Revenue Streams and Capital Outlay: An Empirical Study of Municipal Corporations in India

Abstract

This paper empirically tests the relationship between municipal revenue streams and capital outlay focused on building new infrastructure and amenities for sustainable urban development. The study follows a cross-sectional research design without a time dimension using secondary data from municipal corporations across 26 Indian states and Union Territories obtained from the Reserve Bank of India’s Report on Municipal Finances. An Ordinary Least Squares model was used to estimate the coefficients of own tax revenue, own non-tax revenue and revenue from government transfers. The study's main results show that while coefficients of own non-tax revenue sources, i.e., Rental Income, Fees & User Charges, and Interest earned are 8.52, 3.56, and 40.43 respectively with associated p-values of 0.000, suggesting greater influence in determining capital outlay, the coefficients of own tax revenue sources such as Property Tax, Water Tax, and Advertisement Tax are -0.21, -2.96 and 15.78 respectively with p-values exceeding 0.05 suggesting an insignificant relationship. Transfers from the central government are significant factors influencing capital outlay of the municipal corporations given by a coefficient of 2.45 with an associated p-value of 0.01, while state government transfers have a negative relationship given by a coefficient of -1.15 with a p-value of 0.023. The study also employs several diagnostic tests to ensure validity of the results and robustness of the model employed. The Adjusted R-squared value of 0.98 shows the model is a good fit and coefficients are relevant. Model diagnostics reveal that the results are efficient and model is a good fit to the data. The paper then concludes with discussion on the results obtained and policy suggestions along with indicating scope for further research in the field.