strengthening their financial position and better

fiscal performance of urban local bodies.

1.5

Research Question

What trends are in own revenue receipts and total income receipts with
respect to area size and population composition?

Measure

self-dependency

of

municipalities

and

which

class

of

municipalities have batter fiscal performance?

On which basis evaluation of urban local bodies can be carried out?

What indicators can assess the Service delivery of urban local bodies?

1.6

Research Design

1.6.1

Scope of Study
The study is focused on the Municipalities in Gujarat State. The study has
looked at the municipal finances of 159 municipalities; the trends in
revenues and expenditures of the same.

The research scrutinizes the mismatch between fiscal performances of

urban local bodies with respect to Service delivery within municipality.

Observation of key performance indicators viz. area, access and coverage

of infrastructure, service levels and quality, financial sustainability,
efficiency in service operation and equity related aspects discloses which
class of municipalities is performing best and which class of municipalities
is performing pitiable.

The study considers secondary data of infrastructure for last five years
(2008-09 to 2012-13) collected from performance assessment system.

Financial statistics about income and expenditure receipts composed from

the records of Gujarat municipal finance board. (2007-08 to 2011-12)

1.6.2

Limitations
Out of all infrastructure and civic amenities only water supply, waste water
management, sewage treatment & solid waste management are covered.

Per capita tax payment capacity of citizens in each municipality is not

available, so the tax payment capacity of individual to municipality is not
worked out.

Financial statistics of each budget year (2007-08 to 2011-12) carried out at

constant price.

1.6.3

Research Methodology

Table 4 Framework for Research Methodology

Objectives
Steps
To
understand To
examine
the
provisions relating to
Financing system of
revenues
and
municipalities in Gujarat
expenditure
of
and
to
study the
municipalities
provisions
of To study the provisions of
state
government
to
state/central
determine the revenue
government
to
base of municipalities
determine the revenue
base of municipalities.
To assess the fiscal
position

of

municipalities

by

assessing major income

sources

and

expenditure heads.
To analyze the fiscal
performance of urban
local
respect

bodies
to

with
Service

delivery in urban area.

To suggest measures
for strengthening their
financial position and
better

fiscal

To examine the trends in

major revenue sources
and
expenditures
of
municipalities and assess
their fiscal position
To compare the financial
soundness of ULBs with
their
respective
municipality class
To
categorize
municipalities according
to
the
infrastructural
service level and financial
sustainability.

Sources
Literature review,
GMFB Act, 1979
The
Gujarat
State
Guarantees Act, 1963
The Gujarat Municipalities
Act,1963
74th CAA,1992
Mandates of the state
government related to
municipalities,
Gujarat
state
fiscal
responsibility act,2005
Analysis of financial data
of last 5 year (2007-08 to
2011-12, Secondary data
from Gujarat Municipal
Finance Board)

Observation
of
key
performance indicators viz.
area,
access
and
coverage of infrastructure,
service levels and quality,
financial
sustainability,
efficiency
in
service
operation
and
equity
related aspects
To recommend strategies Identify
optimum
for strengthening the population size of city.
financial position and
better performance in
service delivery.

performance of urban
local bodies.

1.6.4

Structure of the Report

The broad outline of the report is described below.

Chapter 1: Introduction
This chapter contains a brief introduction, background, objectives, scope,
conceptual framework, and methodology of the study.
Chapter 2: Literature Review
This chapter reviews the literature on municipal finance dealing concepts and
principle of municipal finance, methods available for resource of revenue income,
capital income and urban reforms as well initiatives to strengthen municipal
finances undertaken by the state and central government.
Chapter 3: Gujarat Municipal Sector
This chapter deals with the municipal sector in Gujarat State, the functions and
responsibilities of the municipalities, expenditure and revenue assignment, the
legal and institutional framework in the state.
Chapter 4: Assessment of municipal finance
This chapter scrutinizes the major heads of revenue income & revenue
expenditure central government. Matching of size of area, population caters
municipalities to income & expenditure of municipality according to class
compositions.
Chapter 5: Assessment of performance indicator of municipality.
This chapter investigates the key performance indicators viz. area, access and
coverage of infrastructure, service levels and quality, financial sustainability,
efficiency in service operation, equity related aspects of municipalities.

10