Answer:
India’s urban population is projected to reach 41% by 2031, with cities generating over 60% of GDP. Yet Urban Local Bodies (ULBs), constitutionally empowered under the 74th Constitutional Amendment, remain fiscally and functionally constrained.
Major challenges in Urban local governance:
1. Financial Constraints: ULBs suffer from chronic revenue weakness as only 32% of revenues are internally generated, with heavy dependence on state and Union transfers.
2. Mismatch: There exists a 42% gap between resources and expenditure. Property tax realisation stands at just 56% of demand and contributes barely 10–11% of municipal revenues in many states.
3. Incomplete functional devolution: Although the 74th Amendment listed 18 functions, studies show only 4 functions are fully devolved in practice.
3. Capacity deficits: ULBs face an average 35 – 37% vacancy rate in sanctioned posts while in 16 states, municipalities lack independent recruitment powers.
4. Governance issues: Rising bureaucratic interference and political capture cripple effective governance. Delayed State Finance Commissions (SFCs) further weaken fiscal predictability.
5. Planning gaps: Census 2011 recorded 31% urban population, but the latest World Bank estimates show that 54% of Indian population live in urban areas, indicating discrepancies.
Role of the 16th Finance commission in addressing these challenges:
1. Enhanced fiscal support:
- Raised urban share of local body grants to 45% from 36% under 15th FC.
- Recommended ₹3.56 lakh crore for ULBs which is more than double the previous allocation of ₹1.55 lakh crore.
2. Alignment with urbanisation trends:
- The higher allocation anticipates rising urbanisation (projected to be 41% by 2031).
- It provides a financial cushion in case Census 2027 reflects a higher urban growth of more than 40%, preventing under-preparedness.
3. Predictability in transfers: By maintaining 41% vertical devolution to states and refining horizontal criteria (including contribution to GDP at 10%), the Commission attempts to balance equity with performance.
4. Incentivising urban governance reform: Larger unconditional and tied grants encourage better property tax reforms, improved service delivery, and strengthening grassroots infrastructure (water, sanitation, waste management).
5. Correcting fiscal imbalance: Urban share has progressively increased from 19% in 10th FC to 45% in 16th FC, acknowledging structural economic transformation.
Further measures needed:
1. Deepen functional devolution:
- States must fully operationalise the 18 functions under the 74th Constitutional Amendment.
- Reduce overlap with parastatal agencies and activate District Planning Committees to ensure genuine decentralisation.
2. Strengthen own-source revenues:
- Reform property tax systems through GIS mapping, digital assessment, and better enforcement.
- Expand user charges and explore municipal bonds to reduce overdependence on transfers.
3. Build administrative capacity: Invest in urban cadre development, and enhancing training in urban planning, finance, and project management.
4. Improve Urban governance systems: Integrate digital governance platforms, and link grants to measurable performance indicators for transparency and accountability.
Conclusion:
The 16th Finance Commission strengthens the financial backbone of urban local governance, but true decentralisation will depend on functional autonomy, institutional capacity, and accountable urban planning.
‘+1’ Value Addition:
- Urban areas contribute over 60% of India’s GDP but receive historically lower fiscal priority.
- ULB staffing vacancy averages 35 – 37% nationwide.
- 16th FC allocation to ULBs is nearly 15 times higher than 13th FC grants.
- Property tax realisation remains at 56% of assessed demand, indicating reform potential.
- Urban local bodies face a 42% fiscal resource gap, constraining service delivery.
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