Governance & Fiscal Insights

Tag: finance-commission

  • A Shrinking Slice of the Pie: Why Rajasthan Must Act Fast on Urban Revenues

    A Shrinking Slice of the Pie: Why Rajasthan Must Act Fast on Urban Revenues

    The financial health of India’s cities is increasingly dependent on their ability to generate Own Source Revenue (OSR), which consists of taxes and non-tax revenues that Urban Local Governments (ULGs) have the legal authority to levy and collect. For the Urban Local Bodies (ULBs) of Rajasthan, navigating municipal finance presents a unique paradox. On one hand, the state boasts some of the most progressive legal and valuation frameworks in the country. On the other, it struggles with a highly depressed tax base heavily influenced by massive tax exemptions and broader demographic factors.

    However, recent shifts in national funding policies—specifically the mandate of the 16th Finance Commission (FC-16)—make it clear that Rajasthan can no longer afford to ignore its OSR deficits, regardless of its urbanization levels.

    The Urbanisation Hurdle: A Structural Disadvantage

    At a macroeconomic level, a city’s ability to mobilize OSR is heavily tied to its degree of urbanization and economic base. Rajasthan is officially categorized as a “less urbanised large state,” meaning it has an urban population of less than 30% alongside a total population exceeding 35 million.

    Data shows a direct, positive correlation between the level of urbanization and a municipality’s ability to generate its own revenues. For instance, metropolitan ULGs in more urbanized large states collect nearly 3 times the OSR of metros in smaller urbanized states, and a staggering 10 times that of metros in less urbanized states like Rajasthan . Consequently, Rajasthan’s ULBs inherently face a lower baseline revenue generation potential and structurally require more support for both operational and capital expenditures.

    Self-Inflicted Wounds: The Cost of Massive Exemptions

    While low urbanization naturally limits revenue buoyancy, Rajasthan severely restricts its own potential through highly generous tax policies. A major constraint on the state’s OSR mobilization is its policy of granting unusually large size-based exemptions for property taxes.

    The state currently exempts all residential properties below 2,700 square feet and all commercial properties below 900 square feet. This creates a highly depressed tax base, severely limiting revenue potential. To put this in perspective, jurisdictions under the Mumbai Municipal Corporation Act only exempt residential properties below 500 square feet. Because of these massive exemptions, property tax contributes less than 10% of the total OSR for Rajasthan’s ULBs, and the state’s ULB OSR as a percentage of its non-primary Gross State Value Added (GSVA) sits at a mere 0.18%, lagging far behind leading states like Maharashtra (1.40%) or Gujarat (0.84%).

    The 16th Finance Commission: A Wake-Up Call

    The urgency for Rajasthan to overhaul its municipal finances stems directly from the 16th Finance Commission (FC-16), which has explicitly recognised urbanisation characteristics and made accelerating urban growth a central focus of its grants-in-aid. To incentivize speedier urbanisation, FC-16 shifted the macro-allocation of total local body grants between Rural Local Bodies (RLBs) and ULBs to a 60:40 ratio.

    However, the methodological changes introduced by FC-16 structurally disadvantage Rajasthan.

    Under the new FC-16 formula, Rajasthan’s inter se share for the ULB grant pool is fixed at 5.21%. The shift from a formula that rewarded geographical size to one that rewards urban population size and municipal revenue generation strongly indicates that Rajasthan has lost its previous structural advantages in securing urban grants.

    Silver Linings: Progressive Frameworks to Build Upon

    Despite these formidable challenges, Rajasthan presents a mixed picture because it has already implemented critical, politically difficult reforms that many other states lack :

    1. Capital Value (CV) Method for Property Tax: As of 2025, Rajasthan is one of only seven states in India to transition to the Capital Value method for levying property tax. This superior methodology ensures that property taxes are a buoyant source of revenue because it links the taxable value directly to state-notified guidance values or circle rates, reflecting actual market rates.

    2. Legal Mandates for Water Cost Recovery: Rajasthan is one of only six states that have successfully implemented legal frameworks explicitly linking the setting of water tariffs to Operation and Maintenance (O&M) cost recovery. This protects the state from the severe under-pricing that plagues the 13 other states lacking such mandates.

    Pathways Forward: How Rajasthan Can Augment OSR

    To survive the fiscal shift brought by the 16th Finance Commission and ensure fiscal sustainability, Rajasthan must leverage its progressive frameworks and focus on specific levers to augment OSR:

    • Roll Back Size-Based Exemptions: The most immediate fix is expanding the tax net by significantly lowering the massive exemption thresholds for residential and commercial properties, allowing the excellent CV valuation method to actually capture revenue.
    • Enforce the Water Tariff Frameworks: Rajasthan must actively use its existing legal mechanisms to ensure water tariffs are formulaically linked to O&M costs, addressing the historical under-pricing of utility services.
    • Monetize Municipal Assets: ULBs should create comprehensive, geo-tagged digital asset inventories of municipal lands and buildings, and establish robust legal frameworks to link rental income to market values.
    • Leverage Land Value Capture (LVC): By integrating urban planning with finance, Rajasthan’s ULBs can tap into financial windfalls generated by public infrastructure projects through development charges and betterment levies.

    Conclusion

    Rajasthan cannot change its current urbanization levels overnight. However, it has total control over its municipal tax policies. By removing archaic property tax exemptions and fully utilizing its modern valuation and tariff frameworks, Rajasthan can overcome its structural disadvantages, improve its OSR buoyancy, and secure its rightful share of national urban development funding.

  • What if a state’s real liabilities are larger than what its budget appears to show?

    That is the central concern with off-budget borrowings.

    A WorldBank study for the 16th FinanceCommission notes that these are borrowings raised by PSUs, SPVs, or other government-controlled entities, where repayment is ultimately supported by the government through grants, guarantees, or escrow of future revenues. So the borrowing may sit outside the budget, but the fiscal risk does not.

    The root cause is fairly clear: persistent subsidy pressures, loss-making public utilities, and infrastructure financing needs. Off-budget routes allow expenditure without fully reflecting the burden in the budget, which weakens fiscal transparency and creates hidden debt.

    Why is this worrying? Because reported figures themselves are often incomplete.

    The study found major gaps between what some states reported and what emerged from CAG-based reporting. For FY2021–22, TamilNadu reported ₹594 crore of OBBs, while the CAG-linked figure cited in the study was ₹12,357 crore. WestBengal reported ₹1,089 crore, against ₹4,311 crore in the CAG-linked figure used in the study. It also clearly states that there is no independent institutional mechanism to validate reported OBBs, and many cases may be underreported or missed altogether.

    That is what makes hidden liabilities especially dangerous: they weaken the credibility of deficit and debt numbers, complicate compliance with FRBM limits and eventually return as explicit fiscal pressure.

    One reform path already exists– The study highlights Karnataka’s approach of broadening the definition of liabilities under its fiscal responsibility legislation to include PSU/SPV borrowings. That is the right principle: if public resources will ultimately service the liability, it should not remain outside the state’s fiscal lens.

    The wider recommendations are equally important: a uniform reporting framework, separate disclosure of guarantees, grants and loans, annual reporting of escrowed revenues/revenue forgone, better lender-wise disclosures, and modernization of the accounting framework.

    Off-budget borrowing is not just an accounting issue. It is a fiscal governance issue.

    When liabilities are moved outside the budget, accountability also moves with them. And that is precisely why transparent reporting matters.

  • When the Safety Net Is Gone and Borrowing Space Is Nearly Exhausted: A Fiscal Question for Rajasthan

    When the Safety Net Is Gone and Borrowing Space Is Nearly Exhausted: A Fiscal Question for Rajasthan

    Public finance often looks technical from a distance. But sometimes, one policy shift captures a much larger story.

    A simple way to understand the present moment is this: what happens when a government can no longer rely on a fiscal safety net, while at the same time its room to borrow is already becoming narrow?

    That is the broader question emerging from the changing treatment of Revenue Deficit Grants in the Finance Commission framework, especially in the context of Rajasthan.

    The 15th Finance Commission: A Significant Revenue Deficit Cushion

    Under the 15th Finance Commission, Rajasthan was recommended total grants-in-aid of ₹59,374 crore for the award period 2021–26. Out of this – ₹14,740 crore was recommended as Revenue Deficit Grant This was about 24.83% of the total grant-in-aid The full recommended amount was released.

    This is an important point. Revenue Deficit Grant was not a minor component. It was a substantial part of the overall support package. In effect, it acted as a cushion for the State’s revenue-side imbalance.

    The 16th Finance Commission: A Clear Policy Shift

    For the 16th Finance Commission award period, the total grant-in-aid recommended to Rajasthan is stated to be ₹53,357.75 crore. But the more notable shift is this- No Revenue Deficit Grants have been recommended for the award period of 16th FC.

    That is not merely a change in one line item. It suggests a deeper shift in fiscal philosophy.

    The idea appears to be that States should increasingly manage their own revenue gaps through internal correction rather than through recurring external compensation.

    Why This Shift Matters – Revenue Deficit Grants were meant to support States where revenue expenditure exceeded revenue receipts. When such support is available, it provides breathing room.

    When that support is withdrawn, the expectation changes.The burden then shifts more directly toward: improving tax effort, increasing tax efficiency, rationalising expenditure, containing revenue spending, strengthening internal fiscal discipline

    In other words, the framework moves from supporting the deficit to forcing correction of the deficit. Rajasthan’s fiscal capacity faces a double pressure. This transition becomes more significant when seen alongside Rajasthan’s debt position.As stated: the FRBM ceiling for debt is 38.2% of GSDP as per the Finance Accounts for FY 2024–25, the State’s actual debt is already accumulated at 37.1% of GSDP.

    This creates a real double pressure on fiscal capacity. On one side: Revenue Deficit Grant support is no longer available. On the other side: remaining borrowing space is limited. That means the State cannot comfortably depend either on a revenue-gap grant cushion or on large additional debt space. Fiscal adjustment, therefore, has to come increasingly from within the system.

    A larger change in fiscal federalism seen together- these developments indicate a broader transition in India’s fiscal federalism. Earlier approach supported States through revenue gap funding but emerging approach- expect States to correct deficits through their own fiscal management. This reflects a move away from compensating persistent imbalances and toward encouraging structural correction. Whether this shift will strengthen long-term fiscal resilience or deepen short-term stress is a separate debate. But the direction of policy is becoming clearer.

    The Core Question Ahead

    For Rajasthan, this is not just an abstract policy matter. It has direct implications for:- budget management, expenditure prioritisation, subsidy rationalisation, tax administration, fiscal sustainability.

    The real question is no longer only how much support a State receives. The more important question is this:

    How should a State respond when grant support reduces, borrowing headroom narrows, and fiscal adjustment has to come increasingly from within?


    Reduced fiscal cushion. Limited borrowing room. Greater pressure for self-correction.

    That is where the next phase of the public finance debate is heading.