VANISHING BORDERS OF URBAN LOCAL FINANCE : global developments with illustrations from indian... federation

This book examines the emerging trends in vanishing borders of urban local government finance due to uncertain local tax and expenditure regimes. It analyzes the global developments with illustrations from state budgetary operations of the Indian federation. This trend has gained momentum due to concentration of population in cities and big towns as a consequence of globalization, leading to enhanced environmental vulnerability due to climate change. Expanding expenditure needs have not been corresponded by revenue regimes and transfers. Moreover, involving corporate sector in local area preference initiatives through mandatory corporate social responsibility (CSR) is an interesting development. It is expected to work as a local fiscal additionality to supplement locally provided civic and infrastructure services. This additionality may also evolve into public private partnerships at the local level. Such development however has the potential of displacing local government operations. The focus of the book hinges around critically examining setbacks to fiscal decentralization and challenges in improving the status of urban local finances to enhance fiscal autonomy of these governments, particularly in Indian scenario. The book also explores the possibility of an expanded role of local fiscal policy in the context of globalization and climate change, besides addressing the conventional responsibilities with respect to quality of civic services. Shyam Nath is currently Professor and Director, Amrita Center for Economics and Governance, Amrita Vishwa Vidyapeetham University. He is an alumnus of The Maxwell School of Citizenship and Public Affairs, Syracuse University, New York, USA. Yeti Nisha Madhoo is Professor and Co-Director, Amrita Center for Economics and Governance, Amrita Vishwa Vidyapeetham University. As Former Economics Faculty at the University of Mauritius, Dr Madhoo conducted post-doctoral research in Development Economics and Policy under Fulbright Fellowship at University of California, Berkeley, USA Foreword 6 Acknowledgments 8 Contents 10 About the Authors 11 List of Figures 13 List of Tables 15 1 Emerging Challenges in Urban Local Finance 17 1.1 Genesis 17 1.2 Sluggish Origin of Local Finance Institutions in India 19 1.3 Absence of Targeted Local Fiscal Reforms 20 1.4 Self Reliant vs. Borderless Local Fiscal Jurisdictions 24 1.5 Vanishing Borders of Urban Local Finance: The Channels in India 27 1.6 Focus on Global Interlinkages 29 1.7 Ingredients of Local Fiscal Design 33 1.8 Territorial Coverage of the Study 36 1.9 Overview of Chapters 36 1.10 Salient Remarks 40 Note 41 References 41 2 Public Goods Provision and Local Fiscal Domain 44 2.1 Introduction 44 2.2 Public Goods 48 2.3 Common Pool Resources 49 2.4 Global Public Goods 50 2.5 Local Public Goods, Decentralization, and Decisions by Voting 53 2.5.1 Assembly Voting and Local Expenditure 55 2.5.2 Competing Forms of Decentralization 57 2.6 Summing Up 59 References 60 3 Tenets of Fiscal Federalism and Decentralization 63 3.1 Introduction 63 3.2 Conventional or the First-Generation Theory of Fiscal Federalism (FGTF) 64 3.3 Second-Generation Theory of Fiscal Federalism (SGTF) 70 3.4 Hard and Soft Budget Constraints 73 3.5 Redistributing Fiscal Responsibility Between Public and Private Sectors 74 3.6 Concluding Remarks 76 References 77 4 Economic Globalization and Local Public Finance 80 4.1 Background 80 4.2 Globalization Trends and Urban Linkages 82 4.3 Globalization and Fiscal Decentralization 88 4.4 Globalization, Country Size, and Government Budgets 93 4.5 Globalization and Privatization: Moving Outside Local Fiscal Domain 100 4.6 Local Fiscal Policies and Global Governance 106 4.7 Concluding Remarks 108 References 109 5 Corporate Social Expenditure and Fiscal Decentralization: A Novel Framework 116 5.1 Introduction 116 5.2 Corporate Social Responsibility and Privately Supplied Public Goods 119 5.3 Is CSR a Tax or an Earmarked Corporate Social Expenditure? 124 5.4 Performance Auditing: Local Area Preference 126 5.5 Does CSR Extend Fiscal Decentralization? 127 5.5.1 Who Bears the Burden of CSR Tax? 127 5.5.2 Whether CSR Expenditures Are Fungible? 133 5.5.3 Whether Firms Stand for Not-For-Profit Social Activities? 133 5.5.4 Whether Firms Are Appropriate for Local Public–Private Partnerships? 135 5.6 Spatial Dispersal of CSR and Limited Decentralization 136 5.7 Proposed Decentralization of CSR Activities Through Design of CSR Footprint 140 5.8 Concluding Comments 141 References 143 6 Global Climate Change and Local Fiscal Intervention 146 6.1 Introduction 146 6.2 Constitutional Framework and Functional Assignment in India 149 6.3 Rationale for Local Government Participation in Global Climate Governance 152 6.4 Inequality, Poverty, and Adaptation 166 6.4.1 Innovation and Adaptation: Does It Reach Those Who Need It Most? 169 6.5 Local Climate Finance 169 6.6 Intergovernmental Fiscal Transfers and Local Climate Initiatives 172 6.7 Integrating Global and Local Climate Governance 177 6.7.1 City-Based and Individualized Initiatives 180 6.7.2 Participation in Locality-Based Clean Development Mechanism 181 6.7.3 International Funding, Adaptation Interventions, and Vulnerable Populations 183 6.8 Conclusion and Way Forward 184 References 185 7 Overlapping Local Water Supply Regimes 189 7.1 Introduction 189 7.2 Progress Toward SDG 6 190 7.2.1 International Perspective 191 7.2.2 Water Provision Inequalities Across States 194 7.2.3 Inequalities Across Income Groups Within Local Areas 199 7.3 Institutional Mechanisms of Water Provision 202 7.3.1 Rationale and Taxonomy 202 7.3.1.1 Rationale for Public Intervention 202 7.3.1.2 Taxonomy of Provision Mechanisms 204 7.3.2 Ownership Regimes of Water Utilities and Performance 207 7.3.2.1 Public Provision vs. Privatization 207 7.3.2.2 Ownership and Regulatory Effectiveness 209 7.3.2.3 Corporatization Episodes 210 7.4 Water Institutions in India 211 7.4.1 Utility Privatization Experiences 221 7.5 Models of Water Governance and Performance in India 227 7.5.1 Demand-Side Management: Pricing Practices 229 7.5.1.1 Direct Pricing Mechanisms 231 7.5.2 Conservation and Water Pricing 236 7.5.3 Affordability and Equity 240 7.6 Financial Sustainability and Utility Performance 241 7.7 Conclusion 247 References 250 8 Local Fiscal Effort in Response to State Expenditure: Some Empirical Evidence 256 8.1 Introduction 256 8.2 Relevant Empirical Literature 259 8.3 Indian Fiscal Constitution and Politics 262 8.4 Measuring Local Government Willingness to Tax 265 8.5 A Model of Fiscal Collusion and Retaliation 267 8.5.1 Construction of Variables and Sources of Data 268 8.6 Discussion of Empirical Results 269 8.7 Conclusion 271 References 271 9 Environmental Federalism and Atmospheric Pollution: Efficacy of Local vs State Expenditure 274 9.1 Introduction 274 9.2 Existing Literature on Environmental Federalism and Proposed Extension 276 9.3 Air Pollutants in India’s Mega-Cities—with Focus on Delhi and Mumbai 279 9.3.1 Nature of Pollutants 280 9.3.2 Trends in Air Pollution and Source Apportionment 283 9.4 Modeling Efficacy of Air Pollution Mitigation by State and Local Expenditure 288 9.4.1 The Model and Construction of Counterfactuals 289 9.4.2 Sources of Data 291 9.4.3 Estimation Strategy 291 9.5 Empirical Results and Discussion 293 9.6 Conclusion and Emerging Policy Issues 296 Appendix 298 References 305 10 Local Tax Potential in an Urban Setting 308 10.1 Introduction 308 10.2 Neglect of User Charges 311 10.3 Searching a Local Tax Base 322 10.4 Property Tax Vs Business Profit Tax 324 10.5 Business Property Tax 328 10.5.1 Administration of Business Property Tax 330 10.6 Pigouvian Tax on Industry and Business 332 10.6.1 Alternative One: Tax on Corporate Expenditure on Land and Building 334 10.6.2 Alternative Two: Local Carbon Tax 336 10.7 Summing Up 338 Notes 341 References 343 11 Shaping Urban Public Finance 347 11.1 Summary of Emerging Issues 347 11.2 General Policy Context 354 11.3 Specific Policy Context 357 11.3.1 Grants Dependence and Fiscal Indiscipline 358 11.3.2 Local Fiscal Response to Growth in State Expenditure 358 11.3.3 Functional Decentralization and Creation of Parallel Institutions 359 11.3.4 Sharing the Fiscal Divisible Pool 359 11.3.5 Local Share in Corporation Income Tax 360 11.3.6 Revitalization of Local Property Tax 362 11.3.7 Local Carbon Tax as an Environmental Levy 363 11.3.8 Local Climate Governance: Adaptation vs Mitigation 364 11.3.9 Environmental Fiscal Federalism: State vs Local Action 364 11.3.10 CSR as an Additionality to Local Finance 365 11.4 Potential for Future Research 365 References 367 Index 369