{"id":69211,"date":"2025-10-16T11:21:52","date_gmt":"2025-10-16T05:51:52","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=69211"},"modified":"2025-10-16T11:21:52","modified_gmt":"2025-10-16T05:51:52","slug":"fiscal-federalism-and-the-crisis-of-municipal-finance-in-urban-india","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/fiscal-federalism-and-the-crisis-of-municipal-finance-in-urban-india\/","title":{"rendered":"Fiscal Federalism and the Crisis of Municipal Finance in Urban India"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><b>Fiscal Federalism Latest News<\/b><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">Urban India contributes nearly two-thirds of the national GDP, yet its <\/span><b>municipalities control less than 1% of the country\u2019s tax revenue<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This mismatch highlights a fundamental flaw in India\u2019s fiscal architecture, where <\/span><b>centralisation of taxation powers <\/b><span style=\"font-weight: 400;\">has <\/span><b>weakened municipal autonomy.<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Understanding this issue is crucial, as it touches upon <\/span><b>governance, decentralisation, urbanisation, and fiscal federalism.<\/b><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>The Fiscal Paradox of Urban India<\/b><\/h2>\n<ul>\n<li><b>Urban contribution vs fiscal control:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Indian cities are <\/span><b>economic powerhouses<\/b><span style=\"font-weight: 400;\"> but remain <\/span><b>fiscally handicapped<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><b>Municipalities depend<\/b><span style=\"font-weight: 400;\"> heavily on State and Central transfers, loans, and schemes.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This has <\/span><b>created an inversion of democracy<\/b><span style=\"font-weight: 400;\"> \u2014 power is centralised while responsibilities are decentralised.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Post-GST revenue loss:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Introduction of GST (2017) led to the <\/span><b>subsuming <\/b><span style=\"font-weight: 400;\">of octroi, entry tax, and local surcharges, resulting in <\/span><b>an average 19% loss of municipal revenues<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><b>Compensation <\/b><span style=\"font-weight: 400;\">mechanisms have <\/span><b>not reached the municipal level effectively<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The result is the <\/span><b>fiscal uncertainty and dependence<\/b><span style=\"font-weight: 400;\"> on higher governments.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Municipal Bonds &#8211; Promise and Pitfalls<\/b><\/h2>\n<ul>\n<li><b>Policy push:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">NITI Aayog and recent urban reforms promote <\/span><b>municipal bonds<\/b><span style=\"font-weight: 400;\"> as the <\/span><b>next frontier of city finance.<\/b><\/li>\n<li><span style=\"font-weight: 400;\">However, <\/span><b>credibility <\/b><span style=\"font-weight: 400;\">and <\/span><b>uptake remain low<\/b><span style=\"font-weight: 400;\"> due to systemic flaws.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Challenges in creditworthiness:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Credit rating agencies assess cities narrowly on their <\/span><b>\u201cown revenue,\u201d<\/b><span style=\"font-weight: 400;\"> ignoring grants and transfers which form a legitimate and recurring income stream.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This misjudgment reflects an <\/span><b>ideological bias<\/b><span style=\"font-weight: 400;\">, treating cities as dependent entities rather than equal tiers of governance envisaged under the <\/span><b>74th Constitutional Amendment.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>The property tax trap:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Property tax reforms, though vital, <\/span><b>contribute only 20\u201325%<\/b><span style=\"font-weight: 400;\"> of total revenue potential.<\/span><\/li>\n<li><b>Over-reliance on the \u201cuser-pays\u201d model<\/b><span style=\"font-weight: 400;\"> shifts the burden of urban finance onto citizens, especially the urban poor, turning public goods into private commodities.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Services like water, sanitation, public lighting, and mobility are collective entitlements, <\/span><b>not market goods<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>The Constitutional and Ideological Dimensions<\/b><\/h2>\n<ul>\n<li><b>74th Amendment and fiscal equality:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">The 74th Constitutional Amendment (<\/span><b>1992<\/b><span style=\"font-weight: 400;\">) envisioned <\/span><b>urban local bodies<\/b><span style=\"font-weight: 400;\"> (ULBs) as <\/span><b>institutions of self-government<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">However, the <\/span><b>absence of fiscal devolution<\/b><span style=\"font-weight: 400;\"> has reduced them to <\/span><b>dependent implementers<\/b><span style=\"font-weight: 400;\"> of centrally designed schemes.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Need for fiscal justice:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Recognising grants and shared taxes as rights, not favours, <\/span><b>align with the spirit of cooperative federalism.<\/b><\/li>\n<li><span style=\"font-weight: 400;\">Urban <\/span><b>fiscal empowerment<\/b><span style=\"font-weight: 400;\"> is not a technical reform but <\/span><b>a moral and political imperative.<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>The Way Forward<\/b><\/h2>\n<ul>\n<li><b>Democratise the fiscal contract:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Adopt a <\/span><b>Scandinavian model<\/b><span style=\"font-weight: 400;\"> where cities have the right to levy and collect local taxes, including income taxes in some cases.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This <\/span><b>promotes accountability, transparency,<\/b><span style=\"font-weight: 400;\"> and a direct link between citizens and governance.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Reimagine fiscal federalism:<\/b><span style=\"font-weight: 400;\"> Ensure predictable, adequate, and untied transfers to cities. Recognise municipal grants as part of a shared fiscal ecosystem, not as discretionary handouts.<\/span><\/li>\n<li><b>Reform the municipal bond framework:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Recognise grants and shared taxes as part of city income.<\/span><\/li>\n<li><b>Include governance indicators<\/b><span style=\"font-weight: 400;\"> (transparency, audit compliance, citizen participation) in <\/span><b>city credit ratings<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Allow cities to use GST compensation or State tax shares <\/span><b>as collateral for borrowing<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Strengthen local revenue mechanisms:<\/b><span style=\"font-weight: 400;\"> Improve property tax coverage, <\/span><b>digitise <\/b><span style=\"font-weight: 400;\">assessment systems. <\/span><b>Diversify <\/b><span style=\"font-weight: 400;\">revenue sources \u2014 land value capture, service charges, and urban transport levies.<\/span><\/li>\n<li><b>Restructure urban fiscal framework:<\/b><span style=\"font-weight: 400;\"> Tackling urban challenges \u2014 from waste management and housing to climate resilience and infrastructure, and grounded in <\/span><b>cooperative federalism<\/b><span style=\"font-weight: 400;\">, predictability, and autonomy.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Conclusion<\/b><\/h2>\n<ul>\n<li><b>India\u2019s urban future depends on fiscal justice<\/b><span style=\"font-weight: 400;\">. Municipal finance is not merely a bookkeeping exercise, but a reflection of democratic and moral values.<\/span><\/li>\n<li><b>Cities should not be viewed as cost centres but as engines of national prosperity.<\/b><\/li>\n<li><span style=\"font-weight: 400;\">For India to achieve sustainable urbanisation and inclusive growth, <\/span><b>the fiscal relationship between the Centre, States, and cities must be rebalanced<\/b><span style=\"font-weight: 400;\"> \u2014 restoring trust, autonomy, and resources to the grassroots.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\"><b>Source: <\/b><a href=\"https:\/\/www.thehindu.com\/news\/national\/why-is-the-fiscal-architecture-of-municipalities-flawed-explained\/article70168668.ece\" target=\"_blank\" rel=\"nofollow noopener\"><b>TH<\/b><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Centralisation of taxation powers has weakened municipal autonomy, touching upon the issues of governance, decentralisation, urbanisation, and fiscal federalism.<\/p>\n","protected":false},"author":19,"featured_media":69223,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[60,22,59],"class_list":{"0":"post-69211","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-mains-articles","9":"tag-upsc-current-affairs","10":"tag-upsc-mains-current-affairs","11":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/69211","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=69211"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/69211\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/69223"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=69211"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=69211"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=69211"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}