Do Financially Stronger Cities Grow Faster? How Difficult to Answer?

DOI- https://doi.org/10.5281/zenodo.23042811

Abstract

Indian cities are responsible for a large share of the country's economic activity, yet their municipal governments often have very limited financial resources of their own. This raises a simple but important question: do cities that are better able to raise their own revenue actually perform better economically? The question sounds straightforward, but answering it is difficult because richer and faster-growing cities naturally collect more property tax. In other words, high revenue may be a result of growth rather than a cause of it. This paper proposes a way to separate these two possibilities. It focuses on administrative reforms in municipal property taxation—especially GIS-based property mapping, changes in valuation systems, improved collection arrangements, and digital tax platforms. These reforms can increase a city's revenue-raising capacity without necessarily being caused by a contemporaneous increase in economic activity. Because different cities introduced such reforms at different times, the study proposes a staggered difference-in-differences approach to examine whether economic activity changes after reform. Because India does not regularly publish GDP for individual cities, the study will use night-time light intensity, built-up area, and newly registered firms as measures of local economic activity. It will also examine whether any effect works through greater municipal investment, improved access to borrowing, or better information about the city's physical and property base. The study is deliberately open to a positive, small, or even zero growth effect. If reforms increase revenue but do not increase economic activity, that would itself be an important policy finding.

Keywords: Municipal Finance; Own-Source Revenue; Property Tax; Fiscal Capacity; Urban Growth; India; Difference-In-Differences; Urban Governance