THE WORLD BANK                  URR7306
DEVELOPMENT ECONOMICS DEPARTIENT               VOL. 5
URBAN AND REGIONAL ECONOMICS DIVISION
URBAN AXD REGIONAL REPORT No. 73-6
RFPORT ON BOMBAY
ANTEX IV:
PUBLIC FINANCE AMD THE EFFICIENCY OF URBAN DEVELOPMENT
B. B. King and Others
March 31, 1971
These materials are for internal use only
and are circulated to stimulate discussion
and critical comment. Views are those of
the author and should not be interpreted
as reflecting the views of the lbrld Bar.k.
Ref.rences in publications to Reports
should be cleared with the author to
protect the tentative character of these
papers.
-u-



TABLE OF CONTENTS
Page No.
INTRODUCTION .       .........................................i
THE PROCESSES AND PROBLEMS OF FINANCING
DEVELOPMENT IN METROPOLITAN BOMBAY              ..............
The finances of the Bombay Municipal Corporation        .1
a.  Governmental forrm ......   ..........................
b.  Revenue structure and growth .....     .............              3
c.  Property taxation ......     ................                    5
(1)  Tax base--assessment practices ....        ..........       5
(2)  Tax base--composition and growth ............               6
(3)  Tax rates .......        ............................      12
(4)  Property tax revenues--growth ....        ...........      15
d.  Octroi      ...........................................          16
e.  Wheel and theater tax ..............    ..   ............        17
f.  Nontax revenues ...................       ...............        19
g.  Expenditure structure and growth .........     ........          19
(1)  Current expenditures .....         ...................     19
(2)  Capital expenditures .....         ...................     23
The finances of the Maharashtra state government .....              28
a.  Revenue growth and structure ...........     ..  ........       28
b.  Revenues from own sources .....        ...................      36
(1)  Sales taxes .......        ..........................      36
(2)  Other revenues from own sources ....        .........      36
c.  Central assistance ..................       .............       37
d.  State government expenditures ..........     ..  ........       38
(1)  Current expenditures .....         ...................     38
(2)  Capital expenditures and financing         ..........      39
(3)  State plan financing .....         ...................     40
e.  State-local fiscal relations ..........    ..    .........      42
f.  Autonomous agencies ...............    ..   .............       44
(1) State Building Repairs and
Reconstruction Board .....         ...................     44
Problems in the delivery of public services          ..........     45
a.  Housing      ....................... ...................        45
(1) The distributional effects of
rent control:    a digression .................            47
h.  Transportation ...................................               48
c.  Municipal infraBtructure and services ............              49
d.  Urban development            ................                    50



TABLE OF CONTENTS (Cont'd)
Page .o.
Needed adjustment in the tax-expenditure process .51
a.  Coordination and fiscal balance .....         .............    51
b.  Tax reform .........        ..............................     52
(1)  Octroi ........        ..............................     52
(2)  Motor vehicle taxation ...    ..................          53
(3)  Property taxation of vacant land .54
(4) Property tax treatment of
governmental prnperties .54
II   A PROGRAM FOR A MORE EFFICIENT DELIVERY
OF PUBLIC SERVICES                                                 56
Introduction .56
Scale economies, distance costs, and the
delivery of urban public services .57
A remedial program .59
Effects on job location .60
Effects on the stock and qualitv of housing                        61
Effect on public costs-resources .62
Income distribution implications .63
A remedial public administration .64
This annex was prepared by Mr. Roy Bahl, consultant, who visited Bombay
in November/December 1970 as member of an urban mission.



REPORT ON BOMBAY
ANNEX IV - PuBLIC FINANCE AND TlE. EFFICIENCY
OF URBAN DEVELOPMENT
INTRODUCTION
1.        The dual objectives of this report are to describe the processes
and problems of government finances in metropolitan Bombay, and to suggest
and evaluate alternative remedial strategies. Accordingly, the material
which follows is divided into two parts. The first necessarily involves
considerable description of the tax-expenditure process and of existing
arrangements for the distribution of functional and financial rcsponsibility
among governmental units. It concludes with a discussion of possibilities
for bringing about a better balance between fiscal resources and service
requirements, where the adjustments suggested are strictly within the public
finance domain, i.e., tax reform and rearrangements of the government divi-
sion of the expenditure-taxation decision. The subject matter of the sec-
ond part of this paper turns from the more conventional public finance
reform issues to a brief analysis of the joint effects of broader policy
adjustments, i.e., ii. real costs and benefits of a program which includes
not only fiscal measures such as property tax reform and user charge rev-
isions, but also nonfiscal measures such as rent decontrol and selective
planning and zoning ordinance changes.
2.        Throughout this paper, there is cognizance of the possibility
that government fiscal actions have allocation consequences for urban dev-
elopment which may well be more important than more traditional public
finance considerations such as revenue raising potential. There is an
important implication of this point of view for the material presented
below, I.e., it is not a tax study with major emphasis on the search for
methods of marshalling more resources for public use.



I.  THE PROCESSES AND PRLBLEMS OF FINANCING
DEVELOPMENT IN METROPOLITAN BOMBAY
35.       Because there is fragmented government service responsibility
within the Bombay metropolitan area, the traditional public sector opera-
tions are described separately for the city and state governments in the
two following sections. Particular attention is paid to the discussion
of revenue structure. The nature and implications of fragmented respon-
sibilities for public services are dealt with separately, and finally a
set of recommendations are offered.
The Finances of the Bombay Municipal Corporation
a.   Governmental form
4.        The Bombay Government is a Municip al Corporation, constituted
under an individual legislative enactment. As such, it is subject to much
less direct state government control over its budgetary operations, includ-
ing borrowing, than are Indian municipalities in general. However, all
local governments in India, including municipal ccrporations, are limited
by the Federal Constitution in their taxing powers. The Constitution div-
ides public revenues into those which are available to the Union Government
and those which are available to State Governments, and permits the state
authorities to allot any resources, at their discretion, to local bodies.
There is no provision in the Constitution making it obligatory for the
states to hand over any particular source of income to local bodies. The
Bombay Municipal Corporation Act gives authority for four taxes--property
tax, a tax on vehicles and animals, a theatre tax, and octroi. Alterna-
tively, it specifies as expenditure responsibilities of the Corporation:
drains and drainage works including sewage disposal, water supply, con-
struction, maintenance, and improvements of certain public streets, fire
protection, sanitation, primary education, a host of regulatory functions,
and via the relationship with the Bombav Electric Supply and Trar.sport
undertaking, certain electricity and transport services.
5.        In addition to the general public services described, the Bombay
Municipal Corporation operates three malor trading undertakings. The
Bombay Electric Supply and transport undertaking has in the past operated
as a sclf-suffici-nt entity with its own financial and accounting organiza-
tion. It is, however, under the control of the Bombay Municipal Corpora-
tion and requires the security of the Municipal Corporation for its borrow-
ing activities. Moreover, since BEST has moved away from a surplus posi-
tion in recent years, 1/ it could well require an operating subsidy in the
future.  The Water and Market undertakings of the Bombay Municipal Corpora-
tion are not operated as separate entities, and therefore are treated here
as part of the General Municipal Services account.
1/   The contribution to the Municipal Account fell from Rs 29 lakhs in
1965 to no contribution in 1968 and 1969 but rose again to Rs 21
lakhs in 1970 (sce Table 1).



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Table 1. Bombay: Revenues of the Bombay Municipal Corporation!/
(In lakhs of rupees)
1965    1966     19b7    1968    1969     1970
Property tax                         13,01   14,27    15,90   16,77   19,93    21,76
Municipal services                 12,13   13,29    14,87   15,83   18,51    20,25
Education cess                        88      98     1,03      94    1,42     1,51
Octroi2/                              1,54    6,73    10,65    9,76    10,04   12,40
Wheel tax                               91      90       88      94     1,08    1,04
Theatre tax                             10      10       10      10       10      12
Total taxes              15.56   22,00   27,53   27,57    31,15   35,32
Licenses                                63      81       76      80      98     1,03
Other fees and charges3/              7,12    6,94     7,86    8,11    9,63    11,50
Interest on surplus funds               74      77       87    1,00      86     1,21
Net revenue from undertakings         1,44    1,74     1.29    1.45      40      -74
Water                               1,12    1,35       95    1,21        5     -97
Market                                32      39       34      24      35       23
Contribution from BEST                  29       5       --      --       --      21
Total nontax revenue    10,22    10,30   10,78   11,36    11,87   12,98
Total revenue           25,78    32,30   38,31   38,93    43,02   48,30
1/ Including Education and Improvement Trust Funds.
2/ Less refunds.
3/ Including municipal rents.
Sources: Administration Report(s) of the Municipal Commissioner for
Greater Bombay, for the year(s) 1964-65 to 1968-69.
Annual Accounts, Bombay Municipal Corporation (City, Suburbs,
Extended Suburbs, and Education Fund) , for the same years.



6.        Revenues are classified in the traditional tax and nontax way,
and expenditures as current and capital--the Bombay Municipal Corporation
does not utilize development, nondevelopment or plan, nonplan classifica-
tions.  There is, however, a separate budget for each_of the three major
subdivisions of Greater Bombay-,i.e., city, suburbs, and extended suburbs.
The budget of the Municipal Corporation is divided into three parts: a
General Servic-s Fund, an Improvement Fund concerned with slum clearance,
and an Education Fund. Because the concern of this paper is less with
budgetary procedures than with over-all resource allocation, and because
the interrelation among these three funds is simply a system of transfers,
the analyses below will (unless otherwise stated) center on the consoli-
dated Municipal Accounts.
b.   Revenue structure and growth
7.        Tax revenues presently constitute over 70 percent of total receipts
of the Bombay Municipal Corporation, and have been rising as a percentage
of total revenues in recent years. This increase has been due to substan-
tial octroi rate increases and to the natural growth in property tax rev-
enues (-ee Table 2).
Table 2. Bombay Municipal or-poration: Percentage
Distributior of Revenues
'Including Education and Improvement Trust Fund)
1965    1966     1967    1968    1969     1970
Perceni of total revenue
Taxation                      60.36   68.09   71.R6    70.82   72.41    73.13
Nontax sources                39.64   31.91   18.14    29.18   27.59    26.87
Percent of total taxes
Property tax                  83.61   64.86   57.76    60.83   63.98    61.61
Octroi                         9.90   30.59   38.69    35.40   32.23    35.11
Wheel tax                      5.85    4.09    3.20     3.41    3.47     2.94
Theatre tax                     .64     .45      .36     .36      .32     .34
The growth in total revenues over the six-year period in question is approx-
imately 9 percent, and yields a trend of Increase in per capita revenues
(see column (1) of Table 3). 1/ However, while these data reflect a consider-
able per capita monetary increase, the improvement in real terms may have
been much less. When per capita total revenues are adlusted to a constant
I/   Population estimates for greater Bombay are availahle for 1961 and
1967. The intervening years are estimated here assuming a compound
growth rate.



(1962) base using the retail price index estimates for urban Maharashtra,l/
the annual rate of increase falls from over 9 percent to 4.4 percent. Though
the index used ray well be inappropriate for these purposes, it does serve
to indicate the possible discrepancy between real and monetary increases
in Bombay Municipal Corporation's activity. This adjustment of the Bombay
Municipal Corporation's figures to "real" terms will be used throughout
this paper without further caution as to the appropriateness of the prices
series employed. To generate a very crude estimate of the time behavior of
"revenue effort" by the Bcmbay Municipal Corporation, total revenues collect-
ed per rupee of income earned is also shown in Table 3.2/ If this calculation
is accepted as reasonable, these data show that after an increase in thls
ratio between 1965 and 1967 (because of the introduction of higher octroi
rate schedules), there has been a decline in the percentage of income taken
by the Bombay Municipal Corporation's tax and nontax charges. The decl'ne
may be explained by a combination of the absence of discretionary fiscal
action and a growth in the property tax base which is restrained by a ent
control program.   In any case, it shows that the Bombay Municipal Corpora-
tion revenue share of total income generated in Greater Bombay is declinin:.
Table 3. Bombay Municipal Corporation: Selected Revenue
Yield and Base Trends
Property
Revenues         Total Taxes       Ratable Value       Tax Revenue
Per       As a     Per       As a     Per      As a      Per      As a
Capita   Percent   Capita    Percent  Capita   Percent   Capita   Percent
(In      of        (In      of        (In      of        (In      of
Year  rupees)   income   rupees)   income   rupees)   income   rupees)   income
1965     53       3.73      32       2.24     107      7.48       26       1.E8
1966     64       4.15      44       2.82     109      7.01       28       1.83
1967     73       4.36      53       3.13     113       6.69      30       1.81
1968     72       3.92      51       2.77     118      6.40       31       1.69
1969     76       3.84      55       2.77     121       6.07      35       1.78
1970     82       3.82      61       2.78     119       5.50      37       1.72
Source:  Same as Table 1
1/   Such estimates are made by the Maharashtra State Bureau of Economics
and Statistics. See HahArashtra: An Economic Review (Bureau of
Eccnomics and Statistics, Government of Maharashtra, Bombay), Chapter 6.
2/   Estimates of total Bombay income are available for 1961 and 1965, and
the remaining years are estimated with a compound growth rate. (See
the general economic description in the main report.)



-5-
c.   Property taxation
(1) Tax base-assessment practices
8.        The major component of the property tax base is residential
property, which is assessed in Greater Bombay on a basis of annual rental
value, i.e., that rent wi&ich may reasonably be expected, less a 10 percent
allowance for repair. Ordinarily, this would imply residential assessment
on a basis of market rents, and in the case of Bombay would suggest a
property tax base which is responsive to the over-all income growth of the
region. Moreover, a tax on true rents would exact from renter-consumers a
charge based in part on the location or site benefits of a property and
therefore would result in an efflcient allocation of such land resources.
Hlowever, with few exceptions, residential properties in Bombay are subject
to rent control, therefore, ratable value is taken as the legally controlled
rent. The property tax implications of this practice are both a severe
restraint on the natural growth in the property tax base and a deterrent to
the use of property taxation for effecting an efficient allocation of re-
sources.
9.        The Rent Control Ordinance, in fact, reduces considerably the
complexity of the assessmC:.L process. In amount, this assessment may vary
from the market rent of 1948 (the year in which controls were established)
to a calculated standard rent for any residential unit constructed since
1948. The Ordinance prohibits the raising of rents to reflect market
factors. Permission to increase rent may be obtained if improvements to a
property warran,. such an increase, however, such improvement requires prior
consent of the tenants. This is often a formidable impediment.
10.       Two types of residential properties are outside the Rent Control
Ordinance. Government-owned residential properr'cs are assessed on the
basis of the lease negotiated between the landlord (e.g., BEST, Port Author-
ity) and the tenants. Where rents are subsidized, as in the case of Maha-
raslhtra llousing Board, "economically weak" and industrial housing programs,
the amount of the direct subsidy is included in the computation of standard
rent.
11.        In the case of nonresidential commercial property, "standard"
rent is computed as a sum equal to approximately 6 percent of land cost
and 10 percent of construct.on cost. Since the Rent Control Ordinance is
also applicable to nonresidential uses, there is little built-in growth in
this component of the property tax base. Standard rent for industrial
properties is estimated by first segmenting the property into three components:
that whlich Is vacant, that which is used for processing, and tnat which is
not used for processing. -The vacant portion is assessed at 3.5 percent to
5 percent of capital value. The portion used fo- processing is assessed at
6 to 7 rupees per 100 square feet dep?nding on the nature and location of
the activity, and the nonprocessing sections at about 1 rupee less than the
processing sections. The latter two components are reassessed approximatelv
every five years. Vacant land, in general, is assessed at 3.5 percent to
5 percent of capital value, the latter being deri.'.d on a basis of compara-
tive sales.



12.       Properties which are lerally exempt from the property tax
include churches and other places of worshIlp, central and state goverlunent
properties, and properties of the port trusr, the railways, and hEIST.   liow-
ever, all buc places of worship and churches make a rpayment in lieu of
property taxes which is negoz_ated on a basis of sorae fraction of annual
value. Vacant 1anis owned by the government are not assessed until they
are beneficially occupied.
(2) Tax basc--co:nposition and growth
13.       As noted above, one effect of the Rent Control Ordinance is
to reduce the responsiveness of the property tax base to changes in in-
come.  As may be seen from column (5) of Table 4, the average annual rate
of growth in total rntable value is approximately 10 percent.    Shown for
the 1965-70 period (see! Table 3), this rise represents some increase in per
capita ratable value. but it is doubtful if there has been any improvement
in real terms. In fact, if these data are adjusted with the Maharashtra
urban retail price ind-.., the trend in ratable value is one of decline--by
an average annual rate of 1.5 percent. Morever, as a percentage of total
income, ratable value has declined consistently over the past five years.
i4.       A crude estimate of the income elasticity of the property tax
base for the 1961-70 period shows a coefficient of about 0.5 percent, i.e.,
on the average, each 1 percent increase in income was associated with a
0.5 percent increase in ratable value. 1/ This inelastic response is
underlined by the Bombay Municipal Corporation's aathorities estimate that
no more than 10 percent of the annual increase in ratable value is due to
new construction.
15.       Table 4 also depicts intraregional disparities in the growth
rates of ra. able value which are predictable in light of rent controls,
the shortagt of central city building sites, and the considerably higher
rate of populacion growth in the suburL,-a areas. Ratable value in the
1/   This elasticity was assueme4 constant with respect to income, and
estimated by least squares from
lnR   1.2650 + 0.5322 InY
where R   ratable value
Y - income



suburban and extended suburban areas grew at a greater rate than did
ratable value in Bombay city. Examination of the data in Table 5 gives
some indication of the natuire of relative changes in the composition of
the base in city auid suburban areas.   The city area's percentage of total
assessed properties Las derlined, while its proportion of exempted pro-
perties has rise,i to a current level of over 50 percent 1/ The number of
newly assessed properties in Greater Bombay han remained approximately
constant since 1965 as has the city area's annual share of newly assessed
properties, at about 30 percent.
1/   Much of the increase In the city's share of exempt properties came
between 1967 and 1968 when the number rose from 1,864 to 3,537, while
the number In the suburban areas rematned approximately constant. Not
available here is etther an explanation for this increase or an estimate
of the total ratable value of the cxempted properties.



Table 4. Bombay Municipal Corporation: Aggregate
Ratable Value of Properties
(In lakhs of rupees)
Extended     Municipality
Year              "City"        Suburbs     Suburbs         Total
(1)                (2)             (3)        (4)            (5)
1945              L6101
1946              16,72
1947              17,14
1948              17,79
1949              19,48
1950              20,17
1951              20,35          1,67
1952              21,01          2,91
1953              21,99          3,05
1954              23,44          3,49
1955              24,98          4,53
1956              25,21          4,97
1957              25,74          4,85
1958              26,64          5,24        1,53           33,41
1959              27,78          5,88        1,74           35,41
1960              28,93          6,50        1,99           37,42
1961              30,61          7,53        2.30          40,44
1962              31,63          8,18        -,;f           42,28
1963              32,78          9,12        2,72           44,62
1964              34,20         10,31        3,08          47,58
1965              35,90          12,11       3,78           51,79
1966              37,03         13,37        4,22           54,62
1967              38,86         15,10        4,85           5d,81
1966              41,32         16,73        5,46           63,51
1969              43,14         17,58        7,27           67,99
1970              46,20         18,65        4,75           69,61
Compoiand growth rate/       4.20         11.90          --              --
Compound growth rate
[or 1958-70 periodL/     10.45          11.18      11.27           10.65
I/ Computed from Icast squares estimates of
ln R -a+f,t + c
whier. R = ratable value
t = time
Sources:  Administratlon Report(s) of the Municipal Commissioner for
Greater Bmnbay, for the year(s) 1964-05 to 1968-69.
Annual Accounts, Bombay Munricipal Corp rar ion (City, Suburbs.
Exteniled Suburbs, and Education Fund), ior the same years.
Infornation supplied by Boubay Municipal Corporation autliorities.



Table 5. 80ay: Taable Properties:      Selected Characteristics
Total Pro.ertCA_                  Exgmtad                      _Xvw)lX Aaesed                    Eolarxed                     DemolLshed
xtended Total                   Extended Total                 Extended Total                 Cxtended Total                  Extended T
year      ty S5burb, Suburbs umber      City Suburba Suburbs Nu.ber    Cit. Suburbs Suburbs Numr      Cj%1bS;rbs Suburbs Nutber      City Suburbs Suburbs N
Qr c          rLbutlo         (Per cent dLrLPuter) (Pa cant DlatritutLoos                    (p.  et    strTbuCLo)         (Per cant Distrlbutioo)
1968-69 41.94   37.73   20.33  1,92,080   52.58 32.72   14.79   6,74.0  26.00  41.16   30.64   7,974  23.32   4%.37   31.03   3,859   47.98  28.96   23.05
1967-68  42.33  40.04   17.63  1,85.824   51.08  34.99  13.92   6.924   25.95  56.97   17.08   7,629  17.38   59.96   22.46   4.973   56.00  31.23    12.77   1
19"6-67  43.28  39.14   17.58  1,78,993   35.81  45.92  18.27   5,205   26.92  52.44   20.64   7,479   6.52   66.17   27.31   5,306   64.85   16.95   18.20   1
1965-66  43.54 38.77    17.,9  1,64,530   33.38 47.49   19.13   4,188   38.72  42.14   19.14   6,213  11.1.3  63.74   25.14   5,438    71.27  19.36    9.38   1
Sources:  AdriUnaI rattLoo Report(s) of tbe Municipal Comlsioner for Greater Bombay, for the year(.) 1964-65 to 196869.
Aanual Accowits, Bobay Municips.l Corporation (City, Suburbs, Extendod Suburbs, and Education Fund), for the same years.



- 10 -
The nuruber of properties enlarged has declined over this period, and the
share of enlargements in the city area has increased, though of all pro-
perties enlarged, less than 25 percent are in che city area.     Finally, of
all properties demolishedc in Greater Bombay, over half have general'y been
in the city area, thoug;% this proportion has been declining.
16.       These data descri!he in terms of number of properties, a general
picture of greater suburban than central city growth in the propertv tax
base.   In terms of ratable value per property assessed, Table 6 shows that
thc city area increasedl by a greater absolute amount than the suburbs, a
lesser absolute amount than the extended suhurbs, and by a smaller relative
amount than either suburban area.    Tthese data also show a markedly greater
per uinit ratable value in the city area than in either suburban area.
Table 6. Bombay: Ratable Value Per Property Assessed
Year              City            Suburbs        Extended Suburbs
1969-70            5,494             2,476               1,971
1968-69            5,356             2,341               1,861
1967-68            5,254             2,248               1,667
19b6-67            5,016             2,155               1,541
1965-66            5,168             2,225               1,407
17.       Finally, the components of citv and suburban property tax base
growth may be analyzed by examining time changes in the number of properties
locatedl in different ratable value brackets. Such a breakdown is presented
for thc years 1965 andl 1969 in Table 7.   Between the two years, the city
area shows the largest incre.ase in the number of properties in the lowest
rat.'ble value class (below Rs 200) and also relatively larger increases
ir the higher ratable value classes.    In the middle range of ratable values,
the city area is characterized by relatively low percent.'qe increases, and
in some cases even declines. Thius, the growth in the pr-i3rty tax base
of the city area is very much attributable to the extreme ratable value
classes. In the case of the suburbs, the source of increase in the property
tax base is more evenly distributed among properties with differing ratable
values.
18.       In summary, this description of the composition and growth of
the property tax base indicates that: (a) the growth in ratable value is
income inelastic, (b) this inelasticity is rooted in the restraining effects
of rent controls on both central city rental levels and central city redev-
elopment, (c) though the level of ratable value in the suburban areas is



Table 7. Bombay: Classification of Properties According to Ratable Value
(Number of properties)
1L65                     1969                Absoulute Increase      Per Cent Increase
Ratable 'alue       City  Suburbs  Total      City  Suburbs   Total     City  Suburbs   Total   City   Suburbs  Total
Below 200        18910   25293   442n3     28393   30133    58526     9483    4840    14323  50.15    19.14   32.40
201-300         2828   10955   !.  J      2708   13463    16171     -120    2508     2388  -4.24    22.89   17.33
301-400         2734    9188   11 .2      2743   11703    14446        9    2515     2524   0.33    27.37   21.17
401-500         2402    6860    9262      2554    8699    11253      152     1839    1991   6.33    26.81   21.50
501-750         3772    8300   12072      3916    9228    13144      144     928     1072   3.82    11.18    8.88
751-1000        3047    6376    9423      3319    7910    11229      272     1534    1806   8.93    24.06   19.1/
1001-1500       4223     6598   10821     4262     7953    12215       39    1355     1394   0.92    20.54   12.88
1501-2000       3537     5098    8635      3472    6595    10067       65     1497    1432   1.84    29.3b   16.58
2001-5000        9762    6715   16477      9915    6718    16633      153        3     156   1.57     0.05    0.95
5001-10000       6503    2370    8873      6833    4142    10975      330     1772    2103   5.07    74.77   23.69
10001-20000       3693     905    4598      3955    2882     6837     -811     1977    2239 -21.96   218.45   48.70
20001-30000       1111     256     1367     1307    1070     2377      -41      814    1010   -3.69  317.97   73.88
30001-40000        524     118      642      652     409     1061      128      291     419  24.43   246.61   65.26
40001-50000        3 64     78      442      503     258      761      139      180     319   38.19  230.77    72.17
50001-1,00,000     472      83     555       696     219      915      224      136     360  47.46   163.86    64.86
1,00,001-1,50,000     189      37     226       302      88      39n      113       51     164  59.79   137.84    72.57
1,50,001-2,00,000     100       6      106      139      46      185       39       40      79   39.00  666.67    74.53
2,00,001-2,50,000      62     ...       62       88        6      94       26        6      32  41.94      ...    51.61
2,50,001-3,00,000      38       2       40       65        2      67       27       --      27   71.05      --    67.50
3,00,001-3,50,000      22       1       23       43        2      45       21        1      22  95.45   100.00    95.65
3,50,001 and up        44       3       47       83        3      86       39       --      39   88.64      --    82.98
64337     89242  153579   75948   111529  187477     11611   22287   3898    18.05   24.97    22.07
Sources:   Administratioii Report(s) of the Municipal Commissioner for Greater Bonbay, for the year(s)
1964-65 to 1968-69.
Annual Accounts, Bombay Municipal Corporation (City, Suburbs, Extended Suburbs, and
Education Fund), for the same years.



- 1 2 -
apparent1v more responsive to economic growth than is that of thle city, th.
relative magnitude of gatable value In the city area swamps that of the
suburbs, anti (d) while the sources of ratable value growth in the suburhs
is fairly evenlv distributed among properties of different values, thit
in the city is concentrate(d in the very low ratable value and very high
ratable value classes.
(3) Tax rates
1)9.      Depending on the location, condition, and ratable value of a
property, as many as six separate taxes are applied to the ratable vAlue
b.se described above.   Tlhe first is a general purpose rate and is levied
o.:n all rated properties at 24.75 percent. In addition, there is a water
rate on oonmetered properties (4.5 percent) and a halalkhor tax of 3.5 per-
cent. 1/ A primary edtucation cess is levied by the sombay Municipal Corp-
oration on a graduated scale: 2 percent for ratable values between Rs 75
and Rs 299; 2.5 percent for ratable values greater than Rs 300; and no tax
for properties with ratable values below Rs 75. Government properties are
exempc from the education cess. Over and above the Bombay Municipal Corp-
oration's levy is an education cess of the Maharashtra State Government
with a rate of 2 percent on ratable values between Rs 75 and Rs 300 and
2.5 percent on ratable values above Rs 300. Again, properties with ratable
values below Rs 75, and government properties are exempt. Then, the total
nominal rate varies with ratable values from 32.75 percent to 37.75 percent
(see Table 8). In addition, there is a state government special assessment
which is levied on city area properties for rehabilitation purposes. The
rate is differential according to the age of the property. This cess,
levied by the Building Repairs and Reconstruction Board, is discussed
below.
20.       The rates described above are not applicable to vacant, unutilized
land or to govermnent properties.    Privately owned vacant land is subject
only to the general purpose rate of 24.75 percent, and two-thirds of this
is rebated on grounds that no current annual rent receipts are accruing to
the owner, leaving a nominal rate of 8.25 percent. Government-owned vacant
lands are exempt. Other government properties are technically exempt from
the property tax, but negotiate with the Bombay Municipal Corporation, a
payment in lieu of some fraction of the general purpose rate.     On this basis,
the central and state governments, and and railways are to pay 80 percent
of r.e general rate on ratable value, while the port trust is to pay 90 per-
cenC.  tlowever, examination of actual payments in lieu as a percentage of
total tax assessed, shows that the railways remit an amount far less than
80 percent (see Table 9). There are at least two consequences of this
1/   tialalkhor service is directed to the collection, removal, and dis-
posal of all -crements and polluted matters from privies, cesspools,
etc., and the maintenance of drains. Certain properties, which
provide their own service, are exempt from this levy.



Table 8.   Greater Bombay:   Statutory Property Tax Rates
Ratable Value
Type of Levy                    Under 75      75-299    Over 299
-------     In rupees-     ----
General purpose-                                   24.75       24.75       24.7,
Water                                               4.50        4.50        4.50
lialalkhor                                          3.50        3.50        3.50
Bombay Mutnicipal Corporation education cess          --        2.00        2.50
Total BMC rate      32.75      34.75       35.25
State education cess                                  --        2.00        2.50
Total rate         32.75       36.75       37.75
Source:   Infornuition supplied by thc Bcmbay Municipal Corporation
authorities.



- I, -
T'lab l 9.  Bombay MMu i cipzl Corpor,it iol:  TZIsLXS AsscO;se .d 'I1Taxes (X! kt-1tt1
i Rthspect of Goverinnicnt, Rail]wiys, anid ilonibiy l'orL 'I'rust PrvpL i
Property tax           Property tax            Per Cent
AsseL.ed                Collected            Collected
1964-65
Government           54,13,101.09           39,40,323.96            72.8
Railways             23,56,081.95           11,21,801.15            47.6
B.P.T.               60.85,926.98           55.49.851.02            91.2
1,38,55,110.02         1,06,11,976.13            76.6
1965-66
Government           49,63,382.19           40,93,433.46            82.5
Railways             23,24,926.12           11,11,220.48            47.8
B.P.T.               64.05.571.82           59.12.811.41            92.3
1,36,93,880.13         1,11,17,465.35            81.2
1966-67
Government           48,39,991.16           30,59,808.54            63.2
Railways             21,66,600.51            9,67,034.30            44.6
B.P.T.               68,35,313.93           64.23,398.87            94.0
1,38,41,905.60         1,04,50,241.71            75.5
1967-68
Government           49,78,018.85           41,S',914.62            84.3
Railways             21,58,607.08           12,49,073.35            57.9
B.P.T.               63,80.877.99           57,86,218.91            90.7
1,35,17,503.92         1,1?,32,206.82            83.1
1968-69
Government           57,06,530.90           50,47,4'3.65            88.5
Railways             28,60,842.65           16,27,4'4.22            56.9
B.P.T.               59,44.40o.68           58,23,127.52            98.0
1,45,11,780.23          1,24,93,075.39           86.1
1969-70
Government           65,73,047.38           45,93,322.31            69.9
Railways            22,24,231.90             7,45,779.53            33.S
B.P.T.               61.88.822.82           59,94,055.94            96.9
1,49,86,102.10          1,13,33,157.7?           75.6
Source:  Bnmbay Municipal Corporation, Office of the Assessor and Collecto:.



- 15 -
practice of making a payment in lieu which is less than actual assessment.
One is the reduced level of property tax reve.iues and the ensuing oppor-
tunity cost of some amount of public services foregone. The second is
that the existence of a difference between the assessed and negotiated
tax is in erfect a reduction in the cost of utilizing a particular property.
In such a case, full taxation would work in the (direction of increasing the
relative attractiveness of suburban vs. city area property. Good examples
of the real costs of this "tax incentive" to government may well be the
incremental public service costs generated by rail yards and government
office buildings located in the core citv area.
(4)  Propertv tax revenues--growth
21.       On a per capita basis, property tax revenues have increased, on
the average, by about 2 lakhis per year (see Table 3). 11ence, there has
been little real inc~rease. 1/ As a percentage of income, property tax
revenues have declined over thie periodl since 1965. The income elasticity
of property tax revenues during this six-vear period is about 0.8 percent,
i.e., each 1 percent increase in income is assoclated1 with, on the average,
a 0.85 per:ent increase in propertv tax revenues. 2/ This inelasticity may
be traced co the inelastic response of the ratable value base (see section)
(2) above).
22.       Since the base elasticity is 0.5 percent and the over-all elas-
ticity is 0.8 percent, It follows that the rate elasticitv must be greater
than unity, i.e., a 1 percent increase in ratable value brings about a
greater than 1 percent increase in property tax collections. One possibil-
ity for examining the rate component is to construct a time series of the
effective tax rate, i.e., of the ratio of property tax collections to rat-
able value. As may be noted from Table 1O, the effective rate of property
taxation has been rising since 1965.   There are at least three possible
explanations of such increases: (a) increases in adlministrative efficiency
and enforcement procedures, (b) elimination or reduction of incentives,
preferential assessments or exemptions, and] (c) an increase in the total
ratable value of properties s-',ject to higher property tax rates.    Each of
the three contributed t^, :;,: rising effective rate in this case.
23.       Note, however, that while the statutory rate structure described
in Table 8 suiggests that property tax revenues will be somewhere between
32.75 percent and 35.25 percent of total ratable value, the effective
property tax rates shown in Tah]e 10 reveal a muich lower figure. The
1/   Ad<tistment of 196h5-6') property tax revenues by the Ma.harashtra urban
price index, shows nn average annnual lincremienit of 3.6 percent per
year.
2/   Estimated from
ImiR = 2.3') + (.85 lnY
where R = property tax revenues
Y n Income



- I -
dilff:reltce between the cormute(d effective rate and the nominal rate may he
atLr ibuLted to factors such as those described above, and the revenues fore-
gIone may be viewed as thie opportunity cost of sucih concessions.  The appli-
cation of an effective rate of 35 percent in 1909-701 would have Increased
property tax reveniucs by 10) percenit.  Ilowever, the major significntiice of
the difference between nominal and effective rates in this case is thIat it
is not that large, and the experieince of the recent past suggests thaLt the
two rates will converge even more.   Ptence the clasticitv attributable to
'ratLe' will be rtiiliced tai the futire*, and the over-alIl income elasticity Of
prolerLy 'ax revenues will approach the inicome elastLicity of ratable value.
[hte i,;plIlcatiun is that tile Bombay Hunicipal Corporation will face t set of
expetid iturc derianids which are risiny at lcast in proportiun to Income, witli
a major source of revenue which is not.
Table 10. Bonmbay Municipial Corporation: Growti in
Property rax Revenues with Resnect co Ratable Value
Effective
Year            Total Property        Total Ratable           Tax Rate
Tax Revenues              Value              (In Percent)
1965                 13.L-1                51.79                 25.12
1960                 14.27                54.62'                 26.13
1967                 15.90                58.81                  27.04
1968                 16.77                63.51                  26.41
1969                 ;9.93                67.99                  29.3!
1970                 21.76                69.61                  31.26
24.       Finally, some intercity comparisons of the intensity of use of
the property tax could be inferred from the levels of cEfective rates if
comparable statistics were available.   Because of the paucity of research
on the subject of interurban financing patterns, there are not sufficient
datai for such a comparison. But, for example, statistics on Singapore's
tax structure show a ratio of property tax collections (excluding, contribu-
tions in liefu) to annual value which avenrges 35.3 percent for the 1967-68A
period.  This is substantially higher than the Bombay Muntctpal Corporaticnts
effective rate during that period.
d.   Oztroi
25.       Second in importance to the property tax as a revenue producer
for the Bombay Municipal Corporation is the octroi. The octrol is collected
on goods entering Bombay for final consumption, and is levied as ad valorem
or on a basis of weight.   Raw materials, to be used in the production of



- 17 -
exports, are exempt. It is collected from trucks at one of three posts
situated on roads leading into the city, and at tne railway depot, sea docks,
and airport. It is also collected, on a specific basis, on oil entering
Bombay via the pipeline.
I'he rate schedule is extremely complicated with separate rates specified
for each of over 60 classes of goods. As may be seen from Table 11, the
octroi hias grown substantially since 1965-66 both in absolute terms and
as a percentage of total revenuie. It is however not possible to make aniy
judgments about the income elasticity of octroi, partly because of recent
discretionary rate adjsustments.
26.       There is widesoread criticism of the octroi on both efficiency
and equity grounds.   'lost of the dissatisfaction stems from the method of
assessment, which is particularly cur.bersone for road transport. The
vehicle must stop at a checkpost on the outskirts of Bombay where the
driver declares the value an(d composition of the shipment. If the clerk
is satisfied, assessment is madie on a basis of that declaration, and the
tax is collected from the driver. Where the contents of the truck are of
the same type and consigned to one person, the assessment process may be
simple and quick. Alternatively, if there are several ccnsignees or if
the shipment contains different kinds of goods, the detention time is
longer. This time is compounded in larger cities by the generally hieavier
flow of traffic. The real cost of such time delays is the higher price of
goods which consumers may ultimately pay.    Evaluation of octroi does not
require matching this cost against collections, but rather determining
whether another form of tax would impose less social cost.
;'7.       Thlere are also more traditional public finance objections to
octrol.   The rate structure, in including necessities, is regressive, at
least by comparlson with the state sales tax.    The very nature of the
assessment process suggests thiat collection costs must be high. Moreover,
possibilities for evasion andl corn ition may be relatively greater witlh
Octroi than with some other form c sales tax. 1/ The over-all revenue
increase since 1966 (see Table 11) is due primarily to the steadv growth
in receipts from road traffic and to collectlons on oil minerals.
e.   Wheel and sheatre tax
28.       The remainder of Bombay Municipal Corporation's tax revenues is
accounted for by two minor levies--the wheel tax and the theatre tax. The
l,ombay Municipal Corporation Is authorized to r npose a tax on vehicles at
I!   Disillusionment with, Octrol Is not new.   St hns heen the subject of
crItIcIsm In the reports of' rtt In(lian Taxation Enquiry Committee, 1924-25;
Motor Vehicle Tcvatlon Cnqtury Commlttce, 19I      Tax.ation  inqttlry Committee,
1953-54; State Transport Reorganization Committee, 195Q); Committee of
ttinistcrs on Augmentation of Financlal ResomarcEs of Urban Local Bodies,
1965; Conmuittee on Transport Policy and Coordination, 1966; and The Rural-
Urban ReiationshIp Consnittee, 1966.



- 18 -
Table 11.   Octroi Collections by Bombay Municipal
Corporation: Through Docks, 1 Railways,2/ Roads,3/
Head Office, and From Oil Companies
(In lakhs of rupees)
Route           1965-66          1967        1968         1969         1970
Gross total              7,37        11,91       11,10        1.,t(3       14,25
Less refunds             64         1,26        1,58 
Net total                6.73        10,65        9,76        10,04        12,40
Percentage Distribution of Cross Total
vocks                     .24          .11          .21          .14         .13
Railways                  .29          .20          .23          .22         .21
Roads                     .46          .34          .39         .45          .51
Mineral oils(/            ...          .33          .15          .18         .14
Head office               .01          .02          .02          .01         .01
1/ Including BDRS.
2/ Central, Western, and BPT
3   Mlund and Dahesar stations.
4/ Repcesents collection of mineral cils for 1965-66 and 1966-67.
Source:   Bombay Municipal Corporaticn, Office of the Assessor and
Collector.



- 19 -
levels ranging from Rs 140 to Rs 340 per year, depending on the empty weight
of the vehicle.   The owner of the vehicle is liable for payment of the tax.
As may be seen from Table 12, the growth in wheel tax revenues, and the
bulk of collectio,ns, are cEntered in the city area. It may also be noted
from Table 12 tha.t enforcement of the wheel tax apparently is lax, with
collections lagging well belc    40 percent of total assessment.    Relatively,
the collection deficiency in most severe in the surburban areas.     The col-
lection problem with the wheel tax stems primarily from problems associated
with keeping current records on vehicle ownership and with the absence of
a 3cheme to adeouately detect delinquent taxpayers on the roads. The reia-
tively low elasticity of the wheel tax also reflects this laxity in en-
forceiient as evidenced by a 10 percent revenue increase compared with a
50 percent increase In the number of vehicles over the 1965-70 period.
29.       The Bombay Municipal Corporation also levies a tax on theater
admissions at a rate of Rx 10 for first-run theaters and Rs 7 for most
others. The yield from this revenue source is minor, i.e., less than one
half of 1 percent of total tax receipts.
f.   Nontax revenu^s
30.       Nontax revenues account for less than 30 percent of total
receipts of the BMC, and have been declining in recent years (see Table
1). By far the largest share of nontax income is attributable to rents
received from Impraoement Scl. 2ne properties. of the remainder, a substan-
tial amount is due to interest earnings of surplus funds and revenues from
license..--the latter primarily from permits, for dangerous and offensive
trades and for street hawkers.    Note that though market rents and tolls are
levied at rates that more than cover the expenses of the market undertaking,
the water and BEST undertakings are moving away from making a positive
contribution to the RMC budget (see Table 1 and the appropriate discussions
in the main report).
g.   Expenditure structure and growth
(1) Current expenditures
31.       The trend and structure of current expenditures by the Bombay
Municipal Corporation (excludir; expenditure of funds raised directly for
education)l/ are shown in Tablos 13 and 14. On a per capita basis,
current spending by the Bombay Municipal Corporation has increased mark-
edly over the 1961-69 period (see Table 13),2/ but as a percentage of
income has remained approximately constant.
'    Education expenditures, other than those financed from the general
fund transfer, are not shown because of the absence of adequate time
series data. These education expenditures are presented for a shorLer
time period in Table 15.
2/   Wlen adiusi:ed for the Maharashtra urban price index, as above, there
Is almost no increase at all.



T.,lc L2. Bor(bzly Municipal Corporation:  ComparatLive Figures of Assessmint wd
C oIteLcLioO of time Wh feel I'Lx of C!ty, Suburbs, zmud Ixten(Ie(I Suburbzs
Item              1965-66       1966-67       1967-68        1968-69       1969-70
Nuimber of vehicte.;            65.943        73, 146        75,930        87,969        95 ,900
Net demand
City                     1,89,15,858   2,02,90,856    2,07,55,228   2,18;67,036   2,34,42,064
Suburbs                    46,32.011     5',31,939      57,92,297     57,62,636     64,57,211
Extended suburbs            7,73.666      B,16,913      9,56,814      11,22,686     12,66,160
Total  2,43,21,735    2,63,39,7083   ,75,04,339   2,87,52,358    3,11,65,435
Collection
City                       76,22,798     74,93,443      79,58,746     86,12,105     84,77,823
Suburbs                    11,80,192     11,08,505      11,87,655     17,70,565     15,48,503
Extended suburbs         __2,32,926       2,22,000       2,36.305      3,81,807      3,52,123
Total    90,35,916      88,23,957     93,82,706    1,07,64,477   1,03,78,449
Percentage of collection
to net demand
City                           40.30         36.96          38.34         39.38         36.17
Suburbs                        24.32         21.19          20.51         30.72         24.00
Extended suburbs               31.03         27.18          24.70         36.95         27.81
Average percentage       37.07         33.50          34.01         36.90         33.25
S'urce:  Bontay Municipal Corporation, Office of the Assessor and Collector.



- 21 -
Table- 13.  Bombay Municipal Corporation:
Selected Expenditure Trends
TOTAL                      TOTAL                       TOTAL
Current Expenditures       Capital Expenditures            Expencditures
Per       As a percent     Per       As a percent      Per      As a pa'rcnl
Year     capita     of income       capita     of income       capita      of income
1965      52          3.67            15         1.08            68         4.76
1966      61          3.96            20         1.32            81          R,28
1967      66          3.92            25         1.51            91          5.43
1968      74          4.02            31         1.72           105         5.75
1 W9       74         3.74            19          1.01           93          4.75
1970      82          3.83            16         1.26            98          4.58
Sources:   Administration Report(s) of the Municipal Commis-ioner for
Greater Bombay, for the year(s) 1964-65 to 1968-69.
Annual Accounts, Bombay Mjnicipal Corporation (City, Suburbs,
Extended Suburbs, and Education Fund), for the same years.



Tc,bie 14. Eonbay Municip.l Corporation:    Current Expenditures!/
(In lakhs of rvpees)
Water                                      Other     Debt Charges
Primary    Medical     Cit.,       Exc1 uding
year Maintenrince Debt Charges     Ed Lcation3.'  Relief  Services   Water Works    Total
1961      1,41         2,33            1,51      2,00        7,05        1,51       15,84
1962       1,53        3,41            2,13      1.97        7,85        1,75       18,66
1963      2,04         3,36            2,33      24i0        8,34        2,62       20,91
19b4      2,14         3,78           2,63       2,45       9,42         3,03       23,4?
1965      2,06         3,29            2,88      2,76       9,70         3,09       23,79
1956      2,35         3,70           ?,27       3,68       12,78        3,38       29,18
1967      2,63         3,69           4,60       4,11       14,65        3,06       32,76
1963      3,16         3,41            5,90      5,06       16,50        4,07       39,13
1969      3,13         4,70            5,99      5,19       16,80        3,96       39,83
19770     3,95         5,40            6,0',     6,34       20,2         4,37       46,24
Percentage Distriboution
1961      ------23.70     -            9.54     12.68      44.51         9.55
1962      ------26.52     -           11.41     10.57      42 09         9.38
1963      ------26.01-----            11.1S     10.11      40.i0        12.57
1964      ------25.27 -----           11.21     10.44      40.13        12.92
'965      ------22.51 -----           12.08      .1.60     40.80        12.99
1966      ------20.74-----            11.20     12.63      43.81        11.59
1967      -----19.32-----             14.05     12.55      44.73         " 34
1968      ------17.26-----            15.47     13.28      43.29        10.67
1969      ------19.69-----            15.06     13.05      42.22         9.95
1970             19.67----            13.06     13.71       43.51        9.45
1/ Excluding improvement and education funds.
T/ Includes only Bombay Municipal Corporation's contributicJa to education fund.
Sources:  Administration Report(s) of the Ilunicipal Commissioner for
Greater Bombay, for the year(s) 1964-65 to 1968-69.
Annual Acco_iits, Bombay Municipal Corporatio.. (City, Suburbs,
Extended Suburbs, and Education Fund), for Lhe same years.



- 23 -
32.       Over the nine-year period, beglnning 1961, primary education
has increased substantially as a percentage of total current expenditures,
and as a percentage of total claias on the general revenues of the BMC.
With respect to the latter, contributions by the Bombay Municipal Corpora-
tion to the education fund constituted only 9.54 percent of current expend-
itures in 1961, but by 1969 had risen to 15.06 percent. As may be seen
from Table 15, the greater requirement for general municipal funds was
occaaioned by the relative inelasticity of the Bombay Municipal Corporatio.
education fund surcharge on ratable value and by the failure of state gov-
ernment assistance to grow in proportion to education expenditure needs.
Note froem Table 15 that the state contribu.ion fell from 15 percent to 9
percent of total finances over the 1965-70 period. While it is difficult
rn, measure the productivity of public education expenditures, data for a
iive-ear period presented in Table 16 show that the increase in expenditures
per !Fudent was accompanied by an incre3se in student enrollments and a
slight decline in the student-teacher ratio.
33.       The increase in fiscal emphasis on the education function has
been accomplished at the expense of a declining relative share of t1- budget
being devoted to water supply. Over the 1961-70 period, expenditures for
water supply declined as a percentage of Bonbay Municipal Corporation's
spending from 23.7 percent to 19.7 percent. Though time changes in either
the quality of water services or the unit costs of providing any given
quality of service are, to say the least, difficult to measure, the average
daily qvsntity of water provided, per rupee of expenditure, declined (see
Table 16.   If the trends shown in Table 16 do not give mny information
as to the temporal behavior of the quality of water serviezes, they may
partially reflect the effects of rislr.g prices on the   ost of providing
water sunply. On the financing side, declining budget emphasis cn the
water supply function may reflect only an inadequacy of meter rates to
recover costs. First, metered rates may well be of an inadequate level.
Moreover, though there is a municipal government policy to meter all water
supplies, a substantial amount of water charges are still made on a basis
of ratpble value (3ee Table 17). If it would be difficult to justify
ratable value as a proper proxy for water benefit:, received under normal
circumstances, it would be next to impossible to provide such justification
wtiere rent controls are operative.
34.       In the public health (medical relief) sector, bothi the absolute
and the relative am mnt spent increased over the period in question. Simul-
taneously, there has been an Increase in the total number of hospital beds
nnd the total number of In-patients served.
(2) Capital expenditures
35.       Because capital expenditires for particular functions may reflect
the "lumpiness" of such investment3, the six-year tren(I in the level and
the compovttion of capttal expenditures whtclh Is presented In Table 18 must
be interpieted with some cautlon. However, these data do show a reversal
in the trend of increase in total capital spending, with absolute declines
in the fiscal years 1968-69 and 1969-70.   A stmilar pattern is observable



Table 15.  Uonb h;ly MILil cipal Corporation:  Fi ianicing P'ria.' ry d(ltc,itinii
(In lakhs of rupees)
1965   1966    1967   1968   1969    1970
Education cess                          88     98    1,03     94    1,43   1,51
Contribution from municipal
account                             2,88   3,27   4,60    5,90   5,99    6,03
State grant-in-aid                      68     62      63     81     72      74
Other                                    8     10       6     8       5       7
Total          4,52   4,97    6,32   7,73   8,19    8,3%
PercentaRe Distribution
Education cess                         .19    .20     .1f    .12    .17     .18
Contribution from municipal
account                              .64    .66     .73    .76    .73     .72
State ,rant-in-aid                     .15    .12     .10    -IC    .09     .09
Other                                  .02    .02     .01    .01    .01    .ol
Sources:  Administration Report(s) of the Municipal Commissiolier for
Greater Bosbay, for the year(s) 1964-65 to 1968-69.
Annual Accounts, Boubay Municipal Corporation (City, Subu-bs,
Extended Suburbs, and £ducation Fund), for the sam- ,.:ars.



Table 16. Bombay: Selected ludicatorz of Public Service Levels
Water                                    Primarv Education                           Health
Gallons Per                           Per Studeot
Per Cent of Saiqles      Average Quantity     Day Per Rupee              Studeot-    Pr Lery                            Medtcal Relief
Free Yrr            of Water Per Day    of e.ien4Lture   Number of Teacher     Education     Hospital                Exptndituri
YeAr   Clolrofor bacteria   (Niliona of Gallons)       on Water      Students      Ratio   Expenditure     Bed2    Is-Patient  Per In-Patient
1965           91.6                 204.33               3.82        4,34,535     37.18       104          1949     1,18,840        232
1966           95.5                 214.75               3.55        4,5Q,114     37.10       110          2024     1,17,991        312
1967           91.8                 201.91               3.19        4,74,468     35.17       133          2024      94.235         436
1968           90.7                 1)8,36               3.17        4,81.211     34.63       160          2090     1,20,903        419
1969           87.2                 208.67               2.67        4,91,332     35.3$       166          2130     1,28.509        396
Sources;  Admiaistration Report(s) of the Municipal Comissinner for Greater Bombay, for the year(s) 1964-65 to 1968-69
ADDUA  Accouts, hoatay mumicipal Corporation (City, Suburbs, Exteudcd Subturbs, and Education Fund) , for the seme years.



Table 17.  Bomrbay Muniicipai Corporation;  Water Cliarges Collected
by Metering atud on a Valtue Basis, 1965-70
Collections on           Coltlettions by
Year              Valuu Basis                Meter
1965-b6             63,25,485               3,12,73,514
1966-67             65,97,460               2,88,32,631
1967-68             69,92,359               2,01,41,952
1968-69             73,27,389               2,75,68,820
1969-70             75,43,9,2               3,22,0',338
Source: Data supplied by Bombay Municipal Corporation authorities.



- 27 -
Table 18.    Bombay Municipal Corporation:-
Capital Expenditures, 1965-70
(In thousands of rupees)
1965       1966      1967      1968       1969       1970
General control         11,17      23,83     22,95      27,59     27,83      13,65
Water works           2,34,70    6,08,74   7,95,56    9,03,02   4,59,34    4,18,27
Health and educa-
tion                1,34,71   1,04,81      82,99   2,00,86    1,10,89   1,31,18
Sanitation               74,24     52,07     47,09      74,53     69,75      65,84
Roads, sewers, and
street liglts       1,76,59      86,63   2,00,62    2,99,64   2,83,05    1,83,69
Urban development       39,72      69,90     77,28      65,54     29,58       1,52
Otlher                  82,01      84,06   1,06,70    1,46,73   1,46,42    1,34,35
Total                 7,53,14   10,30,04  13,33,32   17,17,91  11,26,86    9,48,50
Percentage Distribution
General control           1.48      2.31      1.72       1.60      2.46       1.43
Water works             31.16      59.09     59.66      52.56     40.76      44.09
Health and educa-
tion                  17.88      10.17      6.22      11.69      9.84      13.83
Sanitation               9.85       5.05      3.53       4.33      6.18       6.94
Roads, sewers, and
street .ights         23.44       8.41     15.04      17.44     25.11      19.36
Urban development        5.27       6.78      5.79       3.81      2.62         --
Other                   10.88       8.16      8.00       8.54     12.99      14.16
I/  Including the improvement trust fund and education fund.
Sources:  Adminlstration Report(s) of the Municipal Commissioner for
Greater Bombay, for the year(s) 1964-65 to 1968-69.
Annual Accounts, Bombay Municipal Corporation (City, Suburbs,
Extended Suburbs,   nd Education Fund), for the same years.



- 28 -
for capital expendltures expressed on a per capita basis and as a percent of
income (see Table 13). These data also show clearly that the capital spend-
ing activities of the BMC have been closely tied to water supply and road-
sewer-street light activities.
36.       Since current surpluses and capital receipts other than loan
proceeds have been relatively small, capital expenditures of the BMC have
been financed primarfiy through borrowing. Currently, there are three
sources of loan fund" for the BMC, two external and one internal.     The
external loans are issued in conformity with the requirements of the
Reserve Bank of India and the Central Government. The great majority of
these loans are taken by banks and other institutional investors.     They must
be raised at a prescribed interest rate and for a life of 12 years. The
present prescribed rate is well below the market rate, thereby providing a
form of central government subsidy to the BMC. The availability of subscrip-
ti.ns to these loans is due to the requirement that banking institutions are
recuired to invest a prescribed proportini of their deposits in a narrow
range of prescribed public securities (those of the central, state, and the
BMC governments). The other external source available to the Municipal Corp-
oration is -he Nationalized Life Insurance Corporation of India. These loans
are raised at a slightly higher, but still subsidized interest rate, and
s(.metimes carry a slightly longer maturity.   Internal loare are ganerated
either by the investment of sinking funds or the investment of special funds.
They carry a 25-year maturity and interest at the currently prescribed rates
for public loans. Internal loans account for over half of total debt out-
standing.
37.       As may be seen from the data in Table 19, there has been a marked
ter.dency in the very recent past to rely less n internal sources, primarily
because of availability of funds from the Life Insurance Corporation of
India. Annual borrowing of the BMC has typically been in response to
fluttuations in capital expenditures (see Table 2n), and accordingly the
pattern of total debt outstanding, presented in Table 21, shows a tapering
off of the level of debt financing. If total general revenues of the BMC
may be viewed in some sense as an indicator of the ability to repay debt,
the over-all "debt burden" hes actually declined over the 1965-70 period
(see Table 20).
The Finances of the Maharashtra State Government
a.   Revenue growth and structure
38.       The Maharashtra state government has vastly greater taxing powers
than does the Bombay Municipal Corporation, therefore state government
revenues are nearly ten times greater. State revenues may be segmented
into "revenues from own sources" and revenues which are received as a part
of total central assistance, i.e., grants and shared taxes. Over the
1I(91-69 period, the percentage of total state revenues from own sources has
falleni, that is, there has been a secular increase in relative dependence



- 29 -
Table 19.   Bombay Municipal Corporation:   Borrowing Activities,
1965-70
Sources of Loan Funds
TOT AL                                             Life Insurance
Capital        TOTAL                    Puhlic       Corporation
Expenditures   Borrowing    Internal   Subscription       of India
1965      7,53,14       6,40,79     3,45,79      2,95,00               --
1966     10,30,04       10,21,91    6,71,98      3,49,93               --
1967     13,33,32       11,85,62    8,10,62      3,75,00               --
1968     17,17,91       14,85,28    9,59,34      3,25,94          2,00 00
1969     11,26,86       13,42,72    5,37,50      5,05,22          3,00,00
1970      9,48,50       14,53,39      44,91      8,08,48          6,00,00
Sources:  Administration Report(s) of thei Municipal Commissioner for
Greater Bombay, for the year(s) 1964-65 tc 1968-69.
Annual Accounts, Bombay Municipal Corporation (City, Suburbs,
Extendecl Suburbs, and Education Fund), for the same years.



- 30 -
lable 20.  liombzay MunicipdE (orporati on:  Ovc r-All Fisc;l I'. l i i
L965   1966   1967   1968   1969    1970
T(P'AJ. current revenues           25,78  32 ,3(  38,31  38,93  43,02  48, 30
T(Y.AL. ctirrenIL expenditurus     25,43   3088   34 48  39, 96  4__00) 48,56
Cu,rrent su'p.lus/duLicit           35   1,4 2  3,83  -I ,03  i ,(2   -26
TOT/U. capital expenditiures        7     10,30   I ,33  17,17  11,26   9,48
;OTAL noncurrent fiiianicing
rv(j i rL red                  _7,]8   8 88  9, 50   18,20  10 94   9,74
'roITAL borrowing                    6,40  10,21  11,85  14,85  13,42  14,53
0the r2-                            78 -1,33   -2,35   3,35  -3,18  -4,79
1/  Represents the net effect of transactions of the Suspense Account ar.:
other specific purpose accounts sucih as the Preraia Fund, Equipment Fund, etc.
Sources:  Administration Repert(s) of the Municipal Commissioner for
Greater Bombay, for the year(s) 1964-65 to 1968-69.
Annual Accounts, Bombay Municipal Corporation (City, Suburbs,
rixtended Suburbs, and Education Fund), for the same years.



Table 2i.   Bombay Municipal Corporation: Outstanding Debt
TOTAl_               Per Capita      Debt Outstanding
DEBT OUTSTANDING       Debt Outstanding  as a Percent of
Year   (In thousands of rupe..s)   (In rupees)     TOTAL BMC Revenues
1965           69,84,77               144.34               2.71
1966            76,70,80              152.56               2.37
1967            84,53,19              161.81               2.20
1968           94,84,29               175.64               2.43
1969          1,05,91,62              187.79               2.39
1970          1,09,51,98              186.89               2.27
Sources; Administration Report(s) of the Municipal Commissioner fot
Greater Bombay, for the year(s) 1964-65 to 1968-69.
Annual Accounts, Bombay Municipal Corporation (City, Suburbs,
Extended Suburbs, and Education Fund) , for the same years.



- 32 -
Lr1 exturnal sources of rrevenuL (see Table 22). lIoth total revenues and
revnlLues from oa n s:!urces have increase.d oni a ;per czipita basis, Li.trely
because of Increases in sales Lax rates, and in the sales L-~X base over
this period. 1/   Moreover, revenues ralsed from own sources liave also in-
cre;ised as a perce tage of Income, a crude indication of rising revenue
effort.  The estimated income elastici.-y coefficient hotih for taxes from
owrn sources and for total revenues is .ihout 1.t, I.e., a 1 percenit increase
in income results In a 1.4 percent Increase in tax revenues from own souirces,
andi a 1.4 percent increase in 'otal reventues. 2/  IIence, the state govern-
ineiiLt tax srructure has a base whichi is apparently responsive co over-all
stztie incomiie growth.  However, it shouil(d be note(d that these data have not
beeni adjusted for discretionary actions, i.e., for tax revenue increments
whicih have resulted from rate charges rather than from natural base increase.
39.       As of 1965 the state government was raising about Rs 48 in taxes
from every Rs 1,003 in Income, as compared with a national average of about
Rs 43 (see Table 23). 3/ Only Tamil Nadu (5.37 percent) of income, Kerala
(5.28 percent), and Andhra Pradlesh (4.92 percent) did better. Moreover,
sinice tlhcse comparisons do not include local go'ernment taxes, and since
the Hombay Municipal Corporation's tax performance may be stronger than
that of most other Indian cities, the over-all tax burden in Maharashtra
a tI therefore its relative position may be even better than that shown
here.
40.       The sales tax is the single most important element in the Maha-
rashcra state revenue structure, constituting about one third of all
receipts (see Table 24). No other single revenue source accounts for more
clhani 10 percent.
1/   ilowever, the increase in real terms must have been considerably smaller.
The all-India Index number cf wholesale prices on a 1961-62 basis, had
risen to 165.4 by 1969. Source: Office of the Economics Advisor,
Ministry of Industrial Development, Internal Trade and Company Affairs,
Government of India.
2/   As estimated with single equation least squares for the 1961-69 period.
The results show
In T = -0.7358 v- 1.425 in Y
In R = -0.4809 + 1.423 In Y
where   T = tax revenues from own sources
R - total revenues
Y - income
3/   ihese comparisons are taken from A. T. Eapen, "A Critique of Indian
Fiscal Federalism," Public Finance, Vol. XXIV (1969), Table 1.



- 33 -
Table 22. MaharashtraState:    Revenue Trends
As a Percentage
Per Capita Amounts       of Income
Revenues  Percentage             Revenues            Revenue
TOTAL   From Own    From Own    TOTAL    From Own    TOTAL   From Own
Year  Revenue  Sources     Sources    Revenues  Sources    Revenue  Sources
1961   11529     9133        79.2       294       232        7.2      5.72
1962   11677     9020        77.3       291       225        7.1      5.47
1963   14593    10747        73.6       355       261        8.1      5.93
1964   18361    14093        76.8       435       334        9.0      6.92
1965   19843    151?8        76.3       458       349        8.9      6.68
1966   22147    16655        75.2       498       375        9.4      7.07
1967   26570     19479       73.3       584       428        9.6      7.06
1968   29314     21666       73.9       629       464        9.3      6.87
1969   336'3    24848        73.8       703       519       10.1      7.46
Sources:  Financial Statement (Budget) of the Government of Maharashtra
for the year 1970-71.
Information on subsidiary points presented to the Fifth Finance
Commission (Government of MaharashtraFinance Department, 1968).
Information supplied by the MaharashtraState Government authori-
ties.
By comparison with other states, Maharashtra's tax ratio is also high.



- 3h -
Table 23.   Comparisons of Tax Effort and Taxable Capacity
Among Indian States: 1965-66
Index of Tax Effort
Index of Fiscal Capacity     State Tax Collection
State                           Per Capita Income         per Rs lCUO of Income
Capacity                      Effort
Amount  Relative!!   Rar.k    Amount Relatived/    Rank
ZlMlzh raLs II rz                      574        140         1       4.82      112         4
West Bengal                            567         139        2       4.23       98         9
I'tii jab                              541        132         3       4.45      103         8
Gujarat                                480         117        4       4.57      ivo         7
l amil Nadu                            426         104        5       5.37      125         1
Assam                                  401          98        6       3.98       93        11
Kerala                                 388         95         7       5.28      123         2
Mysore                                 377          92        8       4.72       110        6
Lammu and Kashmir                      370         91         9       2.24       52        15
Uttar Pradesh                          370          90       10       3.17       74        13
Andhra Pradesh                         361          88       11       4.92       114        3
Madhya Pradesh                         351          86       12       3.87       90        12
Or Issa                                343          84       13       2.98        69       14
Rajasthan                              324          79       14       4.79      111         5
Biihar                                 274         67        15       4.03       94       10
Average                                409                            4.30
uoe?fficient of variation32             21.4                          1.98
Source: A. T. Eapen "A Critique of Indian Fiscal Federalism," Public Finance, Vol. XXIV
(1969), Table t.
I/ Ratio of per capita income for any given state to average per capita income.
2/ Ratio of tax effort index to average tax effort.
3/ Standard deviation as a per cent of the mean.



Table 24.  aliarashtraState Government:   The Coc.position of Current Rcvenues
(In crores of rupe"t)
1965-66              1968-69        Revised Estimates 1969-70     Budget Estimates 1970-71
Revenue                 Amount  Per Cent   A .ount  Per Cent           Amount  Per Cent          Amount  Per Cent
Income taxes other than
corporate income                  16.77    7.37      27.90     7.67             35.35      8.93           41.60      9.61
Estate duty                         0.62      .27       G.62     0.17              0.63      0.16            0.66      0.15
Land Revenue                         5.58    2.45       8.82      2.42             7.34      1.85            15.25     3.52
State excise duty                    3.26    1.43       5.49      1.51             7.49      1.89             7.94     1.83
Taxes on vehile.es                   7.76    3.41      il.83      3.25            12.78      3.23            14.05     3.25
Saits tax                           70.59   31.04     106.45    29.25             24.20    31.37            135.71    31.35
Other taxes and duties             25.89    11.39      43.16     11.86            48.40     12.22           53-59     12.38
Stamps                               8.28    3.64      10.80      2.97            12.06      3.05            12.85     2.97
Registration fees                    0.79     .35       1.05      0.29             l.i2      0.28             1.23     0.28
State share of union excise
duties                            13.43    5.91      29.59      8.13            30.49      7.70           33.37      7.71
Grants-in-aid from central
government                       24.95    10.97      31.56      8.67            25.44      6.42           26.82      6.20
Interest                            14.31    6.29      17.97      4.94            24.22      6.12           26.85      6.20
Medical charges                      4.14    1.82                                  6.64      1.68             5.59     1.29
Agricultural charges                 3.43    1.51       4.98       1.37            9.'8      2.39             1.50     0.35
Electricity schemes                  1.72     .76      25.42       6.99            7.26      1.33             9.11     2.10
Forest receipts                      7.65    3.36       8.16       2.24            9.65      2.44            13.57     3.14
Other                                                  30.10      8.27            33.41      8.44           33.13      7.65
Total revenue      2,27.39              ,63.90                    2,95.96                   4,32.82
Son,rces;. Financial Statement (Budget) of the Government of Maharvashtrafor the year 197('-71.
Info?mation on subsidiary points presented to the Fifth Finance Commission (Government of MaharashtraFinance
Department, 1968).
Information supplied by theMlarashtraState Government authorities.



b.   _evenues from own sources
(1) Sales raxes
41.       The Maharashtra state sales tax is a compestte system co1.11J:nIng
three types of sales tax, i.e., Sales Tax, General Sales Tax, and Retail
Sales Tax.  Sales Tax is levted at the first point of sale; General Salee
'I'ax Tax at the first sale to a retailer or consumer: and Retail Sales Tax
on sales by retailers. Goods are grouped Into five classes for purposes of
taxation.  The schedules specify the rate at whitch each is subject to tax,
and the types of sales tax to which goods are subject.    The variation in
treatment is from certain necessities which zare totelly exempt, to certain
luxuries which are Rubject to all three types of sales tax. The rate sched-
ule for Sales Tax and General Sales Taxes Is compltcated, while the Retail
Sales Tax is levied at a general rate of one-foi,rth of 1 percent on speci-
fied goods. Sales tax on goods in interstate trade is levied under the
Central Sales Tax Act, and receipts become pfart of the general fund of the
state. Motor spirits are taxed under a separate ennctment.
42.       Total sales tax receiptc have grown from an amount of Rs 24 crores
in 1960-61 to about Rs 124 crL.res in 1965-70. Though this growrh far out-
strips that of income over the sane perixd, and sugg;sts a substan-ial rev-
enue-income elasticity of sales tax reLc_uts, no precise estimate is pos-
sible because there have been substantial discretionary (base and rate) ad-
justments over this period.
(2)  Other revenues from own sources
43.       As noted above, the state revenue structure is diverse to an
extent that no other single source accounts for more than 10 percent of
total revenues (see Table 24). However, because of their particular rele-
vance to urban developmena In Bombay, it would seem usqeful to examine here
state government taxation of electricity undertakings, and motor vehitcles.
44.       Two state taxes are levied on transaction? involving electric
power.  rhe first is an electricity duty on units of energy consumed by
liffercnt categories of users.   Residential users in general pay o rate over
five times greater then th-t paid bv industrial usfrs, and residertial users
in Bombay pay a hifner r,te than those residing la -ther parts of Maharashtra.
There is, however, no differential rate ciuarged to industries located with-
in Greater Gc-nbay (as opposed to those outside Creater Bombay). The other
tax is on the sale of electrical energy sold by a bulk li:ensee, if the
sale exceeds 5 million un'ts per year. The current rate of tax is half a
paisa on every unit sold bv the bulk llcens e. The net pr.:-ceeds of this
tax are earmarked for subsidies to the Maharashtra State Electricity Board
for its rural electriftcation scheme, and for other needs of power develop-
ment.



- 37 -
45.       *Ti'  state uotor vehicle tax is based on weight, with a ratt
schedule which s3pecifi2s different rates for different classes of vehicles.
Where commercial vehicles are reglstered solely for use within Greater Bom-
bay, ,. rebate equlv3lent to two-thirds of the state rate is allowed. Unlike
the experience with teF wheel . x of the Bombay Municipal Corporation, the
state government eriorcement p:acedures permit collection of over 90 percent
of motor velicle taxes assessed.
c.   Central assistance
46.       Approximately one fourtr of state tax revenues are the result of
intergovernmental assistance from the central government, either in the
fcrm of shared taxes or zrpnts-in-aid. The amount of these intergovernmental
revenues accruing to Yaharashtra state are a function of decisions by the
Finakire and Planning Coamissions regardin- the total amounts available for
sharin5 and the methods to be used for dividing anv given amount among the
states.  The 75 percent of unilon income tax receipts designated for sharing
is allocated among s:ares, 90 percent on a basis of population, and 10 per-
cent on a basis of state of collection. The 20 percent of union excise
duties which are sh.ared. are done so:  (a) 80 percent on a population
basis, (h) 13.33 percent un a population basis among those states with per
capita income below the national average, and (c) 6.67 percent on a basis
if economnic backwardness as determined by the following criteria:
a.   Scheduled tribes population
b.   Nuc;ber of factory workers per lakh population
c.   Net irrigated area for cultivator
d.   Length of rail-.ays and surfaced roads per 100 square
kilometers
e.   Shortfall In number oft ;.:'nolgoing children as compared
Lo those of schoolgoing rg,e
f.   Number of hospital beds per 1,0nn  population
With tthese criterla, the reco=iendations of the Fifth Finance Commission
s-:Gw Maharashtra's share- of income taxes (11.34 percent) to be exceeded
only by the shale of Uttar Pr#&esh (16.lf1 percent), and the share of excise
duties (1.93 percent) onl- by t!tt-r Pradesh (1R.?2 percent), Bihar (13.81
percent), and Madhya Pradesh .8.48 pelcent).    Of total shared taxes and
duities under the Fifth Finance Cxmwisston the percentage distributed to
Maharashtra is in.60 as compiared with% i2.0R under the Fourth Finance Com-
mission.
47.       With respect to rinance Coitunission grnnts-in-aid, the Fifth
(.ormissilon recommendled that the portion of a state's deficit not covered
by shared taxes should be considered in determining the allocation of grants-
in-aid among the stalels. It should be noted that these are not the actual



- 38 -
dcficits incurred by thte state governments, but are estinated by Lhc Finance
Conmission using certain normative criteria.    In makIng this estimate, state
rus;otirces on a basis of acntial 19(68-69 tax levels and expenditure require-
mcrnts are considered.  Tfhe Conmiss.-n concluded that seven states, including
M,ihrashtra, liad over-all surpluFies and therefore were not entitled to grants-
I n- Aid.  Then, of total shared taxies and Finance Comtmission grants, the
sl%are aiccruing to Maharashtra state was 8.9') percent as compared to 9.14
perce:nt tinder the Flourth Finance Cormils-iion.
4/;.       IlIe forrmula for distribtiting plan grants aipparently places more
erphasis on rewarding higher tax efforts and on specific needs than does
Tha t of the Finance Conunission.  After providing for the needs of Ja.mmu
and Kasiirlr, Nagaland, and Assam, central pla:n assistance to the remaining
states Is dlistributed 6( percent on a basis of popualation; 10 percent on a
batsis of population ior states with below average per capita incomes; 10
percent on a basis of tax      -t; and 10 percent In proportion to commit-
ments in respect of major      i inuing irrigation and power projects.  The
remaining 10 percent is dis.tributed oii a discretionary basis and relates
to speAific problems such as those relating to urbanization, floods, and
tribal areas.
4,).      Because there are not major provisions for maintenance of tax
effort in the distribution of central assistdnce among states, it is pos-
sible th..t external funds will he substituted for whlat might otLlerwise be
locilly raised resources.   One test for this substitutive effect, over time
in lahrashtra, would involve expressing per capita taxes fron own sources
(r/I') as a function of per capita intergovernmental assistance (C/P), after
;;jiisting for time ^hanges in per capita Incove (Y/P), i.e.,
(T/P)t = a + bi(Y!P)t + b2(C/P)t
The results I/ show
(T/P)t - -11.14 + < '(Y/P)t +     1.0l3(G/P)t
(7.87         (1.76)
withi the coefficient of per capita income, but not that of per capita grants
significanitly different from zcrn. This result, even given the statisticat
estimation problems present. suggests that time changes in the level of in-
Lergovernmental assistance had no impact on the level of taxation from own
sources.
d.   State government exDenditures
(U)  Current expenditures
50.       Current expenditures by Maharashtra state have more than doubled
over the past decade. As may be seen from Table 25, the major component
of state expenditures is social services, including education.    The recent
1/   t  ratios are shlown ii parentheses.



- 39 -
trend In expenditures as depicted in Table 25 indicates that the buoyancy
in receipts, due mainly to the state sales tax, has been devoted in large
to debt service and education spending, primarilv at the expense of a
slackening in thie rate of increase in spending for economic development
activities in general.
51.        In an analysis such as this, where the focus is on the fiscal
dimension of Bombay's urban problem, a useful set ef data would be Maharash-
tra state government expendituires broken down by that portion spent instde
and outside of Greater Bombay. The fact that stlch data are not readily
available underlines cite absence of a coordinated mechanism for efficiently
allocating state, central, and local revenue resources among competing
functional ends in Greater Bombay.
Table 25. Maharashtra Scate: Current Expenditure Trends
(In thousands)
1965-66                1968-69                Increase
It'nM          Amount     Percent     Amount     Percent     Amount     Percent
General
administration   53,38,n5      22.14    77,92,32      21.28    24,54,27     45.98
Debt service     26,61.'6      11.04    61,42,64      16.78    34,8;,58    130.83
S-cial
services       1,06,79,49      44.29  1,55,51,26      42.47    48,71,77     45.62
(Education)     (40,60,60)    (16.84)  (73,18,96)    (19.99)  (32,58,36)   (80.24)
Economic
development      21,54,70       8.94    29,25,26       7.99      7,70,56    35.76
Other            32,7 8,34     13.60    42,02,56      11.48      9,2:,72    28.17
Total        2,41,12,14             3,6(,.14,09             1,25,01,95   286.30
Source: Same as Table 22.
(2)  Capital expendittires and fInanc~Ip
52.       The capital 'inincinp. position of the Mnharahtra state government
is describecd for the year 1968-69 in Tlable 26.  It may he seen that the
largest component of capital expenditures is for mtiltlpurposc river, irri-
gatlon, annl power schemtes. It shonld also he noted that an amount rouc,hlv
equivalent to 70 percent of total direct capital expenditures was lent by
the state to other governments or autonomous agencies in Maharashtra. 1/
V/   More to the point of this analysis is the fact that none of this amount
wa1s lent by the state to the BMC.



- 4) -
73.       As may be seen from Table 26, the greatest portion of these ex-
penditures were finznilced by central govermnenL loans, which are allocated
oni various bases to the state governDents in connection with plan Finarces.
Iloreover, the approxLinately Rs 550 million borrowed from the open mnarket
are, in effect, allocted by the central govermnent.    Iarly each year in
coninection with approval of Annual Plan Finances, the central government
determines an allowable ceiling for Maharashtra's open market operation,:.
In effect therefore, the magnitude of total capital finances of the Maha-
rasahtr;a state government Is dictated by centrail government policv.
(3)  State plan finaricinj:
54.       Not only the magnitude, but also the ccmposition of scate govern-
mcint expenditure activity is effected by the central government--the latter
through the requirement that state plan budgets be approved annually.    The
draft Fourth Five-Year Plan (1970-74) of Maharashtra state makes provision
for a total expenditure of Rs 1,Onn crores (see Table 27). For the purposes
at hand, the important question Is the extent to which these expenditures
are to be of direct benefit to Greater Bombay.   Sllch data are not readily
available, sinc- no breakdown of plan expendittires on a basis of inside of
and outside of Greater Bombay, is *ivailable. Ilowever, there are some
specific referenc    to, and other Indirect implications for, Bombay in the
State's draft plan. With regard to power, though there are no specific
references, it is known that about 75 percent of all power consumed in the
State is consumed in Bombay, hence the relatively large commitment to power
does presumably lhold substantial benefits for the Hombay metropolitan
regionl.  lhe rail lines prrnosed, the Diva-Panvel-Apte, the Apte-Goa, and
the Diva-Tarapur will have direct relevance to Greater Bombay. lhe Plan
calls for beginning the second stage of the Wilbur Smith Highway Plan--at
anl expense ,f Rs 4 crores -lch by the itIHC, Union, and State Governments--
and for an expense of Rs 1.6 crores to complete the cxpress highways and
thie Tinaia Creek Bridge.  An amount of Rs 47.55 crores of total state planned
expenditure for water supply is allotted to Greater Bombav, with Rs 35.07
crores to be raised by the 1,MC. No specific reference is made to Blombay
in the housing investment area, tihough Rs 18.75 crores are allocated for
urban housing, to an end of constructing 13,000 new units and clearing 4,700
slumi ulnits.



- 1, -
Table 26. Maharashtra State Capital Finances, 1968-69
(In thousands of rupees)
1968-69
Payment to landholders                                                   14,8
Social and developmental services                                     15,76,77
Multipurpose river schemes, irrigation,
and electricity schemes                                             32,96,96
Public works                                                          10,62,15
Transport and communicationis                                            40,27
Miscellaneous, including government
,eading schemes                                                     13,11,06
Total capital expenditures                                            73,02,10
Current deficit                                                        2,23,k4
Loans and advances by state government                                53.58 00
Total financing required                                            1,28,83,74
of which:
Permanent debt                                                    17,85,00
Floating debt                                                     37,52,00
Loans from central government                                     57,00,00
Loans from aUtonomous bodies                                       3,19,00
Interstate settlement                                                39,00
Sources:  Financial Statement (Budget) of the Government of Maiarashtra
for the year 1970-71.
Information on subsidiary points presented to the Fifth Finance
Commission (Government ofMahnrashtra Finance Department, 1968).
lnformation supplied by theMaharashtraState Government authlori-
ties.
Government of M;tarashtr.i Civil Budget Estimates for the year
1970-71.



- 42 -
Table 27.    !laharashtra State:  Fottrtli Five Year Plan
Exnenditutres a.nd Rvvenits
I)raft lPlan
Amount
Expendditure
Agrictilture/Irri gation                                   375
Powi! r                                                    300
[nilustry and Mining                                        25
Roads                                                       60
Olher transport                                             26
W;iter suLpply                                              85
Mousing and urban development                               24
Social services and miscellaneous                          105
Total              1000
Financing
Central assistance                                         498
Own resources                                              502
Open market loans                                                   85
LIC loans                                                          25
Bombay Municipal Corporation (water supply)                        35
State agencies                                                     54
Other                                                             303
Source:  Government of Maharashtra Five Year Plan, Part 1, pp. 25, 33;
Part II, p. 6. Covernmenc of India Five Year Plan, p. 67.
55.       The most important element of this discussion of state fiscal
pianning is not the balance between the intended proportion of state plan
expenditures in Greater Bombay and the proportion of total state population
in Greater Bombay, but rather it is the lack of any state government concern
for the spatial allocation of expenditures within the state. In a world of
considerable rural-urban migration and public concern over the location
choices of industry, such data would seem essential.
e.   State-local fiscal relations
56.       The formal intergovernmental fiscal relationship between Mahara-
shtra state and the Bombay Municipal Corporation centers around educational
finances and state assistance for urban development. In any case, the mag-
nitude of state government assistance is small.
57.       The state goviernment assists in the financing of primary education
through an aid program, and is directly repsonsible for financing secondary
education. A property tax surcharge, described above, is earmarked for edu-
cation purposes, btut is not returned by the state on a basis of place of



- 43 -
collection, and therefore provides only a small portion of needed resources
for lBombay's primarv education program.  This explains in part the pressure
for increased financial support for education from the general revenues of
the Bombay 'Municipal Corporation. From the four years of data shown in
Table 28, the equalizing intentions of the state government education assis-
tance program may be seen. The relative share of aid going to Bombay has
been declining in the case of both secondary and primary education.    At
least in the case of education, there is no built-in intergovernmental mech-
anism which suggests an alleviation of expenditure pressures.
Table 28. State Education Grants in Mfaharashtra
Primary Education       Secondary Education          Total
Rest of                  Rest of               Rest of
Bombav   Maharashtra    Bonbay    ,1aharashtra  Bombay   11aharashtra
197()     71.5      3936.34       30.02      410.54      101.52     4366.38
1909      71.5      3027.34       18.90      311.S8      90.40      3339.22
1963      80.5      2595.98        8.02      243.85      88.52      2839.83
1967      62.5       2001.91       1.27      137.21       63.77     2139.12
Source:  Data suppliedt by .laharashtra State Government officials.
58.       The other source of state local fiscal relations is a grant to thie
lsombay Improvement Trust for urban dlevelopment purposes. The grant is in-
tended to cover the deficit of the Improvement Trust, h:t may not exceed 10
lakhis in amount.  Over the past four years, the prant has totaled as follows:
Amount of
Grant Pai(d
Y ear                     (In lakhs)
1969-7n                        0.39
1968-69                        9.61
1967-f68                       3.48
1966-67                       lo.on
59.       In addition to these two relattvely small flows from the state to
the local government, thiere is a less formal out fiscally more important
relationship in the area of financing water supply.    The state's program of
multi-purpose river developm,ent includes the construction and operation of
dams whtich in the case of the 1Bhatsai project, providle storage capacity for
a, water supply scheme.  Then while in prtnciple, the Bortbay Htunicipal Cor-
poration is responsible for total construction and operating costs associ-
ated with water supply, there is thts form of state assistance.



- 44 -
60.        Finally, expenditures on national highways with!n Greaiter Bombay
are shared equally between the Bombay Municipal Corporation, the Maharashtra
state, and the central governments.
f.   Autonomous agencies
(1) State Building Repairs 3nd Reconstruction Board
61.       State government involvement in urban redevelopment--heretofore
limitedf to the slum clearance program of the tlouslng ioard and a relatively
small grant to the Bombay Municpal Corporation for sltum clearance--was ex-
panded in 1969 to encompass rehabilltation of selected core city housing.
The state Building Repairs and Reconstruction Board was created to provide
for a certain time for the repair or reconstruction of dangerous buildings
and to provide for the rehousing of dishoused occupiers. The Board, which
operates only in the city area of Greater Bombay, has the responsibllity
and authority to carry out structural repairs and receive no compensation;1/
to move the state2 government to acquire properties beyond repair for purposes
of reconstruction; and to take action for the demolition of dangerous or di-
lapidated buildings.
62.        For these purposes, the Board is authorized to levy a property
tax, with the Bombay Municipal Corpora Ion acting as collecting agent. All
residential properties in the city area are subject to the cess, with the
exception of those owned by government, those rented on a leave and license
basis, and certain newer properties. For purposes of assessing the tax lia-
bility, buildings are classified according to date of construction with rates
higher for older buildings and for buildings which have undergone repair under
the Act (see Table 29). In each case, the owners' share of the tax is 10
percent of ratable value with the remainder being paid by the tenant in the
form of a higher controlled rent. It may also be seen from Table 29 that
the greatest portion of the cess is collected from the oldest class of prop-
erty, and that total collectfons from the cess are equivalent in amount to
approximately 10 percent of total property tax collections of the Bombay
Municipal Corporation.
!/   Other than the cess described below.



- 45 -
Table 29. Repairs aid Reconstru!cLion Board
Property Tax Rates
Rate if         Ratable    Property Tax
Class of     Date       Normal  Structurally       Value       Assessed
Property  Constructed    Rate     Repaired        (In lakhs)  (In lakhs)
_
A     Before 1940     25         40            13,08.19     2,45.59
'41    1940-50         20         30            2,56.63        38.18
C     After 1950      15         20           21,87.33      3,53.76
Source: Data supplie(d by Maharashtra State Government officials.
Problems in the Deliverv of Public Services
63.       The focus of the two preceding sections is on the financial struc-
ture of the two major local government bodies which provide services to the
Bombay metropolitan region. However, these descriptions, for the most part,
treat the Bombay Municipal Corporation and Maharaslitra state governments in
isolation, much to the neglect of their joint impact on the shape of Rombay's
urban development. The objective here is to re-examine the policy decisions
of the Central, State, Municipal Corporation, and autonomous agency govern-
ments with an eye to determining their effects on relative prices of public
and private goods, and on relative prices of various types of public goods.
Since the movement of people and the location of jobs are largely a function
of these relative prices, it should he possible to examine at least the di-
rection of the partial effects of such government policy decisions on the
land usc distribution. It follows that some notion of the aggregate rocial
costs and benefits of these policy decisions might he establishied.
a.  Iousing
64t.      Efficiency questions concerning housing policy in Greater Romhay
reLite to the supply, the location, and the price to consumers.    Public
housingt decisions in metropolitan Rombay are made primarily by tne Maliara-
shtra Housing Boardl, ;an autonomous state government agency: buit also by the
RallIways, thc Port Authiority, HIST, and the Maharas!ltra state government,
each of whichi supply employee housting.  There is no coordination among these
agencies withi respect to anv of the three issues raised above. The discus-
sion in the remalndler of this section will center on the Maharashtra oiousing
Board since it provitdes, by far, the largest share of total public housing
in greater lBombav.
fi5.      Thc increase In the stock of putl ic housiug provided by the Naha-
rashtra llousitni Board In greater fombay is expectetlly a function of financial
constrailnts. These constraints are tn turn related to State government de-
cistons as to the proper investment in hotising vis-a-vis all other public



friucLt I ons, the proper ti is t rib hit ion of housing I rinvestrnen. In Mallarasht rl
vis-a-vis thu rest of tile state, and Central government dlecsiLoris zIs to
toral resource needs In 1iaharashltra vis-a-vis the other states.  With re-
specL to the latter, it might also he argued that the Federal government Is
exerting a dampening effect on the total stock of housing by redistributing
ccntral assistance away from Maharashtra state.   Apart from the level of
public investment, the supply of housing Is also affected !by the state gov-
ernm:ient rent control ordinance which has a dampening effcct on the stock and
cuialIity of housing by discouraging private investment and reinvestment.
6 (.      On the location of housing, t'iaharashtra Housing Board decisions
are made essentially on a basis of the availabilitv of government land;
hence, the board's housing prolects continue to he located in suburban areas.
On the benefits side, such locations are cheaper and therefore a greater
housinig stock for a given investment is possible.  Or. the cost side, if these
tenalnts work in the citV area, at least a greater drain on the transportation
system results.
67.       As noted above, there is a system of direct rent subsidies for
"economically weak" and industrial worker housing. In the former case,
tihese subsidies--which amount to negative taxes--move hutment dwellers into
adequate housing and therefore have some socially desirable effect. It may
or may not affect the cost of froviding other public services, i.e., the
hutments in many cases were originally located in the same area as the new
public housing, hence commuting patterns do not change and the price of city
services consumed in the new housing hopefully is included in rents and re-
flected in property taxes. But with respect to the other housing subsidy
program, it is not -s l!kely that industrial workers tenants previously re-
sided in the same area. l1oreover, from the point of view of the Maharashtra
Hlousing Board, the location of industrial jobs is not necessarily a major
considieration in choosing tba location of subsidized industrial housing.
Hence coimuting patterns a.nd therefore public sec.Jr costs may increase if
industrial workers relorate because of s-jch rent subsidies. I/
68.       While these two classes of housing are directl- subsidized by the
state government with a rent reduction, all classes of Maharashtra Hiousing
boaird flats are implici'ly subsidized becau.se of preferential land prices
which are given the Board.   Such government intervention in fact leads to
a suboptimal land use, i.e., some competing uise would have outbid public
housing for use of that particular land.   This suboptimal use, its attendant
lower property tax payments, and the economic benefits lost by "zoning" out
the other land use, mav be viewed as the opportunity cost of subsidized
hiotis ing.
69.       In sum, the state lousing Board, through location and pricing de-
csions for 1-'-sing, increases the strain on the transport system, i.e., the
Fct'cral government's railways, the municipality's buses, and the State's
1/ llowever, it is possible that the industrial contribution to that
subsidlized housing scheme at least partially offsets the higher
social costs.



- 47 -
roads. s Similarly, in the ahsenice of coordinating housing decisions, at least
on location, with thie Bombay Municipal Corporation, some inefficiencies and
possibly quality deterlorations in the provision of education and other muni-
cipally provi(led scrv±ces may result.   Finally, the state's rent control or-
linance depresses the Bombay Munic!pal Corporatton's resources for meeting
these increased needs, andl has a dempeniing effect on the stock of housing
available.  Ilousing policy in Maharai,w_- highlihts the inefficiencies of
an uncoordinated (among governments) sysceM of public service delivery.
(1) The distributional effects of rent control: a digression
70.       The binding effects of rent contro. on the growth of the property
tax base are readily apparent. Most of the natural growth In the base is
restricted to new construction. However, the incomie distribution implica-
;ons are a little less apparent.    The distributional implications of a rent
control program and an annual value property tax svgtem do warrant some at-
tention here since public policy evaluation of the desirability of rent con-
trol ultimately must focus on whether or not the opportunity costs out% ?igh
the benefits. Rent contrcl, in the ahrence of a property tax, nay be viewedl
as a transfer of real income from lancdlord to tenant, of amount (T) equal to
T    (' - C - K)
where :1   true market rents
C   controlledl rents
K   "key money"
If a property tax is now introduced, withi an effective rate of (r), and if
the incidence of the property tax is assumed to be on the renter, the trans-
fer of real income to the tenant (T) becomes
T = M(1 + r) - C(1 + r) - K
of whi:h am amount (Tre)
lT= C + K - M
is paid by the landllord, and an amouot {T
Tg  r(C - M)
is paid by government. lHence from the point of view of property taxation,
the opportunity cost of rent control is public services of amount (Tg) which
are foregone. 1/
1/   This analysis ignores the effects of physical urban deterioration,
often attributetl to rent controls, on the pronerty tax base.



- 48 -
1). Transportation
71.       Responsibility for the transportation system in greater Itombay Is
divided anong the Central government for railways, thle Municipality for bus
services (through BEST), and the State government for streets.
72.       There is little doubt but that mass transit services are stubsi-
di?Ld. Neither railway nor bus fares are adequate to cover the marginal
costs Of such services, and as a result there is overutilization of the
existing service levels. Moreover, the subsidlies are a part of the consumer-
conm1uteg's decision as to the tradeoff between housing and transportation
services, and probably biases the choice in favor of farther out residential
locations and longer journeys to work.   The results of t;iis *h'ioce are at
least a higher social cost created by crowding and delay on the trains and
buses. On the distribution side, the subsidy might be viewed as an implici'.
subsidy to employers who, as a result of lower transportatien fares, are
able to pay a lower wage than they otherwise would.
7?.       The decision-making process for iness transit services is more
fragmented than chat for housing. Federal decisions about railway services,
Municpal decisions about bus services, and central, state, and local deci-
sions about highways are not coordinated in such a way as to encourage a
more efficient allocation of resources. And if the relationship among the
agencies rerponsib<a for mass trar.sportation facilities is not adequate,
that between housinig and transportation policy decision makers is even worse.
74.       Consider now the alternative remedial strategies which might be
followed if it were argued on the basis of rush hour crowding that the quan-
tity of rail and Lus services offered during peak hours is less than that
demanded at current fares. 1/   There are at least four possibliities for elim-
inating such excess demand.   One is to effect an irw:ease in the peak hour
capacity of the mass transit system by altering the methods of delivering
such services.  Such an alternative is discussed in the mass transit section
of this report. The second is to raise fares which simultaneously rations
us(is and (given a relatively price-inelastic demand for transportation
services) provides resources necessary for increasing ti,e quantity of ser-
vices available. The fare increase for trains and buses would be a central
and municipal decision, respectively, and could be taken independently.
Ilowever, such fare increases have been rejected by each governmental level
on political grounds.
75.       The thiird possibility would be to hold fares const:ant but subsi-
dize operations and expansions from general revenues, thereby increasing
the over-all supply of transport services. In.the case of bus services,
such a subsidy would necessarily come either from an increase in elect:ricity
1/   It would not seem possible to make the same argument for road travel.



- 49 -
rate.- or from the Bomnbay Municipal Corporation's general revenues.  Given
the deficit of BEST In 1969, one of these actions seems a real possibility.
Tie increased subsidy of buses withi electricitv operations Involves essen-
t2ally a decision about a real income transfer betweeni consumers of power
and consumers of transit servi^es. The other alternative, a subsidv frzm
the general revenues of the Bomi.viy Nunicinal Corporation, would further de-
plete revenues which are already censtrained to a considerable extent by
the state Rent Control Ordinance.   In tF '-rse of railroads, further subsi-
Jization would be at the opportunitv cost of a lower level of some public
service consumed somewhere in India.   Little more can be said, hence there
is little if any room for evaluation.
76.       E.ven if resources were found to increase the supply of transpor-
tation services at current fares, it nay well follow that supply will create
its own dlemand such that the current excess demand would be duplicated at a
greater level of service. Whether or not such an effect occurs depends in
large on the reaction of the state government, cspeclallv in terms of its
housing program. The lesson here is that an isolated treatment of cranspor-
tation policy is likely to solve nothia',.
77.       Note that the three policies discussed above 1have in coumaon the
intention of increasing the peak hour carrying cavcitv of the system.     A
fourth possibility would have the objective of holding the capacity of thc
system constant, while reducing the demand for commuter services. For exam-
ple, policies which would cause a reduction in suburban housing subsidies,
an increase in the stock of central city housing, and a movenient of jobs to
suburban locations. That is, a program to discourage commuting into the
congested area is a program which increases the relative costs and reduces
the relative benefits of doing so.
78.       From the above it may be noted that a]though mass transportation
decisions and responsibilities in greater Bombay are vested in the central
and municipal governments, the state government rnlays an in:egral role in
determining the qtiality of services available.   It foilows :hat it will not
be possible to remedy mass transit problems on a governmentil level, rather
a coorclinatedl intergovernmental stratpcy will be renuired.
c. Municipal infrastructure anri services
79.       Service responsil'lltV for sewers, water, primary education, sani-
tationt, fire protection, and .eOst other custodial services (with the excep-
tion of police) are vested In the Bombay Mlunicipal Cirporation.   However,
hoth the cost of providting these services and the axnount of resources avalil-
able to meet these costs are a function of the policy (decisions of other
levels of government. For exa'nple, the cost of certain of these services--
ciflier [a terms of a higher rupe-: er tin!t paid or a lower service quialitv
for a given rupee ;mount--are .'." tly related to overcrowding in the city
area.  For example, where oj-rcrowding Leads to slim condition-, at ]cast



- sn -
sanitation and fire costs will tend to be higher.   Moreover, there are dis-
economies of density with re3pect to public util!ties which become especially
1mportant when replaicement of existing infrastructure mcst be considered.
It miglht be argued effectively that the overcrowcling wh1ci, Pi-ss rise to such
costs is to some extent effect^d by State and Central goverimen!. decisions
which were not taken in consultation with the Bombay Municipal . C. oration.
Not only is an uncompensated spillover imposed on the Biombay Murlcpal Cor-
poration on  he cost side, but the State governrentts rent concrol program
deprives the city of muc' of th.- revenue necessary to meet these higher
costs.  As noted above the direct response of the state, in terms of inter-
governmental fiscal program-s to offiet the resource-requiremert gap of
the Bomnbay Municipal Corporation, has been all but nonexistent.
d. Urban development
80.       The .unction of direct investment for redevelopment of slum or
dilapidated areas in Grc'ter Bombay is now almost exclusively a state gov-
ernment endeavor. The pro)gram takes two forms. one is the activity of the
Maharashtra Housing Board in replacing hutment slums with subsidized housing
for the "economically weak." the other is tl:e Building Repair arid Recon-
struction Board which uses the proceeds of a special assessment c,n real prop-
erty to rehabilitate dilapidated housing in cer.tral Bombay. Thert is some
coordination between the Board and the Bombay Municip3l 'corporation since
the latter officially designates properties -.hich nust undergo repair. In
the case oi Maharashtra 11ousing Board replacP-ment of hutment sluirs, there
is little coordination with either the Bombay Mfunicipal Corporation or the
Repair and ReconstructIon Board with respect to priorities in areas tc be
renewed. However, in terms of effects on over-all urban efficiency, the
general policy of locating the housing projects near the cleared hutment
site minimizes the possibility of introducing differential costs.    However,
in general, it is clear that the present arrangement for carrying o't renew-
al activities does not enable a tradeoff in the use of resources by the two
autonomous agencies, and further makes the question of priorities in slum
clearncice and renewal more a state than a city decision.
81.       Apart from slum clearance and redevelopment is tele question of ur-
ban physical .ievelopment per se.  The Bombay Municipal Corporation does ex-
ert sume measurv of control here via a land use plan and a set of zoning
Ordinances.  The latter includes a designated maximum ratio of floor space
tu building area, the floor space index, which declines from rhe city to the
suburban areas. There would seem to be little economic rationality associ--
ated with such a policy, i.e., it is not conducive to permitting construction
of the optimal stze structure on any given plot of land. Moreover, the floor
space t   't2  'SI) effectively limits intensive use of suburban 1t,nd, and in
so doing biases certain choices 'n favor cf core :Ity locations.    Hence,
from a point of view of social costs this policy is contrary to ::he general
decentralization objectives of the 3ombay Municipal Corporation.
82.       Another phase oi the urban development progi-n in Greater Borabay
involves the state housing board auctioning of suburban, governnment-owned
land for private. commercial, and residential uses, and using the proceeds



- 51 -
to finatice public housing projects. rhe market pvice of these properties,
e.g., along either expre-ss highway, is directlv influenced by the allowiable
FSI. 'n such a case, the real cost cf maintaining a FSI below that *.hich
is optimal for the land in que/iS,.n, is some amount of public housing fc:e-
gone.
83.       A major urban d:-elopmrEnt conicern In Creater Bom'ay is the Backbay
Reclamclcr. project.   It    a state governr:ent activity, and from a cost-
benefit point of view is .ucrative.   Iiowever, the highest use of reclaime(d
land is commercial, and hence a greater flow of conanuters to the city area
is generated. It follows that the Federal Government and the Bombov Murnici-
pal Corporation share in Lhe hir,her costs of the Backbzy project, but in few
of the benefits. Apait from adjustment in transportation fares to reflect
true marginal costs, or abandonment of tbe project, there would seem to be
two alternatives to redressing the kir,d- of governr.ental resource-require-
ment imbalances which have occurred. The first is for the state to compen-
sate the Bombay Municipal Corporation 2-ad the Federal Government for the
higher costs incurred on account of the project, if such a cost could in
fact be accurately calculated. The second is to create a requiremin' where-
by each job created would have to be acccmpanied by some specified amounc of
housing. This scheme would probably have the effect of reducing the market
price per unit of public service cosrs.   Moreover, it would have the effecc
of stimulatin-g soi.we ir.vestment In housing which might not otherwise have
existed.
Needed adjuRtments in the tax-expendihure process
a. Coordination and fisc&l balance
84.       A combinarion of certain provisions in the Indian Constitution and
ccrtain provisions ir. the statutes has created a fiscal imbalance for urban
government" %hich is conducive: neither to adequate~ fir.ancing not to adequate
cortrol of urban development. The kinds of considerations which originally
prompted the designation of certain taxing powers as union, and other!; as
state, and which promoted states to designate certain taxes specifically for
local use, are apparenrly no longer relevant. The position of the Bombay
Municipal Corporation Is one of having expendtture responsibilities which
are growinp, rapidly in response to the pressures of economic development,
urbanization, and in-migration. However, the reventue system of the Bombay
Muntcpal Corporation is comparatively income-inelastic. Compounding this
failure to establish a halance between expenditure requirenents and revenue
resources, is a frap,mented system of delivering public services and in gen-
eral a pi!ceneal approacAl to public policy decision-making. This absenca
of public policy coordination haa resulted In a set of uncompensated exter-
ndlities. For ey.&iple, the growth of the property tax base (the base of the
major revenue producer of the Bombay Municipal Corporation) is limited by
controlled rents--a state government ordinance-while pressures for expendi-
ture increase on the part of the BMC are effected by state goverrment actions



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such as the Backbay Reclamiatian project and by  vdleral an(I Sl;lte government
decisions regarding the pr    itg of railway transportation a-' hQusing ser-
vices.  In gencral , {Iflc'. . -a by each layer of government ar,  .ikLu  K pen-
dently and therefore '      r.gate mist not move total cfficiency tow:i i iome
olit irnum.  If they dlo, IL .:nAst he by accident.
85.       Such ;, situation (demands, as a first step toward improvlng urban
efficieticy, a more coordinated approach to decision making, i.e., to all
questions relating to the allocation of scarce resources within the olomhay
MetropolItan Region.   As a minimum, the formationi of a lletropolit n Cotincil
of Covernments with .ppropriate representation from all layers of government,
inicludling autonomous agencies, would seen necessary.  It would be unrealistic
to assurhe that such an agency could have decision making authority.   What it
coull do, however, Is produce an annual analysis (a) or alternative strategies
f'or investing fun(ds to deliver public services, and (b) of all public poli-
cies which affect such delivery.   At the very minimuim, sucn an arrangement
might force a mor   anpropriate examination of the issues, and a marshalling
of the kinds of data .nost relevant to the (Iccisions in question.
I,.  Tax reform
3l6.      Tax reform for the Bombay iunicipal Corporation is needed for two
reasons.  One is thc premium which must be placed on the mobilization of
r.:sources for public use, and thc other relates to str:ctural problems wilich
may a(dversely affect thle distribution of landl use within the metropolitan
reg;ion.  Accordingly, suggested in the following sections are possible tax
policy changes wlh..h are related to octrot, the wiheel tax, the proper,., tax
treatment of vacant lanid, and thc property tax treatment of governmer-
erty.
(1) Octroi
87.       Numerous public reports have dealt with the evils o' octroi and
have recommended replacing it with some other form of revenue (see section
Id above). While there is much agreement as to the undesirable features of
octroi, there is little agreement as to a proper substitute. Since octroi
is in fact a sales tax, the most often suggested replacement is some less
objectional form of sales tax, for example, a surcharge on/or a share of the
present stace sales tax. The advantages of this alternative are real. First,
the admintstrattve machinery is already present in the state system. Second,
the state 8,les tax base sho%3 evidence of a substantial income elasticity,
a feature badly needed by the Booibay Municipal Corporatior. Third, a cursory
examination of rate schedules suggests that the octroi is more regressive
th-an the state sales tax, and finally, the state sales tax possesses none of
the objectional administrative features of octroi. The problem with this
alternative stems from the fact that replacement of the octroi throughout
the state hes been suggested, and there is expected dlsagreement over the
aporopriate method of sharing the local sales tax surcharge.



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(3)  L'roperLv taxa tion of vacant land
)2.       Ctirrently, vacant landl is assessed at 3.5 percent to '3.0 percent
of canital value, and is allowed a property tax rehate eqtial to two-thirds
of the existing rate.   This type of preferential treatment is a shortcoming
wlhich most countAries using thic annual value method liave abandonecl.  It cE-
f[ctively reduces the holding cost of land and has the effect of encouraging
speculators to hold their land off the market for a longer period. This in
I it : Inpo;es. I a soc ll cost on the community if it induces a leapfrog pattern
of u1r1bn.l devt lopEmMtllt.  Contrarv to the objectives of an annual value property
tax system. the prefercntial treatment of vacaint landi ignores the returns
from kraitifn  whicih accrue to speculators as surely as do rent payments to
ldl oirds.  It follows that vacant land should be assessed at the full rate,
itnci(tiing the city and state education cesses. Moreover, there should be
periodic reassessment of vacant land on a hasis of full market value In its
hie hest and best use.
(4)  Propertv tax treatment of government proerties
93.       As pointerl out ahove, the preferential propertv tax treatment whici
is afforded gov irnment property has two uinJcsirab]e effects.  First, there
is a revenue loss to the 1't¶C which may he viewed as a governmental incorie
trainsfser from the B !C to the Mal' rashtra state and thc union governments.
If it could be argue(d that the public resource-requir'ement gap is greater
for thic i.:C tliani For either the State or Central Government, it xwould Eollow
that rerioval of  hits preferential treatment would( bring about an over-all
irmprover.ient in fiscal balance.
94.       Ueyond thle quest ion of rcvenues is thc possibility th5at government,
ut:; .i property  ..l7er, realizes a lower cost of land than do private sector
;u,Y! users.  Thcerefore, governnent will tend to overirvest In land vis-a-vis
otil-'r factors.  rile pro le-is crvated by this nalaliocation of resources have
heen well cove red in the text.
9rJ       To alleviate thiese two ill effects, two lroperty tax adjust ments
s:,ou Id be ia (Ide.  First . all government-owned vacant land should be assessed
at truei market v,tl-uc and be subject to the full general rate plts the educa-
Lion c.ss. Seconn , the procedure of allowing a payment in lieu of property
t,ixe-s should be abandoned in favor of full payment b, all government hodics.
c.  lIterpovernmeutal fiscal relations
96.       Coordination of public policy decision making would in fact in-
crease the efficien v of urban development, i.e.I lt would enable an increase
itn real benefits gained per rupee spent. Ilowever, this does not necessarily
resolve the fiscal iroalance problem in that expenditure ,lemands on the Borl-
bay Niunicipal Corporation v-ill still outstrip resources available. There
are a number of possibliites for redressinR this imbalance. First, a free-
ing of the property tax base via decontrol of rents and permission for the



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88.       If a surcharge on the state sales tax was designed to replace
octroi, there would seem some basis for arguing for distribution of at least
a portion of the proceeds on a basis of point of collection. A benefits
justification for including In Bombay's share, sales taxes on goods destined
for resale in other parts of Maharashtra, is simply that there are costs
associated with serving as a trading center for which the Bombay Municipal
Corporation is entitled to be reimbursed. In practice, a point-of-collection
distribution would have returned abouc 80 percent of anv surcharge to Greater
Bombay In 1969.
89.       Other approaches, than a uniform state-wide shift to sales t.lxa-
tion, might be taken. Technically it vw,uld be possible to adopt a shired
sales tax to replace octrol in G-reater Bombay but to retain octrol in all
other municipalities in the state.  Alternatively, it would be possible to
permit all local governnerts in Maharashtra to levv a sales tax surcharge
up to a maximum rate, dIenpndlng on their own discretion, where the maximum
rate for the BlIC would be larger thar! for any other municipal government in
the state. It should be noted that the alternative of replacing octroi with
a shared state sales tax, distributed within the state on an income-equali-
zing basis, would not give the Bombay Municipal Corporation an income-elastic
revenue source. In fact, such a plan would probably give an intergovernmen-
tal revenue source wtth a lower elasticity th.an the octroi.
90.       Some idea as to the necessary magnitude of such a surcharge may be
gained by exaamining current revenue levels. Octroi collections in Greater
Bombay in 1969-70 amounted to Rs 12,40 lakhs. Of total State Government
sales tax revenues of Rs 1,23,50 lakhs that year, Rs 1,03,57 were collected
in the Bombay city division. Hence octroi is equivalent to about 13 percent
of state sales collections in Bomr v city. In order to determine an appro-
rriat! set of rates for the local s_.rcharge, a careful study both of the
composition of revenues frorr the state sales tax and of the equity effects
desired would be required.  Such a study is beyond the scope of this mission.
(2) Motor vehicle taxation
91.       Throug,h a relatively minor sonrce of the Bombay Miunicipal Corpor-
ation's reventie, the whecl tax is poorly administered and in need of reform.
As noted above, less than 40 percent of wheel taxes assessed are collected
because of enforcement difficulties. Meanwhile, the state government is
able to collect over 90 percent of motor vehicle taxes assessed, primarily
becatise of a relatively more efficlent enforcement procedeure. The case for
a sharing arrangement Is made even stronger by the present requirement in
thie state tax law that vehlfces registered exclusively for use in Bombay be
so declared. One possib1lity for a sharing arrangement would require the
lBonIbay Manicipal Corporation to conform its classfication and tax base to
that of the state government, and the state would then act as a collectin:,
agent.  If 90 percent of wheel tax assessed in 1969-70 had been collected,
receipts would have totaled 2,80 lakhs as compared with the 1,03 lakhs actu-
ally realized.



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Bombay Municipal Corporation to replace octroi with a state sales tax sur-
charge would markedly improve the revenue position of the Bombay Municipal
Corporation.   Another possibility is the direct transfer of functions, e.g.,
water and sewerage, to the state. This alternative, however, removes allo-
cation decisions from the Bombay Municipal Corporation where, it might be
argued, they can best be made.
97.       Another posibhillty is that thc fiscal relief for the Bombav Muni-
cipal Corporation will come in the future from the Union government, via a
larger share of central assistance to state government on a basis of urban
needs.  Should this come to pass, there is no vehicle by which the funds
could be passed through by the state to the Bombay Municipal Corporation.
The existing state assistance programs are an education aid program which
discriminates against Bombay in favor of the rural hinterland, and a rela-
tively anemic urban development grant.    Maharashtra state could increase
the fiscal viability of the Bombay Municipal Corporation and create a flex-
ibility for passing through Feder.al funds by institutinr a sizable and gen-
eral purpose urban grant to the Bombay Municipal Corporation. The grant
could be defined in terms of some percentage of an elastic state government
revenue source, e.g., the sales tax. Quite apart from the argument that such
a program would better balance the requirements and resources of the city
government, one might take the (debatable) position that in-migration to
Bombay imposes an uncompensated externality on the Bombay Municipal Corpora-
tion for which the Maharashtra state government should provide compensation.



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11. A PROGRAM FOR A MORE EFFICIENT DELIVERY OF PUBLIC SERVICES
Introduction
98.        For purposes of suggesting a remedial urban development program.
for Grea er Bombay, two types of urban problems must be distinguished. One
is inadequate public sector investment. The other is a failure to obtain
maximum benefit from a given level of investment because of an inefficient
arranigeuient of economic activity within the metropolitan area and because
of a 'ragmented decision-making process. The first problem requires addi-
tional resources as a part of the solution. It is not considered here. The
very existence of the second problem suggests that policies aimed at chan-
ging the spatial distribution of economic activity and/or establishing a
proper system of prices for public and private goods might increase total
welfare by permitting a more efficient delivery of public services. These
policies would necessarily have to be accompanied by some integration of the
governmental decision-making process, i.e., by the establishing of some
method for allocating scarce revenue resources among competing expenditure
needs.
99.       The objective of the discussion below is to describe a program
which, through effects on implicit and explicit prices, will result in (a.
a reduction of the per resident public service costs of supplying any given
level of services, (b) an increase in the revenue resources available to the
Bombay Municipal Corporation, (c) an increase in the available stock and
quality of housing, and (d) an Improvement in the quality of transportation
services. The accompanying intergovernmental reforms necessary to comple-
ment such a program are also described.
100.      Because of the relevance of the question of the existence or non-
existence of scale economies in the provision of urban public services to
the composition of a remedial program such as that described here, the fol-
lowing section is given over to that subject. However, note that in the
absence of corroborating evidence, an assumption of constant (per person)
costs is mnade. The scale economy issue is discussed below primarily to sug-
gest the possible implications of an alternative assumption, e.g., that there
exist scale diseconomies.   Section III provides a description of thce elements
of the program, and Section IV is an analysis of the mechanism of response
of land-use, housing, transportation, public costs and resources, and job
locatio.i. Finally, the income redistribution consequences are examined.
There is no attempt to assign "price tags" to the effects of various elements
of this progreI. Rather, the goal is merely to argue for the direction of
effect on various elements of the urban economy (e.g., the stock of housing).



- 57 -
Scale economies, distance costs, and the delivery of urban public services
101.      The general question of the public service cost implications of
alternative arrangements of economic activity may be examined by considering
separately the variation In costs of delivering transportation, public util-
ities, and general public services to different configurations of population
and economic activity.
102.      It night be argued that on a per capita basis, transportation
costs rise with the distance between place of residence and place of em-
ploynent. It also is higher if great numbers of corimuters demand service
at particular times (e.g., peak hours) and have the same destination (e.g.,
Victoria Terminal or Churchgate Station). Then per capita transportation
costs are a function of factors such as distance and destination, and con-
gestion, irrespective of over-all city population size and density. It
follows that with the same total carrying capacity of the system, a rear-
rangement of the present origin-destination pattern could result in lower
per capita cost.1/
103.      In t;:e case of public utilities and general public services, ques-
tions of whether or not there exist economies of scale, or economies of den-
sity, become more relevant. Because of the importance of the scale economy
issue for formulating an appropriate urban strategy for Bombay, ic would
seem worthwhile to simply state the rudiments of the economy of scale issues
as well as the relevance of excess capacity and external effects on factor
prices to the costs of providing public services. In the present context,
economies of scale may be said to exist if population growth allows the use
of different combinations of factor inputs which in turn results in increased
average productivity such that there is a reduction in per capita costs.2/
Conver.ely, after a certain size is reached, further population growth yields
factor input combinations and factor prices which cause per person costs to
rise. These are diseconomies of size. The argument for scale effects in
Greater Bombay takes a somewhat different line. It is that the relevant
consideration is not economies of population size but economies of popula-
tion density.3/ That is, for a given size population, there is some optimal
density with respect to per capita costs. Increases in density short of
that optimum yleld falling per person costs and increases beyond that opti-
mum yield rising per capita costs.
1/   See the Transportation Annex to this report.
2/   That is, the productivity increase more than offsets any increase in
factor prices.
3/   llowever, since land area is a constant, this distinction is more for
expositional than theoretical purposes.



1I u.     Now cons idcr the arguments as to how per capita costs relate to
tile level of population dens-ity, In the provlston of public ut ility an(i gen-
Cr;11 pubLic services.  There arez short-nin declines in the per person cost
-f distributing water, sewer, an(d power services to more dense populations,
slmply because onze the system is created and idle capacity exists, the real
costs of distribution to incremental units are small.     This is, in fact, a
'spreading" effect of allocating the cost of the svstem, i.e., it results
frorm the "lumpiness" feature of stich investments.  However, there is some
optLimal (density after whlch per capita costs may rise (for any giveni size
system), ci'her beca1use of pumping costs occasioned by higher buildings, or
because higher densities tend to be associated with higher land values and
consequently a greater real cost of land input.    Thus, the short-run 1/ aver-
age cost curve may be U-shaped.    The other relevant question relates to the
shape of the long-run average cost curve, i.e., as system capacity is ex-
panded, do per person costs rise, fall, or remain constant. The arguments
that they rise are persuasive.    For example, if land values are a positive
fuction of population density, expansions of the distribution system at
higher levels of output will be increasingly costly.
105.      Per capita costs of providing general municipal services such as
sanitation, street cleaning, and fire protection may also be U-shaped with
respect to population density. This will be expecially true if higher den-
sities are associated with slum conditions which spawn, nmsong other tnings,
unsanitary living conditions and greater fire hazards. Primary education
costs in Greater Bombay are probably not directly affected by the density
of population, with the exception of those costs associated with transport-
ing students to and from schools.
106.      Then for public utility and general service costs, it might be
argued that the short-run per capita cost curve is U-shaped with respect to
population density.   bLnt there is no empirical basis for hypothesizing that
level of population density which is optimal. And even if there were, it
would not necessarily follow that a reduction in population density 2/ in a
particular area within the metropolitan region would reduce per capita costs.
As for public utilities, the pumping costs for higher buildings will not
(lisappear and larnd values may or may not drop with declines in density. In
tihe longer run context, however, it might be argued that an arrest in, the
growth of population density may enable the city to delay replacement of the
present system with one which has greater capacity. On the other hand, dis-
economies of density for general municipal services tend to be associated
with slum conditions, and the strategy for reducing these costs has to do
with urban renewal as much as with decreasing density.
1/   Where the clhort-run is defined here as a period where the total caipa-
city of the sytem is held constant.
2'/ Such as would result from a movement of population from the citv area
to the suburbs.



- 59 -
107.      Thus far, the di-cusston has centered on the densitv-diseconomv
question with respect to the city aren. It follows that the converse may
bc true in the suburbs--an increase in population size and/or density would
result in lower per capita costs. Generally, this argument would have to
rest on the existence of idle infrastructure in suburban Bombay. This may
well be the case if intensive suburban development is considered.     lHowever,
in the case of other areas of thc suburbs, the growth of population would
probably necessitate further capital investment in order to create a capa-
city for satisfying at least public utility needs.     Ideally, planners would
know, for each public service, thc differential costs associated with loca-
ting a marginal bloc of population in any given area of the region. The
present value of the costs could then be matched against public and private
sector benefits, all interrelations considered, and an optimal arrangement
of people and jobs defined. With an analysis so general as that presented
here, and with far less than the necessarv data available, it cannot even
be said whether total pullic service costs (excluding transportation) will
rise or decline if the marginal resident is moved from the city area to the
suburbs. Thercfore, in the analysis below it will be assumed constant. It
will be assumed, however, that an improved balance in each of the city and
the suburban areas i.i the employment-residence ratio will reduce per capita
total transportation costs.
A remedial program
10g.      There are numerous ways to effect the level of urban efficiency in
Bombay.  One is to recover full marginal (private and social) cost from the
provision of any service and let people live and work where they want. This
not being possible, another in%olves introducing a set of public policies
which will induce a reduction in the distance between place of employment
and place of residence and thereby reduce per capita transportation expen-
ditures.   Specifically, such policl2s could focus on either rearranging the
core city land use distribution, or inducing job movement to the suburbs.
The stratesy suggested here leans heavily toward the latter.
109.      The program described h..e is one which, through effects on impli-
cit and explicit prices, should r.?sult in a decentralization of job locations.
a lowe.-ing of over-all per resident public service costs (for any given qual-
ity of service), an increase in resources available to the Bombay Municipal
Corporation, and an Increase in the available stock and quality of housing.
The elements of such a program are as follows:
1.   A selective decontrol of rents beginning with all commercial
establishments, all housing presently rented on a lenve and
license basis, and all new residential housin,. At a later
point in time, residential housing would be decontrolled on
a selective area-by-area bAsis.



'.   An incentive for housing rehabilitationi composed of permission
for any Jandlord to carry out approved renewal of his proper--
cies, evict present tenanits, and thereafter be free from rent
controls. However, an iritial constraint would be that the
property still be used for residential purposes after thc
imoroverienLs are made.
3.   A change in the floor space Index to allow higher buildings
in suburbatn areas, with the provisc that any incremenral
public costs associated with higher builitngs would be covered
by the developer.
4.   The govervnment portion of dlrect rent subsidies to industrial
workers in Maharashtra Houising Board flats would be eliminated.
5.   The Backbay (and other) reclamation project(s) could continue,
but there would be a housing requirement for each block of
employece,, i.e., for each square foot of office space created,
a designated amount of housing space would be required.    The
^nus of this requirement would be placed on the commercial
de.'eloper. A similar requirement would be imposed for any
other sizable nonresidential development in the core city of
either a governmental or a quasi-government agency. The re-
quiremenit would also hold for government land which is auc-
tioned to the private sector for commercial development.
6.   The preferential property tax treatment for privatelv owled
vacant land would be eliminated along the lines discussed
above, as would all preferential property tax treatment
afforded government properties.
7.   Rail and bus fares would be raised, but riot necessarily by an
amount such that they would be sufficient to cover marginal
cost. No major improvements in the quality of transportation
services, e.g., new rail lines, are suggested.
Effects on lob location
110.      The over-all effects of this seven-part program would be a decen-
tralization of job locations. Certain commercial establishments are located
in the city because the Rent Control Ordinance effectively subsidizes these
locations. Part of the subsidy becomes an economic rent to the entrepreneur
and the remainder allows him to pay a necessary premium for factor inputs,
e.g., the higher real wage necessary to attract suburban labor to central
city job locations. Decontrol of rents on commercial properties will bid
up the location cost of such establishments and force the currently margin-
al operations to seek other locations. These firms will be replaced either
by residential uses or by other commercial uses (neither of which will be
covered by rent controls) which find core city locations optimal even whb.n



- 61 -
true land rents are paid.   H1igher transportatton charges will tend to dis-
courage commuting by bidding up the wage required by workers to commute to
the city area. Hience, not only will site rents of city area locations rise,
but labor costs will also increase and central commercial locations will
become less desirable for yet another group of marginally profitable loca-
tions.
111.      These policies, of course, will riot have the effect of decentral-
izing jobs if suburban locations do not become relatively more attractive
than before the program.   The case ma(de here is that a program such as this
does in fact raise the relative attracrion to suburban sites. Six reasons,
of varying degrees of importance, could be offered in support of this argu-
ment. First, higher transportation fares will make suburban residents less
willing to commute to central city job locations and this may be revealed
in a willingness to accept a 'ower money wage in a suburban location. Second,
since the effect of rent control probably is a greater divergence between
market and actual rents in the city than in the suburbs, a decontrol of
rents on commercial sites will raise location costs relatively more in the
city than in the suburbs. Third, a liheralization of the floor space index
in the suburhan area will permit taller buildings there, and if there is a
positive shadow price 1/ associated with the incremental story in the suburbs,
the comparative advantage of suburban sites will be enhanced. Fourth, the
more harsh treatment of vacant land should result in forcing such land into
use earlier than would otherwise be the case.     Since vacant or unutilized
sites are typically more prevalent in the suburbs than in the city, the
quantity of available suburban land should be increased, and the price at
whici this land is offered on the market should be lower. Fifth, the elim-
ination of the property tax subsidy to the state and central government agen-
cies will effectively raise the cost of city vs. suburban locations and
therefore would tend ts bias future decisions in favor of the latter.      Fin-
ally, the comparative advantage of Backbay (and other reclaimed and govern-
ment-owned) commercial sites over suburban commercial sites will be reduced
by the joint housing requiremnent which effectively lowers the returns to be
had from such sites.
Effects on the stock and quality of housing
112.      The net effect of this program will be to increase the stock and
the quality of housing in Greater Bombay. In thc city area, rent decontrol
of commercial establishments would result in a replacement of some existing
commercially used land by other businesses, and in some cases by residential
units. Similarly, tne Backbay housing requirement, the private housing re-
habilitation incentive, and the promise of decontrol on all new units con-
structed, should result in more private investment in housing both in the
1/   That is, if there is a positive value attached to the story which
could not be built because of the FSI restraint. Current evidence
that this shad-w price Is positive is the willingness of suburban
cormiaercial developers to build to the maximum allowable height, and
the petition of the Maharashtra hiousing Board to the BMC to make
allowance for a more liberal FSI for suburban sites which are intended
for auction to the private sector.



- 62 -
city and in the suburbs. The net -Ifect would be an increase in the stock
of housing, inltially probably of a ligh-income type.     All decontrolled
rents will surely be rnised and the majority of new construction may well
be of a middle-income and high-income type. However, a trickle-down effect
would be operative as people moved to new residences. This housing pollcy
coopled wilh Increased transportation fares may bid up wage payments by core
city employers, hence increase the capacity of the population to absorb the
hligher rents. Finally, as the rent decontrol program is extended to cover
older residences. higher property taxes would induce rehabilitation of
housing In prime locarions and thereby increpeo   the quality of housing.
Effect on public costE-resources
113.      The general effccts of the program describe- would be to decentral-
ize job locations and to create a better balance betw . jobs and residences
in the suburbs. There are also serious implications for public sector oper-
atons. As pointed out above, the lack of knowledge about the shape of the
average cost functions prohibits a realistic esZlmate of the effects of this
program on public utility and other general public service costs, and so for
the sake of discussion, they are assumed constant. 1/ On the other hand,
tihe decentalization process described above is assumed to red-ce the per
person cost of providing any given quality of transportation services.
114.      On the revenue sias, the selective decontrol of rents will result
in a higher assessment oa all decontrolled properti.es, and if over-all effi-
ciency is increased by this amount of freeing of the market, it follows that
total taxable capacity (including annual rents, income, and total sales) will
be--in the long run--increased. However, it should be noted that in the case
of the propertv tax, an assessment of commercial properties on a basis of
economic rents rather than reproduction cost would be necessary to capture
the tax effects of increased efficiency. Finally, increased rail and bus
fares also represent increased resources for public uses. On a governmental
level, the Bombay Municipal Corporation would stand to realize an increase
in fiscal balance because of increased property tax revenues and higher bus
fares. Moreover, the freeing of annual rent assessment, even partially,
from the rent control constraint will result in a greater elasticity cf the
Bombay Municipal Corporation's property tax base.     The central government
would conceivably benefit from reductions in service responsibility and from
increased tail fares.
115.      It is therefore tempting to make the over-all argument that such
rearrangements of economic activity, as described above, will simultaneously
increase government revenues and raise the level of services which could be
supplied with any given amount of resources.
I/   To the extent this is not true, differtnt I.mplications for effects on
public costs may be derived. It is possible to much such inferences
under differenc sets of assumptions, but such an exercise is not at-
tempted here.



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Income distributior. implications
116.      While a higher level of government services and a greater effi-
ciency of government services may be attained as a result of such a program,
it can be shown that there are relevant income distribution issues to be
considered.
117.      Assessment of the effects of this program hns heretofore rested
on certain assumptlons about the Bombay labor market and the actual opera-
tion of the rent control program. Th- decontrol of rents on conmercial es-
tablishments may drive some merchants to suburban locations, others to clhange
either occupation or their st&Lus as entrepreneur. Moreover, if replacement
is accompanied by changes in the type of commercil establishments to those
which are less labor intensive, and if existing ltbor Is not occupationally
mobile, some unemployment could result. On the other hand, if there is son.e
elasticity to the supply function of labor for the new core c1ty estrabliah-
ments, and if it is responsive to cost of living factors, wage rates v-ill
be bid up via a process as described above.
118.      For resident'al housing, the effects of decontrol will bz a trans-
fer of real income from tenants, to landlords, to other tenants, and to gov-
ernment--the latter in the form of higher property tax payments. The size
of this transfer uill depend or. the extent to which "key money" is presenitly
being extracted from tenan:s, and the real transfer will be reducec to the
extent that the incidence of the Bombay Municipal Corporation's expenditures
with the inacremental funds are progressive.  At any rate, housing prices
wll rise ir. the absolute, and, depending on the nature of the suppiy sched-
ule for labor, as a percentage of income.
119.      The share of total income extracted by government will rise as
assessed property values begin to reflect market rents and iv higher wages
result, the state's consumption tax base will rise. .4gain, a progressive
redistribution of these expenditures by the state government will lessen
the undesirable red' ributive effects of such a program.
120.      The removal of direct government subsidies for industrlal worker
housing will, depending on the nature of the supply curve for labor, result
in increasing the money wage rate for these workers. In essence, the argu-
ment here is that the government share .'f the subsidy initially was divided
between employers, in terms of the lower wage rates whtch they could offer,
and employees, in terms of the lower rent wh:ch they would have to pay.     The
su%'Psidy has an opportunity cost of some amount of federally provided public
services foregone, since the union government pays part of the subsidy, hence
it is possible to argue that the lack of coordination between the location
of such housing tor industrial workers and industrial site location results
in a public sector social cost which might h-ve been avoided in the absence
of the subsidy.



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A remedial public administration
121.      A price-oriented program along the lines argued above would neces-
sarily have to be supplemented with a decision-making process whic:- :ould
ensure some optimum in the distribution of funds.   Obviuusl--, a program such
as this could be hindered by, e.g., the Bombay Municipal Cnrporation's zon--
ing which might impede commercial movement to the suburbs, new state housing
subsidies which might offset the decentralizing effects of higher raii. and
bus fares, or increased fzdcrsl capital gains t&xation which might alter lo-
cation deci0ons in favor of remaining in cercr-- locations. Also obvious
is the stimulattve effects to such a program of actions such as improved
communications services in the suburbs.
122.      The decision-making process will have to spzn both government. 1
responsibility and functional responsibility. Thus, a regional transporta-
tion planning organ will be as ineffective as a Bombay Munizipal Corporation
economic and physical planning commission. What must be created is a Greater
Bombay public sector advisory commission which will comprehe!nsively analyze,
on a regular besis, all implicit as well as explicit resource allocation
questions.  Such a body would be responsible for providing annually a set
of recommendations for public invesLment, in Bombay, by ali levels of govern-
men t.