Thread by @zerodhamarkets

Imagine this: you're driving to work on an ordinary day when—BAM—you hit a pothole. Before you can catch your breath, you realize the road ahead is flooded, and to top it all off, there's a massive traffic jam.

Frustrated, you mutter a few curses at the city authorities.

Aren’t they supposed to fix these problems?

But here’s the big question: why don’t things ever seem to get better?

Is it just incompetence, or could there be something else going on? Maybe—just maybe—the municipality doesn’t have enough money to fix these issues in the first place.

Let’s break this down, starting with the basics.

City governments, or municipalities, are in charge of the everyday services we depend on—clean streets, working drains, garbage collection, safe parks, and yes, filling potholes.

But as you can imagine, running a city isn’t cheap. Roads need constant repairs, drainage systems need upgrades, and streetlights need power.

These are just a few of the bills municipalities need to cover.

And here’s the tricky part: most municipalities don’t have enough money to get all of this done.

A recent report by the Reserve Bank of India (RBI) reveals that municipal finances in India are in serious trouble.

Urban areas contribute a massive 60% of India’s GDP, but here’s the shocker: all the municipal corporations across the country put together generate just 0.4% of the GDP as their own revenue.

Yes, you read that right—only 0.4%.

And it gets worse. Even within that tiny slice, there’s a huge imbalance. The top 10 cities, like Mumbai and Delhi, make up over 58% of all municipal revenue, leaving smaller towns and lesser-known cities struggling to get by.

So, if your city doesn’t have enough money, how can it possibly fix potholes or stop flooding?

That’s likely the root of the problem.

Municipalities have two main ways of making money:

1) Own Revenue: This is money they collect themselves through:

- Taxes: Property tax, water tax, electricity tax, and so on.

- Fees and Charges: Parking fees, garbage collection charges, fines, etc.

2. Transfers: These are funds or grants given by state or central governments. Think of it like pocket money—it’s not earned but handed over by someone else.

Here’s where the issue lies: Indian municipalities are overly dependent on transfers.

As of 2023-24, about 38.1% of municipal revenue came from transfers, while only 30% came from their own taxes.

This dependency is growing. Back in 2016-17, municipalities earned 42.8% of their revenue from taxes, but that’s dropped to just 30%.

Think of it like this—if your entire salary depended on your parents giving you money each month, you wouldn’t have much control over your finances, right?

If they delayed or cut your allowance, you’d struggle to pay for rent or groceries. That’s exactly what happens to municipalities.

When state or central governments delay grants, cities can’t cover even basic services like garbage collection or road repairs.

This dependency ties municipalities’ hands.

They can’t plan or execute projects independently because they’re always waiting for someone else to approve the funds—and the timeline.

It’s a cycle that keeps cities stuck in place.

Let’s take a closer look at how municipalities spend the money they have. Their expenses fall into two main categories:

1) Revenue Expenditure: This covers everyday costs like paying salaries, keeping streetlights on, and collecting garbage.

2) Capital Expenditure: This is for long-term projects, like building new roads, parks, or drainage systems.

Here’s something interesting: in recent years, capital expenditure has been growing much faster than revenue expenditure.

In 2023-24, about 61.5% of municipal spending was expected to go toward big infrastructure projects, while only 38.5% was set aside for day-to-day maintenance.

Compare this to 2019-20, when the split was more balanced—56.1% for capital expenditure and 43.9% for revenue expenditure.

Source: RBI

This shift shows that cities are putting more focus on flashy new projects, but they might be overlooking the basics.

Sure, new roads and parks are exciting, but ignoring routine maintenance—like filling potholes or managing garbage—can make daily life frustrating for citizens.

So, here’s the real question: can municipalities find ways to raise more money?

Yes, they can. Some cities are already trying creative ways to boost their revenues. Take Bangalore, for instance.

The city introduced a modern paid parking system in busy areas, adding ₹31.5 crore to its annual budget. Imagine the impact if other cities adopted similar ideas on a larger scale.

Another option is municipal bonds. These work like loans—cities borrow money from investors to fund big projects.

Cities like Pune and Ahmedabad have even started issuing green bonds to fund eco-friendly initiatives.

But here’s the catch: only financially stable cities with good credit ratings can access this option.

Smaller municipalities, which are already struggling, often can’t take this route.

Source: RBI

If we want better services in our cities, municipalities need to focus on three key areas:

Increase Own Revenue: This means collecting taxes more efficiently and coming up with innovative ways to charge for services. For example, digitizing property tax collection or offering online payment options can make it easier for people to pay and help reduce revenue leaks.

Reduce Dependency on Transfers: By generating more of their own income, municipalities can become financially independent and avoid delays caused by waiting for funds from state or central governments.

Balance Spending: While big projects like new roads and parks are important, municipalities must ensure they don’t neglect day-to-day maintenance like fixing potholes or keeping streets clean.

At the end of the day, better finances mean better services. If municipalities manage their money well, they’ll be able to fix roads, upgrade drainage systems, and make daily life better for all of us.

As citizens, it’s in our interest to demand better financial management from our local governments.

After all, it’s our money, our city, and our quality of life on the line.

So the next time you hit a pothole or wade through a flooded street, remember—better city finances could make all the difference.

We cover this and one more interesting story in today's episode of the Daily Brief. You can watch the episode on YouTube, read on Substack, or listen on Spotify, Apple Podcasts, or wherever you get your podcasts. All links here:
thedailybrief.zerodha.com/p/why-your-cit…