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15th Finance Commission allocates Rs 1.5 lakh crore in grants to urban local bodies

Entry conditions are set for 4,500 ULBs to access the FC grants. It is now mandatory for them to publish accounts and notify floor rates for property tax. This is expected to build confidence among investors and catalyse the market for future municipal bond issues, experts say.

February 02, 2021 / 05:35 PM IST

The 15th Finance Commission has allocated Rs 1.5 lakh crore in grants to urban local bodies (ULBs) in India for the next five years which is a 78 percent increase over last time. It has also imposed conditions on the municipalities for timely publishing of annual accounts and service-level benchmarks. This, say experts, will bring about greater confidence amongst the municipalities’ investors and lenders and catalyse the market for future fund raises, especially municipal bond issuances.

This allocation is a huge increase from the previous allocation of around Rs 87,000 crore which was made by the 14th Finance Commission for ULBs for the five years from 2015-16 to 2019-20.

With COVID-19 having impacted their financial position, some urban local bodies were hoping that they may get enhanced funding from Budget 2021 to undertake improvements in social infrastructure.

Experts say that with the country urbanising fast and urban population expected to double to over 800 million by 2050, massive investment of Rs 39.2 lakh crore is required to cater to the urgent demands for developing and upgrading urban infrastructure services such as roads, sewerage, street lights, waste management and treatment facilities, water bodies, among others.

Therefore, more funds in the hands of the otherwise financially weak ULBs by the 15th FC become very important, especially for India’s smaller cities, where a substantial portion of the ULB’s receipts (in some cases as high as 90 percent) still comes from grants.

Some of the reforms suggested in the report include mandatory entry condition of publishing audited and unaudited annual accounts online, notifying floor rates for property tax, and showing annual increase in property tax collections.

This means that every municipality in India would need to comply with these conditions in a phased manner to avail any 15th FC grants.

The FC has also laid down a deadline of March 2024 for states to constitute State Finance Commissions and submit action taken reports on their recommendations in state legislatures.

“The Finance Commission has not just significantly increased the (grant) outlay for India’s municipalities but has also mandated them to notify floor rates for property tax (and ensure its increase is in line with the increase in state GSDP). It has also directed states to strengthen their respective state finance commissions, which put together will make the cities’ fund inflows more predictable,” Mohak Mathur, head, Municipal Finance, Janaagraha, told Moneycontrol.

Secondly, it has imposed conditions on the municipalities for timely publishing of annual accounts and service-level benchmarks, will give the necessary impetus in creating transparency and therefore greater trust and confidence amongst the municipalities’ investors and lenders, thereby catalysing the market for future fund raises, especially municipal bond issuances, he added.

Simply put, this means that these two basic yet crucial reform conditions are expected to lead to improved relationship for municipalities with its key external stakeholders that include multilateral financial institutions, credit rating agencies and large infrastructure investors, especially for future fund raising, including municipal bond issuances.

The Finance Commission is a constitutional body that gives suggestions on Centre-state financial relations. The report of the 15th Finance Commission was tabled in Lok Sabha by Finance Minister Nirmala Sitharaman on February 1.

In order to maintain predictability and stability of resources, especially during the pandemic, the 15th Finance Commission has recommended "maintaining the vertical devolution at 41 percent the same as in our report for 2020-21.” The panel, headed by former bureaucrat NK Singh, had in November last year submitted its report titled Finance Commission in COVID Times to President Ram Nath Kovind

The recommendations of the 15th Finance Commission include fund allocation of Rs 1.5 lakh crore comprising 100% outcome funding of Rs 38,000 crore for million-plus urban agglomerations, tied to performance indicators on air quality (Rs 12,000 crores) and water and sanitation (Rs 26,000 crores).

The remaining cities have received an allocation of Rs 83,000 crore in aggregate, with 60 percent of the funds tied to performance on water and sanitation and balance being untied. In addition, the Commission has also earmarked Rs 26,000 crore for urban health infrastructure, Rs 8,000 crore for incubating new cities and Rs 450 crore for shared municipal service centres.

The total fund allocation of Rs 1.55 lakh crore for India’s approximately 4,500 urban local bodies (ULBs) is spread over the next five years, FY 2021-22 to FY 2025-26. This grant allocation to India’s municipalities is 35 percent of the total divisible tax pool for Local Bodies (of Rs 4.36 lakh crore), and is a substantive 78 percent increase over the Rs 87,000 crore allocation made by the previous (14th) FC allocation for ULBs for the five years, FY 2015-16 to FY 2019-20.

In its interim report for 2020-21 the FC had allocated grants amounting to Rs. 29,250 crore for India’s municipalities (ULBs) which was 32.5 percent of the total divisible tax pool for Local Bodies (including both rural and urban). Last year the FC also increased the allocation to the Local Bodies, from the total divisible tax pool, from 3.54 percent in 2019-20 to 4.31 percent in 2020-21.

Lucknow Municipal Corporation (LMC) on November 13 raised Rs 200 crore by issuing municipal bonds on private placement basis using BSE BOND platform, the exchange said. Lucknow Municipal Corporation bonds on December 2 became the first municipal bonds from North India to be listed on Bombay Stock Exchange (BSE). Uttar Pradesh Chief Minister Yogi Adityanath attended the listing ceremony in Mumbai.

The city of Lucknow is the ninth in the country to have raised municipal bonds that have cumulatively touched around Rs 3,600 crore. The next city to raise municipal bonds will be Ghaziabad, followed by a joint bond by Varanasi, Agra and Kanpur, Durga Shankar Mishra, secretary, ministry of housing and urban affairs, had said.

Eight other cities have raised municipal bonds so far. These include Amaravati (Rs 2000 crore), Visakhapatnam (Rs 80 crore), Ahmedabad (Rs 200 crore), Surat (Rs 200 crore), Bhopal (Rs 175 crore), Indore (Rs 140 crore), Pune (Rs 495 crore) and Hyderabad (Rs 200 crore).

Municipal bonds are bonds issued by urban local bodies to raise money for financing specific projects such as infrastructure projects. The Securities and Exchange Board of India regulations (2015) regarding municipal bonds provide that, to issue such bonds, municipalities must: (i) not have negative net worth in any of the three preceding financial years, and (ii) not have defaulted in any loan repayments in the last one year.

A city’s performance in the bond market depends on its fiscal performance and one of the ways to determine a city’s financial health is through credit ratings.
Vandana Ramnani
first published: Feb 2, 2021 05:35 pm