Fifth Of Municipal Corporations Saw Revenue Halve Amid Covid-19 Second Wave: RBI State Finances Report

The third-tier of government—urban local bodies and municipal corporations—have seen their finances deteriorate materially due to the Covid-19 crisis, which could impact their ability to provide services to local communities amid a continuing pandemic.

A earlier World Bank study had estimated that local authorities globally would lose around 15-25% of revenues in 2021. This would make the maintenance of the current level of service delivery difficult to sustain, that study said.

To understand the impact on India's local governments, the Reserve Bank of India conducted an online qualitative survey of 141 municipal corporations between July and August 2021. In addition, available budgetary data on 20 largest municipal corporations, which together account for around 60% of revenue and 55% of expenditure of all municipal corporations, was studied.

The analysis found that fiscal stress built up across these entities, with revenue falling and expenditure rising, forcing cut-backs across a non-essential categories. In rural India, village panchayats struggled for funds during the pandemic and similar challenges were encountered by the urban local bodies, the RBI report said while citing existing research and its own study.

RBI Survey Of Municipal Corporations

According to the findings of the survey:

• Up to 98% of respondents reported financial challenges, including an increase in expenditure; decline in revenue collection; and lack (or delayed release) of funds from the state governments during the second wave of the pandemic.

• Nearly 70% of municipal corporations reported a decline in revenue while 71% reported an increase in expenditure.

• Several municipal corporations had to cut down expenditure in other areas to make available funds for the Covid-19 response.

The survey found that the loss of revenue for municipal corporations was steeper during the second wave, with 22% of them reporting revenue loss of more than 50% in the second wave compared with 16% in the first wave.

The impact on expenditure of municipal corporations was more pronounced during the second wave as well, with 11% reporting an expenditure increase by more than 50%.

Budgetary Analysis Of 20 Large Municipal Corporations

The RBI also analysed the budgets of 20 large municipal corporations.

"Before the onset of the pandemic, the consolidated revenue balance of the municipal corporations was in surplus. Budgetary data relating to 20 large municipal corporations indicates that their combined revenue surplus declined in 2020-21, with many of them recording either a fall in the revenue surplus or an increase in the revenue deficit," the study said. The decline in surplus was more pronounced than the increase in deficit, it said.

According to the survey, municipal corporations adopted a combination of measures to bridge resource gaps.

They mobilised additional funding from sources such as borrowing, grants from the states and the centre, reserves, municipal funds, deposits in state disaster response funds, issuances of Covid-19 bonds, donations and contribution.

• Around 43% of the respondents to the survey reported use of grants from the State governments to meet pandemic-related needs of funding.

• 19% of the survey respondents reported drawing from reserve funds to meet the resource gap.

• About 6% of surveyed corporations borrowed from state governments and another 2% borrowed from banks.

• Five corporations responding to the survey issued bonds to finance Covid-related expenditure.

Corporations also cut back on non-expenditure, with 18% of those surveyed reporting such measures.

Lessons From The Crisis

Local governments already suffered from insufficient budgets, over reliance on funds from upper tiers of government, lack of access to new sources of revenue and limited autonomy. The Covid-19 crisis has amplified these structural constraints, said the RBI study. This, at a time, when the responsibilities of local governments towards delivery of public services has increased manifold.

As budgets of municipal corporations came under severe strain, many were forced to cut down discretionary spending, use reserves and other contingency funds.

The report said the crisis reinforced the need to increase financial autonomy of civic bodies, strengthen their governance structures and financially empower them. In addition, "the importance of transfers from upper tiers of the government during a crisis cannot be over-emphasised".