Incorporate direct funding for cities in the GST design

A recent report by the McKinsey Global Institute (MGI) titled “India’s Urban Awakening: building Inclusive Cities, Sustaining Economic Growth” (April 2010) highlights India’s urban challenges and opportunities.

The report, based on nearly two years of research, projects that India would have around 590 million people living in urban areas by 2030. The net increase in working-age population will be 270 million, while 70% of net new livelihoods will need to be generated in urban areas.

By 2030, there will be 68 cities with population of more than one million each, and 91 million urban households will be middle class, who will expect much better amenities than those existing today.

To manage the urbanisation process, the report projects investment of $1.2 trillion in real 2008 dollars (equivalent to $134 per person per annum) if the current situation of low quality and inadequate urban amenities is to be reversed.

In particular, it projects that 700-900 million square meters of paved roads will be needed, 20 times the capacity added in the past decade. It also projects the need for 7,400 kilometers of metros and subways, 20 times the capacity added in the past decade.

The underlying persuasive and urgent message of the Report is that there will need to be a qualitative and fundamental change in India’s operating model for the urban areas.

The report focuses on five elements of urban operations. These are:
funding sources;
governance structures of urban areas;
land use and spatial planning by cities with a view to improving affordability, accessibility, and quality of urban amenities and services affecting daily activities of the population;
sector policies such as housing, transportation, health facilities, education and environment management, including water and solid waste management; and
specific goals concerning how India’s population will be divided across the country among urban and rural areas of differing sizes and proximity.

All five require competencies in urban management and policies, and willingness by the politicians, bureaucracy and other stakeholders to initiate urgent changes.

A high quality public policy debate in these areas has unfortunately been conspicuously lacking. There is room for honest differences in the choices India should make, but these must be based on strong empirical and analytical foundations not solely ideologically or politically driven as appears to be the case today.

It is in the above context that the funding sources for urban areas require urgent attention. To meet their challenges, the cities in India need to substantially improve their capabilities. But this requires that consistent with international practices, including in the United Kingdom, South Africa and China, the Indian cities must have reliable sources of funding.

The current financing arrangements, which leave cities with uncertain sources of funds and limit their planning and policy autonomy, as well as accountability, are simply not sustainable, and result in poor governance.

The cities are currently over-dependent on central or state government grants, such as on JNNURM projects for urban infrastructure, or for slum improvement.

The report of the 13th Finance Commission, chaired by Vijay Kelkar, has strongly urged that direct transfer fund mechanism be built into State and Central GSTs (goods and services tax proposed to be introduced from April 2011) for the cities. As the GST is expected to have a single treasury (an area, which requires urgent strengthening if the GST is to be smoothly implemented), a portion (10-20%) of the GST can be distributed to the cities through Government Treasury at either the State Bank of India or the Reserve Bank of India, subject to certain conditions. RBI may be preferred as it currently also analyses state and local finances annually. Such a direct transfer is also strongly supported by the report.

As the Centre and States reach final decisions on the design and implementation of GST, it is imperative that the vital need for more secure funding for the cities, through direct transfer of GST revenue to them (subject to conditions), is not overlooked. Indeed, this is one of the criteria by which the final agreement on GST should be judged.

The conditions could include accounting and management information system reforms; compulsory e-tendering of projects with transparent norms and procedures; and rate of progress in meeting education, health, urban sanitation, transport and other needs. Progress towards implementing UID card project could also be included.

Direct funding, however, cannot achieve the desired outcomes unless human resource issues are addressed. In this connection, a group of urban management officials with specialised training in city management needs to be developed at the national level (and supplemented in states by state-level professionals) can be positioned in cities to help implement urban projects, with specific accountability. As in other areas, qualities of professionalism, and citizen-centric nature of public service delivery systems needs to be enhanced.

Increasingly dysfunctional arrangements (such as specifying that certain positions can only be held by officials from a particular service, such as the Indian Administrative Service, needs re-examination. Unless India finds a method to give much higher weight to “deserved trust”, i.e. competency plus integrity in recruiting, allocating and promoting government officials, it will not be able to meet urban (or rural challenges and expectations of its citizens. This realisation has occurred even in countries such as Malaysia, which have in the past exhibited rapid growth.

Creation of standardised software for the country for monitoring of urban governance merits serious consideration. This is because the current urban management, including JNNURM and other related projects, suffer from limitations of poor availability of data and of rigorous analytical studies (such as for projecting urban transport or water demand in cities such as Pune or Chennai). It is time that India’s IT capabilities, so visible internationally, were used to grasp India’s urban opportunities.

Direct funding through transferring a part of GST revenue to cities is only one of the important methods for securing the needed funds. The others include property tax reform, developing municipal bonds market, utilising state assets more productively, better accessing clean development mechanism funds under Kyoto agreement through say switching to more energy saving street lighting, public private partnerships and more strategic use of cost recovery and user costs. The possibilities are many.

But even with these combined resources, the need for economising on the use of resources will remain as demand grows rapidly.

The writer is a professor of public policy, Lee Kuan Yew School of Public Policy, National University of Singapore and can be reached at sppasher@nus.edu.sg. Views are personal.