Borrowing by Municipal Governments

190 Om Prakash Mathur

proceeds oftaxes,duties,tolls,and fees leviable by the state;(b) the determination ofthe taxes,duties,tolls,and fees that may be assigned to,or appropriated by,the municipalities;and (c) the grants in aid to municipalities from the consolidated funds ofthe state.

Apart from serving the larger purpose ofstrengthening the forces of decentralization in the country,these amendments have three implications:

The system ofassigning tax powers and authority to municipalities and sharing the state resources with municipalities was inadequate to meet the financial requirement ofmunicipalities. As municipalities under the provision ofschedule 12 acquire additional expenditure responsibilities,several ofwhich have interjurisdictional implications,a new fiscal system may have to be put in place. An institution outside the government framework may be able to better assess the financial requirements ofmunicipalities and devise an appropriate fiscal package for them.

As a result ofthe constitution ofstate finance commissions,the system oftransfers between the state and municipalities has undergone a dramatic shift,with far greater emphasis being given to stability.Several states,instead ofsharing individual tax revenues with municipalities,have opted for “pool sharing”ofstate resources.This system permits municipalities to benefit from the buoyancy ofstate revenues.In such states,the relative importance ofgeneral-purpose grants has declined.In many states,the system ofsharing revenues from individual state-level taxes continues.Table 5.7 gives the share ofmunicipalities in states’resources as recommended by the first state finance commission.

Borrowing by Municipal Governments

Municipal government borrowing is regulated by the Local Authorities Loans Act 1914.17 This act specifies purposes for which local bodies may contract a loan,limits on the amount ofthe loan,duration ofloans,security or collateral,and repayment procedures.Subject to these limits,a state government has the flexibility to determine the framework within which local governments (all forms oflocal bodies including parastatals) can borrow from the market.The framework laid out in the state-level municipal laws contains rules about (a) the nature ofthe funds on the security ofwhich money may be borrowed,(b) the works for which money may be borrowed,(c) the manner ofapplying for permission to borrow,(d) the manner ofraising