Fiscal Architecture and Municipal Bonds in India

Faulty Fiscal Architecture:

• Urban India generates two-thirds of the national GDP, yet its municipalities control less than 1% of the tax revenue.

• The Goods and Services Tax (GST) introduced in India led to a loss of nearly 19% of city revenue sources.

• The GST framework subsumed traditional municipal budgets, deepening cities’ dependence on State and Central grants.

Criticism of Municipal Bonds:

• The credibility of Indian municipal bonds remains low due to a skewed framework of assessing credibility.

• Cities’ creditworthiness is often judged by their own revenue performance, neglecting the regular flow of grants and transfers from higher levels of government.

Future of India’s Fiscal Contract:

• India needs to democratize the fiscal contract, reimagine fiscal federalism, and make municipal bonds credible.

• The rating system must account for a city’s governance capacity, transparency, audit compliance, citizen participation, and empower cities to earmark a portion of their GST compensation or State share as collateral for municipal borrowing.

Fiscal Architecture India is important topic for Civil service exam (WBCS).

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