The finances of many of India’s small and medium-sized towns are in “complete disarray”, according to a study conducted by Participatory Research in Action (Pria), a non-governmental organization that focuses on improving governance and transparency at the local level.
Most towns of less than 150,000 people track municipal revenues and expenses handwritten ledgers, which are poorly organized, do not follow proper accounting standards and often go missing, the study found.
The ongoing investigation has been conducted over nine months in Rajasthan, Haryana, Himachal Pradesh, Madhya Pradesh, Chhattisgarh and Bihar through interviews with local and state officials and citizens and analysis of financial records and data when they were available.
“Everybody is busy fixing the big towns,” said Rajesh Tandon, Pria’s president and founder. “There’s no sense of urgency in changing the system and making things like tax collection happen in a modernized way in these places. The growth rate of these cities is much faster, and they will have to be engines of future economic growth.”
The municipalities tracked in the study still use a “single-entry” bookkeeping system where entries are recorded by hand as cash comes in and payments go out—and there’s no balance sheet.
Often, they don’t know what they own and who owes them money, never mind how much. The study found most small and medium towns—except in Rajasthan—kept records so poorly that extensive financial analysis wasn’t possible.
The lack of transparency is strongly linked to poor service delivery, in areas from public health to water and electricity services, according to the study. Preliminary findings also show rates of tax and fee collections are well below those in larger towns and cities. Small or medium-size towns are still dependent on grants from the Union and state governments to provide at least half their revenues.
This creates a “culture of bailouts,” where municipalities come to depend on income streams that might not be permanent, according to the study. Municipalities won’t have success with appeals to people to pay their taxes when services are bad, says Tandon. Going forward they can’t go to the markets and raise money because of their poor collection rates of taxes and fees and a lack of transparency in their financial systems.
“Who will give you a loan when you don’t know what your assets are, how much money is due to you or if you can’t account for the fact that you own this or that?” he said.
In Sasaram, a commercial hub located along National Highway 2 in Bihar, a grant from the Centre provided large dump trucks to collect trash. But they were too large to fit down the narrow streets. They sat idle and were eventually sold for scrap, according to Sanjukta Ray, a programme executive at Pria and an author of the study.
A good start towards improving financial systems and reducing the waste of thousands of crores per year in small and medium towns is easy in theory, according toMukesh Mathur, acting director of the National Institute for Urban Affairs, which was not connected with the study.
Municipalities need to switch to “double-entry” bookkeeping—the standard used by corporations where money moves between different accounts on the balance sheet.
The institute is currently working on deploying accounting software to help modernize municipal finances and has run training programmes for officials in smaller towns. Often the reforms have failed to catch on because of “entrenched resistance,” said Mathur.
That reason might be corruption, said Tandon. “There is ready made software that does it for you these days. ... When only a few people know how the system works, it is easy for them to take advantage of it.”