Issues raised by the Consortium comprising former mayors and commissioners of municipal corporations of Himachal Pradesh

The Chairperson and Members

16 Finance Commission of India

New Delhi

On the visit to Shimla, dated June 24, 2024.

Subject: Issues raised by the Consortium comprising former mayors and commissioners of municipal corporations of Himachal Pradesh.

Dear Chairperson Sir and Members,

We, former mayors, and commissioners who have served city governments in different periods of time welcome you to this historic town of Shimla.

At the outset, we would like to reference the Chief Secretaries’ National Conference held in Dharamshala in June 2022, which included a comprehensive chapter on municipal finance. The conference advocated for strong decentralization of finances to local bodies.

This is the urban century of India, not just due to demographic shifts gravitating towards cities but also the necessity to understand and manage this urbanization to make it more sustainable—ecologically, economically, and livably. The success of this effort will depend on the urbanization trajectory we adopt and build upon cautiously over the next few decades. The flow of finances will play a major role in this. However, the scale of our economy is currently insufficient to meet rising needs. The World Bank estimates that around $840 billion is required to provide the bare minimum urban infrastructure in India in the next one decade.

We would also like to highlight the comparative figures of Intergovernmental Transfers (IGTs) to urban local bodies and argue for a substantial increase, at least doubling the current finances. As the Commission is aware, cities contribute almost 70% to the country’s GDP and almost 90% to its revenue but receive very little in return.

The IGTs to Urban Local Bodies (ULBs) in India are about 0.5% of GDP, quite low compared to 2-5% for other developing nations (Ahluwalia et al., 2019). In South Africa, it is 2.60%; in Mexico, 1.60%; in the Philippines, 2.50%; and in Brazil, 5.10% of their GDPs. While IGTs constitute around 40% of the total revenue sources of ULBs, there are issues around their predictability, tied nature, earmarking for vulnerable groups, and horizontal equity. IGTs are significant given the present state of ULB finances and their need for stable support until their own revenues improve.

After the introduction of the Goods and Service Tax (GST), the share of ULBs’ tax revenue (other than property tax) in total revenue declined from about 23% in 2012-13 to about 9% in 2017-18 (Ahluwalia et al., 2019). IGTs from States to ULBs are very low, with State Finance Commissions (SFCs) on average recommending the devolution of only about 7% of the State’s own revenue in 2018-19. It is necessary to increase the quantum of IGTs as a percentage of GDP.

Despite the 74th Constitutional Amendment aiming to create space for the financial strengthening of ULBs, three decades of progress have fallen short of expectations. ULBs continue to suffer fiscal stress even after three generations of urban reforms, significant changes in the tax base post-GST, and nudges from the Central Finance Commission (CFCs) and SFCs. Municipal revenues are low, only about one percent of GDP during the 2007-08 to 2017-18 period, compared to about 6% in South Africa and 7.4% in Brazil. Dependence on intergovernmental transfers (IGTs) is high, with own revenue accounting for less than half of the ULBs’ total revenue.

Urban Story of Himachal Pradesh

Urbanization in Himachal Pradesh was systematically developed by colonial rulers. Prior to that, the state saw urban settlements only along the rivers, with very little mobility. However, the British, with their imperial power and design, were able to build mountain towns, something that was previously not practiced in the state. Sustaining these urban settlements economically, climatically, and ecologically on mountain tops was beyond the scope of earlier settlements. It was the advent of industrial infrastructure that spurred the development of most hilly towns.

Sustaining these urban settlements is a significant challenge today. For instance, the production cost of water for Shimla town is around Rs 150 per kiloliter, the highest in the country, because the water has to be lifted from a long distance with an elevation of around 2,000 meters. The cost is high, quite obviously.

Moreover, the towns have grown exponentially. The Himalayan towns are very fragile and extremely vulnerable to both climate and natural disasters. The development trajectory in the state has also pushed many people to urban settlements. Though the 2011 census indicates an urbanization rate of around 10%, the urban settlements, which require a specific definition for Himalayan regions, are much more extensive than that.

Himachal towns also attract a significant number of tourists. Although the population of the state is less than seven million, it receives around 40 million tourists. Shimla town alone, with a population of over two hundred thousand, gets a tourist flow of around four million annually. Hence, the infrastructure created by the urban local bodies is not just for a static population but varies temporally.

Himachal towns also face climate-induced disasters. The year 2023 saw a major disaster. The urbanization patterns in the last few decades have exacerbated the problems of the towns. In the absence of geological data, land use planning is done in a typical copy-paste model of plain lands. What is built on the surface must be determined by the strata underneath because the Himalayas are fragile, and tectonic plate movements are still ongoing.

Another significant issue affecting both urban local bodies and panchayats is waste management. Both solid and liquid waste management are major challenges, and towns often do not know what needs to be done. Much of the solid waste is produced outside the state, and most of it is neither recyclable nor biodegradable.

Urban mobility in the mountain towns and particularly in Himachal Pradesh is quite challenging. The pace of motorised transport and push for creating more spaces for such a mobility is ruining the hilly landscape. Though mobility plans for alternate modes of transport have been prepared but due to financial constraints these are hardly met. Alternative modes focus on non-motorised transport and on vertical mobility along with horizontal mobility. 16FC must help mountain towns for enhancing the alternative forms of mobility, which are sustainable, lower carbon footprint and based on strengthening public transport.

Urban governance is another major challenge in Himachal towns. The HP High Court recently noted that Shimla has only five sanitary inspectors for its 30 municipal wards. Similarly, across the state, with over five municipal corporations and over 60 urban local bodies, there are not more than 30 sanitary inspectors.

Urban forestry must be looked at from a different lens by the 16FC. Unlike cities of the flatlands, mountain towns have large forest spaces. Take for example, Shimla where more than 55% of the total geographical area of the town is under forest. Neither the city government (ULB), nor the state government allows commercial green felling. These act as lungs to its people and the tourists. This space should also be considered by the commission for adequately compensating such towns who have more than 25 per cent of forest cover in their geographical area.

Shimla, and many other Himalayan towns were built by the British during the colonial rule. As such there is a great value of heritage added to these towns. In Shimla town more than 100 buildings are earmarked as heritage. Maintenance of such buildings is a challenging task. The 16FC must consider a liberal grant for undertaking a study and preserving the heritage nature of such buildings and spaces.

Some Existing Constraints:

1. Poor resource position due to a lack of adequate commercial activities.
2. High non-plan expenditure due to a large workforce and periodic pay revisions by the state government.
3. Inadequate resource devolution from State Finance Commission recommendations, though the total IGTs exceed those decided by the SFCs.
4. Very high costs on asset management, including roads, retaining walls, culverts, and bridges.
5. Annual asset losses due to climate change, cloudbursts, floods, and forest fires.
6. High material costs for plant and machinery.
7. No potential for PPP or private investment due to the small size of the population.

In this context, the 16th Finance Commission must consider the specific needs of urban local bodies. The 15th Finance Commission’s recommendations linking grants to increases in property tax commensurate with the GSDP have adversely affected mountain towns and must be altered. For non-million-plus towns, especially in the Himalayan region, the composition of tied and non-tied funds should be 50:50. Emphasis should also be placed on incentivizing operation and maintenance infrastructure grants, as adaptation strategies indicate that losses due to climate change will adversely affect urban infrastructure.

Specific Grants Needed:

1. Removal of legacy waste.
2. Recycling plants for plastic waste and compost plants.
3. Establishment of environment monitoring, assessment, and awareness centres for community engagement and motivation.
4. Community counselling centres for disaster-affected people, especially children and those affected by sexual abuse.
5. Preservation of traditional water bodies and springs.
6. Training centres for sanitation staff and engineers.
7. Environment services for the peri-urban areas.
8. Specific grants for urban forestry in mountain towns
9. Conservation of heritage which is the duty of the ULB should be taken into consideration.

Adarsh Kumar, first mayor of Shimla

Madhu Sud, former mayor of Shimla

Shakti Singh Chandel, retired IAS, former Commissioner Shimla Municipal Corporation

Dr M P Sud, retired IAS, former Commissioner Shimla Municipal Corporation

Tikender Singh Panwar, former directly elected deputy mayor of Shimla