THE literature on the study of cities tends to have some distinct themes. This essay compares and contrasts two themes that dominate. The first relates to the city as a unit of democratic governance. There are myriad overlapping identities of people in the city, from slum dweller to the ‘gated’, from a one-person-in-car commuter to those who rely on public transport, from young women to old people. They all have one thing in common: they rely on being provided with amenities and services that everybody uses – roads, water, sanitation and waste disposal, public transport, primary health, education, and so on, i.e. public goods. These are meant to be provided by a city government and tend to be the focus of local attention since they pertain to the day-to-day quality of life of people in the city. A great deal of the political and civil society activism in the city can be found to be concentrated on the many aspects of the provision of public goods.

The other major stream to be found in the study of cities views the city essentially as an economic agglomeration. Enumerations of the contributions of cities to GDP (Gross Domestic Product), their ability to attract investment, and being a concentration of one or other type of economic activity, are all part of this view of the city as agglomeration. For capital, agglomerations carry innumerable advantages: a large pool of all types of labour, financial and other support services and, with a little hard bargaining, even subsidies for simply locating there. At the individual level, in India, the city has become the repository of all our economic aspirations. Economic opportunity is a major reason for migration to the city. The paradigm of city-as-economy is reflected in policies at all levels of governance and across a broad spectrum of economic activities.

Do these narratives intersect at all in practice? Functions of the city government are listed in the 12th Schedule of the 74th Constitutional Amendment.¹ The third item in this list is ‘Planning for Economic and Social Development’, along with providing public goods. The formulation that optimal provision of public goods forms the foundational grid that enables economic development is clearly inherent in this legislation. Decisions in both arenas are vested with the city government.

However, in reality, city governments have ‘absolutely no role’ to play in making decisions about locating economic activities within their jurisdictions. Such decisions are taken entirely by state governments and, at the larger scale, by the central government. Usually, there is not even a token process of consultation with city governments about the impact these economic decisions are likely to have on their ability to provide public services and infrastructure.

 

City governments, the entities in charge of the provision of public infrastructure, play no part in the policy decisions that create the city as agglomeration. Neither capital nor citizens look to it as an essential player in the city-as-economy. This institutional disconnect results in a huge gap between the speed at which city governments react to changes in demand for amenities, and that at which capital makes economic decisions. For example, Infosys set up its office in Electronic City on the eastern edge of Bangalore in 1994. The flyover easing traffic to that entire section of the city only opened in 2010.

The Bangalore Water Supply and Sewerage Board (BWSSB), in charge of water supply for the city, while admitting that it is not able to supply sufficient water to the city, shows a population projection of 10.5 million by 2021. The figure had already reached about 11 million in 2016. The city is provided piped drinking water of an average 65 litres/day/capita. The range could vary from 125 lt/day/capita to 45 lt/day/capita depending on locality. The norm for a metro city like Bangalore is 150 lt/day/capita.²

While there are complaints, even threats, that a city with poor quality public infrastructure might lose its agglomerative advantage, cities routinely lag decades behind demand/need generated by fast paced economic change. This widening gulf between the rapidly transforming scale and nature of the city-as-economy, and legislative provisions for its governance is reflected in all state and central mechanisms pertaining to cities. Always loath to share power with ‘local leaders’, state legislatures have never been enthusiastic about the many devolutions envisioned in the 74th Amendment, much less periodically making them suitable for changing realities.

The 74th Amendment coincided with the advent of economic liberalization. The city of the early 1990s that it took as its base, and the city driven into the 21st century by new economic imperatives have essentially diverged. So while the city occupies the position of primacy in a globalized economy, its governance remains frozen in outdated paradigms. There is an increasing sense that a quarter century after the 74th Amendment, the place of the city in the national socio-economic fabric has changed to such a degree that many provisions of that historic document now need to be revisited.

 

This essay sets out the characteristics of the two sides of this dichotomy based on data, while looking for features that might help to bring them together in a meaningful whole. As it transpires, within the context of the economic fabric of Karnataka, Bangalore occupies absolute primacy. This makes it an ideal candidate for this exploration.

There are a couple of measures used here for contrasting these two aspects of the city: The first is commercial tax collections (tax on sales and trade) from Bangalore Urban district. This will be the main proxy to measure the size of the agglomeration, the economic avatar of the city. It measures, literally, the size of taxable commercial transactions. These include: value added tax, Karnataka sales tax, central sales tax, entertainment tax, tax on entry of goods, luxury tax, professional tax, and betting tax. This is part of Karnataka state revenue and is utilized entirely within the state.³ This would be an input to the revenue available for expenditure for the provision of public goods. Other data such as share of employment and economic activity will also be used to provide a picture of the economic size of Bangalore within Karnataka.

 

The second measure relates to spending on public goods, and is calculated mainly from the revenue accounts of the Bruhat Bengaluru Mahanagar Palike (BBMP), the city government. In addition, accounts of the Karnataka state will be used to account for direct state expenditure on Bangalore city. Accounts of other parastatals that operate within the jurisdiction of the city will also be used to get at the size of expenditure for public goods. Policy documents such as the State Finance Commission recommendations will give an idea of how the city is viewed in governance terms.

The city of Bangalore had a population of about 11 million as of 2016. According to the 2011 census, the city accounts for about 16% of the population of Karnataka, and a similar proportion of all workers in the state. However, the city accounts for 45% of all urban non-farm workers. Mysuru and Belagavi, the next largest cities by population, each account for only about 5% of such workers. The size of Bangalore in the state’s economy is truly massive. According to data from the Annual Survey of Industry, the city accounted for 23% of all registered factories in 1998, but by 2011 had a whopping 52% of such factories. As a result, its share of employment in the factory sector rose from 37% in 1998 to 61% in 2011. The economic size of Bangalore overwhelms the state of Karnataka. The meaning of the term ‘agglomeration’ becomes evident from this data. What also becomes clear is the continuing, and accelerating, demand by capital to locate in this city. Without this choice being made by investors and entrepreneurs, the city would not see such huge growth in its working population. According to Economic Census data, Bangalore had 1.1 million non-farm workers in 2005; by 2013 this number stood at 1.6 million.

 

The monetary size of this growth in economic activity, as illustrated by employment, can be measured by looking at the collection of commercial taxes from Bangalore Urban district. The state government collected Rs 14,413 crore in such taxes from Bangalore Urban district in 2010-11; by 2015-16 this number had gone up to Rs 29,531 crore, an increase of 105% over just five years. In per capita terms, tax collection increased from Rs 14979 in 2010-11 to Rs 26367 in 2015-16. The impact of this revenue can be seen in the Karnataka State accounts for these years. By 2013-14, commercial tax from Bangalore Urban made up 63% of total commercial tax in the state, 41% of total tax revenue and 26% of total state revenue receipts. If other taxes and tariffs from Bangalore Urban are taken into account, this percentage share increases significantly. As an economic agglomeration, Bangalore’s performance has been stellar and the city has contributed huge revenue for the government to undertake development activities across the entire state.

Accounts of the BBMP form the basis for an assessment of the resource base that is available to the city government to provide basic services and infrastructure. In 2010-11 the total revenue of the BBMP was Rs 3315 crore. This went up to Rs 3830 crore in 2012-13, before declining to Rs 3093 crore in 2013-14. Such ups and downs are common in local government accounts in India, but the size of these fluctuations in a city the size of Bangalore is remarkable. Total per capita revenue of the city was Rs 3445 in 2010-11, and Rs 3039 in 2013-14.

 

Of this revenue, property tax, the largest own revenue head, contributed about a 26% to 30% share. Grants from all sources, state and central, on schemes as well as part of revenue sharing, went up from 22% in 2010-11 to about 29% in 2013-14. In 2013-14 per capita property tax was Rs 830 and grants Rs 880. Dependency of city government on internal own sources of revenue declined, while the economy as measured by commercial tax collections boomed.

In fact, according to norms worked out in 1964 by the Zakaria Committee for expenditure on just five core functions of municipal corporations (water, sewerage, storm drainage, roads and street lights), the requirement in Bangalore was Rs 983 per capita in 2003-04.⁴ Adjusted for inflation, the requirement in 2013-14 is likely to be about Rs 2000 per capita on just these five functions. The crucial role of state grants and revenue sharing mechanisms in shoring up insufficient own revenues becomes clear from this. Grants from Karnataka state towards public goods in Bangalore were about 5% of its commercial tax collection 2010-11, a figure which went down to 3.8% in 2013-14.⁵ That is the relative size of the two aspects of the city; agglomeration and public goods.

 

It is also worth noting that in 2013-14, the per capita commercial tax was Rs 23,067, but the per capita property tax was just Rs 815. How does one reconcile these values? Should property tax not be a function of how well the economy is doing? But property tax is a highly politicized issue in most urban centres in India, and municipalities routinely balk at raising the rates regularly. This tax should at the very least be pegged to an inflation index. At the moment it is more or less arbitrary.

In metropolises like Bangalore, the municipal corporation is not the only body providing services. Many metros are also state capitals, giving state governments an apparently indisputable right to meddle in their running, at times on a day to day basis, and most certainly in their infrastructure needs. To meet this requirement, a multiplicity of parastatals are created and the function of running the city parcelled out to entities which almost never coordinate with each other, or do so grudgingly. So in Bangalore, for water there is BWSSB, for land related issues there is Bangalore Development Authority (BDA), for area planning there is Bangalore Metropolitan Regional Development Authority (BMRDA), along with the Urban Development Department of the state government. In addition, there are two parastatals that provide public transport; Bangalore Metropolitan Transport Corporation (BMTC) for road transport and Bangalore Metro Rail Corporation Limited (BMRCL) for metro rail. Most of these entities are supposed to function on a zero sum basis, i.e. they are supposed to pay for their operations from the user fees/tariffs they charge. So in principle, the financial burden of these entities for the state government is nil. However, BWSSB has been bankrupt from the day it was created, BMTC frequently runs at a loss, and the state has equity invested in BMRCL. The state government also stands guarantor for large external loans taken by these entities.

 

State accounts give some idea of how much money the state government ends up providing, quite apart from grants to BBMP, to these various parastatals on a demand basis in a highly irregular and unplanned fashion. If this contribution is added to the grants it gives BBMP, the latter’s share of commercial tax collection goes up to about 5.5% in 2013-14. So the revenue base for provision of public goods in Bangalore is less than 5% of the value of Bangalore as agglomeration, in real terms.⁶

Under the 74th Amendment, a mechanism was mandated to create a formula for devolution of state funds to local self-governments, urban and rural. However, the State Finance Commission (SFC) recommendations are advisory, not binding. While they take an inordinate amount of time to do their work, it is still worth looking at the principles they apply for this exercise, taking their cues from the 74th Amendment.

The last SFC in Karnataka was set up in 2008 and issued its report in 2011. Its main recommendations were as follows: (i) 33% of net state revenue to be shared among rural and urban local self governments; (ii) the parameters to be used for this formula are area, population density, SC/ST population, population per hospital bed, and number of illiterate persons (with weights assigned); (iii) this works out to a 70:30 split between rural and urban local governments, (v) therefore, 10% of net own revenue to be devolved to all urban governments put together.

 

Thus, urban Bangalore, which contributes at least 26% of all state revenue, is mandated to get less than 5% of it for its upkeep. The parameters used by the SFC are necessary to measure need in rural areas and perhaps even in smaller towns. But are they sufficient to assess need in a city like Bangalore? The issue of integration of expanding economic activity and civic amenities is completely missing. In this entire document there is not even a mention of the fact that cities are first and foremost economies, that public goods of cities are predicated on their economies, or that the two are inexorably linked and form a continuous feedback loop. You cannot provision the former without factoring in the latter.

Central government interventions starting with schemes like Jawaharlal Nehru National Urban Renewal Mission have made an attempt to infuse some funds into urban infrastructure, but they too suffer from the same handicaps as those associated with state governments. They come very late, are given as one time grants for specific projects, lack funds for operation and maintenance and, most importantly, do nothing to narrow the gap between the time scales of economic development and augmenting urban infrastructure. In verity, decentralization should have given the city government this ability to plan and govern by integrating this dichotomy of the city. No existing model addresses this urban malaise.

This analysis has also shown why India must be seen as essentially a poor country, notwithstanding its IT industry. How else does one explain the fact that a single city generates more than 26% of the revenue of the state, but cannot even be supplied enough water? This also means that what can be made available to Bangalore has to be carefully measured out. It is well understood that taxes are distributive. Areas or activities that generate the revenue cannot expect to keep it to themselves. Cross subsidizing is unavoidable and completely justified. Should the state improve literacy and build irrigation canals with money from the commercial taxes of Bangalore city? Yes, of course.

 

However, it must also be remembered that the ability of Bangalore city to generate this kind of revenue is crucially dependent on its increasing worker population remaining productive at some minimal level, for which expenditure on public goods is crucial. The doubling of commercial taxes from urban Bangalore over the past five years has happened given the existing city amenities. If these had been more robust and efficient, what could be the level of tax collection?

So, the process of rationalizing allocations for city governments must start by acknowledging their role in the economy, present and future. City governments must also become part of the process of decision making that creates the city as agglomeration, so that they can make timely provisions to satisfy the resulting increasing demand for public goods. The existing non-intersecting set of institutions and processes that govern the two sides of the city give rise to poor outcomes in public goods provisioning and possibly also in the economy. Unless the two start marching in step with each other, the status of the city as a dichotomy at odds with itself will not change.

 

Footnotes:

1. This does not include urban public transport, a very important factor, which is a state function.

2. Central Public Health and Environmental Engineering Organization (India) Manual on Water Supply and Treatment.

3. This is not the only source of revenue of the state from Bangalore. There are other tax and non-tax heads under which the state gets revenue. For example, excise, motor vehicle tax, service tax, stamp duties, customs, corporate income, tax on goods and passengers, electricity and a few others.

4. P.K. Mohanty, B.M. Misra, R. Goyal and P.D. Jeromi, Municipal Finance in India – An Assessment, Study No. 26, Department of Economic Analysis and Policy, Reserve Bank of India, Mumbai, 2007.

5. When other taxes are taken into account, this percentage will drop significantly.

6. More likely to be 2% to 3%.