Art 3. Vol 3. 2026
By Anvi Srivastava
Anvi Srivastava is an undergraduate student at the Lady Shri Ram College for Women pursuing BA (hons) Political Science, with a keen interest in public policy, governance, public administration, and political economy. Her research interests include decentralisation, public finance, welfare policy, and evidence-based policymaking.
Urbanisation is growing at a fast-paced rate in India. Yet, Local self-governing bodies of India are amongst the weakest in the world regarding their ability to raise revenue independently as well as provide public services for urbanization and economic development. This raises serious challenges in addressing urban needs, environmental sustainability, urban infrastructure, and growing demands of the population.
This revenue problem can be traced to historical patterns of institutional set – up. Indian Independence brought about a different kind of dynamism in all governance structures. The Constitution which came into effect in 1950, ushered a new era of local self-government, in a break from colonial legacy. Local bodies constitutions were democratically amended through the implementation of adult franchise and abolition of communal representation.
A major flaw was left in this aspect. The Constitution put the issue of local self-government under the State List. This means that the State enjoyed the right to decide on how to run the affairs of urban local bodies. The urban local self-government bodies were thus not recognized as being autonomous entities by the Constitution of India. The ULBs were therefore dependent entirely upon State Governments, and were vested only such powers and functions as defined under respective State Legislatures. Over the years, many of the urban local bodies become weak. A significant breakthrough came with the 74th Amendment Act, 1992, which gave Urban local bodies a constitutional status.
The Constitution (74th Amendment) Act, 1992, formally recognised urban local governments as the third tier of government. The Amendment came to effect in June 1993. The Act recommended that the state governments should assign to municipal governments a set of 18 municipal functions such as urban planning including town planning, provision of water, public health, slump upgradation, regulation of land use and construction of buildings, roads and bridges, sanitation and solid waste management, and urban poverty alleviation, etc.
These functions are listed in the 12th Schedule which was inserted into the Constitution through the amendment. But there was no comparable recommendation by the 74th Amendment on the finances of municipal governments. The 74th Amendment Act defined the range of possible expenditure assignment leaving it to the states to notify devolution from the range identified (Ahluwalia, et al., 2019).
In the case of revenue sources of urban local governments, the amendment leaves it entirely to state governments. Article 243X entrusts to state governments the power to impose taxes, duties, tolls, and fees; allows state governments to assign revenues from specific taxes to urban local governments. Article 243Y leaves to State Finance Commissions (SFCs) the tasks of reviewing and recommending devolution of tax revenues and grants-in-aid to urban local governments (Ahluwalia, et al., 2019).
State governments, however, have been holding back the complete devolution of functions under 12th schedule, particularly urban planning and town planning, which is an important source of mobilizing finance. Instruments such as betterment levies, development charges, impact fees, and tax increment financing can be used by municipal governments to mobilise revenue which can be used for building urban infrastructure for planned development of a city.
Currently, while studies show that the Revenue – raising capacity of Urban – local bodies is a major factor behind the growth of regions, infrastructure development in cities, and the efficacy of public services, cities generate 66% of GDP but receive less than 1% of tax revenues, leading to a chronic fiscal gap. Furthermore, the primary source of revenue for ULBs remains transfers from the state and central governments. This is seen by the fact that Municipal corporations rely on state and central transfers for over 75% of their budgets.
The total grants from the Central government and the State governments to the MCs increased by 24.9 per cent and 20.4 percent, respectively, in 2022-23. Overall, in the post-GST period (2017-18 onwards), own tax revenue as a ratio of total revenue has come down for the MCs. On the other hand, the share of transfers in total revenue has increased, indicating the rise in vertical dependence of the MCs on the upper tiers of the government.
According to RBI’s 2024 report, Municipal Corporations only generated 0.6% of GDP in revenue, as
compared to the state government generating 14.6 % of GDP in revenue and the Central government generating 9.2% of GDP in revenue. This underfunding leads to unreliable public transport, deprived schools, and inadequate public service provisions. The Reserve Bank of India also notes that despite institutionalising local governance, there has not been appreciable betterment in the municipal corporation functions.
As urbanisation continues to expand, the need to improve and devolve greater powers to urban local bodies acquires greater significance. Hence, Urgent reforms are required in ULBs in order to keep pace with the rapid development of cities and address the needs of the citizens.
Why India’s Cities cannot finance themselves – The historical and Constitutional roots of Underfunding
Urbanisation is growing at a fast-paced rate in India. Yet, Local self-governing bodies of India are amongst the weakest in the world regarding their ability to raise revenue independently as well as provide public services for urbanization and economic development. This raises serious challenges in addressing urban needs, environmental sustainability, urban infrastructure, and growing demands of the population.
This revenue problem can be traced to historical patterns of institutional set – up. Indian Independence brought about a different kind of dynamism in all governance structures. The Constitution which came into effect in 1950, ushered a new era of local self-government, in a break from colonial legacy. Local bodies constitutions were democratically amended through the implementation of adult franchise and abolition of communal representation.
A major flaw was left in this aspect. The Constitution put the issue of local self-government under the State List. This means that the State enjoyed the right to decide on how to run the affairs of urban local bodies. The urban local self-government bodies were thus not recognized as being autonomous entities by the Constitution of India. The ULBs were therefore dependent entirely upon State Governments, and were vested only such powers and functions as defined under respective State Legislatures. Over the years, many of the urban local bodies become weak. A significant breakthrough came with the 74th Amendment Act, 1992, which gave Urban local bodies a constitutional status.
The Constitution (74th Amendment) Act, 1992, formally recognised urban local governments as the third tier of government. The Amendment came to effect in June 1993. The Act recommended that the state governments should assign to municipal governments a set of 18 municipal functions such as urban planning including town planning, provision of water, public health, slump upgradation, regulation of land use and construction of buildings, roads and bridges, sanitation and solid waste management, and urban poverty alleviation, etc.
These functions are listed in the 12th Schedule which was inserted into the Constitution through the amendment. But there was no comparable recommendation by the 74th Amendment on the finances of municipal governments. The 74th Amendment Act defined the range of possible expenditure assignment leaving it to the states to notify devolution from the range identified (Ahluwalia, et al., 2019).
In the case of revenue sources of urban local governments, the amendment leaves it entirely to state governments. Article 243X entrusts to state governments the power to impose taxes, duties, tolls, and fees; allows state governments to assign revenues from specific taxes to urban local governments. Article 243Y leaves to State Finance Commissions (SFCs) the tasks of reviewing and recommending devolution of tax revenues and grants-in-aid to urban local governments (Ahluwalia, et al., 2019).
State governments, however, have been holding back the complete devolution of functions under 12th schedule, particularly urban planning and town planning, which is an important source of mobilizing finance. Instruments such as betterment levies, development charges, impact fees, and tax increment financing can be used by municipal governments to mobilise revenue which can be used for building urban infrastructure for planned development of a city.
Currently, while studies show that the Revenue – raising capacity of Urban – local bodies is a major
factor behind the growth of regions, infrastructure development in cities, and the efficacy of public services, cities generate 66% of GDP but receive less than 1% of tax revenues, leading to a chronic fiscal gap. Furthermore, the primary source of revenue for ULBs remains transfers from the state and central governments. This is seen by the fact that Municipal corporations rely on state and central transfers for over 75% of their budgets.
The total grants from the Central government and the State governments to the MCs increased by 24.9 per cent and 20.4 percent, respectively, in 2022-23. Overall, in the post-GST period (2017-18 onwards), own tax revenue as a ratio of total revenue has come down for the MCs. On the other hand, the share of transfers in total revenue has increased, indicating the rise in vertical dependence of the MCs on the upper tiers of the government.
According to RBI’s 2024 report, Municipal Corporations only generated 0.6% of GDP in revenue, as compared to the state government generating 14.6 % of GDP in revenue and the Central government generating 9.2% of GDP in revenue. This underfunding leads to unreliable public transport, deprived schools, and inadequate public service provisions. The Reserve Bank of India also notes that despite institutionalising local governance, there has not been appreciable betterment in the municipal corporation functions.
As urbanisation continues to expand, the need to improve and devolve greater powers to urban local bodies acquires greater significance. Hence, Urgent reforms are required in ULBs in order to keep pace with the rapid development of cities and address the needs of the citizens.
India’s cities drive economic growth, yet their institutions continue to struggle with fiscal autonomy. This two-part series examines the historical and constitutional roots of municipal underfunding, before turning to contemporary challenges of property taxation, GST devolution and municipal finance.
At its heart is a simple question: can India build globally competitive cities without giving them the fiscal capacity to govern themselves?