ISSN 2330-717X

Cash-Strapped BMC Needs Urgent Reforms, New Funding Sources – Analysis

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The crux lies in reimagining the allocation of funds from the Central government

By Sayli Udas⎯Manikar

The Brihanmumbai Municipal Corporation (BMC) appears to be in the red with Municipal Commissioner Praveen Pardeshi dipping into its reserves to withdraw ₹4,380 crore to finance the ₹33,441-crore budget for 2020-21, which was presented on Tuesday. This step ensured that the civic body met the statutory requirement of the Mumbai Municipal Corporation Act of not showing a budget deficit.

The financial capital’s civic body, which once boasted a rich cash flow, is now grappling with finding new sources of revenue. If the BMC continues to dip into its available reserves of ₹52,286 crore in every budget, the reserves are sure to run dry in about a decade with the civic body’s increasing expenditures. The BMC has another ₹26,382 crore in its reserves which cannot be dipped into even in emergency situations as it has been allotted for committed liabilities like provident fund, pensions, gratuity and other deposits.

It is important to understand why the BMC’s revenue has come under such stress. There are three major factors contributing to this fund crunch.

Firstly, the introduction of the Goods and Services Tax (GST) two years ago, hit the BMC badly with octroi being discontinued. Octroi’s daily collection method ensured cash inflow, taking care of the BMC’s urgent needs. On the other hand, the GST compensation is a fixed amount given on a fixed date, forcing the civic body to borrow from banks during emergencies. The situation further depends on the State’s own finances, i.e. if finances worsen, the State will not be able to fulfil its commitments.

Secondly, with the discontinuation of octroi, which is now estimated at ₹9,800 crore, the BMC has had to depend largely on property tax as its revenue source, which makes up 22% of its income. However, the collection of property tax is riddled with issues: there are pending litigations and few people and establishments comply, given the lack of strong laws against non-compliance. To add to these problems, in 2019, there was confusion over exempting houses less than 500 square feet from property tax. The actual property tax collected till December was only ₹1,810 crore, making up only 36% of the annual collections in the first three-quarters of the year. The real estate slump also contributed to a steady drop in the income from ‘premiums’.

Thirdly, the 74th Amendment Act recognised municipalities as the third tier, and its 12th Schedule puts down 18 functions to be performed. Only 12 of the 18 functions have a corresponding finance source.

In this budget, the city’s financial planners are seen scrounging for scraps to project revenue in 2020-21. Increasing lease, rent and premiums of all vacant land tenancy properties, providing conditional FSI to regularise areas like flowerbeds and deck lifts, and emphasis on property tax collections are a few steps proposed.

While these steps may help in small ways, serious financial reforms need to be introduced to fix this issue permanently. This can be done through a fixed fund like a city GST that is drawn up based on indicators, so that a share of the GST is mandatorily passed on to cities. The crux lies in reimagining the allocation of funds from the Central government. There will also need to be a fresh thinking on replacing a buoyant tax like octroi with an equally robust source of income for all municipalities.

The replacement cannot be given by the State in the form of a dole or compensation. Some taxes could be passed on to cities and innovative revenue generation methods could be drawn up. There is huge pressure on Mumbai to perform as both a megacity and India’s financial capital.

For now, the city needs help to financially stand. The Central government needs to step in to redefine fund allocation and roles of municipal bodies if it wants Mumbai and other cities to retain their richness and spirit for the years to come.


This araticle originally appeared in The Hindu.

Observer Research Foundation

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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