Context:
Despite increasing urbanisation, Finance Commission (FC) transfers to cities remain limited, with the 16th FC continuing a low share of GDP allocation while emphasizing self-revenue generation by cities.
Key Highlights:
- Government Policy / Fiscal Framework
- The 15th Finance Commission allocated about ₹1.2–1.3 lakh crore to Urban Local Bodies (ULBs) (~0.12–0.13% of GDP).
- The 16th FC (2026–31) is expected to allocate ₹3.56 lakh crore, still around 0.13% of GDP.
- Emphasis on increasing Own Source Revenue (OSR) such as property tax and user charges.
- Conditional & Performance-Based Grants
- Around 20% of grants are performance-linked, with targets like ₹1,200 per household OSR.
- Tied grants restrict spending to sectors like water supply and sanitation.
- Utilisation Issues
- Nearly ₹90,000–95,000 crore of 15th FC funds remained unspent or pending.
- Indicates capacity and governance challenges at the urban local level.
- Federal & Structural Concerns
- Proposal of ₹10,000 crore incentive for peri-urban mergers raises concerns over State autonomy.
- Limited attention to cess revenues (2.2% of GDP) reduces divisible pool.
- Lack of focus on urban climate resilience.
Relevant Prelims Points:
- Finance Commission (Art. 280)
- Constitutional body recommending tax devolution and grants-in-aid.
- Urban Local Bodies (ULBs)
- Governed under 74th Constitutional Amendment Act, 1992.
- Own Source Revenue (OSR)
- Includes property tax, user charges, fees.
- Tied vs Untied Grants
- Tied: Specific purpose
- Untied: Flexible use
- Cess and Surcharge
- Not part of divisible pool, retained by Centre.
Relevant Mains Points:
- Why Grants Remain Limited
- Increasing reliance on local fiscal autonomy.
- Rising share of cess reduces divisible resources.
- Concerns over inefficient utilisation of previous funds.
- Implications
- Weakens urban infrastructure development.
- Limits planning autonomy of cities.
- Creates imbalance in cooperative federalism.
- Challenges
- Poor municipal capacity and governance deficits.
- Narrow tax base and weak property tax systems.
- Over-centralisation through conditional grants.
- Way Forward
- Increase untied grants and predictable transfers.
- Strengthen municipal finance reforms (property tax digitisation).
- Expand divisible pool by rationalising cess/surcharges.
- Promote capacity building and urban governance reforms.
UPSC Relevance:
• GS 2 – Polity (federalism, local governance)
• GS 3 – Economy (public finance, urban development)
• Prelims – Finance Commission, 74th Amendment