How are municipal finances affected by violent conflict? This paper from the Crisis States Research Centre draws on case studies of conflict in Ahmedabad and Srinagar in India to identify which factors determine the impact of conflict on city finances. It finds that the extent to which a city exhibits good administrative capacity, efficient revenue-collection systems and a long-term programme of developmental expenditure can reduce the financial harm caused by conflict.
The degree of fiscal devolution in India varies by state, resulting in conspicuous disparities in the extent of decentralisation across the country. Urban local bodies (ULBs) and state finance commissions differ in the extent of their control over: a) administration, b) expenditure and revenue-raising through taxes such as property taxes and the octroi – an entry tax on imported goods – and c) non-tax levies such as fines and rents.
Ahmedabad is one of the largest and richest cities in Western India, but it is beset by an ongoing Hindu-Muslim conflict which culminated in violent clashes in 2002. Srinagar, in the Northern state of Jammu, Ladakh and Kashmir, has suffered years of under-investment and violence, stemming partly from the ongoing India-Pakistan dispute over Kashmir. The relationship between conflict and municipal finance displays particular characteristics in each of these two contrasting cities:
- Ahmedabad benefits from revenue surpluses deriving from strong administrative and tax enforcement systems and high levels of octroi collection. These enable the local government to finance investment in urban infrastructure.
- During the conflict, octroi collection fell and property taxes may have been slightly affected by the mass exodus of Muslims during the fighting.
- Although donors and investors suspended some financial support during the violence, the resilience of the city’s municipal structures and the lack of damage to its infrastructure meant any impact on finances was transient.
- Srinagar’s municipal organisation is weaker. The city is not entitled to levy the octroi tax and the administration is beset by inefficiency, leaving the local government without the resources for significant capital investment.
- Long-term violence in the area has seen lower levels of donor aid and private investment, while large grants from the central government have discouraged the development of local tax collection.
- Most capital works have focussed on the restoration of infrastructure destroyed or neglected during the conflict.
Although it is difficult to isolate the conflicts from other variables affecting the two cities’ development, a typology for analysing the impact of conflict on finances can be abstracted from the case studies:
- Where a city’s institutional structures are weak, a sustained insurgency can impede revenue collection and administrative development. By contrast, a strong municipal finance framework facing a short low intensity conflict will suffer fewer consequences.
- The types of municipal revenue stream can be divided into ‘economically buoyant’ sources, those relating to individuals’ wealth, and immobile sources. The first of these respond rapidly to economy downturns during conflict. The second may be influenced by the conflict’s impact on citizens’ prosperity. The third can be affected by similar factors, although they are generally the least elastic.
- Expenditure is indirectly affected by conflict, as lower revenues and increases in administrative costs tend to reduce available finances, especially for developmental activities. This may encourage the evolution of a strong civil society to fill the gap left by insufficient municipal support.