Financial Viability of Small and Mid-sized Cities in India: A New Approach

We develop a novel framework for performance evaluation of governments, identifying three strands embedded in a public finance cycle: (a) expenditures are getting translated into services, (b) service delivery bringing about revenues, and (c) revenues resulting in expenditures. An intuitive construct is conceptualised, and a slack-based Data Envelopment Analysis Model is mapped to each of these strands. Stylised facts derived from the possible consequences by comparing the input/output radial efficiencies and the off-radial slacks thereafter, offer a nuanced analysis of financial viability for 910 small and mid-sized urban local governments (ULGs) in southern India. We find that, irrespective of size, services fail to generate sufficient revenues in ULGs, primarily due to poor revenue collections. Most of the ULGs could have incurred existing levels of expenditures with lesser revenues, indicating suboptimal resource utilisation. Smaller ULGs suffer from supply bottlenecks in services, which are maximum in roads, followed by water supply. The mid-sized ULGs face leakages of expenditures in general, while the smaller ULGs, in establishment expenditures in particular. Policy recommendations suggest revising water tariffs, parking fees, incurring expenditures on the maintenance of roads, regular monitoring and audits, and effectively devolving and utilising tax and non-tax revenue handles. JEL: C14, H41, H70, H71, H72, R51