Urban Challenges and Opportunities in Shimla and Himachal Pradesh

Former mayors and commissioners who have served city governments at various times, welcome 16 Financial Comission to the historic town of Shimla.

At the outset, we reference the Chief Secretaries’ National Conference held in Dharamshala in June 2022, which included a comprehensive chapter on municipal finance advocating for strong decentralization of finances to local bodies.

India is experiencing an urban century, not only due to demographic shifts but also due to the need to manage urbanization sustainably—ecologically, economically, and livably. The success of this effort will depend on the urbanization trajectory we adopt and the financial resources we secure. However, the scale of our economy is currently insufficient to meet rising needs. The World Bank estimates that around $840 billion is required to provide the minimum urban infrastructure in India over the next decade.

We highlight the comparative figures of Intergovernmental Transfers (IGTs) to urban local bodies (ULBs) and argue for a substantial increase, at least doubling the current finances. Cities contribute almost 70% to the country’s GDP and almost 90% to its revenue but receive very little in return. The IGTs to ULBs in India are about 0.5% of GDP, which is quite low compared to 2-5% in other developing nations. For example, in South Africa, it is 2.60%; in Mexico, 1.60%; in the Philippines, 2.50%; and in Brazil, 5.10%. While IGTs constitute around 40% of the total revenue sources of ULBs, there are issues around their predictability and tied nature.

The introduction of the Goods and Services Tax (GST) reduced the share of ULBs’ tax revenue (other than property tax) from about 23% in 2012-13 to about 9% in 2017-18. IGTs from States to ULBs are very low, with State Finance Commissions (SFCs) recommending the devolution of only about 7% of the State’s own revenue in 2018-19. It is necessary to increase the quantum of IGTs as a percentage of GDP.

Despite the 74th Constitutional Amendment aiming to strengthen ULB finances, three decades of progress have fallen short of expectations. ULBs continue to suffer fiscal stress even after three generations of urban reforms and significant changes in the tax base post-GST. Municipal revenues are low, only about one percent of GDP during the 2007-08 to 2017-18 period, compared to about 6% in South Africa and 7.4% in Brazil.

Urbanization in Himachal Pradesh

Urbanization in Himachal Pradesh was systematically developed by colonial rulers. Prior to that, the state saw urban settlements only along rivers with very little mobility. However, the British built mountain towns, a practice previously unheard of in the state. Sustaining these urban settlements is challenging. For instance, the production cost of water for Shimla town is around Rs 150 per kiloliter due to the long-distance elevation of around 2,000 meters.

The Himalayan towns are fragile and vulnerable to climate and natural disasters. The 2011 census indicates an urbanization rate of around 10%, but the actual extent is more extensive. The state receives around 40 million tourists annually, significantly impacting infrastructure.

Himachal towns face climate-induced disasters, with the urbanization patterns exacerbating these problems. Inadequate geological data leads to poor land use planning, which is unsuitable for the fragile Himalayan environment. Waste management is a major challenge, with towns often struggling with solid and liquid waste, much of which is non-recyclable and non-biodegradable.

Urban mobility in mountain towns is challenging. The push for motorized transport is damaging the hilly landscape. Alternative modes of transport focusing on non-motorized and vertical mobility are needed. The 16th Finance Commission must help enhance sustainable, low-carbon mobility options and strengthen public transport.

Urban governance is another challenge. For instance, Shimla has only five sanitary inspectors for its 30 municipal wards. Urban forestry is crucial, as mountain towns like Shimla have large forest areas that act as lungs for the population. The 16th Finance Commission should consider compensating towns with significant forest cover.

Existing Constraints and Recommendations

Some existing constraints include:

1. Poor resource position due to lack of adequate commercial activities.
2. High non-plan expenditure due to a large workforce and periodic pay revisions by the state government.
3. Inadequate resource devolution from SFC recommendations.
4. High costs on asset management.
5. Annual asset losses due to climate change.
6. High material costs for plant and machinery.
7. Limited potential for PPP or private investment due to small population size.

The 16th Finance Commission must consider the specific needs of ULBs. Recommendations linking grants to property tax increases should be altered for mountain towns. The composition of tied and non-tied funds should be 50:50 for non-million-plus towns in the Himalayan region. Emphasis should be placed on incentivizing operation and maintenance infrastructure grants.

Specific Grants Needed

1. Removal of legacy waste.
2. Recycling plants for plastic waste and compost plants.
3. Environment monitoring, assessment, and awareness centers.
4. Community counseling centers for disaster-affected people.
5. Preservation of traditional water bodies and springs.
6. Training centers for sanitation staff and engineers.
7. Environment services for peri-urban areas.
8. Specific grants for urban forestry in mountain towns.
9. Conservation of heritage buildings and spaces.