Fiscal Innovations and

8
Urban Governance

OM PRAKASH MATHUR
Contents

I IN T R O D U C T IO N 2 3 3

II CASES O F FISCAL IN N O V A T IO N S 2 4 0

Case 1: Reform of Property Taxation in Andhra Pradesh

Case 2: Issuance of Bonds by the Ahmedabad
Municipal Corporation
Case 3: Public-Private Participation in the Provision of
Infrastructure to Tirupur

III A SET O F O B S E RV A T IO N S: E M E R G IN G C O N N E C T IO N S

BETW EEN FISCAL IN N O V A T IO N S A N D G O V E R N A N C E 2 63

Annexure 1 2 6 7

Annexure 2 2 6 9

End Notes 2 7 0
8
I
Fiscal Innovations and
Urban Governance
OM PRAKASH MATHUR

I N T R O D U C T IO N : E X P L O R IN G T H E C O N N E C T IO N S B E T W E E N
F IN A N C E A N D G O V E R N A N C E

Numerous studies have been carried out in recent years on the finances
of local governments in the developing economies.1 With few exceptions,
these studies are focused on one single issue: what should be done to
improve and strengthen the finances of local governments? What
instruments should be used to make the local governments financially
viable? What should be done to enhance their creditworthiness so that
they can have access to the capital market and enter into such financial
arrangements as would permit them to meet their growing expenditure
responsibilities?
Mention should be made at the outset that the issue of the finances
of local governments has historically been a matter of widespread concern
in most developing economies, mainly on account of the extremely
unsatisfactory state of their finances and their high level of dependency
on the Central and provincial or state governments. Its growing importance
in recent years has, however, been enhanced by a large scale reappraisal
of the role of local governments that has taken place in a number of
developing countries. Recent years have seen, almost universally, strong
trends towards decentralization and consequential reallocation of functions
and responsibilities between the different levels of governments.2 In this
context questions have been asked about the role, functions and
responsibilities of local governments: should the local governments be
concerned - as provided for in the classical formulation - with resource
allocation functions such as the provision of public goods w'hose benefits
are likely to be limited to local jurisdictions or should they assume
responsibility for such functions as economic stabilization, income
redistribution and poverty reduction?^ Drawing justification from the principle
of subsidiarity, many developing countries have favoured a decentralized
organization of responsibilities w'here a function is assigned to a higher
level of government when it is in a better position to carry it out compared to
234 THE C H A L L E N G E OF U R B A N GOVERNANCE

a lower level of government. With the application of this principle, local

governments in many countries are experiencing fundamental changes
in the division of authority ris-a-ris the higher levels of governments and
ris-a-ris the market.

Box 1
The notion o f subsidiarity
— just as it is wrong to withdraw from the individual and to com m it to
the com m unity at large what private enterprise can accom plish, so
it is likewise unjust and a grave disturbance o f right order to turn over
to a greater society of higher rank functions and services w h ich can
be performed by lesser bodies on a lower plane. This is a fundam ental
principle of social philosophy, unshaken and unc ha ng e a b le . O f its
very nature the true aim of all social activity should be to help members
to th e s o c ia l b o d y , b u t n e v e r to d e s tro y or a b s o r b th e m .
— Papal Encyclical Quadragesima Anno

In many countries, the role of local governments has undergone a

major shift on account of the new fiscal realities facing them. These
realities characterized by severe limitation of financial resources have led
to dow nloading of a large number of functions and responsibilities to
local governments, often unaccompanied by devolution of fiscal powers
and financial resources.' As a result of both the trends toward
decentralization and fiscal pressures, local governments have come to
acquire, in a number of countries, economic and social responsibilities
that are often new and unanticipated. These have led them to ask if
these are their legitimate responsibilities, and what should the local
governments do to generate resources in order to meet expenditure on
such responsibilities? W'hat kinds of new fiscal and other instruments
should they bring into use?
A second development that has brought the issue of the finances of
local governments to the forefront is the increased mobility of capital,
technology and other factors of production across nations, combined
with the worldwide trends toward globalization. Although theories about
the local effects of globalization and global restructuring process are
partial and far from robust, indications exist that there is considerable
local sensitirity to such processes. In several instances, the fiscal
problem s of city governm ents have been c o m p o u n d e d by global
econom ic restructuring and shifting locations of labour and capital.s
A few studies that have analyzed such effects have shown that
 FI SC A L I NNOVATI ONS A N D U R B A N G O V E R N A N C E 235

globalization has, on the one hand, led to the reformulation of relations

between the public and private sectors at the local level and, on the
other hand, to increased c o m p e titio n betw een cities and city
governments for domestic and external investments.*' Cities in many
developing countries are at the centre of globalization, and are being
called upon to enhance their competitiveness and to respond to the
challenge of the opening up of the national economies." Globalization
has accelerated the demand for city-based infrastructure and services,
and has led the local governments to innovate new financial and
other partnership arrangements for meeting the increased infrastructure
and service requirements.
Yet another development that has made a vital impact on the
finances of local governments is the global thrust towards governan ce.
Governance has acquired a new meaning wherein it is seen as a
process of setting priorities and sets of actions not only by the government
but by other stakeholders as well— the non-governmental sectors, the
business, industry and in fact, the civil society as a whole :4 In its new
formulation, governance is much more than making available to citizens
certain social goods e.g., water supply, conservancy services, primary health,
roads, and street lighting; it is concerned as much with the institutional
arrangements (who does what), the financing modes (how are the different
functions financed i.e., via tax, non-tax, grant or debt financing), cost recovery
mechanisms, fixation of accountability and the like. Good governance
requires a proper choice of fiscal instalments, choice clearly falling on those
instruments that have a wider civil society acceptance and which are likely
to lead to greater accountability and transparency. It has added a new
dimension to the fiscal behaviour and responsibilities of local governments.
As these pressures have m ounted, local governments in the
developing countries have resorted to using a mix of fiscal instruments
and arrangements for raising resources and better managing the patterns
of expenditure. Experience in the developing countries indicates that
these have typically included putting into use innovative sources of
local revenues, improved efficiency in local tax collection, reduction in
capital expenditure, new intergovernmental fiscal arrangements, selling
local (municipal) assets, deferment of maintenance, expenditure control
and management, and long-term borrowing. In many countries,
strategies in this sphere have meant adoption of such options as
privatization, public-private partnerships, and im plem entation of
market-oriented cost recovery approaches .9 Many countries have
236 THE CH ALLEN G E OF URBAN GOVERNANCE

established municipal development funds (MDF) to compensate for the

lack of long-term capital for urban infrastructure.
Changes of a somewhat similar nature have been observed in the
system ot local government financing in India.111 As in the case of much
ot the developing world, the finances of local governments in India too
have historically been in a dismal state. Recent estimates have shown
that the locally-generated tax revenues comprise only 4.6 per cent of
the total revenues raised by the Central government and 8.05 per
cent of revenues raised by the state governments.11 On a per capita
basis, the municipal governments raise only about one-fifth of the
revenues raised by the Central government. Considering the fact that
the municipal areas produce over 50 per cent of the country's GDP. it is
evident that the municipalities are not able to establish effective linkages
with activities carried out within their own jurisdictions. Much of the
GDP gains from city-based activities accrue to either the Central or state
governments.1- Furthermore, the municipal governments are able to
finance no more than 60-65 per cent of their recurrent expenditure out
of their own. locally-generated resources. For historical reasons, user
charge as a principle for charging for services is applied, at best, on a
limited scale.

TABI.K l. Revenues of the Central. State, and Municipal Governments

1991-92

Government Total (Rs billion) Per capita (Rs)

Centre 833.2 986.8

States 484.6 573.9
Municipalities 39.0 205.3

SOURCE. Finance of State Governments. 1993-94. Reserv e Bank of

India Bulletin 1994.

In the allocation of fiscal powers, the municipal governments in

India have access to rev enue sources that are characterized by low
level of elasticity and buoyancy, with the more elastic of them
constitutionally falling within the domain of the Central and state
governments.1' Moreover, the municipal governments enjoy little
 F IS C A L IN N O V A T IO N S A N D URBAN G OVERNANCE 237

autonomy in adjusting the tax bases, tax rates and even the
procedures for tax administration and enforcement. The entire local
tax and non-tax system is thus obsolete and has seriously constrained
the efficient functioning of cities and their governance.
The municipal governments in India have encountered increasing
demographic and social pressures in recent years. During the census
decades 1971-91, for instance, urban population in the country increased
at annual rates varying between 3.1 to 3 8 per cent, and doubled from
109.1 to 217.6 million persons. This demographic expansion was
accompanied by a phenomenal increase in the number of persons below
the poverty line, which rose from 60.1 million in 1973-74 to 83.3 million
in 1993-94. This phenomenon which is also associated with the growth
of slums and squatter settlements has placed an enormous financial
strain on local governments.11
Parallel to the developments in the other parts of the world, cities
and city governments in India have come to also face the multiple
challenges of decentralization, globalization, and governance. The
Constitution (seventy-fourth) Amendment Act, 1992 has ushered in the
country an era of democratic decentralization incorporating specific
provisions for the empowerment of local governments.1S The Amendment
Act has laid down in the 12th Schedule of the Constitution a list of
functions that it considers appropriate to be performed by the
municipal governments. Many of these functions e.g., planning for
economic and social development, urban poverty alleviation, urban
forestry, and protection o f the en v iro nm en t are n ew a n d
u na n ticip a te d , and carry im p o rta n t re d is trib u tio n a l an d
interjurisdictional implications. The Amendment envisions, over a
period of time, a major vertical and horizontal restructuring in the
state-municipal fiscal relations. Questions have thus arisen as to who,
and which level of government, should finance such services as
economic and social planning, and poverty alleviation, and what
should be the respective roles of the Central, state, and local
governments in their financing? The idea of decentralization to the
local level as a way of improving government responsiveness and
accountability is very much related to the notion of fiscal responsibility,
which requires that governments making decisions on expenditure
programmes should assume responsibility for taxing those who benefit
from them. Decentralization is expected to also generate greater
efficiency in service delivery and lower public spending.
238 THE C H A L L E N G E O F U R B A N GOVERNANCE

Box 2
Defining horizontal and vertical restructuring

• Horizontal restructuring refers to the redefinition of public-private

and reconstitution of local government roles ris-a-ris the market.

• Vertical restructuring refers to revising the functional and fiscal

relations between the different governmental levels.

Several cities in India are faced with the challenge of globalization.

Recent estimates indicate that cities, particularly the larger cities, have
become the major destination for foreign direct investment (FDI). Several
of such cities are in direct competition for attracting such investment.
This has accelerated, in a significant way, the demand for developed
land, housing, roads, power, water supply, sewerage systems, and other
linked services and infrastructure. Indeed, the fruition of such investments
is linked directly to the availability of infrastructure and services in cities
and towns. Given the increasing recognition that traditional sources
(e.g., public sector financing) are unlikely to be adequate for meeting
the city-linked infrastructural needs, questions have arisen as to what
the local governments should do in order to attract investment for the
provision and upgradation of city-based infrastructure and services? What
sources should they tap for raising new capital resources for financing
infrastructure and services?
Mainly as an outgrowth of the provisions of the Constitution (seventy-
fourth) Amendment Act, 1992. recent years have also seen, in the country,
an increasing discussion on governance, in particular, on the relationship
of elected representatives, bureaucracy, and the civil society. What role
should these stakeholders play in the governance of cities? W ho should
be responsible for determining local priorities? Implicitly, these discussions
have brought in issues of accountability and of instruments that would
be able to finance sendees for which the municipal governments in the
new set-up are responsible. Pressures have mounted on local governments
albeit in different ways, leading them to consider how to better use the
given tax bases, improve financial performance and management, apply
m ore a p p r o p r ia te p r ic in g system s, a n d enter in to fin a n c ia l
partnerships in order that the infrastructure and services needs o f
cities can be effectively met.
These changes in the role and responsibilities of local governments
are accompanied by important initiatives that are designed towards
 FI SCA L INNOVATI ONS A N D U R B A N G O V E R N A N C E 239

local fiscal strengthening, the most important of these being the earlier
referred to Constitution (seventy-fourth) Amendment Act, 1992. This
initiative has enabled the states with a unique opportunity to redesign a
system of local governance and finance that is coherent and adapted to
today's needs. Specifically, it contains a provision for the setting up in
each state of a Finance Commission to determine the principles governing:

• the distribution between the state and the municipalities of the

net proceeds of the taxes, duties, tolls and fees leviable by the
state, which may be divided between them and the allocation
between the municipalities at all levels of their respective shares
of such proceeds;
• the determination of the taxes, duties, tolls and fees which may
be assigned to, or appropriated by the municipalities:
• the grants-in-aid to the municipalities from the Consolidated
Funds of the states.

Independent of the Constitution (seventy-fourth) Amendment Act,

attempts have been made in different states and cities, so far selectively,
to improve and strengthen the finances of m unicipal governments as
also to enable them to raise additional resources and involve other
partners in the provision of what have traditionally been labelled as
municipal infrastructure and services. In several parts of the country,
the basis of property taxation has come under major review and
restructuring. Property taxes as w ould be shown later, have been an
important and stable source of revenue for municipal governments
but in recent years have suffered on account of a highly constrained
system of valuation and assessment and poor administration and
enforcement. Several states and cities are now attempting to reform
the property tax system in order to enhance the revenue-yielding
capacity of this important source. Several municipal governments
have introduced changes in the system of financial accounting and
management in order to be able to streamline and better manage
municipal expenditures. A major developm ent in recent years has
been to privatize m u n icip al services and involve the private sector
in their provision, delivery and m anagem ent. Similarly, a few
m unicipal governments (e.g., A hm edabad, Pune and N agpur) have
taken steps to access the capital market for financing their grow ing
infrastructure needs.
240 THE C H A L L E N G E OF U R B A N GOVERNANCE

While these actions are still limited to a few municipal governments,

yet these are important landmarks in the history of municipal finance in
India. The issue is: are these actions and fiscal instruments serving
revenue-raising goals and also leading to better governance of cities? To
what extent have the fiscal initiatives led to or promoted accountability,
transparency and participation? Have these been designed in a way that
these have wider popular acceptance? Is there any link between fiscal
innovations and governance?1" The issue ranges over a wide spectrum of
public finance concerns, including the nature of taxes that should be
raised within cities and their distributional impact, questions of fiscal
responsibility, accountability and control, debt financing, and how local
finance might be improved to limit economic decline and social disparities
within cities.
This study is designed to look at such issues. The study consists of
a documentation of fiscal initiatives1' in respect of:

• reform of property taxation in Andhra Pradesh

• issuance of bonds by the Ahmedabad Municipal Corporation
• public-private participation in the provision of infrastructure to
Tirupur (Tamil Nadu).

The documentation comprises a description of these initiatives, the

forces that led to them, and a set of observations on the extent to which
these initiatives have contributed to what may seem to be good governance
characteristics. Part II of the study is devoted to a description of the
initiatives. Part III of the study provides a set of observations on the
interconnections between sound local finance and urban governance.

II C A S E S O F F IS C A L IN N O V A T I O N S

Case 1: Reform o f Property Taxation in Andhra Pradesh

Property taxation is perhaps the most widely-used source of revenue for

local governments throughout the developing and developed world.
It has been long favoured as the principal source of revenue for local
governments, mainly due to the perception that it possesses the
characteristics of a benefit tax. Unlike other forms of taxation, property
tax is said to be particularly suitable as a local tax because of its
immobility. As a consequence, property tax is seen as promoting
 FISCAL INNOVATIONS AN D URBA N G O V E R N A N C E 241

accountability in local government decision-making— local governments

being answerable to those w ho bear the cost of their actions, i.e., the
citizens.
The theoretical framework of property taxation is well articulated in
public finance literature. This tax is to be associated with a number of
distinct advantages. These are:

• The object of taxation, i.e., the property is immobile, at least in

the short run, and therefore, taxation of property is difficult to
avoid or even shift.
• A tax on property provides no direct competition to other taxes
that are typically imposed by the Central and state governments.
• It allows the application of the benefit principle because local
services are, in some degree, capitalized into property values.
Property taxes are ways to allow owners and occupants to
contribute towards the cost of local services.
• It is relatively stable in times of economic slowdown. Also, the
effects of price movements on property taxes are minimal.
• It can be responsive to econom ic grow th provided it is
accompanied by good property tax policy and administration.
• It causes only minor distortions in resource allocation.

G iv e n these th e o re tic a l a n d p ra c tic a l a d v a n ta g e s , it is

surprising that property taxes in Ind ia have not been adequately
m o b ilized for raising resources in the country .19 Indeed, these
do not form a part of the co untry ’s tax policy, nor has the re fo rm
of these taxes been considered an integral part o f the o n g oing tax
reform process. The result is that property taxes, despite their
being the prim ary source of revenue for m u n icip al governm ents,
remain m in o r in terms of revenue yields. In 1990-91, property
taxes in India are estimated to have generated only about Rs 14,250
m illio n o f revenues, form ing 2.6 per cent o f the total tax revenues
of the Central and state governm ents, and 0.25 per cent of the
country's gross dom estic pro d u ct (G D P ). These shares have
changed little over the years, notw ithstanding an extraordinarily
large increase in land and property values, and a dramatic increase
in the share of construction sector in the country’s GDP.
242 T HE C H A L L E N G E O F U R B A N GOVERNANCE

TABLE 2. Rev enue Significance of Property Taxes (1990-91)

Estimated yield from property taxes (Rs million) 14,250
Property tax yield as a % of GDP 0.25
Property tax yield as a % of total tax revenues 2.6
Property tax yield as a % of total municipal revenues 40 - 4 5

Property tax yield as a % of total municipal expenditure 25-28

Per capita property tax yield (Rs) 65

SOU RCE, NIPFP (1995). Redefining State-Municipal Fiscal Relations: Options

and Perspectives for the State Finance Commissions.

Property taxes in Andhra Pradesh-"— the state of this case study—

constitute an extremely important source of revenue for the municipal
governments. In 1991-92. the total yield from property taxes
amounted to Rs 400.7 million or 50.9 per cent of the total internal
resources generated by municipal governments. It formed 0.1 per
cent of the state's gross domestic product. The productivity' of property
taxes in the state as measured in terms of yield per capita (Rs 55) was
lower than the All-India average.
Until the property tax system in Andhra Pradesh was changed in
1993. assessment of properties for tax purposes was based on the
annual rateable value (ARV) of land and buildings. The annual rateable
value was defined as the gross annual rent at which a property may
reasonably be expected to be let out from year to year. In this sense,
annual rateable value was a hypothetical rent or a notional rent, held
as a proxy for market rent of the concerned property. In the case of
rented properties, annual rateable value was assessed on the basis of
the actual rent excepting for those properties where a ‘fair rent" had
been fixed under the Andhra Pradesh (Lease, Rent and Eviction)
Control Act, I960.
The Andhra Pradesh Municipalities Act, 1965 which contains
procedures for levying this tax, provided for a revaluation of properties
and consequently of tax liabilities, once in five years. Similarly, the Act
provided that annual rateable value of properties was subject to
 F IS CA L I NNOVATI ONS A N D U R B A N G O V E R N A N C E 243

different kinds of deductions and rebates, these being rebate related to

owner-occupied houses, rebate for repairs and maintenance, depreciation
for the age of the building, rebate on early payment, and vacancy
remission. Exemption from local property taxation also constituted an
important ingredient in Andhra Pradesh. Thus, properties used for public
worship, educational purposes, charitable hospitals, irrigation works, and
buildings whose ARV was below a threshold were exempted from payment
of property taxes. The underlying considerations in granting exemptions
were social justice, compensation to those properties which provided,
directly or indirectly, those services which had characteristics of merit or
public goods, and high administrative and collection cost in tax collection,
particularly from 1o w t tax-yielding properties.
The property tax system in Andhra Pradesh as in the other states of
the country, however, was choked in each of its components and sub­
components. For instance, the method of assessing property values on
the basis of ARV, i.e., rent at which a property may reasonably be expected
to be let out from year to year, proved to be ad h o c , discretionary and
subject to varying interpretation (see Box 3)- Similarly, serious problems
were noted in using the 'actual rents' for assessing property values as in
practice, actual rents were made up of a number of components (a lump
sum payment, a monthly rent, and monthly rent divided into rent for
space and rent for fixtures), making assessment on that basis, an
extremely difficult exercise. The properties which were under rent
co ntro l h ard ly y ie ld e d any tax revenue. The p ro b le m was
com pounded further as, notwithstanding the provision in the Andhra
Pradesh M unicipalities Act, only a few m unicipalities undertook
periodic revaluation of properties w hich resulted in large scale
inequities in the system, retarding the yield from property taxes.21 Field
evidence showed that as a result, the differences between the assessed
value and market value of properties widened, and led to large scale
stagnation in the revenues from property taxes. The various types of
exemptions and rebates further constricted the tax base. The system of
door-to-door tax collection promoted rent seeking collusion between
the assessor, tax collector and tax payer resulting in massive leakages
and corruption. Giving monetary values to the lost income on account
of these infirmities of the system (e.g., inability of the annual rateable
value to capture the market rents, of large scale rebates and exemptions)
is a hazardous exercise, but the facts that (i) assessment to market rent
ratios were in the range of 50-60 per cent, (ii) only about 30-35 per
244 THE C H A L L E N G E OF U R B A N GOVERNANCE

cent of the total num ber of properties constituted the tax base, (iii)
rebates were substantial, and (iv) rent control acts significantly limited
the annual rateable value, the loss to the total property tax yields could
be as high as 150—175 per cent of the actual collections on this account.

Box 3
A description o f the rental system
The rent prescribed by the statute is a hypothetical rent, as
hypothetical as the tenant. It is the rent which an imaginary tenant
might be reasonably expected to pay to an imaginary landlord for
the tenancy of this dwelling in this locality, on the hypothesis that
both are reasonable people, the landlord not being extortionate,
the tenant not being under pressure, the dwelling being vacant
and available to let, not subject to any control, the landlord agreeing
to do the repairs, and pay the insurance, the tenant agreeing to pay
the rates, the period not too short nor yet too long, simply from
year to year.J-

It is in this background that the Government of Andhra Pradesh

undertook to reform the property tax system, clearly with the objective of
better tapping this source of revenue and eliminating the deficiencies of the
prevalent system. Significantly, the initiative f o r the reform em anated
fr o m the c h ie f p o litic a l executive o f the state who f o u n d the entire system
inefficient, stagnant, discretionary, a n d adm inistratively loose.
The key to the reform process lay, at the outset, in identifying
a m ethod o f assessment that w o u ld best reflect the value o f a
property. Three m ain m ethods of valuation, nam ely, rental value,
capital value, and site area are generally used in the different parts
of the world. The main advantage o f the rental value is that it is
based on the incom e concept and is easier to co m prehend. This
system yields good results w here the size of the property rental
market is large. O n the other hand, the capital valuation system
is effective in s itu a tio n s w here pro p e rty sale a n d purchase
transactions are common. The issue was as to which of the three
w ould yield better results. For the state, the issue wras: should the
existing method of using a "hypothetical rent”, or 'a ctual rent’, or
'fair rent’ be co ntin ue d for assessing the value of a property? Or,
should it be jettisoned in favour of using the capital value? Or,
should it be done on some other basis such as the site or area
valuation using characteristics of the site/area? There were other
 FI SCA L INNOVATI ONS A N D U R B A N G O V E R N A N C E 245

issues as well, particularly as these related to the overall tax incidence,

rebates, exemption, and collection system but these were secondary to
the prime issue of assessment and valuation.
In its totality, the Andhra Pradesh property tax reform whose
foundations were laid in 1989, was driven by the following objectives:

• To evolve a scientific method of assessment and levy of property

tax by incorporating in it the principles of equity, objectivity,
fairness and simplicity.
• To levy property taxes uniformly in respect of buildings similarly
situated;
• To delink the operation of Rent Control Act from the assessment
of property tax.
• To reduce the discretion of the assessor and avoid arbitrariness
in assessment.
• To make tax administration efficient, transparent and effective in
the levy of property tax.
• To improve buoyancy in the property tax revenues.

Taking the first objective as being central to the reform process, the
Government of Andhra Pradesh weighed the relative advantages of the
three alternative systems, and considered their feasibility in the light of
(i) political acceptance, (ii) compatibility with the legal framework, and
(iii) the revenue generating goals. The choice was made in favour of the
site/area based system under w7hich the annual rental value of properties
could be fixed with reference to the characteristics of the area, using
such indicators as location, type of construction, plinth area, age of the
building, and the nature of use. The Andhra Pradesh government adopted
this method as it, p rim a facie, seemed to possess such advantages as
objectivity in assessment, procedural simplicity, standardized methodology,
and better clientele appreciation and cooperation.
The new m ethod o f property assessment involved several
interconnected steps:

• division of the city into convenient, contiguous and largely

homogeneous areas/zones, based on three factors, namely: (a)
availability of services like water supply, street lighting, roads
and drains; markets and s h o p p in g centres; e ducational
institutions; banks, postal services and public offices; m edical
246 THE C H A L L E N G E O F U R B A N GOVERNANCE

facilities; and factories and industries; (b) nature of construction

of properties; and (c) the nature of use of properties (e.g.
residential, shops, industry, offices and banks, educational
institutions, hospitals and nursing homes, cinema theatres, hotels
and restaurants, godowns and others);
• a sample survey of 20 per cent of all properties in each zone to
determine the prevalent rental values and to fix the rental ranges
in each zone/area;
• issuance of a draft public notification showing the division of the
city into zones and the rental ranges, for inviting objections from
the public: it marked a significant departure from the earlier
practices when no such consultations were considered essential;
• issuance of a final notification giving the maximum and minimum
rental values for each of the zones/area.

The reform process also included decisions in respect of the rebates

and exemptions, and tax payment procedures. Considering the fact that
the reform process must be gradual, issues pertaining to the rebates and
exemptions were left untouched, meaning that rebates extended earlier
on account of owner-occupancy. age of the building, and repairs were
permitted to be continued in the new system. Similarly, exemptions
were not only continued but their scope was expanded to cover those
owner-occupied residential buildings whose property tax burden was
below a threshold level. In order to limit the incidence of the new
system, the increase in property taxes was capped so as not to exceed
75-100 per cent of the previous tax level.
The new system incorporated two other innovative features. The
first related to the procedure for property tax payment. Unlike in the
past where a door-to-door collection was prevalent, the new system
brought the banking sector into the local tax system. As an incentive to
the banking sector, arrangements were made with the banks that they
could retain and use for limited periods, the property tax payments. A
second feature of the new system was the introduction of an incentive
grant wherein, municipal bodies were given fixed amounts ranging
between Rs 1.5 million and Rs 4.0 million if they were able to raise tax
collection efficiency to 85 per cent of tax demanded.
Consequent upo n the decision of the Andhra Pradesh government
to introduce the new system, several m un icip al bodies passed
resolutions to adopt it and set up committees to suggest strategies for
 F IS CA L INNOVATI ONS A N D U R B A N G O V E R N A N C E 247

p u ttin g it in to practice. O ther m u n ic ip a l bodies extensively

communicated with tax payers, the details of the new system. The new
system came into effect on 1 April 1993. As a result, property tax yields
have risen dramatically in Andhra Pradesh, and the expectation is that
when all municipal bodies including the three corporations which are
still resisting its extension, the increase in property tax yield may be 100
per cent over the previous periods.
The area-based method constitutes in recent times the most important
initiative taken in the country to eliminate the arbitrariness from which
the system of estimating the ARV has historically suffered2^. The approach
is effectively a formula for property valuation w'here a property is defined
by a vector of specific attributes. Hence, conceptually, what has been
tried in Andhra Pradesh is that the value of a property has been determined
as a discrete function of six attributes:
V = f (plinth area; land area; location; type of construction; type of use; age)
where f(.) is a linear combination of these attributes.

Putting the new system into effect has meant a process involving:

• an explicit recognition by the state government that the earlier

system of property taxation was arbitrary' and non-performing
• a political decision to replace it with a system which could narrow
down the gap that existed under the old system between the
assessed value of properties and market value of properties
• wider acceptance of the system by municipal governments and
tax payers
• broad understanding on the zoning and classification of cities,
notwithstanding the problems that are inherent in any such
exercise
• use of measurable norms in the assessment and valuation,
irrespective of the basis of assessment, thus ensuring that such a
standardization would be equitable and be able to withstand the
rigors of the law
• simplicity and transparency in the application of the new system,
enabling individuals to calculate the ARV and the property tax
burden
• use of the banking sector in the tax collection strategy.
248 T HE C H A L L E N G E O F U R B A N GOVERNANCE

The impact on account of the restructuring of property7tax assessment

is particularly noted in two areas: on the revenues of the municipalities,
and tax payers' acceptability. The growth trends of property tax revenues
during the pre- and post- reform period are presented in Table 3. There
has been a 61 per cent increase in demand on residential assessment and
more than 90 per cent in non-residential assessments. Given the fact that
the new system provides for incentives to efficiency considerations, the
prognosis is that the growth trends in revenues may persist in the future.

TABLE 3. Property Tax Yields in Andhra Pradesh

Year Property tax yields Additional revenue due to

(Rs million) restructuring of property taxes
(Rs million)

1992-93 3753.3 —

1993-94 3979.4 226.1

1994-95 4848.1 868.7

1995-96 5909.0 1060.9

SOURCE. N a id u . ib id.

The other impact is on the tax payers' acceptability of the area-

based taxation which constitutes, in different ways, one of its most crucial
non-revenue gains. The process in which the new taxation system was
introduced in the state has demonstrated that the citizens w ould accept
a system which is simple, w hich is non-discriminatory, and which
allows them to file objections. These are important gains and impinge
heavily on the sustainability of the area based taxation. It has also
been u ph eld by the judiciary on the ground that it m aintained
objectivity and rationality.2*
Any reform process must recognize that property tax policy
formulation is the responsibility of state governments, and the execution
of policy that of the municipal governments. A prerequisite for reform
lies in political w ill and political initiative and acceptance o f the
reform by the tax payers. A concom itant step is to dem onstrate
 FISCAL INNOVATIONS AN D URBA N G O V E R N A N C E 249

how a ll co uld gain from the property tax reform. For instance, the
state governments may be able to reduce grants to municipal governments.
The municipalities could increase revenue on property account and may
secure greater autonomy in rate-setting. The tax payers could in the
long run have lower tax rates due to the repealing or reduction of rebates
and exemptions. The Andhra initiative demonstrates that it is possible.

Case 2: Issuance o f Bonds by the Ahmedabad

M unicipal Corporation

One of the critical issues that India has in recent years been confronted
with is how to finance and maintain municipal infrastructure and services.
Municipal infrastructure and services have thus far been financed out
of grants and loans from the state governments. Institutional financing
has also made inroads into selected m unicipal infrastructure. The
role of m unicipal bodies in creating infrastructural capital has been
marginal, if not non-existent, principally on account of their inability
to generate any revenues beyond what are necessary to operate and
maintain such services as water supply, sew'erage, roads, primary
health, street lighting and the like. Indeed, most municipal bodies in
the country have large revenue deficits which are met out of the
existing system of intergovernmental transfers.
Note needs to be made of the fact that the statutory framew'ork
which lays down the powers of municipal bodies also does not provide
to them any major role in the sphere of capital financing of infrastructure
and services. Their borrowing powers are statutorily restricted, evidently
for the reason that unlimited municipal borrowing could have serious
repercussions on the macroeconomic fiscal balance and stability. In
most states, m unicipal corporations are permitted to borrow only
w ithin certain limits w hich are defined generally in terms of the
percentage of the annual rateable value of properties or of the value
of the Corporations’ physical assets.2"’ Moreover, they can borrow
only with the permission of the state governments.2*’ There also
exist detailed requirements for the creation of sinking funds, control
on investments and m onitoring by state governments. The key point
is that the m unicipal corporations have not made use of even these
limited powers for augmenting their infrastructure and services. Debt
financing o f m u n icip al infrastructure remains far from being a
co m m o n practice in Indian cities.2"
250 THE C H ALLEN G E OF UR BAN GOVERNANCE

The Ahmedabad Municipal Corporation (AMC) has recently

completed the necessary formalities for raising a Rs 1,000 million loan
from the market by issuing what are called municipal bonds. The issuance
of municipal bonds by the Ahmedabad Municipal Corporation is the
first case of its kind, and constitutes an extremely important fiscal initiative
on the part of a local body in the country. This case describes how a
medium-sized municipal corporation, faced on the one hand with
deteriorating finances and declining levels of services, and on the other
hand, with bleak prospects of raising loans from the traditional sources
such as the state government, undertook major initiatives, initially to
reform the tax system and procedures but later used the improved revenue
streams to enter the capital market on the strength o f its own balance sheet.
Located in the state of Gujarat*. Ahmedabad is a large metropolis
with a population of 3 5 million persons, growing at an annual rate of
approximately 3-3-5 per cent. In the post-1991 period, Ahmedabad city
has received substantial industrial investments on account of the generally
progressive and forward-looking policies of the state of Gujarat.
Ahmedabad's economic contribution to the state’s GDP has also been
substantial, and is reflected in the accelerated development of its industrial
base and construction activity.
Ahmedabad city is run by the Ahmedabad Municipal Corporation
(AMC) which was established in 1950 under the Bombay Provincial
Municipal Corporation (BPMC) Act, 1949. The AMC’s main functions
under the Act are to provide water supply, sewerage, solid waste
management, street cleaning, street lighting and public health. Although
not obliged under the Act. the Ahmedabad Municipal Corporation runs
hospitals, medical colleges, and local transport. The main sources of
AMC's revenues are the taxes on property and octroi levies, which account
for 80' per cent of its total revenues. Octroi is the main tax and
contributes 72-75 per cent of the tax income. The Corporation can
borrow in the market in accordance with the provisions laid down in
the BPMC Act. The Act lays down the borrowing powers and the
procedure by which the Corporation can raise, deploy and service
the loans. The clarity in the borrowing powers and debt-servicing
arrangements are a positive feature of the BPMC Act.
The Ahmedabad Municipal Corporation had a sound financial base
until the early 1980s. However, the financial condition of the AMC
started deteriorating in the latter part of the eighties, to the extent
that at the close of the fiscal year 1993-94, the AMC had accumulated a
 FI SCAL I NNOVATI ONS A N D U R B A N G O V E R N A N C E 251

deficit o f approximately Rs 60 million on revenue account alone. The

growth rate in the revenue yields of the two main taxes, namely, property
taxes and octroi hardly reflected the rate at which the construction and
other activities were expanding in the city. The non-tax component of
the AMC was non-performing, and the administration and enforcement
of municipal taxes were lax. Low level of education, poor work conditions,
and inadequate training and support of the Corporation’s staff contributed
to the deficiencies in performance.

TABLE 4. Revenue Income and Expenditure of Ahmedabad

Municipal Corporation
Year Revenue income Revenue expenditure Cumulative
balance (- or +)

1989-90 1354.5 1420.5 -178.7

1990-91 1486.6 1604.4 -296.5

1991-92 1746.6 1748.5 -298.4

1992-93 1988.8 1998.2 -308.8

1993-94 2197.6 2248.9 -359.1

SOURCE. Asnani, ibid.

NOTE. The outstanding balance at the commencement of the fiscal year
1989-90 was Rs 112.8 m illio n.

The administrative leadership and management of the Ahmedabad

Corporation was changed in 1994, and was immediately confronted
with a host of questions: what should be done to stem the deterioration
in the finances of the Corporation? Did the problems lie in tax
structures, assessment or their administration and enforcement? What
should be done to raise additional resources in order to meet the
b u rg eo n in g financial requirem ents o f city infrastructure? The
administrative leadership fixed for itself the follow ing priorities:

• restore balance and stability in the finances of AMC,

• build confidence in the public in respect of AMC's capacity to
efficiently and equitably deliver services,
252 THE C H A L L E N G E O F U R B A N GOVERNANCE

• assess the credit worthiness and risk level in the finances of

AMC.
• put to effectiv e use the existing statutory provisions for mobilizing
additional resources.

Following the fixation of priorities, the Ahm edabad Municipal

Corporation undertook bold measures to improve the administration
and enforcement procedures in respect of property taxes and octroi,
and simultaneously to project an image of the Corporation as a body
which was sensitive to people's needs, aspirations and priorities. O n
the tax front, the AMC undertook to strengthen the property tax base
and co lle c tio n procedures. The c o llection of property tax in
Ahmedabad had been extremely tardy, with the collection being less
than 30 per cent of the tax demanded. A primary reason for this was
lack of transparency in the valuation of ARV which almost invariably
was contested in courts, leading to delays, deferment, reassessment
and the like. In 1994. the AMC introduced a series of measures to
improve property tax collection which included:

• disconnection of water supply and drainage lines on non-payment

of property tax
• advertisement of names of major defaulters in newspapers
• attachment of property of major defaulters
• restructuring and strengthening of the property tax administration
• reorganization of the data bank on property taxes, particularly in
respect of tax demand and collection from individual properties
• regular monitoring of tax collection

O n somewhat similar lines, the AMC focused on the preparation of

a valuation manual for the levy of octroi and a series of steps to locate
and plug those points from where funds were being siphoned off. These
comprised the following:

• formation of vigilance squads to monitor the octroi checkposts

• creation of a data bank on the prices of goods which were subject
to octroi levy
• establishment of a market research wing to continually update
the data bank on prices
 F IS C A L IN N O V A T IO N S A N D U R B A N G O V E R N A N C E 253

• induction of professionals for checking the valuation of goods at

major octroi collection points.

The impact of these measures was immediate: collection to demand

ratio in respect of property taxes rose from 28.3 per cent in 1993-94 to
32.9 per cent in 1994-95, and in the subsequent year, to 44.6 per cent. In
the aggregate, property tax revenues increased from Rs 442 million in
1993-94 to Rs 800 million in 1995-96— posting an increase of nearly 80
per cent in two years. Revenue from octroi levies also witnessed an
increase of a similar order, from Rs 1296 million in 1993-94 to Rs. 2030
million in 1995-96. The sum result of the different measures including
those which covered the non-tax component of AMC’s revenues was
that the AMC’s continuing deficit on revenue account turned into a surplus
in 1994-95. This surplus which was Rs 18.7 million in 1994-95 rose to
Rs 518 million in 1994-95, and immediately helped to restore the citizens’
confidence in the AMCs capacity to effectively administer the local tax
structure and prevent leakages and corruption.

TABLE 5. AMC’s Revenue Income and Revenue Expenditure

(Rs million)
Year Revenue Revenue Surplus/
Income Expenditure Deficit (+/-)

.1993-94 2197.6 2248.9 -359.1

1994-95 2854.6 2476.7 +18.7
1995-96 3748.1 3248.9 +517.9

The changed financial scenario enabled the AMC to undertake

smaller capital projects o f high priority to both meet people’s needs
and aspirations and to instil confidence am ong its clientele that it can
deliver. However, Ahm edabad city’s capital requirements were large,
needing substantial funding. The new administrative leadership also
needed further evidence of the fiscal strength o f the AMC particularly
w h e th e r the spurt in revenues was a tem porary, short-lived
phenom enon, or a sustainable one. The AMC’s leadership was also
aware of the expansion that had taken place in the country’s capital
market offering an important potential source of resources. The issue
254 T HE C H A L L E N G E O F U R B A N GOVERNANCE

was w hether given the surpluses that the AMC had been able to
generate over a brief two year period and given the initiatives that it had
taken to reform its main rev enue sources, AMC could put to use such
innovative instruments as the issuance of municipal bonds. India has
had no tradition of municipal bonds; at the same time, it was aware of
municipal bonds as being one of the most important revenue sources
for municipal and local governments in the USA. Securing long-term
financing like bonds, however, was essentially a function of the faith in
the system responsible for spending and management. Did the AMC
possess this faith?
A useful instrument for assessing the creditworthiness of a body
corporate such as a municipal corporation or of a specific debt obligation
is credit rating. It is a rating of the relative safety of payment of interest
and principal on a debenture, structured obligation, preference share,
fixed deposits, or a short term instrument. Credit rating, in assigning a
rating, considers a mix of factors that bear on the creditworthiness of the
borrowing municipal government which include the economic base of
the city, current financial position of the concerned city government, debt-
related factors, legal and administrative issues and project-specific issues.
The Ahmedabad Municipal Corporation decided to have its proposal to
raise Rs 1.000 million from the capital market credit-rated. It entrusted this
task to CRISIL, a credit-rating agency in India, which, after detailed
investigation into the finances, liabilities and future prospects gave an A+
rating for the issuance of this Bond. An A+ rating means adequate safety of
the timely payment of interest and principal. This process has been of
particular interest: it has made the evaluation of credit risk to the public,
and it is also a public announcement to investors that the state government
will not bear any losses on the investment. In providing this rating,
CRISIL observed that:

The management, namely the executive and the executive wing, have
been instrumental in improving the fiscal profile of the corporation,
specifically with reference to tightening the tax assessment and collection
mechanisms. The management has also been able to set the agenda
for property-tax reforms, which would have far-reaching implications
on AMC's fiscal status. Such measures have been supported by the
State government and bureaucracy, which adds to the stability of these
reforms. The management has also initiated measures to improve its
own administration system by hiring consultants in specific areas, going
in for increased c o m p u te riz a tio n and recruiting professionals
 FISCAL INNOVATIONS AND URBA N G O V E R N A N C E 255

directly into the Corporation at various levels.

The outlook for AMCs’ finances, in the medium term, is positive as
the Corporation has been able to upgrade the tax administration
framework. In the long term, the Corporation's ability to implement
the proposed property tax reforms w ould further strengthen the tax
base of the Corporation. In addition, AMC has initiated efforts to
diversify its revenue base by undertaking activities like commercial
property development. These reforms are expected to be .supported
by the political and administrative w'ing at the state level, as they would
add to the financial health and autonomy of municipal bodies in Gujarat.
Presently, there are significant demand-supply gaps for all core
services extended by AMC. AMC is addressing this issue by undertaking
multiplicity of projects in all core service areas. The implementation
of the proposed capital projects would depend on its ability to enhance
its resource base and sustain the growth in revenues. In addition, the
Corporation's ability to exercise control over its expenditure w ould be
of critical bearing. The prevailing policy framew'ork would have to be
sustained to achieve the desired results.29

The Ahmedabad Municipal Corporation is now poised to issue

Municipal Bonds. The Bonds to be issued will be general obligation
bonds; for their redemption, a portion of the revenue receipts has been
pledged and earmarked. The Corporation proposes to open an account
to ensure that the dedicated funds remain untouched and set aside
exclusively for paying back the bond amount. Though the public at large
has not been involved directly in decision-making on the issuance of
Bonds, a survey conducted to ascertain the attitude of citizens has revealed
a high degree of willingness on their part to invest in them. The willingness
to invest in such Bonds which are fixed obligations and which could
constrain local fiscal flexibility demonstrates that the funds so raised will
be invested for meeting the citizens infrastructural priorities and needs.

Box 4
The typology o f bonds
G eneral o b lig atio n bonds pledge the full faith and credit o f the issuing
government. The issuing government makes an unconditional pledge of its
pow'ers of taxation to honour its liability for interest and principal repayment.
Revenue bonds pledge only the earnings from revenue producing activities,
often the earnings from the facilities being financed with the revenue bonds.
256 THE C H A L L E N G E O F U R B A N GOVERNANCE

The steps taken by the Ahmedabad Municipal Corporation on the

governance of the city have been very7 visible. The entire relationship
between the Corporation and its citizens has changed. The citizens who
viewed the Corporation as an inefficient organization, now look upon
the Corporation as a body which can deliver the goods and services for
which it is responsible. It has introduced a sense of partnership and
participation among citizen groups.

Case 3: Public-private Participation in the Provision

o f Infrastructure to Tirupur

The provision and financing of municipal and city-based infrastructure and

services in India have historically been a responsibility of the state and local
governments. Special-purpose public undertakings have also invested
substantially in the financing of such infrastructure as water supply and
sewerage, and on a smaller scale, cityw'ide roads. The underlying rationale
in public sector financing lies in the fact that many of these infrastructural
services are in the nature of 'natural monopolies’, or characterized by
'externalities', 'non-excludability', and lo w price elasticity of demand', and
have, as a result, been financed out of the publicly-raised resources.

Box 5
Characteristics o f infrastructural services
Natural monopolies: Most urban infrastructure services are natural monopo­
lies and their marginal cost declines over a very large range of output. As such, it
has been feared that the private sector might exploit its monopolistic situation.
Such services include water, waste water management, telephone, electric­
ity, bridge, and road networks.

Externalities: Manv services like sanitation and solid waste disposal have significant
external economies. As a consequence, market-based systems may fail to provide
the service in adequate quantity and quality.

Non-Excludability: It is difficult to exclude anyone from using, say, roads or

public lighting. The consumer may refuse to pay for the service since he may be
able to use it free of charge legally or otherwise.

Price elasticity o f demand- Certain infrastructure services being necessities (like

water) have almost inelastic demand. Private provision of these could result in
exploitative pricing unless prices of regulated.

Requirement o f heavy investment in capital equipment: This has discouraged

private sector entry into certain infrastructure segments.
— The India Infrastructure Report, pp: 27-28 (1996: New Delhi)
 FI SCA L INNOVATI ONS A N D U R B A N G O V E R N A N C E 257

Recent years have witnessed in the country a major shift in thinking

about the financing modes of such infrastructure and services. For one
thing, it is increasingly recognized that public sector resources may not
be sufficient to meet the infrastructure investment requirements of cities
and towns. The India Infrastructure Report, for instance, has estimated
such requirements to be anywhere between Rs 800 billion to Rs 940 billion
for the period 1996-2001.10 Given the demand on public resources from
other sectors, this scale of funding is unlikely to be available for urban
infrastructure, thus opening it to other financing modes and alternatives.
Secondly, the last few years have generated within the country a debate on
the role of governments including that of local governments and what they
should be concerned with. This debate has resulted in two related strands
of policy: privatization , and the trend to an enabling rolef o r the government.
In a sense, privatization is an extension of the principle of subsidiarity
which requires that the government should undertake functions only to the
extent that it can do so better and more efficiently than the private sector.
This line of argument has reinforced the need to distinguish between the
provision of public goods and services and their production and delivery.11
Better understanding and application of such distinctions or what Rakesh
Mohan calls, the unbundling o f services, has led to an increasing interest of
the private sector in the provision of such services.
As distinguished from the concept of privatization, the term ‘enabling
government’ has come into being to describe a situation where on the
one hand, conditions are created for the participation of the non­
governmental sector in the provision of services and infrastructure, and,
where on the other hand, the non-governmental

Box 6
The issues o f enabling government
• What size, level and structure of government is best suited to perform
an enabling role ?
• How can government facilitate activity by the private and voluntary
sectors in order to bring about pluralistic governance?
• How can higher levels of government facilitate lower levels of
government in the discharge of their duties ?

sector is given the right to compete with the government for the
production of these services. These developments have ushered in the
258 THE C H A L L E N G E O F U R B A N GOVERNANCE

country' an era o f pluralistic type o f governance, and as a consequence,

government as historically understood is being gradually substituted by
a pluralistic range o'i governance bodies involving the public, private and
voluntary sectors.
It is in the context of this policy shift' that a small, but a highly
specialized town called Tirupur compelled by the need to survive in a
highly competitive global market, and actively supported by the different
levels of government took the initiative of involving the private sector
in the provision of a good which has historically been viewed as a
natural m onopoly, i.e., water supply. The key factor in the initiative,
evidently an innovation in the Indian context was the economic
com pulsion: good quality water must be available in adequate
quantities for the cotton knitwear garment industry if the industry is
to remain competitive in the international market. Water was a crucial
infrastructure input in garment production for purposes of washing,
dyeing, bleaching and other processes. The existing modes of drawing
water were become unreliable and constrained, and leading to
negative externalities whose costs were too high for the industry to
stay economically viable.
Tirupur is a special grade municipal town located 50 kms to the
north-east of Coimbatore in Tamil Nadu in southern Ind ia .'2 In 1971,
the town recorded a population of 113.302 which increased to 235,661
by 1991. By the turn of the century its population is projected to
increase to over 300,000. The town has been experiencing an annual
population growth rate of between 3-6 and 3-8 per cent. The economic
base of the town is almost w holly linked with the manufacture of
cotton knitwear garments. Often referred to as the ba n ia n city (the
vest city), it initially produced vests and undergarments for the
domestic market but later extended its production for the global
markets. The growth and development of Tirupur as a consequence
has been phenomenal. Tirupur today accounts for over three-fourths
of India's cotton knitwear exports. In 1986, exports from the town
were a mere Rs 0.18 billion. By 1992, the town exported garments of
the value of Rs 15 billion. It is estimated that the value of exports
will reach Rs 25 billion— Rs 30 billion in 1997. In 1986, there were
only 10 to 15 leading exporters in the town but w ithin a span of a
decade the number of exporters has risen to nearly 400 (1996). This
spectacular growth has been achieved notwithstanding the poor levels
of support infrastructure such as water supply, effluent disposal, roads,
power, and telecommunications.
 FI SC AL I NNOVATI ONS A N D U R B A N G O V E R N A N C E 259

The growth of population and industry has widened the gap between
the demand for and supply of infrastructure and services. Water supply
in the town is extremely inadequate. The main sources of water to the
town are rivers and borewells. While the Tirupur municipality provides
water for household consumption, garment industry uses non-municipal
sources such as the private trucking of water and borewells for meeting
its requirements. As such, the cost of water is extremely high. The town
has no sewerage system and the only river that passes through the town
called Noyil is, in fact, an open sewer. The industrial units do not have
effluent treatment facilities. The bleaching and dyeing industries consume
large quantities of water and dispose the same untreated into Noyil river.
This water is carried to downstream villages which has affected their
agriculture, human habitation and all forms of life. The haphazard growth
of the town coupled with poor enforcement of environmental regulations
by the municipality and the Tamil Nadu Pollution Control Board (TNPCB)
have encouraged exporters to discharge effluents consisting of toxic
chemicals and colours into the Noyil river. Many dyeing units discharge
their effluent into any open water body or even on land. This has
phenomenally increased health risks in the town and also affected the
supply of potable waiter.
Tirupur town has a municipal body, and is governed for its functions
and fiscal powers by the Tamil Nadu Municipalities Act, 1965. In 1994­
95, it had a total revenue income of Rs 103.12 million and an expenditure
of Rs 98.26 million on revenue account. The main sources of revenue
for the municipality provided for in the Act are taxes on property,
non-tax revenues such as fees and fines, income from m unicipal
properties, and state government transfers on account of shared
taxes, grants and loans on capital account. Property tax is the single
largest source of revenue for the M unicipality, and contributes
anywhere between 30-40 per cent of the revenue income of the
Tirupur municipality. The major heads of expenditure i.e., public
health and sanitation, and water supply and drainage accounted for in
1994—95, 33.6 and 39.8 per cent of the total municipal revenue expenditure.
Measured in terms of the growth rate of revenue income and other
financial ratios, the financial performance of Tirupur Municipality can be
said to be creditable. However, the debt servicing of Tirupur Municipality
has been far from satisfactory, with the result that it has a large
accumulated debt of over Rs 330 m illio n . W ith this financial position
and the level o f revenues that the T irupur m u n icip ality is able to
260 THE C H A L L E N G E OF U R B A N GOVERNANCE

generate, it is not in a position to undertake any large scale expansion

of infrastructure and services that it is responsible for.
Towards the end of the 1980s. the garment exporters of Tirupur
formed an association, called the Tirupur Exporters Association (TEA)
with the objective of bringing to the attention of the government the
problems of the industry. The TEA represented to the Central government
and the state government of Tamil Nadu to accord to Tirupur. the status
of an Export Growth Centre and make special funding arrangements for
infrastructural development. The TEA argued that investments in
infrastructure were essential both to enhance the production and
productivity of the garment industry as also to improve the quality of
exports. Plans were accordingly formulated on the assumption that
public sector financing would become available for the augmentation of
infrastructure and services. However, on account of the scale of
requirements, these plans made no progress. Public sector financing of
this scale proved elusive.
The Tamil Nadu Corporation for Industrial Development (TACID)
which had been set up in 1991 to advance the interest of the industry in
the state made a similar assessment, and observed that in view of the
non-availability of public funds other institutional and financial options
should be explored. One option that was to be explored was that of
involving the private sector in the provision of such services as w'ater
supply, sewerage, effluent disposal and roads. A key question was whether
it was at all possible to develop a project covering these components which
would be financially viable and able to pay for itself. O f these, w'ater was
the only corhponent that lent itself to direct charging. Cost of the other
components could be met only through taxation. Given this context, the
issues that arose were: In what manner should the private sector be involved
in this project? What should be the mode? Should the private sector be
encouraged to develop, manage and operate it on an ownership or lease
basis or on a Build, Operate and Transfer (BOT) format? What kinds of
concessions will the private sector require in order to undertake such a
project? The possibilities of private sector participation in the provision of
such services also presented questions pertaining to the sources of financing,
determination of a unit price, regulations, accountability and the like.
The entire exercise entailed several interrelated steps:

• Establishment of the feasibility and financial viability of the

project covering water supply, sewerage and drainage facilities,
 FISCAL INNOVATIONS AND URBA N G O V E R N A N C E 261

in d u strial effluent collection and treatment system, and

improvement and expansion of intra-city roads. The Infrastaicture
Leasing and Financial Services (ILFS), a private sector company,
undertook the task of preparing the feasibility report, and
presented what finally came to be know n as the Tirupur Area
Developm ent Plan (TADP). The feasibility report provided
details of the costs, pricing, and recovery mechanism s,
establishing that the project was financially viable and that it
could pay for itself. The Plan entailed an estimated investment
of Rs 5,890 million. It is important to point out that this
exercise was preceded by large scale field surveys, focusing
on the willingness and ability of households and industry to
pay for the services and on the environmental impact of the
project on the neighbouring villages. The surveys constituted
an extremely crucial input to the TADP exercise.
Determination of the institutional responsibility for the project. A
critical question was about the institutional framework that would
be able to undertake responsibility for the project. Considering
the fact that the implementation of the Tirupur Area Development
Plan (TADP) would necessarily involve raising resources both in
the domestic and international capital market and require expertise
in entering into complex equity-debt arrangements, a decision
was taken to create a special purpose vehicle (SPV), a joint venture
company, called the New7Tirupur Area Development Corporation
Ltd (NTADCL). From a strategic, resource-raising and risk sharing
point of view, creation of such a vehicle was considered to be
the most effective option. Regulations of various types and internal
management capacity of the Tirupur Municipality did not allow
it to play this role. NTADCL was incorporated in 1995 and a
m em orandum of understanding signed between the State
government of Tamil Nadu, TACID, ILFS, and TEA on the broad
parameters on the design of such a project. It was an unique
institutional format of pluralistic governance which included
the governments, state-level parastatal agencies, a private
sector financing company, and the exporters association which
was the principal user or the beneficiary of the proposed
project.
Consideration of the financing options for the TADP. W hile it
was generally understood that public sector financing of the
262 THE C H A L L E N G E O F U R B A N GOVERNANCE

order envisaged was unlikely to he available, other questions

concerning the debt-equity proportions and the mechanism of
raising debts confronted such agencies as the ILFS and the state
government. A broader equity base was considered essential
and desirable in order to secure the cooperation of the
participating agencies and timely completion of the project. As
such, a decision was taken that NTADCL— the agency responsible
for the implementation of the project, will have equity holders
comprising the Government of India, TACID, TEA, ILFS and the
Built-Operate-Transfer operator. The participation of TEA (Tirupur
Exporters Association) was significant as it was the single most
important beneficiary of the project. Similarly, the equity
participation of the BOT operator was viewed as necessary' for
ensuring their continued attention to the operation and
maintenance of the project. Debt, it was decided, will be raised
from the financing institutions such as the World Bank, USAID,
ILFS and supplier of equipments by the issuance of what are
tentatively called the Water Bonds. Debt-equity ratio is envisaged
to be 2.6:1. A linked but critical decision in this respect was to
sell water on the principle of full cost recovery' in the aggregate,
meaning that the pricing could differentiate between different
consumer groups according to their ability to pay. This principle
alone could ensure the financial viability of the project.
• Selection of the Build-Operate-Transfer (BOT) operator. The
key to the success of the project and, indeed, of the larger issue
of the private sector participation in such projects as water supply
and sewerage, is the operator who is to be responsible not only
for creating the infrastructural capital but also for operating and
maintaining the same for 30 years. The operator has to also
secure adequate return on equity within a limited time period
before transferring the project to NTADCL. In view of the planned
financial participation of the international and domestic institutions
in this project, it was decided to seek global tenders on the
established BOT patterns and norms. The entire process of
reviewing the tenders has since been conducted by experts
unconnected with the participating institutions and other
stakeholders in an open and transparent manner. The final
selection is to be made shortly.1'
 FI SCAL I NNOVATI ONS A N D U R B A N G O V E R N A N C E 263

The Tirupur project constitutes a major step in putting into practice

the principles underlying privatization and enabling government, and a
typical case of government facilitating activity of the private and other
sectors. Given the parameters and scale of the project, the development
of this project has taken several years which has seen wide-ranging
consultations, involving public and private sector institutions, domestic
and international financing companies, and the producers and consumers
of services. It has demonstrated that there are diverse arrangements for
financing municipal infrastructure and services of which Tirupur represents
only one model. The Tirupur project is designed on the principle of
transparency, i.e., the need to maintain the link between local benefits
and local costs in a way to ensure taxpayers awareness.

I ll A SET O F O B S E R V A T IO N S : E M E R G IN G C O N N E C T IO N S B E T W E E N F ISC A L

IN N O V A T IO N S A N D G O V E R N A N C E

An attempt has been made in this study to explore, with three distinct
examples, the interconnections between local fiscal innovations and
governance: to ascertain whether these innovations led to, promoted or
advanced in any way, what would seem to be the chief characteristics of
good governance, i.e., decentralization, accountability, local initiatives,
transparency, civil society movements and participation. The key to the
study is to be found in the underlying proposition that sound local finances
are an essential component of good governance, and governance can
hardly be considered effective if the governments— be they Central, state
or local— are unable to adhere to the canons of fiscal discipline, fiscal
efficiency, and fiscal autonomy. The context of the study is significant in
that the past few years have witnessed in India, as in several other
developing countries, an unprecedented level of interest and debate on
local governance, and wide-ranging actions to empow'er local governments
to enable them to address the numerous challenges they are faced with.
The Central governm ent's initiative to am end the Constitution in order to
strengthen thefou n d a tio n s o f dem ocratic decentralization at loca l levels,
efforts on the p a rt o f at least a few state governm ents to reform the local
tax system, adoption by m unicipal governments o f new modes o f fin a n cin g
a n d resource-raising, a n d emergence o f public-private partnerships in
the provision o f infrastructure are but a fe w examples in this direction.
The three cases documented in this study have shed further insights into
the connections between fiscal innovations and governance. Although
264 T HE C H A L L E N G E O F U R B A N GOVERNANCE

generalizations on them may be difficult to arrive at, the fiscal

innovations prov ide interesting propositions through which local and
state responses to the challenges they are faced with, can be better
understood. For instance, the three cases show that:

• A simple, transparent a n d undifferentiated ta x system has a

greater possibility o f securing clientele acceptance a n d o f being
sustained, even i f it entailed a higher tax burden.The Andhra
Pradesh initiative in respect of property tax reform strongly
suggests that notwithstanding the general reluctance on the part
of m unicipal councils to increase the tax burden on their
constituencies, a system:

■ which is simple and comprehensible,

■ which is standardized, and which is designed to eliminate the
discretion in estimating the annual rateable values (ARVs) or
the property tax burden, and .
■ which is transparent in that the tax rate ranges are known to
the tax payers through gazettes, newspapers and media, will
be widely acceptable.

• E fficien t adm inistratio>i a n d e n forcem en t o f ta x system are

c ru c ia l f o r securi>ig p u b lic support on such issues as raising
resources in the market, pledging revenue streamsj'o r redemption
o f loans, a n d the like. The Ahmedabad case on the issuance of
bonds shows that efficient administration and enforcement of a
tax system, development of a data bank that updates information
on the market prices of goods which are subject to tax levies,
and taking up of steps that prevent leakages and corruption, are
necessary to not only restore the confidence of the citizens and
tax payers in the functioning of a local body, but also essential
for local governments to use instalments such as the open market
borrowings for raising resources. Public cooperation and good
governance can not be expected to follow7in the absence of an
efficient and equitable tax administration.
• Public sharing o f credit-rating inform ation is an important input
to building alliances andpart>ierships with the non-governm ental
sector and other interest groups. The credit-rating of a corporate
body such as the Ahmedabad Municipal Corporation has shown
that it is an extremely useful instrum ent not o n ly for
 FISCAL INNOVATIONS AN D UR BA N GO V E R N A N C E 265

determ ining the creditworthiness and risk-taking capacity of a

local body, but for demonstrating to the citizens where the
potentials lie, what part of the potentials are currently tapped or
not tapped, and the local b o d y ’s financial strengths and
weaknesses. Such exercises and information sharing have led to
the participation of industry and business in taking up projects
(e.g., slum upgrading) that w ould ordinarily fall within the
jurisdiction of local bodies.
• Pu b lic fin a n c in g o f infrastructure is only one alternative; given
the right p rice signals public-private partnerships are possible to
be fo r g e d in the d elivery o f even those services w hich are
characterized by ‘externalities’. The Tirupur case shows that
there exists in practice an array of strategies and diverse
arrangements to make use of the different stakeholders in the
provision and delivery7of services. It has demonstrated that the
government itself can create conditions for the private and voluntary
sectors to take up activities w7hich are ideal for market-type pricing
regimes, and thereby bring in pluralistic governance.
• C om m itm ent and leadership are critica l to initiating changes in
the loca l fis ca l arrangements. In Andhra Pradesh, initiative for
change in the property tax system emerged from the highest
political executive of the state who found the earlier system,
constraining in terms of its revenue generating capacity,
discriminatory and iniquitous , and opted for a system that was
simple, open and non-discriminatory. The Ahmedabad initiative
w7as led by the administrative leadership of the Corporation w7ho
put to effective use the existing statutory and other provisions
for improving its finances. For long term and sustainable growth
of the Corporation, the initiative included measures such as
professionalization of the key functions of the Corporation,
information sharing, and forging alliances with key stakeholders.
In Tirupur, it was the Tirupur Exporters Association and its
economic interest that led to institutional restructuring and public-
private enterprise for the delivery of services. What is important
to recognize is that leadership exists at all levels and need not
necessarily emanate from the public sector.

Underlying in these propositions is the general theme that the

challenges w7hich the local governments in India have come to face with
266 THE CH A LL E N G E OF URBA N GOVERNANCE

in recent years are being responded to in different ways and with

varying degrees of success. Different modes appropriate to local
conditions have been used to improve the level, quality and delivery
of urban services. Citizens' acceptance of higher tax liability and
new partnership arrangements in the expectation that they will be
the eventual beneficiaries are im p o rtan t steps tow ards better
governance of cities. As pressures on local governments mount and
as they acquire new roles and responsibilities, these w ill have
significant implications for local public finances with emphasis shifting
to issues of choice, efficiency and accountability in the delivery of
local services, many of which essentially are publicly-provided private
goods. The challenge for the local governments will be to provide
those services that citizens are prepared to pay for.
 F IS C A L IN N O V A T IO N S A N D U R B A N G O V E R N A N C E 267

annexure 1.Taxation Heads Assigned to the Union and the States in

the Constitution (As Listed in the Seventh Schedule
_____________ of the Constitution)__________________________________
Union States
Entry in List I Head Entry in List II Head
of the Seventh of the Seventh
Schedule Schedule

82 Taxes on incom e Land revenue, including

other than the assessment and
agricultural income collection o f revenue,
the m aintenance o f land
records, survey for
revenue purposes.
83. Duties o f customs 46 Taxes on agricultural
including export income
duties
84. Duties o f excise on 47 Duties in respect of
tobacco and other succession of
goods manufactured agricultural land
or produced in India
except: a. alcoholic
liquors for hum an
consum ption:
b. o piu m . Indian
h em p and other
narcotic drugs and
narcotics; but
including medicinal
and toilet
preparations
containing alcohol or
any substance
included in sub­
paragraph (b ) o f this
entry.
85 Corporation tax 48 Estate duty in respect
o f agricultural land
86 Taxes on the capital 49 Taxes o n lands and
value o f the assets, buildings
exclusive o f
agricultural land o f
individuals and
companies; taxes on
the capital of
companies
268 THE C H A L L E N G E OF U R B A N GOVERNANCE
A N N K X l'K E 1 Contd.

Union States

Entry in List I Head Entry in List II Head

of the Seventh of the Seventh
Schedule Schedule

E state d u ty in 50 T ax es o n m in e r a l rig h ts

re s p e c t o f s u b je c t to a n y lim ita tio n s

p r o p e r ty o th e r im p o s e d b y P a r lia m e n t
th a n a g r ic u ltu r a l b y la w r e la tin g to m in e r a l

la n d d e v e lo p m e n t .

<SH D u t ie s in re s p e c t SI D u t ie s o f e x c is e o n th e

of s u c c e s s io n to f o ll o w in g g o o d s

p r o p e r ty o th e r m a n u fa c tu re d or p r o d u c e d

th a n a g r ic u ltu r a l in th e S tate a n d

la n d c o u n t e r v a ilin g d u tie s at th e

s a m e o r lo w e r rate s o n

s im ila r g o o d s

m a n u fa c tu re d or p r o d u c e d

e ls e w h e r e in In d ia :

a. a lc o h o lic liq u o r s fo r

h u m a n c o n s u m p t io n :

b. o p iu m . In d ia n h e m p

a n d o t h e r n a r c o tic d r u g s

a n d n a r c o tic s ; b u t n o t

i n c lu d i n g m e d ic in a l a n d

to ile t p r e p a r a tio n s

c o n t a in in g a lc o h o l o r a n y

s u b s t a n c e in c lu d e d in s u b ­

p a r a g r a p h ( b ) of th is e n try .

89 T e r m in a l ta x e s o n S2 T ax es o n th e entry’ o f

g o o d s or g o o d in to a lo c a l a re a fo r

p a s s e n g e rs c a r rie d c o n s u m p t io n , u s e o r sa le

b y r a ilw a v . sea o r th e r e in .

air: tax e s o n

r a ilw a v fa re s a n d

fre ig h ts.
 F IS C A L IN N O V A T IO N S A N D URBAN G OVERNANCE 269

a n n e x i- r k 2. Twelfth Schedule Article 243W of the Constitution

Seventy-Fourth Amendment Act 1992 on Municipalities

1. Urban planning including town planning

2. Regulation of land-use and construction of buildings
3. Planning for social and economic development
4. Roads and bridges
5. Water supply for domestic, industrial and commercial purposes
6. Public health, sanitation, conservancy and solid waste management
7. Fire services
8. Urban forestry, protection of the environment and promotion of
ecological aspects
9. Safeguarding the interests of the weaker sections of society, including
the handicapped and mentally retarded
10. Slum improvement and upgradation
11. Urban poverty alleviation
12. Provisions of urban amenities and facilities such as parks, gardens,
playgrounds
13. Promotion of cultural, educational and aesthetic aspects
14. Burial and burial grounds; cremations, cremation grounds and electric
crematoriums
15. Cattle pounds; prevention of cruelty of animals
16. Vital statistics including registration of births and deaths
17. Public amenities including street lighting, parking lots, bus stops and
public conveniences
18. Regulation of slaughter houses and tanneries
270 THE CH ALLENG E OF URBAN G OVERNANCE

End Notes

1. All references to local governments in this study refer to urban local

governments. These include municipal corporations, municipal bodies
and other forms of city town governments.

2. Recent studies have shown that as a political phenomenon,

decentralization is widespread in developing and transitional
economies. Of the 75 countries with population greater than 5
million, all hut 12 claim to have embarked on some transfer of
political power to local units of government. See, William Dillinger,
Decentralization and its Implications f o r Urban Service Deliver}’,
The World Bank (1994: Washington D.C.), and Roy W. Bahl and
Johannes F. Linn. Urban Public Finance in Developing Countries,
The World Bank (1992: Washington D C.).

3- In the classical formulation, the public economics literature assigns

three roles to the public sector: (i) macro stabilization, (ii) income
distribution, and (iii) resource allocation. The public economics
model assigns the first two of these roles to central government.
Subnational governments enter the picture only with respect to the
third role of government— resource allocation. See, R. Musgrave
and P. Musgrave. Public Finance in Theory and Practice, McGraw
Hill (1984: New York). Views on fiscal federalism and
decentralization in general are constantly changing between nations
and, across time, within particular nations. See, Vito Tanzi, "Fiscal
Federalism and Decentralization: A Review of Some Efficiency and
Macroeconomic Aspects", Annual Bank Conference on Development
Economics. The World Bank (1995: Washington D C.), and Wallace
E. Oates, "Fiscal Decentralization and Economic Development", in
National Tax Journal. Vol. 46, No. 2 (1993: Washington D.C.).

4. Such downloading is uniquely observed in transitional economies where

budget cuts and public sector restructuring implemented by higher levels
of government have trickled down to the local level. The fiscal pressures
have created a chain reaction as one level of government undertakes to
reduce its transfers to the next level of government. See for further
discussion. Environment and Planning, Vol. 12, 1994, and A.R. Hobson
and France st-hilaire. Urban Governance and Finance: A Question o f
Who Does and What. IRPP, (1997: Quebec).

5. Janice Caulfield, "Taxation and Equity within Metropolitan Areas”,

presented at the OECD/Sweden Workshop on Governing Metropolitan
 F IS C A L IN N O V A T IO N S A N D U R B A N G O V E R N A N C E 271

Areas: Institutions, Finance and Partnerships (1997: Stockholm).

See Fu-chen Lo, "Changing Patterns of Global Production, Technologies,

and the World City System”, The United Nations University (1996:
Tokyo), and Fu-chen Lo and Yue-man Yeung, Emerging World Cities
in Pacific Asia, The United Nations University (1996: Tokyo).

See, Om Prakash Mathur, ‘Governing Cities: Facing Up to the

Challenge of Poverty and Globalization”, in Patricia McCarney (ed.),
Cities and Governance. University of Toronto (1996: Toronto).

McCarney et.al., ‘Towards an Understanding of Governance: The

Emergence of an Idea and its Implications for Urban Research in
Developing Countries”, in Richard E. Stren (ed.). Urban Research in the
Developing World (1994: Toronto).

An interesting table on local choices of fiscal strategies is contained

in Terry Nichols Clark (ed.), Urban Innovation: Creative Strategies
f o r Turbulent Times. (1994: Sage Publications). Also, see Jeffrey I.
Chapman. Long-Term Financial Planning: Creative Strategies f o r
Local Government, ICMA (1967: Washington D.C.), and OECD,
Infrastructure Policies f o r the 1990s (1993: Paris).

India is a federation of Union and states; the subject of local government

falls within the domain of states who are responsible for their creation,
constitution, and assignment of functions and fiscal powers.

See, National Institute of Public Finance and Policy, Redefining State-

Municipal Fiscal Relations: Options and Perspectivesfo r the State Finance
Commissions. (1995: New Delhi).

The inter-governmental allocation of the sources of revenue is

structured in a way that much of the gains from activities undertaken in
cities accrue to the Central and state governments. (See Annexure 1)

The Constitution of India does not directly assign any tax powers to
local governments. The state governments out of the tax powers that
they enjoy under the Constitution allocate a few taxes to local
governments (see Annex 1).
272 THE CH ALLENG E OF URBAN G OVERNANCE

I t. For a fuller discussion, see, Om Prakash Mathur. "State of India's Urban

Poverty" (1994: Asian Development Review, Manila).

15. The Constitution (seventy-fourth) Amendment Act. 1992 assigns a

constitutional status to local governments, meaning that they stand
protected by the Constitution from arbitrary dissolution or suspension.
It provides for regular elections at municipal levels, with provisions in
respect of elections having been brought at p a r with those at the level
of states and the Centre.

16. The ability of municipal governments to levy their own taxes, set and
adjust user fees, and raise their own revenues with the approval of
their own constituents is an essential, and often overlooked, aspect of
effective participation democracy. See Mark H. Bidus, Municipal
Development and Democracy in Central America, U.S. Agency for
International Development (1995: Washington D.C.).

17. There are other fiscal initiatives too: however, this paper is limited to
studying these initiatives only.

18. R.J. Bennet summarizes the advantages of property taxation: “It

undoubtedly has strong advantages in being cheap and easy to
administer: it allows easy definition of the tax base, and relates local
taxation to services that result from the distribution of property.' See.
Bennet (1980). The Geography o f Public Finance, pp 290.

19. Property taxes in India owe themselves to Entry 49 in List II of the Seventh
Schedule of the Constitution of India which provides for the levy of taxes
on lands and buildings. Taxes on land and property are, however, levied
by municipal governments in accordance with the procedures laid down
in the State municipal acts. The procedures lay down the tax bases, rate
structures, rebate and exemption policies and measures for dealing with
payment delays and defaults. The autonomy of municipal governments
in formulating property- tax policy is severely limited, and allowed at best
in fixing the tax rates within certain ranges and often in designing collection
strategies. Since property tax policies are determined by State governments,
there is a large scale diversity in almost every' sphere of property taxation.
Thus, for instance, a tax on land and property is an obligator}' tax in some
States and an optimal tax in others, with the result that a numl>er of
municipalities have opted not to levy any property tax at all. Diversity is
particularly sharp in the structure (if tax rates.
 FISCAL INNOVATIONS AND URBA N G O V E R N A N C E 273

20. Andhra Pradesh is one of the twenty six states of the Indian federation. In
1991, its population was 66.5 million persons. The total urban population
of the state was 17.9 million or 26.9% of the state's total population.

21. The Andhra Pradesh Municipalities Act, 1965 mandates the revision of
property tax every five years, but as revision invariably meant
enhancement and consequent litigation and also a long process of appeal,
the quinquennial revision did not take place regularly. Only 19 local
governments out of the 109 in the state revised the assessment by 1981
and 50 undertook the revision between 1982 and 1989- There were no
revisions in the remaining municipal bodies. See Naidu, ibid.

22. Taken from Rakesh Mohan (1983), “Indian Thinking on Property Tax
Reform", in A. Datta, Property Taxation in In d ia . Indian Institute of
Public Administration, New Delhi.

23- Note should be made of the fact that there are other valuation systems
too, such as the capital valuation which have not been experimented
with so far. The capital valuation system is noted for its other advantages.

24. The merit of the Assessment Rules, 1992, is that they rid the house-owners
of the harassment and the constant threats of revision of annual rental
value by the concerned officials of the corporation. The earlier system of
taxation left too much discretion in their hands. Now, the only thing that
has to be ascertained is the carpet area of the house, the rest is determined
by the Rules and the notifications. There is no question of the revision of
annual rental value periodically on the ground that the rental value has
gone up. A new system, with all good intentions is being tried out— a
system designed in the interest of the body of house owners— tax payers
as well as the corporation. May be, this is the trial and error method.
Unless found to be offending the Constitutional or a statutory provisions,
it must be allowed to be worked. One should start with the presumption
that the corporation knows what is the better method of classification. It
has chose to divide the Municipal corporation area with reference to
roads for valuation of holdings. It is difficult for the court to substitute its
opinion for that of the corporation nor can any one guarantee that if the
municipal corporation area is divided on the basis of zones it will be a
perfect classification and would eliminate all complaints and grievances
of differential treatment. It is because of the inherent complex nature of
taxation that a greater latitude and larger elbow room is conceded to the
274 THE C H A L L E N G E OF U R B A N GOVERNANCE

legislaaire—or its delegate, as the case may he—in such matters. Judgement
of the Supreme Court in tine case of Patna Municipal Corporation Act—
Assessment of Annual Rental Value of Holdings Rules (1994: Patna).

25. Municipal Corporations in India are larger municipal bodies (usually

with over 300,000 population). These are governed by different
statutes and enjoy comparatively wider powers and responsibilities.
There are large-scale inter-state differences in the borrowing powers
of municipal corporations. Municipal bodies do not enjoy these powers.

26. The state governments exercise strict controls over those municipal
governments which are indebted.

27. Interestingly, the issuance of local debt was earlier considered

synonymous with local irresponsibility. In fact, the opposite may
be true now. A government that eschews debt issuance is acting
irresponsibly. Since capital facilities provide services over a long period
of time, it makes sense to pay for these facilities over a long period.

28. Gujarat is one of the twenty six states in the country. In 1991, it
had a total urban population of 14,3 million, forming 34.5 per cent
of the state's total population.

29. The Credit Rating Information Services of India Limited (CRISIL),

Credit Rating of Municipal Bonds: Rating Report on Ahmedabad
Municipal Corporation (1996: New Delhi)

30. Government of India. The India Infrastructure Report: Policy

Imperatives f o r Growth and Welfare (1996: New Delhi). The report
is popularly known as the Rakesh Mohan Committee Report.

31. Traditionally, one factor that has influenced the structure of

government and the division of functions has been the extent of
the economies of scale in the production of services. Once provision
and production functions are dissociated, these services can be
produced by whichever sector is able to achieve the scale economies.

32. Tamil Nadu is one of the twenty-six states in the country. In 1991.
it had a total urban population of 19.1 million which formed 34.1
per cent of its total population.

33. Final selection is to be made by October 1997.