Quick Overview
India’s municipalities, despite managing crucial urban services, control less than 1% of the national tax revenue. This fiscal imbalance highlights the urgent need to reform municipal finance. The article discusses structural weaknesses, the impact of GST, dependence on grants, and limited creditworthiness of Urban Local Bodies (ULBs), while suggesting fiscal reforms for strengthening urban governance and achieving Sustainable Development Goal 11.
Introduction
Urban India contributes nearly two-thirds of the country’s GDP but municipalities manage a meagre portion of fiscal resources. The result is a growing mismatch between their expanding responsibilities and limited financial autonomy, undermining sustainable urban development and governance.
Structural Issues in Municipal Finances
Municipalities rely heavily on tied or delayed state and central grants. The Goods and Services Tax (GST) has further eroded local fiscal autonomy by subsuming traditional municipal taxes such as octroi and entry tax, leading to significant revenue loss. Limited creditworthiness, political reluctance to raise taxes, and weak institutional capacities further constrain municipal functioning.
Urban Local Bodies under the Constitution
The 74th Constitutional Amendment Act (1992) accorded constitutional status to Urban Local Bodies (ULBs) through Part IXA, defining three tiers—Nagar Panchayats, Municipal Councils, and Municipal Corporations. It also mandated elections, representation, and the 12th Schedule for municipal functions like water supply, sanitation, and waste management.
Sources of Municipal Finance
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Own Revenues: Property tax, user charges, and advertisement fees.
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Intergovernmental Transfers: Grants from State and Central Finance Commissions.
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Borrowings & Bonds: Instruments like municipal bonds used by cities such as Ahmedabad and Pune.
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Public-Private Partnerships (PPP): Infrastructure development and asset monetisation.
Need for Fiscal Reform
The devolution of functions to ULBs has not been matched by adequate fiscal powers. Rapid urbanisation, population pressure, and increasing infrastructure needs demand a comprehensive overhaul of fiscal frameworks to ensure effective and participatory governance.
Recent Initiatives
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AMRUT 2.0 & SASCI: Incentivising property tax reforms and municipal bond issuance.
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Finance Commission Reforms: Recommendations for using GIS-based property tax mapping and empowering municipalities with new tax instruments.
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Digital Governance: Introduction of e-tax systems for transparency and efficiency.
Key Reform Measures
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Stable Revenue Recognition: Treat grants and shared taxes as legitimate income.
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Credit Rating Reform: Include governance and fiscal management indicators.
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GST-linked Borrowing Flexibility: Allow GST compensation as collateral.
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Property Tax Reforms: GIS mapping, revaluation, and enhanced collection mechanisms.
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Cooperative Federalism: Formula-based predictable transfers.
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Innovative Financing: Adoption of Social Stock Exchanges and Value Capture Financing.
Conclusion
Fiscal empowerment of municipalities is integral to India’s journey toward sustainable and inclusive urbanisation. Building financially autonomous and accountable ULBs will not only strengthen grassroots democracy but also align with SDG 11 – Sustainable Cities and Communities.
CLAT/Exam Relevance Summary
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For UPSC:
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GS Paper 2: Federalism, Local Self-Governance, and Fiscal Devolution.
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GS Paper 3: Infrastructure and Sustainable Development.
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Theme: Strengthening Urban Fiscal Governance for Effective Decentralisation.
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Keywords: Municipal Bonds, Fiscal Autonomy, 74th Amendment, GST, Finance Commissions.
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For CLAT/Legal GK:
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Constitutional significance of the 74th Amendment (Part IXA).
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Legal framework of municipal functions and financial accountability.
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Current relevance in urban governance and sustainable development.
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