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10 Sep, 2012

Why India’s Small Towns Are Not Benefitting from Economic Progress


India’s economic progress is not trickling down to its far-flung rural areas, exacerbating the rich-poor income gap and forcing rural-urban migration. Indian economic journalist Paromita Shastri addresses these questions in her book How India’s Small Towns Live (or Die), an extensive study of 30 small towns spread over the states of Rajasthan, Odisha, Andhra Pradesh, Haryana, Himachal Pradesh, Madhya Pradesh, Chattisgarh, and Bihar.

The book argues that reviving India’s small towns and big villages is imperative “to prevent intense migration pressure on the handful of metros and state capitals and the resulting urban dehumanization” It notes that “most small town municipalities are in shambles; they lack resources, planning, data, maps, incentives and proper accounting. Corruption and power politics dog them, and citizens have no say or role in their running.”

The book looks at the kaleidoscope of municipal finance issues in India, keeping the small towns at the core, and argues for a radical change in the constitution and working of these municipalities, with effective devolution of funds, functions, and functionaries from the state level. It contends that municipal bodies need to function independently and with real participation of citizens to be the force of change that gives birth to a new urban India.

According to a published review of the book, “India is currently one of the fastest growing economies. This progress is to be celebrated but also needs to be critically understood. Is this growth seen throughout the country? Have small and medium towns participated in the development?”

The review adds, “With India’s rapid growth rate and more than half its GDP earned from the service sector, the small towns have not been able to participate in the growth and development relative to the rest of the country. By improving living conditions in small towns with better housing, education, water supply and socio-economic incentives towns can be revived while reducing the pressure on metropolitan cities.”

According to Shastri, the most significant reason municipalities have been unsuccessful is because of the lack of decentralization. “Devolution is an important component of decentralization,” transferring the authority to make decisions, and manage finances to municipalities that control services such as education, housing, development of industrial and commercial estates, and electricity. Decentralization will force local units to be held accountable for the work they do and will also increase transparency.

“This concept ensures that municipalities take responsibility for their finances, focusing on how to improve revenue-generating sources and how to cut costs. Giving municipalities more power will let them provide services that are most relevant to the areas they are in charge of, allowing them to be more efficient.

According to the review, she also notes that  municipalities have very little authority to collect revenue or to widen the tax base. Municipalities are highly dependent on the state government for transfers and grant-in-aids. They lack of autonomy in setting tax rates as well as suffer from poor administration, management and collection procedures.

Shastri explains that land reforms are important since tax on land is a large portion of revenue for municipalities. Although the value of land has been increasing in most of the towns, the taxes on land have not been revised and do not reflect these changes.

She also notes that the efficiency of municipalities in their expenditures are not much different from their revenue generating skills. The overhead cost of the municipalities eats away a large portion of the finances that municipalities receive. Says the review, “A major component of the establishment cost is the salary bill, and since it is steady and recurrent municipalities can do little about it, other than freezing employment. This leaves them with little or no resources to meet running expenses such as providing civic services to residents of the area.”

Then comes the problem of widespread corruption which fritters away already scarce resources. Corruption occurs when representatives are misappropriating funds and abusing their power. It starts at the state government level and trickles all the way down to the local governments.

“Often development work is concentrated around residential areas of municipal officers while the rest of the city is neglected. The problem is exacerbated by the lack of federal and local regulations requiring good book keeping. Since there are very few records of grant flows officers get away with misappropriating funds, leaving little for the functionary costs of the municipalities.”

Some of the concepts Shastri suggests for improvement are property tax reform, fiscal and administration reforms, and public-private partnership. One of her key points is involving the public in the process of decision-making win order to put greater pressure on the municipal officers to execute their duties.

The public private partnership would be the most effective solution to municipal development since the private companies are profit maximizing and with competition will provide services most efficiently and at economical prices. However, municipalities would have to be decentralized in order to have the ability to finance these projects and make decisions on what is the most important service that needs to be provided.

Paromita Shastri, How India’s Small Towns Live (or Die), Academic Foundation, 2001, 180 pp., ISBN: 4772-73/23, reviewed by Tanya Mallavarapu, MA candidate in Economics, Duke University, NC, U.S.A.