Municipal finance reforms in India started a couple of decades ago with sporadic experiments in a transition to accrual accounting.
The reforms gained traction in 2006 with the introduction of the National Municipal Accounts Manual (NMAM).
This, however, was advisory and, moreover, addressed only one dimension of fiscal management: accounting and financial reporting.
As municipal governance is the responsibility of individual states under India’s federal constitution, over the past decade each state (provincial) government has taken its own measures to reform municipal finance.
This state-specific approach ensured that, even after 10-plus years of reform, a common national framework for benchmarking financial management systems in municipalities was missing.
A growing need was felt for a set of fiscal management principles for municipalities applicable across the country.
I was part of a team tasked with coming up with a Model Municipal Finance Code – an overarching framework at the national level governing how municipalities manage their budgets.
The initiative was the brainchild of Janaagraha Centre for Citizenship and Democracy, a non-profit organization based in Bangalore working with citizens and the government to improve the quality of life in Indian cities and towns.
A common code for a diverse nation like India – which has has more than 3,000 urban local bodies – posed its own set of challenges.
‘A common code for a diverse nation like India – which has has more than 3,000 urban local bodies – posed its own set of challenges.’
The annual budgets of municipalities range from a few hundred thousand to more than a billion dollars.
Accounting, budgeting, and financial reporting systems in different states are at various levels of maturity.
Human resource capacities in the finance function vary vastly from place to place.
On top of this, as municipal governance is the responsibility of the states, it was anticipated that their compliance with a common national code could, at best, be a response to market forces rather than a legal obligation.
The challenge was compounded by the fact that many states already had in place legislation or guidance frameworks governing municipal finance – aligning to a common code would involve significant modifications.
Expecting states to toe the line without resistance was akin to wishful thinking.
Considering these realities, the team decided from the outset that the code would not be a rigid set of rules.
It would follow the principle of ‘Apply or Explain’, meaning that municipalities are encouraged to apply the provisions of the code or explain why a particular provision has not been applied, further indicating how the principles outlined in the code were otherwise being adhered to.
The Model Municipal Finance Code that was published in August 2017 is structured in the following way: (1) Preliminaries, (2) Fiscal Management, (3) Financial Reporting, (4) Municipal Funds, (5) Accounting and Controls, (6) Budgeting, (7) Audit, and (8) Miscellaneous.
In each section, the code discusses the main principles followed by detailed provisions explaining these.
While addressing the traditional areas of accounting, budgeting, and financial reporting, it encourages the adoption of good practice in areas such as fiscal risk management, public disclosure, outcome-based budgeting and so on.
The principles and provisions are not too onerous for a progressive municipal administration to adopt, and states may choose to adopt the code in a phased manner, starting with the larger cities and moving on to wider coverage.
The code is the first of its kind to attempt introducing a set of principles governing municipal finance at the national level, and Janaagraha will be engaging with state governments to institutionalise it.
In coming years, states are expected to tweak their laws and guidelines to align with the code, and state governments, auditors, providers of finance, citizen groups, and other stakeholders are likely to require municipalities to apply it in their financial management.
Municipalities, on the other hand, are expected to adopt the code proactively as an enabler in their quest for accessible and cheap capital.
Initial adoption must be followed by periodic stock-taking to evaluate challenges that emerge – as well as to improve the code itself.
