Internal Earmarking of Funds for Services to Urban Poor
ULB Level Reform
JNNURM Primers Page 1
1. The Reform
JNNURM requires ULBs to undertake reforms aimed at institutionalizing “internal earmarking of funds in their budgets specifically for basic services to the poor”. The Mission also seeks
commitment from ULBs for:
; Undertaking reforms in budgeting and accounting systems to enable internal earmarking
of funds for the urban poor.
; Setting targets for expenditure incurred on delivery of services to the poor.
Internal earmarking of funds refers to the percentage of total estimated municipal income that would be utilized for provision of housing and basic services for the urban poor. While budgeting systems and processes are a key element for efficient functioning of municipalities, it is often the most neglected and underdeveloped barring a few exceptions.
“Internal earmarking, within local body budgets, for basic services to the urban poor”, is an important reform required for the attainment of the following larger objectives envisaged under JNNURM:
; Scale-up delivery of civic amenities and services with emphasis on universal access to
the urban poor.
; Provision of basic services to the urban poor including security of tenure at affordable
prices, improved housing, water supply and sanitation, and ensuring delivery of other
existing universal services of the government for education, health and social security.
; Integrated development of slums through projects for providing shelter, basic services
and other related civic amenities with a view to providing services to the urban poor.
2. Rationale for the reform
Internal earmarking of funds for the urban poor in ULB budgets will ensure equity, efficiency, transparency and accountability of the local body:
; Equity: All cities have some proportion of their population as urban poor. The current
practice of a common budget having generic items has failed to provide a proportionate
share in resource allocation for urban poor. Though unintentional, this has resulted due to
systemic and structural limitations of present municipal budgeting. The mechanism of a
separate budget head or entirely separate budget with detailed budget items for urban
poor under separate head will facilitate allocation of resources for the urban poor on an
; Efficiency: Separate budget head for urban poor welfare and detailed budget items under
separate head and other respective service heads will improve efficiency in allocation and
utilization of resources for the urban poor. It will also facilitate performance monitoring
; Transparency: Separate budget head for urban poor welfare and detailed budget items
under this separate head and other respective service heads, including accounting of
receipts and payments, will facilitate transparency. With such improved budget structure
it would be easy to ascertain how much the ULB is spending on the urban poor and under
which head/budget item.
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; Accountability: Performance monitoring will become easy and will help in fixing
accountability for under or non-performance.
Separate budget head for urban poor welfare and detailed budget items under this separate head, and other respective service heads for urban poor or separate budget structure is expected to have benefits for all stakeholders, namely citizens (urban poor) and the ULB.
; Equitable allocation of resources for the poor
; Focused development and efficient delivery of services
; Opportunities for greater participation in decision-making and improved interaction with
; Better monitoring of budget and progress of ULBs
; Transparency and accountability in resource allocation and utilization by ULB.
; Improved budget systems and procedures
; Enhanced focus on allocation and utilization of resources for urban poor
; Creation of an effective Management Information System (MIS)
; Facilitate objective and timely decision-making
; Better coordination between departments and agencies
; Ability to monitor and track programs, services, and revenues effectively and on a timely
; Overall improvement in governance, delivery of services and citizen interface.
; Availability of MIS on timely basis across all departments about spending on services
and development provided to urban poor
; Appropriate and timely decision-making
; Ability to monitor and track programs, services, and revenues effectively and on a timely
3. Reform components
There are three main aspects/components of this reform –
1. Adoption of clear, affirmative policy of earmarking (allocating) certain quantum (MHUPA
recommended norm is 25 % of municipal budget including funds flowing from higher level 1governments) of funds for urban poor by the State and each municipal body of the State. 2. Constitution of „Basic Services for Urban Poor Fund‟ and setting the rules/modalities for
contribution to and disbursement from funds.
3. Creation and operation of appropriate budgetary mechanism to ensure that funds allocated for
urban poor get spent on urban poor.
In response to the internal earmarking, within local body budgets, for basic services to the urban poor reform conditionality, states and ULBs have initiated processes (policy adoption) aimed at earmarking a certain percentage of the budget exclusively for the urban poor. For example,
1th DO letter No. ------------- dated May 14 2007 from Minister for Housing and Urban Poverty Alleviation
to Chief Ministers
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Gujarat state has adopted a policy for earmarking 20 percent of its budget for urban poor and has made it mandatory for ULBs in the state to earmark the same proportion of their budgets for provision of services to the urban poor. Andhra Pradesh State has given policy direction to municipal bodies to allocate 40% of total budget for provision of services to the urban poor. Though this is a step in the right direction it will be effective only if above mentioned main three aspects/components and various sub-aspects of the reform (explained below) are implemented in a following manner.
4. Steps in implementing the reform
Implementing the reform relating to internal earmarking of funds for the urban poor may be based 2on the concept of Urban Poverty Sub Plan in every city (Urban Local Body) creating a vision
poverty free, slum free cities, setting milestones for affordable housing, basic amenities and employment generation etc. estimating requirement funds, developing a legal framework based policy for internal earmarking of funds, ensuring the preparation of separate budget for urban poor, creating BSUP Fund etc.
A comprehensive reform implementation plan for achieving internal earmarking of funds for services is described under three main components of reforms - adoption of an affirmative public policy, constitution of non-lapsable BSUP Fund and creation of an appropriate budget structure and mechanism.
Adoption of Policy on internal earmarking for basic services to the urban poor
A local body can adopt internal earmarking of funds for urban poor policy by council resolution but taking in to account bigger picture of this reform it is necessary that the State Government should take lead to formulate and adopt internal earmarking of fund for the urban poor in statutory terms (suitable amendment of Municipal Acts).
Earmarking certain specified percentage of local body budget is the soul of this reform. As mentioned above MHUPA recommended norm is 25 % of municipal budget including funds flowing from higher level governments but this policy decision certainly involves various considerations mentioned below.
Whether to reserve certain percentage of municipal income (and more importantly of which source of income revenue, capital etc.) or of expenditure and that too of which type of expenditure revenue, capital etc.? If it is linked to particular source of income then there exists possibility of missing distributional equity aspect. Instead of earmarking funds for urban poor in a one-dimensional manner, State and local bodies may earmark funds in following multidimensional way in the policy -
% of municipal revenue income for the urban poor out of total municipal revenue income
(in case of surplus budget)
% of municipal revenue expenditure for the urban poor of total municipal revenue
expenditure (in case of deficit budget)
% of capital expenditure out of total capital expenditure
2th DO letter No. ------------- dated May 14 2007 from Minister for Housing and Urban Poverty Alleviation
to Chief Ministers
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It is important to know that earmarking in itself may not serve any purpose without measures to improve municipal finance and reserving part of various sources (income) for the urban poor in a separate Fund.
Beside how much should be the reservation of funds for the urban poor, public policy should consist following
; Defining clearly who is urban poor? As each State and City is at different of socio-eco-
infrastructure development, application of blanket poverty definition will not be
appropriate. Equally important is the process of identifying and registering an urban poor
objectively and transparently to receive basic service under this and future scheme.
; JnNURM scheme has recommended certain basic services to be provided to the urban
poor but it is necessary that the State Governments decide the list and the level of basic
services to be provided to urban poor in the light of state and city level specific
Constitution of a ‘Basic Services for Poor Fund’
The policy should provide for the constitution of a non-lapsable fund to be known as a BSUP fund and also should set rules and modalities contribution to and disbursement from funds. Rules should also provide that if the earmarked budget is not spent on the urban poor, then the unspent (balance) amounts to be transferred to the non-lapsable BSUP Fund.
Constitution of a separate fund is important aspect of actualizing objectives of internal earmarking of funds for the urban poor. If vehicle of fund is not created then as it has been past experience earmarking may happen in local budget but in actual terms expenditure may not happen. Further Fund serves as an accounting and statutory entity which will facilitates transparency about amount contributed to and disbursed from the fund for the urban poor and will help in big way in ensuring accountability of spending funds for the urban poor.
3The BSUP Fund may be created by earmarking portion of following sources of or by providing
specific percentage share of total revenue income of Urban Local Body as discussed earlier.
Property Tax, Professional Tax, Entertainment tax
Stamp Duty Surcharge Vacant Land Tax Land Use Conversion Charges
Town Planning Fees/Charges Betterment Levies External Development Charges
Grants from Central and State Government
Recovery of at least 10% of the funds released to implementing agencies under JnNURM through revolving fund
Creation of an appropriate municipal budget structure and mechanism
The last mile necessity for actualizing policy of internal earmarking of specific budget for providing services to urban poor and for operationalising BSUP Fund is of this reform is the creation of an appropriate municipal budget structure and mechanism. Budget is a management tool for planning as well as controlling (monitoring/tracking) the performance. Beside earmarking specific amount in a non-lapsable BSUP Fund it is important to plan appropriate works for providing basic services to the urban poor; to allocate necessary funds for these works and finally
3th Annexure 3 to the DO letter No. ------------- dated May 14 2007 from Minister for Housing and Urban
Poverty Alleviation to Chief Ministers.
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to monitor performance (physical and financial) of the works to achieve desired objective of urban poor, slum free cities. It is therefore necessary to create appropriate budget structure and mechanism at local body level keeping following ground realities, operational issues in consideration.
At present budget items earmarking budget for services to poor do exist in municipal budgets but in rudimentary and scattered across the budget manner without any linkage with each other. (Refer Figure 1) Such type of budget system will not sufficient to achieve objectives of the internal earmarking of funds for the urban poor reform.
There are three ways to restructure municipal budget to actualize this reform –
; Though Figure 1 shows that present municipal budgets have functional classification but
that is not the case. As explained in next section municipal budgets lack correct, logical
functional classification coupled by scattered around few items for urban poor. So the
first way could be adopting functional classification on the lines of Annexure 1 of this
primer and then dividing each function and the items falling under the function in to poor
and non-poor category (Refer Figure 4) Bangalore Municipal Corporation has attempted
this option. Compare to next two options/budget structure this structure allows flexibility
in transferring of funds from one function (Road) to another function (Sanitation).
; Creation of a separate functional budget head in both revenue and capital budgets titled
„urban poverty alleviation, basic services to and welfare of urban poor’ with detailed
items put under this separate budget head for urban poor. All the items pertaining to
provision of basic services and other services to urban poor which stand scattered in the
present budget structure to be brought under this separate budget head (Refer Figure 5).
This kind of structure will have more flexibility and focus compare to simple functional
structure (Figure 4).
; Dividing municipal budget at source (vertically) in to poor and non-poor that is creation
of a separate budget for services to the urban poor with all functional budget heads, sub-
heads and budget item under it (Refer Figure 6). Such separate budget structure is most
logical for operationalising BSUP Fund. It also allows flexibility in allocation of funds
for various services for poor. Such a separate budget can be called as „P Budget’.
Pimpari-Chinchwad Municipal Corporation of Maharashtra has attempted this option.
It will be up to an urban local body and a state government to adopt any one of these three options but adoption of functional classification as per Schedule 12 of the Constitution of India and National Municipal Accounting Manual (see Annexure 1 of the primer) and correcting accounting classification (Figures 2 and 3) will be most fundamental .
Grouping scattered budget items for basic service to urban poor and placing them under each functional budget head in to Poor category (option 1, Figure 4) or adopting a separate budget head for urban poor welfare and detailed budget items under this separate head and other respective service heads (option 2 Figure 5) or a separate budget structure (option 3 Figure 6) doesn‟t simply mean creation of budget items under two heads or budgets, namely budget for urban poor and budget for non-poor. It will require re-engineering of the entire budgetary process. The following principles would need to be kept in mind while introducing a separate budget head for urban poor welfare with detailed budget items under this separate head, and other respective service heads or a separate budget structure for urban poor:
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Figure 1 – Existing system of internal earmarking of budget for urban poor in overall municipal budget
; In the absence of structural guidelines, almost all ULBs have a unique structuring of their
budget with great heterogeneity and non-compatibility existing among ULBs. It is
necessary to adopt a common basic minimum budget structure as prescribed in the
National Municipal Accounting Manual (NMAM).
; Unless the underlying classification is corrected, a separate budget head for urban poor
welfare with detailed budget items under this separate head, and other respective service
heads for the urban poor or a separate budget reform will not have much utility.
; Since internal earmarking of funds for services (adoption of a separate budget head for
urban poor welfare with detailed budget items under this separate head, or a separate
budget structure) for the urban poor is also a mandatory reform under the UIDSSMT
scheme, as well as JNNURM, a state-wide approach for designing and steering
implementation of appropriate budgeting for the urban poor would be necessary. This
will result in uniformity across the state and also result in reduced implementation time
; The state/ULB must undertake a critical study of the existing budgeting system and
structure, and explore possibilities of improvement in the structure and procedures.
; Focus should be on creating separate self-contained budget head for the urban poor under
existing budget document or a separate budget structure for the urban poor.
; This reform should be integrated with accounting and e-Governance initiatives being
undertaken in the ULB.
; Adopt a flexible phase-wise approach for implementation based on the need and
requirements of ULBs.
In the case of most ULBs (with some exceptions) the present budget classification clubs two diametrically opposite accounting items/heads, e.g., deposits and advances along with revenue and capital items. While deposits or funds receipts amount to current liability, advances given amount to current assets. Similarly, deposits refund or fund utilization results in reduction in current liability, while recovery or adjustment of advances given, results in a reduction in current assets. Consequently, it is appropriate to group these items under separate budget parts, including JNNURM Primers Page 7
under an extraordinary budget not under revenue or capital budget. With the classification that clubs revenue receipts and expenditure (Budget Part 1) and capital receipts and expenditure from the own resources part of the capital budget (Budget Part 2); it will be easy to assess a ULB‟s
own resource position. Similarly, by clubbing the borrowings and grant parts of the capital budget (Budget Part 2) and deposits, advances and fund parts of the extraordinary budget (Budget Part 3) the ULB‟s assets and liability (balance sheet) position can be readily assessed.
A three-part budget classification has been suggested (refer Figure 2).
Figure 2: Basic Budget Classification (as per National Municipal Accounts Manual)
Revenue Budget Capital Budget Extraordinary Budget
(Budget Part 2) (Budget Part 3) (Budget Part 1)
Own Sources, Borrowings, Deposits Advances
Expenditure Expenditure Expenditure Receipt Receipt Receipt
The three-part budget classification will have to be repeated under all the separate budget heads that an Urban Local Body plans to maintain. E E e
Part I – Revenue Budget – Revenue Receipts and Expenditure
Part II – Capital Budget – Capital Receipts and Expenditure but grouped separately under
Capital (own sources) Budget – Capital Receipts and Expenditure from own sources
Capital (loans & borrowings) Budget – Capital Receipts received in the form of new
loans and the expenditure carried out from them.
Capital (grants) – Capital Receipts received in the form of development grants and the
expenditure carried out from them.
Part III – Extraordinary Budget – Receipts and Payment of extraordinary nature grouped under
following distinct parts:
Deposits and Fund Budget – Deposits and Special Funds receipts and payment made
Advances Budget – New advances given and advances adjusted or recovered.
The classification builds in flexibility to cope up with an increase in volume and sphere of the ULBs. The three-part budget classification can be easily expanded in future into seven parts. For example, the capital budget can be bifurcated into three parts, namely Capital (own sources), Capital (loans and borrowings) and Capital (grants). Similarly, the extraordinary budget can be bifurcated into three parts Deposits, Funds and Advances (refer Figure 3).
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Figure 3 - Basic Budget Classification in an Extended Form
Revenue Capital Capital Capital ExtraordinExtraordinExtraordin
Budget Budget Budget ary ary ary Budget
Own BorrowiBudget Budget Budget Grants
Sources ngs Deposits Advances Funds
E E E E E E E R R R R R R R
Having achieved correct classification and structure as shown in figure 2 & 3 in the light of reform components, ULBs should go for an internal earmarking of funds for services by E E E E E E E (adoption of a improved functional budget system as shown in Figure 4 or a separate budget head for urban poor welfare, with detailed budget items under this separate head as depicted in Figure 5, or separate budget structure for the urban poor as depicted in Figure 6.
Any structure selected out of structures shown in the Figures 4 to 6 should be adopted consistently for all the three basic budgets (Figure 2) or seven basic budgets (Figure 3) explained above.
Figure 4 – Dividing Functional Budget in to Poor and Non-Poor category
General Water Supply Solid Waste Roads
Budget Budget Budget Budget Budget Budget Budget Budget AllocatAllocatAllocatiAllocatAllocatAllocatAllocatAllocat ion for ion for on for ion for ion for ion for ion for ion for Non Urban Urban Non Urban Urban Non Non
Poor Poor Poor Poor Poor Poor Poor Poor
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Figure 5 – Separate Budget Head Budget Structure for internal earmarking of funds for urban poor
Figure 6 – Separate Budget Structure for earmarking internal funds for urban poor
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