Financial Strategy for Municipal Corporation
With rapid urbanization, the government at all levels are confronted with urgent demand to improve the city’s infrastructure and services and livelihood of the public for harmonious development of the society. However, under the circumstance of fiscal difficulties, the generous government grants and loans cause great fiscal pressure and debt risk. Funds are always a bottleneck for urban development.
As part of urban reform strategy, it is necessary to strengthen the financial information system, which is an effective tool in achieving organizational goals. It is crucial for the healthy performance and financial status of an organization. Hence, strong steps are required to build the Urban Local Body’s (ULB’s) governance system and to take up reforms in various aspects like – resource mobilization, e-governance, service delivery, disclosure and financial management. The factors that fostered the reforms in accounting are:
- • Emphasis on information needs: Timely, Accurate, Relevant and Validated information
- • Changing role of ULBs: Better transparency, Accountability, etc.
- • Need for Institutional Development: Better Financial management through sound financial information system
Thus, for economic development of urban area, which is the engine of economic growth, accounting and financial reform for ULBs has assumed significant importance..........
Local Self-Governance: An Overview
• Local Bodies
Local Bodies are institutions of local self-governance, which look after the administration of an area or small community such as villages, towns, or cities. The Local Bodies in India are broadly classified into two categories. The Local Bodies constituted for local planning, development and administration in the rural areas are referred as Rural Local Bodies (Panchayats) and the local bodies, which are constituted for local planning, development and administration in the urban area, are referred as Urban Local Bodies (ULBs).............
• Urban Local Bodies (ULBs)
As per Article 243Q of the Constitution, every State Government should constitute three types of municipalities (referred to as urban local bodies) in urban areas. Provided that a Municipality may not be constituted in such urban area or part thereof as the Governor may, having regard to the size of the area and the municipal services being provided.............
Initiative for Reform in Municipal Accounting System
Together with the devolution of powers, the accounting systems followed by ULBs were also subjected to reviews and directions for reforms. In 2001, the Supreme Court of India, while deciding on public interest litigation, recognized the defects of cash-based accounting system and directed the Government of India to develop guidelines for an accrual-based accounting system that could capture the full costs of services. Consequently, the Ministry of Finance issued Guidelines for the Utilization of Local Bodies’ Grants in June 2001.............
Cash-Based Accounting System
Most ULBs in India follow a cash basis of accounting wherein cognizance is not given to the timing of event and no distinction is made between revenue and capital items. Revenue items are recognized only when cash is actually received, irrespective of the timing when the revenue is accrued. As a result, accounting consideration is not given to the timing of the event of the transaction. Similarly, expenditure items are recognized only when cash is actually paid, irrespective of the timing when the expenditure is incurred...........
Double-Entry Accrual-Based Accounting System (DEAS)
On the other hand, accrual-based accounting is a method of recording transactions in which revenues, costs, assets, and liabilities are reflected in the books of account of the period in which these accrue and arise, irrespective of actual receipt or payment made during the period. The basic feature of double entry accrualbased accounting system is that it considers timing of each event and also makes a distinction between capital and revenue items. Therefore, accrual-based accounting system helps in accurately determining the financial performance and financial status of a ULB for any period and on any date..................
Main Issues
The Central Finance Commissions observed that providing basic services at the grassroot level makes them the primary interface of the citizens’ interaction with the government. The principle of subsidiarity implies that matters are best handled by the least centralized competent authority. Following this, these institutions need to be adequately empowered – both functionally and financially – to enable them to fulfill the role envisaged for them in the Constitution.............
Hastinapur Municipal Corporation
Municipal Corporation of Hastinapur is spread over an area of 127.237 sq.km. It resembles all the typical characteristics of a Metropolis and is considered the most important industrial and commercial city in Indraprastha State. Hastinapur, a center of Railway Service, now turned into a Railway Division and making mining activities expanded day by day with growth of industrialization in the surroundings...........
Financial Information of the Municipal Corporation of Hastinapur
Mode of Maintaining Accounts
The accounts are maintained manually. The staff of the Municipal Corporation of Hastinapur is not familiar and conversant with computer application........
Accounting Process
The accounting process followed by the Municipal Corporation of Hastinapur has the features as presented in Exhibit I...........
Bank Accounts
According to the Indraprastha Municipal Corporation Act, 1993 and the Municipal Corporation Finance Rules of the Government of Indraprastha, every ULB in the State has to open current account(s) with any nationalized bank, generally in treasury-linked branch of the concerned bank.............
Physical Assets
As cash-basis accounting is followed and no distinction is made of capital and revenue expenditure, there are no records of physical assets owned by the Municipal Corporation in terms of asset description, location, value, etc...............
Revenue
The revenue base of Municipal Corporations can be broadly categorized into: (a) tax revenues, (b) non-tax revenues, (c) assigned (shared) revenue, and (d) grants-in-aid............
Expenditure
The expenditure of the Municipal Corporation of Hastinapur can be broadly categorized under –
• Salary (Establishment)
• Administration Expenses
• Works (i.e., Physical Assets like water supply system, sewerage system, parks and playgrounds, etc.)
Expenditure
• ...........
Payroll
Thirteen (13) Drawing and Disbursement Officers are engaged to handle the payroll system independently. Nearly 20% of the total accounting entries relate to salary expenditure............
Financial Status
Revenue from property tax and service charges on central government buildings are declining due to delayed service of demand by the Municipal Corporation; and poor collection efficiency. New sources of revenue are not explored..............
Improvement Initiative
To strengthen Municipal Corporation of Hastinapur in its financial management, the State Government appointed a new Municipal Commissioner primarily with the intention of addressing the current situation and improving the financial status and services of the Municipal Corporation.............
Experiences of Other ULBs
The new Municipal Commissioner ascertained the measures taken by ULBs in other States, and these are listed below:
• ULBs in other States developed an accounting manual for DEAS based on the National Municipal Accounts Manual as guiding direction for maintenance of accounts, preparation of budget and financial statements and MIS
• ULBs in the States introduced simple and off-the shelf computer system customized to meet the specific requirements of the respective ULBs
•...........
The Requirement
The new Municipal Commissioner planned to draw up a strategy to improve the financial position of the Municipal Corporation of Hastinapur, through identification and accessing new sources of revenue such as user fees, parking charges, vending fees, improving collection efficiency through timely billing; and customer friendly
payment mechanism such as online payment, payment at designated bank branches, payment by credit card, mobile collection vans, etc...............
Exhibits
Exhibit I: Accounting Features of the Municipal Corporation of Hastinapur
Exhibit II: Year-Wise Bank Details of the Municipal Corporation of Hastinapur
Exhibit III: Composition of Municipal Revenue and Trends
Exhibit IV: Composition and Trends of Municipal Expenditure
Annexure
Annexure I: Organization Chart of Municipal Corporation of Hastinapur
