The RBI State of the Economy Bulletin on the theme “Coping with the Pandemic: A Third-Tier Dimension”, has analysed what the Centre, States and Cities did to manage the pandemic at the local level. E Jayashree Kurup analyses the problems that this survey of 141 Municipal Corporations has revealed and their long-term implicationsAs the pandemic shifted focus to the cities, managing urban economics was a challenge. Historically, municipal revenue receipts largely comprise of their own tax revenue, non-tax revenue and transfers from the Central and the State governments. Property tax is the dominant component of own tax revenue, whereas fees and user charges are the largest non-tax revenue.According to a Municipal Finance Report by the National Institute of Urban Affairs (NIUA) for the 14th Finance Commission, in cities “own revenue formed only about 40-43% of the revenue receipts whereas, higher governmental transfers/grants formed a majority of the revenue between 52-55%. Tax revenue as a percentage of own revenue receipts was around 58%, while non-tax revenue as a percentage of own revenue receipts was 42% during 2015-16 to 2017-18. Out of total transfers/grants on the revenue account, State Government transfers/grants formed a significantly large portion of intergovernmental transfers, ranging from 80%-86%, while the central transfers were between 14%-20%.The share of borrowings in total receipts of municipal bodies was historically less than 5 per cent. This changed dramatically during the pandemic.To cope with the rising demands during the pandemic, cities and states have stepped up borrowing. Health and related infrastructure that drew a meagre 3.6 per cent of the GDP, now became priority expenditure. The Centre allowed states additional borrowing of up to 2 per cent of GSDP (Gross State Domestic Product) for the year 2020-21. The 15th Finance Commission has recommended a relaxed borrowing limit for State governments to accommodate priority expenditure.Low-income groups in cities, with limited safety nets, were vulnerable to economic shocks like the pandemic. The 15th State Finance Commission recommended sector-specific grants from the Union Government to protect these communities.City level solutions: Let us first analyse how the crisis was managed at the city level in terms of finance. Soon after the pandemic hit and cities were locked down, they provided relief packages to the marginalised sections of society. About Rs 22,000 crore was provided as relief packages by Odisha, Kerala and Karnataka, amounting to about 0.1 per cent of the GDP in the first few months of 2021. Tamil Nadu’s additional expenditure on COVID related relief, including cash support and additional food subsidies, was about Rs 17,618.8 crore.There was an immediate need and little or no surplus to fall back on. As states were unable to cope with this sudden financial burden, the Centre allowed states to borrow money to meet their additional expenses. This was, in turn, passed on to the cities. About 6 per cent of municipal corporations surveyed by the RBI, borrowed from State governments and another 2 per cent borrowed from banks to meet the additional need for funds during the pandemic.The Centre linked permissions to borrow, to a displayed ability to manage finances. In September, Chhattisgarh, Kerala, Madhya Pradesh, Meghalaya, Punjab, Rajasthan and Telangana received permission to borrow an additional Rs 16,691 crore as an incentive on achieving the capital expenditure target set by the Ministry of Finance for H1:2021-22.The first 0.5 per cent of this additional borrowing limit was kept unconditional. About 1 per cent was linked to four citizen-centric reforms: (i) Implementation of One Nation One Ration Card System, (ii) Ease of doing business reform (iii) Urban local body/utility reforms and (iv) Power sector reforms. The remaining 0.5 per cent was linked to the completion of at least three of these reforms. An additional borrowing limit of 0.25 per cent of GSDP was allowed to States only on completion of two actions: (i) Aadhar Seeding of all the ration cards and beneficiaries; and (ii) Automation of all the FPSs in the State.Ease of Doing Business: In 2020-21, only 17 States complied with this reform to achieve Ease of Doing Business rankings. They received permission from the Centre to raise Rs 37,600 crore. This included: (i) Completion of the first assessment of ‘District Level Business Reform Action Plan 8’ (ii) Elimination of the requirements of renewal of registration certificates/approvals/licences obtained by businesses under various Acts and (iii) Implementation of a computerised central random inspection system. During 2020-21, there were 20 States that completed the reforms, and received the Centre's permission to raise additional financial resources of Rs 39,521 crore through market borrowings.Utility reforms were aimed directly at better public health and sanitation services to citizens. They also aimed to financially strengthen ULBs. Eleven States successfully undertook this reform and were granted additional permission to borrow Rs 15,957 crore in 2020-21 from the open market.With reforms in the power sector, states could get an additional borrowing of 0.25 per cent of GSDP if they met the three stipulated parameters. About 19 States successfully met one or the other target and were granted additional borrowing permission of Rs 13,201 crore. The final instalment of 0.5 per cent was linked to carrying out at least three out of four reforms stipulated by the Government of India.However, the conditionality was waived later, and all states were granted permission for this additional borrowing. The RBI cautions that “The relaxation of borrowing limits and deviations from the FRL target during the pandemic calls for a revised fiscal roadmap aimed towards fiscal consolidation in the medium term.”Additional Funding: The survey responses from 141 cities reveal that apart from reduction of non-essential expenditure, the Municipal Corporations also mobilised additional funding from multiple sources such as borrowing, grants from the States and the Centre, reserves, municipal funds, deposits in State Disaster Response Funds (SDRF), issuances of COVID bonds, as well as donations and contribution (Chart III.16). Revenue receipts account for around 70 per cent of total receipts of Municipal Corporations in India whereas capital receipts account for about 30 per cent.Intergovernmental Transfers: During the pandemic, intergovernmental transfers were among the least affected sources of revenue. Thus, strengthening and streamlining transfers from upper tiers of government, through institutionally sound mechanisms can help fortify the financial stability of municipal corporations.There are several facets of municipal finances that merit reforms. Transparency, better governance and management, and better accountability is the order of the day. States and cities have borrowed like never before for a once in a generation pandemic. Can this also throw up innovative financing solutions that could turn the state of Indian cities and citizens around? Would cities perform better in terms of financing solutions during future crises? What would be the long-term impact of all this borrowing on the state of government finances and the banking sector?E Jayashree Kurup is Director Wordmeister Editorial Services, Real Estate & Cities. She is also Advisor, Communications, National Institute of Urban AffairsImage Sources: Google Images