{"id":91655,"date":"2026-03-09T09:35:20","date_gmt":"2026-03-09T04:05:20","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=91655"},"modified":"2026-03-09T11:58:17","modified_gmt":"2026-03-09T06:28:17","slug":"fiscal-devolution-to-cities","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/fiscal-devolution-to-cities\/","title":{"rendered":"Fiscal Devolution to Cities &#8211; Gaps in Financing India\u2019s Urban Future"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><b>Fiscal Devolution to Cities Latest News<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Urban centres in India are the <\/span><b>primary engines<\/b><span style=\"font-weight: 400;\"> of economic growth, generating nearly 67% of GDP and around 90% of government revenues.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Despite their economic importance and rapid population growth, the<\/span><b> 16th<\/b><span style=\"font-weight: 400;\"> Finance Commission (<\/span><b>FC<\/b><span style=\"font-weight: 400;\">) continues the pattern of limited fiscal transfers to Urban Local Bodies (ULBs).\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission instead emphasises enhancing Own Source Revenue (<\/span><b>OSR<\/b><span style=\"font-weight: 400;\">) through local taxation, raising questions about the adequacy of fiscal support and the implications for urban governance and federalism.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Urban Economy vs Fiscal Support<\/b><\/h2>\n<ul>\n<li><b>Cities as engines of growth:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Urban centres contribute around two-thirds of India\u2019s GDP and a significant share of government revenues.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">India\u2019s urban population is projected to reach 41% by 2031, increasing pressure on infrastructure, housing, sanitation, and mobility.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Urban grants under Finance Commissions:<\/b>\n<ul>\n<li><b>15th Finance Commission (2021\u201326):<\/b><span style=\"font-weight: 400;\"> Urban local bodies received \u20b91.2\u20131.3 lakh crore over five years. This amounted to roughly 0.12\u20130.13% of GDP.<\/span><\/li>\n<li><b>16th Finance Commission (2026\u201331): <\/b><span style=\"font-weight: 400;\">Proposed allocation of \u20b93.56 lakh crore over five years (\u20b975,000 crore annually). With India\u2019s projected GDP around \u20b9400 lakh crore, the ratio remains around 0.13% of GDP.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Key insight:<\/b><span style=\"font-weight: 400;\"> Despite higher nominal allocations, the share of GDP transferred to cities remains stagnant, indicating limited improvement in fiscal support.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Per Capita Transfers &#8211; The Hidden Reality<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s urban population exceeded 470 million around 2020. It is expected to reach 600 million or more during the 2026\u201330 FC cycle.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">When grants are distributed across this growing population, per capita transfers remain stagnant or decline in real terms.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><b>fiscal capacity<\/b><span style=\"font-weight: 400;\"> of cities does not grow proportionately with the rising urban population and infrastructure demands.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Utilisation Challenges<\/b><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">Even the limited funds allocated have not always been effectively utilised.<\/span><\/li>\n<li><b>For example,<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Under the 15th FC, total local body grants were about \u20b94.36 lakh crore.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Around \u20b990,000\u201395,000 crore remained unspent or pending utilisation.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Approximately \u20b930,000\u201335,000 crore of these unspent funds were meant for urban local bodies.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Reasons include:<\/b><span style=\"font-weight: 400;\"> Administrative bottlenecks, weak institutional capacity in ULBs, delays in project approvals and fund releases.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Tied Grants and Fiscal Autonomy<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>What are tied grants?<\/b><span style=\"font-weight: 400;\"> Tied grants are earmarked funds that must be used for specific sectors such as water supply, sanitation, wastewater management, etc.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Implications: <\/b><span style=\"font-weight: 400;\">They limit the <\/span><b>fiscal autonomy<\/b><span style=\"font-weight: 400;\"> of cities. ULBs cannot allocate funds according to local priorities.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>16th FC<\/b><span style=\"font-weight: 400;\">: It introduces even stricter conditions through performance-based grants.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Performance-Based Conditions<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A portion of urban grants is linked to certain <\/span><b>governance reforms<\/b><span style=\"font-weight: 400;\">, such as regular elections for local bodies, improved fiscal discipline, publication of provisional and audited accounts, and constitution of State Finance Commissions.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Additionally, 20% of funds are conditional on meeting specific benchmarks. Cities must increase OSR (~\u20b91,200 per household annually), especially through property taxes and user charges.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Concern<\/b><span style=\"font-weight: 400;\">: Many cities may struggle to meet these benchmarks, risking the loss of funds.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Federalism Concerns<\/b><\/h2>\n<ul>\n<li><b>Incentives for peri-urban mergers<\/b><span style=\"font-weight: 400;\">: The Commission has proposed \u20b910,000 crore as a one-time incentive for merging peri-urban villages (population &gt;1 lakh) with urban areas.<\/span><\/li>\n<li><b>Issues involved:<\/b>\n<ul>\n<li><b>Constitutional concerns: <\/b><span style=\"font-weight: 400;\">Urban development is a <\/span><b>State subject<\/b><span style=\"font-weight: 400;\"> under the Constitution. Central incentives may interfere with State autonomy.<\/span><\/li>\n<li><b>Administrative complications: <\/b><span style=\"font-weight: 400;\">In States with strong rural governance structures (e.g., Kerala), such mergers could create institutional and service delivery challenges.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Neglect of Climate Finance<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The 16th FC recommendations pay<\/span><b> limited attention<\/b><span style=\"font-weight: 400;\"> to climate change, despite cities being highly vulnerable to floods, heatwaves, urban pollution, and infrastructure stress.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">At the same time, the Centre collects cess revenues worth around 2.2% of GDP (\u2248 \u20b98.8 lakh crore).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These funds remain outside the divisible pool, even though much of the revenue originates from urban economic activity.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Implication<\/b><span style=\"font-weight: 400;\">: Cities receive limited fiscal returns despite generating substantial revenue.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Way Forward<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Increase<\/b><span style=\"font-weight: 400;\">: Fiscal transfers to cities, raise urban grants as a larger share of GDP.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Enhance: <\/b><span style=\"font-weight: 400;\">Fiscal autonomy, reduce reliance on tied grants and allow flexible funding.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Strengthen<\/b><span style=\"font-weight: 400;\">: Own source revenues, reform property tax systems, improve municipal financial management.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Empower: <\/b><span style=\"font-weight: 400;\">Urban Local Bodies, implement <\/span><b>74th<\/b><span style=\"font-weight: 400;\"> Constitutional Amendment provisions fully, strengthen State Finance Commissions.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Allocate: <\/b><span style=\"font-weight: 400;\">Dedicated funds for climate-resilient infrastructure.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Revisit: <\/b><span style=\"font-weight: 400;\">Cess revenue sharing, consider including a portion of cess collections in the divisible pool.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Conclusion<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s cities are the primary drivers of economic growth, yet their <\/span><b>fiscal empowerment <\/b><span style=\"font-weight: 400;\">remains limited.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While the 16th FC emphasises fiscal discipline and revenue generation, it does not substantially increase the share of funds flowing to urban local bodies.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A sustainable urban future requires greater fiscal devolution, enhanced autonomy, and stronger institutional capacity, enabling cities to plan and finance their own development while the Centre plays the role of an enabler rather than a controller.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\"><b>Source: <\/b><a href=\"https:\/\/epaper.thehindu.com\/reader\" target=\"_blank\" rel=\"nofollow noopener\"><b>TH<\/b><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Highlighting gaps in fiscal devolution to cities, the 16th Finance Commission (FC) continues the pattern of limited fiscal transfers to Urban Local Bodies (ULBs). <\/p>\n","protected":false},"author":19,"featured_media":91698,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[5944,60,22,59],"class_list":{"0":"post-91655","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-fiscal-devolution-to-cities","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/91655","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=91655"}],"version-history":[{"count":4,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/91655\/revisions"}],"predecessor-version":[{"id":91713,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/91655\/revisions\/91713"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/91698"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=91655"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=91655"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=91655"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}