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Chapter 4 - Trends In Municipal Finances In India


4.1 Overview of Municipal Finances

This chapter presents an overview of municipal finances in India. The first section analyses the pattern and trends in municipal finances using all-India fiscal aggregates obtained from secondary sources3 to provide a macro picture across the country . The second, third and fourth sections provide indepth analysis of the structure of municipal finances of select 35 Municipal Corporations (MCs). The analysis is based on data gathered from the budget documents of these selected MCs, covering the period 1999-2000 to 2003-2004.

4.2 Size of the Municipal Sector

As per the Report of the Twelfth Finance Commission, India has 3,723 ULBs, of which 109 are MCs, 1432 are municipalities and 2182 are Nagar Panchayats.

The total revenue of the municipalities grew from Rs.11,515 crore in 1998-99 to Rs.15,149 crore in 2001-02 at a compounded average growth rate (CAGR) of 9.6 per cent. The total expenditure increased from Rs 12,035 crore to Rs 15,914 crore during the same period, registering a CAGR of 9.8 per cent. In spite of the growth of the municipal sector in the country, it accounts for a very small proportion of both Gross Domestic Product (GDP) (at current prices) as well as revenue and expenditure of the upper tiers of Government.

Total revenue of the municipal sector accounts for about 0.75 per cent of GDP of the country. In contrast, the ratio is 4.5% for Poland, 5% for Brazil and 6% for South Africa [Buckley (2005)]. Similiarly, municipal revenue forms a  little more than 2 per cent of

Table 13: Revenue Significance of Municipal Sector

Year

Municipal

Percentage

Relative share of Municipal Revenue

 

Revenue

of GDP at

 

(as per cent of Total Revenue of)

 

(Rs. Crore)

Factor Cost

State Govt.

Central Govt.

Combined State &
Central Govt.

1998-99

11,515

0.72

4.4

4.1

2.5

1999-00

13,173

0.75

4.2

4.4

2.5

2000-01

14,581

0.77

4.2

4.5

2.4

2001-02

15,149

0.73

4.1

4.2

2.3

Source : (i) Reports of Eleventh and Twelfth Finance Commission, (ii) Economic Survey, GoI 2004-05.


combined revenue of State and Central Governments. Total revenue of ULBs has been growing at a lower rate (9.7 per cent during 1998-99 to 2001-02) than the growth of combined revenue of Central and State Governments (10.8 per cent during 1998-99 to 2001-02). This reflected in a marginal decline in the share of municipal revenue in total government revenues from 2.5 per cent in 1998-99 to 2.3 per cent in 2001-02. Table 13 provides an overview of the relative importance of municipal revenues in relation to revenues of the States and the Centre.

In terms of total expenditure, the municipal sector accounts for about 0.79 per cent of the GDP of the country. While, municipal expenditure accounts for little over 2 per cent of the combined expenditure of State and Central Governments, it declined further between 1999-2000 and 2001-2002. Table 14 provides an overview

Table 14: Expenditure Significance of Municipal Sector

Year

Municipal

Percentage

Relative share of Municipal Expenditure

 

Expenditure

of GDP at

(as per cent of Total Expenditure of)

 

(Rs. Crore)

Factor Cost

State Govt.

Central Govt.

Combined State & Central Govt.

1998-99

12035

0.75

4.52

4.31

2.21

1999-00

14452

0.82

4.60

4.85

2.36

2000-01

15743

0.83

4.53

4.84

2.34

2001-02

15914

0.76

4.22

4.39

2.15

Source: (i) Reports of Eleventh and Twelfth Finance Commission (ii) Handbook of Statistics on Indian Economy, RBI 2005-06


of the relative importance of municipal expenditure in relation to the expenditures of the States and Centre.

4.3 Finances of Select Municipal Corporations

This and subsequent sections undertake indepth analysis of municiple finances based on primary data obtained from the budget

Table 15: Study Sample - Cities with more than 1 million population in 2001

S. No.

Name of the City

Name of the State

UA/City Population

MC Population

 

 

 

(2001) (million)

(2001)

1

Greater Mumbai

Maharashtra

16.37

11914398

2

Kolkata

West Bengal

13.22

4580544

3

Delhi

Delhi

12.79

9817439

4

Chennai

Tamil Nadu

6.42

4216268

5

Bangalore

Karnataka

5.69

4292223

6

Hyderabad

Andhra Pradesh

5.53

3449878

7

Ahmedabad

Gujarat

4.52

3515361

8

Pune

Maharashtra

3.75

2540069

9

Surat

Gujarat

2.81

2433787

10

Kanpur

Uttar Pradesh

2.69

2532148

11

Jaipur

Rajasthan

2.32

2324319

12

Lucknow

Uttar Pradesh

2.27

2207340

13

Nagpur

Maharashtra

2.12

2051320

14

Patna

Bihar

1.71

1376950

15

Indore

Madhya Pradesh

1.64

1597441

16

Vadodara

Gujarat

1.49

1306035

17

Bhopal

Madhya Pradesh

1.45

1433875

18

Coimbatore

Tamil Nadu

1.45

930882

19

Ludhiana

Punjab

1.40

1395053

20

Kochi

Kerala

1.35

596473

21

Visakhapatnam

Andhra Pradesh

1.33

982940

22

Agra

Uttar Pradesh

1.32

1259979

23

Varanasi

Uttar Pradesh

1.21

1100748

24

Madurai

Tamil Nadu

1.19

928869

25

Meerut

Uttar Pradesh

1.17

1074229

26

Nashik

Maharashtra

1.15

1076967

27

Jabalpur

Madhya Pradesh

1.12

951469

28

Jamshedpur

Jharkhand

1.10

570349

29

Asansol

West Bengal

1.09

475439

30

Dhanbad

Jharkhand

1.06

198963

31

Faridabad

Haryana

1.05

1054981

32

Allahabad

Uttar Pradesh

1.05

975393

33

Amritsar

Punjab

1.01

1011327

34

Vijayawada

Andhra Pradesh

1.01

851282

35

Rajkot

Gujarat

1.00

967476

Source :
(i) http://urbanindia.nic.in/mud-final-site/programs/urbandevelopment/nurm.htm Website of MUD (accessed on November 15, 2005);
(ii) http://www.censusindia.net/results/millioncities.html Census of India website (last accessed on March 24, 2006)
(iii) Secondary sources, including budget documents of the MCs

documents of 35 major MCs of the country whose population was 1 million and above as per 2001 Census. Table 15 shows the sample of MCs and the States to which they belong.

4.4 Municipal Revenues

4.4.1 Structure of Municipal Revenues

The revenue base of MCs can be broadly categorized into: (a) tax revenues, (b) non-tax revenues, (c) assigned (shared) revenue, (c) grants-in-aid, (d) loans and (e) other receipts. Table16 lists out revenue sources under each major revenue head. It may be mentioned that composition as well as relative importance of revenue sources of MCs varies across the States.
Table 17 sets out the major components of tax revenue of selected MCs in India. While, property tax is the major revenue source in most of the MCs, octroi is the major source in the MCs of Maharashtra and Gujarat. Octroi has been abolished in all other States excepting Maharashtra and Gujarat.

Table 18 illustrates the major user charges and fees levied by the select MCs in India. There is considerable heterogeneity in the levy of user charges by MCs across states.

Table 16: Revenue Sources of Municipal Corporations in India 1998-2002

Revenue Head/Category

Sources of revenue

Tax revenue

Property Tax, Octroi, Advertisement Tax, Tax on Animals, Vacant Land Tax,

 

Taxes on Carriages and Carts

Non-Tax revenue

User Charges, Municipal Fees, Sale & Hire Charges, Lease amounts

Other receipts

Sundry receipts, Law charges costs recovered, Lapsed deposits, Fees, Fines

 

& Forfeitures, Rent on Tools & Plants, Miscellaneous Sales etc.

Assigned (Shared) revenue

Entertainment Tax, Surcharge on Stamp duty, Profession Tax, Motor Vehicles Tax

Grants-in-aid

(i) Plan Grants made available through planned transfers from upper tier

 

of Government under various projects, programmes and schemes

 

(ii) Non-Plan Grants made available to compensate against the loss of income

 

and some specific transfers

Loans

Loans borrowed by the local authorities for capital works etc. – HUDCO,

 

LIC, State and Central Governments, Banks and Municipal Bonds

 

 

Source: Budgets of Municipal Corporations.



Table 17: Sources of Major Tax Revenues of Selected Municipal Corporations

 

in India 1998-2002

 

Name of State

Name of Municipal
Corporation

Major Taxes

Andhra Pradesh

Hyderabad

Property Tax, Profession Tax

Bihar

Patna

Property Tax, Profession Tax

Delhi

Delhi

Property Tax, Advertisement Tax

Gujarat

Surat

Property Tax, Octroi

Karnataka

Bangalore

Property Tax, Advertisement Tax

Kerala

Kochi

Property Tax, Profession Tax

Madhya Pradesh

Indore

Property Tax, Advertisement Tax

Maharashtra

Mumbai

Octroi, Property Tax

Punjab

Ludhiana

Octroi, Property Tax

Rajasthan

Jaipur

Octroi, Property Tax

Tamil nadu

Chennai

Property Tax, Profession Tax

Uttar Pradesh

Varanasi

Property Tax, Advertisement Tax

West Bengal

Kolkota

Property Tax, Advertisement Tax

 

 

 

Source: Budgets of Municipal Corporations.

 


Shared tax revenue, which varies in terms of composition and nature across states, also forms significant proportion of MC resources (Table 19). Entertainment tax is an important tax, not levied by the MCs, but collected and assigned to the MCs by State Governments. In Andhra Pradesh and Tamil Nadu, in addition to entertainment tax, profession tax and surcharge on stamp duty are also assigned to local bodies.

Table 18: Sources of Major User Charges and Fees of Selected Municipal

Corporations in India 1998-2002

Name of State

Name of Municipal Corporation

User Charges and Fees

 

 

 

Maharashtra

Greater Mumbai

Water Charges, Sewerage Charges, Building

 

 

Licence Fees

West Bengal

Kolkata

Planning Fees, Car Parking Fees, Mutation

 

 

Fees

Karnataka

Bangalore

Betterment Charges, Building Licence Fees,

 

 

Penalty for Late Tax payment

Orissa

Bhubaneswar

Building Licence Fees, Market Fees

Gujarat

Surat

Water Charges, Building-related Fees,

 

 

Betterment Charges

Tamil Nadu

Chennai

Building Licence Fees, Market Fees, Other

 

 

Licence Fees, Parking Fees

Andhra Pradesh

Hyderabad

Dangerous and Offensive Trade Licence

 

 

Fees, Market Fees, Slaughter House Fees

Uttar Pradesh

Kanpur

Building Licence Fees, Market Fees

 

 

 

Source: Budgets of Municipal Corporations.

 

 

Table 19: Sources of Shared Revenues of Selected Municipal Corporations in

India 1998-2002

Name of State

Name of Municipal
Corporation

Shared Municipal
Taxes

Maharashtra

Greater Mumbai

Non-agricultural Assessment
Tax,

 

 

Entertainment Tax

West Bengal

Kolkata

Motor Vehicles Tax, Entertainment Tax

Karnataka

Bangalore

Entertainment Tax, Surcharge on Stamp

 

 

Duty

Gujarat

Surat

Entertainment Tax

Tamil Nadu

Chennai

Surcharge on Sales Tax, Duty on Transfer

 

 

of Property, Entertainment Tax

Andhra Pradesh

Hyderabad

Surcharge on Stamp Duty, Profession

 

 

Tax, Entertainment Tax

Source: Budgets of Municipal Corporations.

 


Apart from their own revenue sources, i.e., tax and non-tax revenue sources, the MCs depend upon grants from State Governments. These grants are primarily intended to compensate for the mismatch of functions and finance. Most of the MCs receive financial support in the form of revenue grants from State Governments to meet current expenses. Similiarly, capital grants are also provided for meeting project related expenditure. Table 20 shows the composition of grants-in-aid in selected MCs.
In addition to own revenues, shared revenues, user charges & fees and grants-in-aid, loans also constitute an important source of municipal revenues in some ULBs.

4.4.2 Composition and Trends of Municipal Revenues

Relative contribution of various components in the total revenue over the years has been presented in Tables 21(a) and 21(b).

Between 1999-00 to 2003-04, while the share of non-tax, assigned revenue, non-plan and plan grants improved, the share of tax revenue in total revenue receipts of MCs declined.

The average shares of major revenue components (average of 2000-04) based on the data of 35 Municipal Corporations are shown

Table 20: Major Sources of Grants-in-Aid of Selected Municipal Corporations

in India 1998-2002

Name of State

Name of Municipal

Grants-in-Aid provided to

 

Corporation

Municipal Corporations

Maharashtra

Greater Mumbai

Primary Education Grant and Secondary

 

 

Education Grant

West Bengal

Kolkata

Dearness Allowance Grant, Grant to

 

 

Implement Recommendations of Pay

 

 

Commission and Water Supply, Sewerage

 

 

and Drainage Grants

Karnataka

Bangalore

Octroi Compensation, Motor-Vehicle Tax

 

 

Compensation and Family Planning

 

 

Scheme Grants

Orissa

Bhubaneswar

Salary and Dearness Allowance Grants,

 

 

Road Development Grant, Primary

 

 

Education Grant and Secondary

 

 

Education Grant

Gujarat

Surat

Education Grant, Family Planning Grant

 

 

and Small Savings Grant

Tamil Nadu

Chennai

Revenue Grant, Contributions and

 

 

Compensation for Toll

Andhra Pradesh

Hyderabad

Property Tax Compensation, Octroi

 

 

Compensation, Per Capita Grant, Motor

 

 

Vehicle Tax Compensation and Road Grant

Uttar Pradesh

Kanpur

Octroi Compensation, Salary Grant,

 

 

Education Grant (Primary & Secondary

 

 

Education), Medical Grant, Road Grant

Source: Budgets of Municipal Corporations.

 


in the Figure 2. Among the various revenue sources, tax revenue assumes greater importance in terms of both size and share. The

Table 21(a): Composition of Municipal Revenue and Trends

(Rs.in Lakh)

Sl.

Revenue

1999-

2000-

2001-

2002-

2003-

Average

No.

component

2000

2001

2002

2003

2004

Growth Rate %

1

Tax revenue

458509

554597

461895

573952

599387

8.23

2

Non-Tax revenue

238670

297890

296487

421422

434905

17.42

3

Assigned revenue

87557

115909

110146

132588

131076

11.66

4

Non-Plan grants

26667

34145

33341

54876

50161

20.42

5

Other revenue
receipts

98600

86769

48024

64177

63271

-6.11

 

Revenue Receipts

910003

1089310

949893

1247015

1278800

10.18

6

Plan grants

16753

15665

31712

30027

49898

39.20

7

Loans

19917

47245

31805

28520

32835

27.33

8

Other capital receipts

11228

18101

18622

25785

33948

33.55

 

Capital Receipts

47898

81011

82139

84332

116681

27.89

 

Total Receipts

957901

1170321

1032032

1331347

1395481

11.04

Source: Based on the Budgets of Municipal Corporations.



Table 21(b): Composition of Municipal Revenue and Trends

(Per cent to Total)

Sl.No.

Revenue component

1999-

2000-

2001-

2002-

2003-

Average %

 

 

2000

2001

2002

2003

2004

 

1

Tax revenue

47.87

47.39

44.76

43.11

42.95

45.21

2

Non-Tax revenue

24.92

25.45

28.73

31.65

31.17

28.38

3

Assigned revenue

2.78

2.92

3.23

4.12

3.59

3.33

4

Non-Plan grants

9.14

9.90

10.67

9.96

9.39

9.87

5

Other revenue receipts

10.29

7.41

4.65

4.82

4.53

6.34

 

Revenue Receipts

95.00

93.08

92.04

93.67

91.64

93.08

6

Plan grants

1.75

1.34

3.07

2.26

3.58

2.40

7

Loans

2.08

4.04

3.08

2.14

2.35

2.74

8

Other capital receipts

1.17

1.55

1.80

1.94

2.43

1.78

 

Capital Receipts

5.00

6.92

7.96

6.33

8.36

8.36

 

Total Receipts

100.00

100.00

100.00

100.00

100.00

100.00

Source: Based on the Budgets of Municipal Corporations.


aggregate tax revenue of the 35 MCs constituted 45 per cent of average aggregate total revenue (total receipts), which was followed by non-tax revenue constituting 28 per cent of the average aggregate.

4.5 Municipal Expenditure

4.5.1 Structure of Municipal Expenditure

The expenditure incurred by the MCs can be broadly categorized into: (a) revenue expenditure and (b) capital expenditure.



Table 22: Categorisation of Municipal Expenditures

Expenditure Category

Expenditure Items

Establishment expenditure

Staff salaries, Allowances, wages, Pensions & Retirement benefits etc.

Administrative expenditure

Rents, rates & Taxes, Office maintenance, Communications, Books &

 

periodicals, Printing & stationary, Travel expenditure, Law charges etc.

Operations & Maintenance

Power & fuel, Bulk purchases, Stores, Hire charges, Repairs & expenditure Maintenance and Interest payments made on loans

Capital expenditure

Buildings, Water supply & Sewerage, Energy/lighting, Solid waste management , Roads, Bridges, Culverts, Causeways, Health & sanitation, Parks and recreation spaces, Furniture & fittings, Tools & plant, Equipment etc., Principal repayments of loans

Other expenditure

Miscellaneous expenses not accounted for in the above

Source: Budgets of Municipal Corporations.


Further, revenue expenditure broadly comprises (i) establishment expenditure, (ii) administrative expenditure, (iii) operations and maintenance expenditure, and (iv) interest payments on loans; the capital expenditure comprises (i) expenditure on capital formation and (ii) principal repayment. The component of these major expenditure categories are shown in table 22.

4.5.2 Composition and Trends of Municipal Expenditure

The composition of aggregate expenditure of the MCs, in terms of the above categories, and trends are shown in Tables 23(a) and 23(b).

Table 23(a): Composition and Trends of Municipal Expenditure

(Rs.in Lakh)

Sl. No

Expenditure component

1999-

2000-

2001-

2002-

2003-

Average

 

 

2000

2001

2002

2003

2004
Rate %

Growth

1

Establishment and administration expenditure

279216

330414

329592

411432

402550

10.19

2

Operation and maintenance expenditure

107383

128165

142174

164406

154400

9.96

3

Other revenue expenditure

51830

56120

55954

58190

56265

2.17

4

Revenue Expenditure

438429

514699

527720

634028

613215

9.20

5

Capital Expenditure

96933

105942

119463

124817

150424

11.76

6

Other Expenditure (not classified)

209744

266611

210685

399205

470925

28.40

 

Total Expenditure

745106

887252

857868

1158050

1234564

14.34

Source: Budgets of Municipal Corporations.



Table 23(b): Composition and Trends of Municipal Expenditure

(Percent to Total)

Sl. No.

Expenditure component

1999-

2000-

2001-

2002-

2003-

Average%

 

 

2000

2001

2002

2003

2004

 

1

Establishment and

37.47

37.24

38.42

35.53

32.61

36.25

 

administration expenditure

 

 

 

 

 

 

2

Operation and maintenance expenditure

14.41

14.45

16.57

14.20

12.51

14.43

3

Other revenue expenditure

6.96

6.33

6.52

5.02

4.56

5.88

4

Revenue Expenditure

58.84

58.01

61.52

54.75

49.67

56.56

5

Capital Expenditure

13.01

11.94

13.93

10.78

12.18

12.37

6

Other Expenditure (not classified)

28.15

30.05

24.56

34.47

38.15

31.07

 

Total Expenditure

100.00

100.00

100.00

100.00

100.00

100.00

Source: Budgets of Municipal Corporations.


The average shares of different components in aggregate expenditure during the period of 2000-04 are shown in Figure 3.
Among all the components of municipal expenditure, the expenditures on capital works, establishment & administration, and operations & maintenance assume importance. The establishment & administrative expenditure constituted 36.25 per cent of the aggregate total expenditure, during 2000-2004. Capital expenditure, which is an important component, constituted less than 13 per cent of the total expenditure, during the same period.

The above expenditure pattern indicates that the MCs’ spending on capital works has been significantly low which is critical for building civic infrastructure for planned urban development.

The under-investment in public works is reflected in inadequate availability of civic amenities such as water supply, sewerage, transportation networks and storm drainage system as discussed in the next chapter.

4.5.3 Expenditure on Public Works

The expenditure on public works is an important component of the expenditure incurred by the Municipal Corporations. It includes both the expenditure on capital formation as well as the current expenditure incurred on public works by the MCs. The current expenditure comprises expenditure on staff, administration and operations & maintenance. The trends and compostion of expenditure on public works are shown in Tables 24(a) and 24(b). The total expenditure on all public works of the MCs accounted for 46.5 per cent of the total expenditure, on an average, during 2000-2004. Among the components, expenditures on health & sanitation and street lighting have grown the fastest, followed by expenditures on roads, education and sewerage. The growth in expenditures

Table 24(a): Composition of Expenditure on Public Works and its Trends

(Rs.in Lakhs)

Public Works

1999-

2000-

2001-

2002-

2003-

Average

 

2000

2001

2002

2003

2004

Growth

 

 

 

 

 

 

Rate %

Health & Sanitation

14593

33708

38339

47695

49443

43.20

Water supply

28803

31742

34694

40792

40976

9.38

Roads

58730

85658

83420

92270

97390

14.85

Parks & Playgrounds

72658

77040

83298

88722

90533

5.68

Education

48500

57782

60533

72218

74885

11.72

Sewerage

20963

22742

27783

31013

32860

12.06

Solid waste management

42440

50696

50886

57511

57614

8.26

Energy/lighting

27436

43150

32092

81495

69277

42.65

All Major Works

314123

402518

411046

511716

512977

13.75

Source: Budgets of Municipal Corporations.



Table 24(b): Composition of Expenditure on Public Services and its Trends

(as Percentage of Total)

Public Works

1999-

2000-

2001-

2002-

2003-

Average

 

2000

2001

2002

2003

2004

Growth

Health & Sanitation

4.65

8.37

9.33

9.32

9.64

8.26

Water supply

9.17

7.89

8.44

7.97

7.99

8.29

Roads

18.70

21.28

20.29

18.03

18.99

19.46

Parks & Playgrounds

23.13

19.14

20.26

17.34

17.65

19.50

Education

15.44

14.36

14.73

14.11

14.60

14.65

Sewerage

6.67

5.65

6.76

6.06

6.41

6.31

Solid waste management

13.51

12.59

12.38

11.24

11.23

12.19

Energy/lighting

8.73

10.72

7.81

15.93

13.50

11.34

All Major Works

100.00

100.00

100.00

100.00

100.00

100.00

As share of Total Expenditure (%)

42.16

45.37

47.91

44.19

41.55

44.24

Source: Budgets of Municipal Corporations.


incurred on water supply, parks and play grounds and solid waste management has been relatively modest.

The MCs have been assigned some of the essential service delivery functions as defined under the respective Municipal legislations. It was laid down that they shall give primary attention to providing essential services like water supply, sewerage, street lights, solid waste management and public (only primary) health. A disproportionately high spending on non-discretionary items like

secondary education or secondary health care may not be desirable, unless an MC has already attained satisfactory levels of services on essential services.

The composition of expenditure on various public services in the MCs (shown in Figure 4) clearly indicates that the expenditure incurred on essential municipal functions (obligatory/non-discretionary items) like provision of water supply, drainage, sewerage, health & sanitation and solid waste management has been comparatively lower than the expenditure incurred on non-essential functions (discretionary items) like provision of education and parks. This calls for rationalising the discretionary spending by MCs through suitable guidelines; and to improve public accountability of expenditure through citizen’s charters and social audits which will be discussed in Chapter 6.

Although water supply and sewerage functions are handled by separate boards in some metropolitan cities like Delhi, Hyderabad, Bangalore and Chennai, this fact does not affect the findings on municipal expenditures. In fact, the pattern of expenditure on public works, after deducting the corresponding figures for water supply and sewerage, of the above four metropolitan cities, more or less remains the same.

4.6 Summary Observations

The municipal sector in India has remained small with its total revenue accounting for about 0.75 per cent of GDP. In terms of both revenue and expenditure they account for a little above 2 per cent of the combined revenues and expenditure of Central Government, State Governments and ULBs. Analysis of the data for 35 major MCs indicated higher growth of expenditure (14.3 per cent) during 200-04 compared to the growth of total receipts (11.0 per cent). Component-wise, tax revenue accounted for 45.2 per cent of total revenue, followed by non-tax revenue (28.7 per cent) during 2000-04. Establishment and administration expenditure accounted for about 36 per cent of total expenditure during 2000-04. Expenditure on public works accounted for about 44 per cent of the total expenditure with expenditure on roads and parks and playgrounds accounting for about 19.5 per cent of the total expenditure.


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