Abstract

This document covers a brief and pointed framework of the detailed process of urban local/municipal governance in India, with special reference to the main features, structure, finance, and problem/attention areas. Notably, the urban sector will play a decisive role in the growth story of India @ a Viksit Bharat @2047. It is important to note and underline that the political economy in India is gradually giving attention to developing systems and procedures for the urban majority. The Government of India has launched urban missions in the last decade, which have yielded positive results. It is also noted that the 74th Constitution Amendment Act of 1993 and its follow-up have achieved reasonable success in promoting wider representation, fiscal devolution and decentralisation up to the town hall. However, bottom-up awareness and people’s participation (Janbhagidari) at the grassroots level are fairly weak and need attention. Similarly, the devolution of funds and functions is not yet over as per the requirements of ULGs. Finally, a set of points is included as problem areas for wider cognisance and attention. 

Keywords: Global to Local, Localism, 74th CAA, Local Government Structure, Decentralisation, Municipal Finance and Resource Mobilisation

Urban Local Governments in India

India has 8000+ urban centres, out of which 4766 are statutory towns with the status of urban local government, as per Janaagraha’s (2022) recent survey of the Indian City System. These urban centres are divided into three categories: municipal corporations, municipal councils/bodies, and town panchayats. The remaining census towns have been given urban status based on changes in their economic profile as per laid-down norms by successive census operations. In addition, there are also cantonment boards that manage the areas primarily occupied by armed forces. As per UN DESA, the 461 million urban population in India is likely to add another 416 million by 2050, with a total share of urban population exceeding the 50% landmark.

Global-Local Debate

As elsewhere, ULGs in India also received special attention as part of globalisation (1990s) and global cooperation for Habitat I and II (1976 to 1996), which focused on the living conditions of human settlements. These deliberations on urban areas reached a consensus that “Think Globally and Act Locally” (UNACADEMY.COM). It was argued that ‘globally tailor the structure for the Act done locally’ means addressing local needs in the process of public administration. This argument is based on the outcome of a global debate in the early 1990s, which focused on global issues, strategies, and their application in the local context. The 1992 World Summit on Sustainable Development (WSSD) 1992 clearly emphasised the Green and Brown Agenda, focusing on the environment and the need to develop local actions to deal with respective issues.

Think global to understand issues in a wider context. However, the solution will differ from place to place depending upon local conditions. It is specifically applied in urban planning, whereas the allocation of space for housing differs according to land availability and market conditions. Initially, for example, the plot area for economically weaker section (EWS) housing was 60 to 80 square metres, which came down to 20-25 square metres, in successive plans in Delhi and other cities. Therefore, the availability of a house for the weaker section is a global application. However, the plot size is a local issue. Hence, Think global and Act local are complementary but not contradictory.

Urban development is a state subject in India’s federal structure. Accordingly, ULGs are created by states under Article 243 of the Constitution of India. Urban issues vary from national, state, and regional levels, and their solutions will also differ from place to place under the same focus area, such as affordable housing for a plot size to a cross-section of income groups.

Increasing the Focus on Urban India 

Accordingly, India renamed the Ministry of Works and Housing in 1985 to create its first-ever Ministry of Urban Development (now known as the Ministry of Housing and Urban Affairs-MoHUA). This was followed by the creation of the National Commission on Urbanisation (NCU) to conduct a comprehensive assessment of the urban sector for necessary corrective actions. The NCU had wider consultations across the country at different levels of stakeholders and expertise. Subsequently, the Government of India promulgated the 74th Constitution Amendment Act (74th CAA) of 1993, a landmark intervention that provided constitutional recognition to ULGs as a viable unit of self-governance and local democracy. 

Simultaneously, the Government of India, through the Ministry of Housing and Urban Affairs, has initiated Urban Mission since the last 10 years to strengthen existing local government functions/services covering sanitation, mobility, housing, infrastructure finances, and governance in a sense of cooperative federalism. The missions gave due consideration to bottom-up planning with top-down support. The missions brought central and state-level cooperation with final implementation at ULGs in each of the mission components covering the Smart Cities Mission, Pradhan Mantri Awas Yojana (PMAY), AMRUT (Atal Mission for Rejuvenation and Urban Transformation), Swachh Bharat Mission (SBM), Deen Dayal Upadhyay National Urban Livelihood Mission (DDNULM), and National Heritage Mission.

Despite these initiatives, India lacks a comprehensive urban policy, as suggested by the New Urban Agenda of Habitat II. Although India prepared a draft National Urban Policy in 2018, it has yet to take a final shape. However, the state of Kerala has developed a State Urban Policy, which is the first of its kind in India, to shape urban areas as per the requirements for Viksit Bharat-India @2047.

74th Constitution Amendment Act of 1993

The main features of the 74th CAA specifically include:

1. Continuity and wider representation in the elected body, blocking the practice of frequent suspension by states in Article 243 U to ensure bottom-up leadership and wider representation (33% to 50% of women, only with reservations to other weaker sections). Accordingly, only the dissolution of the elected body of ULGs is possible with fresh elections within six months.

2. Provision of Metropolitan/District Planning Committees (MPC/DPC) to consolidate plans of urban and rural local bodies within the respective jurisdiction and address distributional and jurisdictional aspects of infrastructure, services, and financial resources (article 243 ZD and ZE) in the context of alternate city boundaries covering administrative, physical city, and city region. However, the non-functioning of these two committees prevents their basic purpose of consolidating rural and urban planning at the grassroots level (Box 1). 

Creation of ward committees as per Article 243S, consisting of one or more wards with a population of 3 lakh. People’s participation as expected in the amendment is still halfway done. First, not all functions are transferred to ULGs. Second, people’s participation becomes difficult in the wake of agencies’ vertical and horizontal structures. The wards committees have not operated in a grass-roots manner and have remained on paper for planning, resource mobilisation, implementation and social safety at the grassroots level.

Creation of the State Finance Commission (SFC) as per Article 243Y and insertion of clauses 280 (bb) and (c) in the Constitution to amend the terms of reference of the National Finance Commission to directly allocate funds for local governments in urban areas and rural areas (Panchayats).

Point 4 above has paved the way for a quantum jump in the intergovernmental grants (fiscal transfers) with the provision of state finance commissions (N/S FC) constituted every five years. It has brought a normative base and predictability in transfers and the allocation of untied funds. It also provided local elasticity and autonomy to prepare a bottom-up budget at the ULG level.

The recent allocation by the Fifteenth NFC (2021-2026) has, for the first time, covered urban agglomerations as a single unit for environmental, productivity and quality of life considerations. The amount of grant has gone a quantum jump from Rs. 1000 crore (Xth NFC-1995-2000) to Rs. 2000 Crores by (XIth NFC-2000-2005) and Rs. 121055 crores (XVth NFC2021-2026).

The CAA also made a provision of 18 functions as per 243 W to be handled by ULGs as per Schedule XII in the constitution (Chart 1). These functions exclude natural disasters. However, the Disaster Management Amendment Bill, which was passed by parliament on March 25, 2025, made special provisions to create an Urban Disaster Management Authority (UDMA) for state capitals and municipal corporations in addition to State/District DMAs. This will open the scope for urban institutions to engage more in disaster management.

Chart 1: Municipal Functions in India

Complimentary Actions 

The structure promulgation of CAA also followed the procedural support with specific Codes, Acts, Byelaws, Rules, and Regulations, which include the following:

i. Urban Development Plan Formulation (1997) 

ii. Model Municipal Law (2003), 

iii. The National Municipal Accounting Code (2001), 

iv. Solid Waste Management Rules (2016), 

v. The Urban Street Vendors Act (2014 and 2024), 

vi. National Policy on Faecal, Sludge, and Septage Management, 2017 

vii. National Urban Housing and Habitat Policy, 2007 

viii. Standing Operating Procedures (SOPs), guidelines, manuals, and checklists for different areas of action

ix. Follow-up on the insertion of clauses (bb) and (c) in Article 280 (3) of the Constitution, giving a reference to the National Finance Commission to directly allocate funds to ULGs, and 

x. The reform agenda under different schemes and programmes covering investment, finance, operation, and maintenance, particularly during the last ten years, with the launch of urban missions, has been discussed.

The complementary actions have strengthened urban governance at the grassroots level with efficiency in services, housing, infrastructure, safety, transparency, and accountability.

New Localism and Dynamics of Development in Urban Development 

The 74th CAA and its follow-up have given due cognisance to new localism, which tends to devolve powers to ULGs in line with national policy objectives on productivity, environment, climate change, access to services, and grievance redressal. The abovementioned complementary actions have provided a legal and institutional framework to address each of the indicators of new localism and development dynamics based on citizen participation and integration of elected and non-elected functionaries for a common purpose of achieving a balanced, pro-poor, productive, and sustainable ULG services market. The status and adequacy of new localism and development dynamics show mixed results with significant achievements and equally important gaps and corrections, as shown in the following points:

As stated earlier, Schedule XII (243W) and Finance Commission devolution (243Y) tend to address the expansion of services in line with the New Localism. However, the de facto status of the devolution of functions and finances is substantially different for the following reasons:

• There has been a significant improvement in ULG representation and continuity, and normative allocation with continuity and better application. However, the two clauses (243W and Y) are discretionary in nature, and the allocation of functions has the dominance of respective states due to the existence of para-statals and para-municipal agencies. These agencies are not accountable to ULGs and, in turn, to residents. 

• Similarly, during the post-GST (Goods and Services Tax) era, many taxes with a strong urban bias (show tax, entertainment tax, service tax on restaurants, etc.) have been subsumed in GST, but these proceeds are not in the divisible pool of consolidated funds to be shared with ULGs.

Finances Of The ULGs 

Historically, municipal finance in India began with Lord Rippon’s resolution and covered a long journey up to 74th CAA (Box 2). As a follow-up to the CAA, special attention has been given to accounting, budgeting and resource mobilisation reforms. It has had a significant impact on the liquidity of funds at the municipal level. However, the finances of ULGs in India still have a vertical and horizontal imbalance in terms of liquidity and the need to meet expenditure requirements. 

The gap reflecting the mismatch between revenue and expenditure requirements leads to a low-equilibrium trap covering low mobilisation of own sources, discretionary allocation/accountability, and inadequate delivery of services (Figure 2). 

Chart 2: Low Equilibrium Trap

Structure of the Municipal Finance

The sources of money for ULGs include taxes, non-taxes, grants, and loans, whereas the application of money (expenditure) covers establishment, operation and maintenance (O&M), investment (capital expenditure), and debt repayment. Income and expenditure are managed under a detailed framework of accounting, budgeting, auditing, and capacity building, including manpower deployment at the ULG level (Chart 3). 

Chart 3: Municipal Finance Structure

As urban development is a state subject, the de jure and de facto powers to levy taxes vary from state to state. There is a long list of taxes in respective municipal Acts, but only a few are levied by the ULG, covering property tax (PT), water tax, animal tax, etc. Non-taxes cover advertising and building licence fees, along with issuance of birth and death certificates, and charges for municipal assets (e.g., community halls and stadium crematoriums) and rents on municipal properties. However, after the abolition of Octroi, property tax (PT) became the mainstay of municipal finance as part of non-tax revenue. Water charges (wherever the service is delivered by ULG), Building licence fee and development charges are levied by ULGs. (UN-Habitat Discussion Paper-2019)

Fiscal transfers include revenue sharing from national and provincial governments. 74th CAA has rationalised the transfers and made them transparent and normative. This is realised through recommendations of successive finance commissions at the national and state levels (Article 243Y). These transfers cover untied funds and grants based on performance, specific purpose, and capital projects.

As per the World Bank study (2022), borrowing powers are governed by states in line with the Local Authorities Loan Act 1914. However, due to the lack of borrowing capacity/creditworthiness, ULGs, by and large, fail to secure commercial loans. Therefore, ULGs depend on soft loans as part of specific schemes or programmes or bilateral/multilateral arrangements. 

Yet another stream of funds includes municipal bonds initiated by the Bengaluru Municipal Corporation in 1997 and later by the Ahmedabad Municipal Corporation in 1998. The GOI also issued guidelines for municipal bonds in 2001.

Participatory funding or local elasticity, as per the UN Habitat Discussion Paper-2019 on Municipal Finance, is another external source based on the convergence of resources and synergy from a range of stakeholders, such as (i) constituency funds of members of parliament, legislative council, corporate social responsibility (CSR) funds, and local contributions (contribution from citizens in the form of cash, labour and management responsibility). 

Size of the Municipal Finance

The size of municipal finance has remained static at around 1% of GDP. The recent estimates in a World Bank/RBI study put the MF around 1%–1.3% of GDP as compared to the significantly high share in Brazil (7.4) and South Africa (6), and Poland (4.5). This created a low equilibrium trap, leading to weak accountability and inadequate delivery of services. (Chart-4) 

Chart 4: Source of Municipal Finance in India 

Own-Source Income

As per the Economic Survey, the municipal own sources constitute 44% of revenue income. However, the size of own sources is declining over a period of time. (Chart-4) Declining dependence on source funds is a matter of concern for ULGs and reflects low yields from taxes, fees, and other sources.

The property tax (PT) share in GDP in India is noted as 16% in 2010, compared to the average of developing economies (0.60), whereas the global average was 1.04. The reasons for underutilisation of the PT base are attributed to low coverage, static rates, and inadequate collection. A large chunk of properties falling within unauthorised colonies, slums, squatters, and urban villages are not covered. For example, Delhi (since 2001) rates have not been revised. The demand collection and balance information is not updated.

Non-tax sources constitute approximately 20% of the sources. Recent data suggest that the share of non-tax income has marginally increased in recent years. This confirms that cities are making consistent efforts to raise revenue from user charges.

External Sources

Fiscal transfers are governed by recommendations made by national and state finance commissions (NFCs/SFCs). There has been a quantum jump in the allocation by NFCs and SFCs. However, the due share to ULGs is not allocated due to (i) the exclusion of ULGs from GST (which subsumes a couple of taxes of local nature levied by ULGs). Simultaneously, states could not constitute the SFCs on time, and the normative basis of state allocation showed a great deal of variation (Box 3). 

Capital Expenditure/Investments 

As stated earlier, capital expenditure is largely made through soft loans and grants. However, bonds and commercial loans are also used, although at a relatively low scale. The issuance of municipal bonds can be seen under two phases, wherein a total of 22 municipal bonds amounting to Rs 1,200 Crore were issued in 1997. Subsequently, until 2005, a couple of ULGs issued bonds. Later, after a 13-year gap in 2018, the Pune Municipal Corporation issued Rs. 100 Crores, followed by a few other cities, such as Indore, Hyderabad, Ghaziabad, Lucknow, Baroda, and Rajkot. These bonds also include green bonds, which were promoted by specific guidelines from the Securities and Exchange Board of India in line with the GOI commitment on climate change. 

Commercial Loans

The overall availability of capital expenditure is fairly low (Box 4). Furthermore, a vertical imbalance exists in the size of municipal capital expenditure. Municipal corporations occupy a major pie (82%) of capex compared to only 18 % capex by the remaining 3800 ULGs. Yet the MCs have a vast potential to expand capex to the tune of 20 times their existing debt stock. The size of municipal finance is also particularly high among the four major (Maharashtra, Tamil Nādu, Karnataka and Gujarat) states, which occupy nearly one-third of the urban population.

Data suggests high reliance on guaranteed lending, carrying soft loans for urban infrastructure. Only 2 % of investments in urban infrastructure are drawn from commercial market loans. This is caused by imbalances in the creditworthiness of ULGs, which need correction to enable urban India to implement urban awakening towards the national vision to become a developed nation by 2047. A couple of actions are needed to improve municipal creditworthiness (Box 5) 

Politics and Administration 

Enactment of the 74th CAA introduces a significant change in the politics and administration of urban areas. It established continuity in the elected body, leading to the existence of local leaders in decision-making. Initially, the enactment and follow-up yielded positive results with special reference to the following:

• Continuity in the elected body among different types of ULGs, along with the existence of local elected leaders, led to a bottom-up creation of gradual leadership.

• Promotion of women leaders as per the reservation of at least one-third seats, which was raised to 50% in most cases.

• Development of leader associations, such as the All India Council of Mayors.

• Development of the Gujrat City Managers Association

• Some states, such as Andhra, also had the Association of Chairpersons of Municipalities 

• Timely auditing with the involvement of the CAG (Comptroller and Auditor General of India) as per the CAG Act 1971.

As urban development is a state subject in the federal structure of India, the state leadership and bureaucracy adopted a go-slow approach and did not devolve the requisite powers and functions to ULGs. Accordingly, over a period of time, the existence of the elected body was affected by one or another type of reluctance or the go-slow approach of the respective states. It is striking to note that as many as 1400 elected bodies of ULGs were not in place as of September 2021. It is, therefore, important to strengthen elected bodies with their due existence as per Article 243U of the 74th CAA. 

Certain services, such as water, sanitation (sewage), poverty alleviation, and land/housing, are handled by state parastatals or para-municipal agencies. These agencies are not duly accountable to ULGs and do not follow state instructions. Furthermore, they do not share their profits with ULGs despite the recommendation by the Second Administrative Reform Commission. In addition, the para-statals or para-municipals have a huge amount of liability to be paid to ULGs on account of deficiency charges that become due after the transfer of the respective area or service from such agencies.

Deployment of staff in ULGs is fairly poor compared to requirements. Many cities do not have an exclusive executive officer, planner, or engineer. In such cases, one functionary has to serve two or more ULGs. Accordingly, a local cadre of municipal staff needs to be developed across the ULBs along with suitable capacity-building initiatives. In this regard, the MKY of the Government of India is emerging as a viable support to develop a role-based online training for urban functionaries. It will significantly improve local administration.

Areas of Attention/Problem Areas 

ULGs have undergone a significant change in their structure, finances, and adequacy of services. The ULGs have adopted the principles of new localism and development dynamics, leading to increasing recognition in the political economy. At the same time, ULGs still suffer from a mismatch between funds, functions, and functionaries (manpower capacity) with fiscal stress and a lack of financial autonomy to meet the requirements of their mandatory functions. The areas for specific attention that emerge from the preceding analysis are as follows:

I. Absence of national and state urban policies to guide, hold, and strengthen urban institutions in a consolidated and coordinated manner.

II. Decentralisation and empowerment of ULGs have only effectively reached up to town halls. Grassroots decentralisation with bottom-up awareness, engagement and participation is fairly low.

III. Local participation—the key for JanBhagidari—in urban governance requires the development of suitable systems and procedures in the form of institutional (effective ward committees) and fiscal frameworks (participatory budgeting).

IV. Lack of exclusive fiscal powers to ULGs to achieve a balance between funds and functions at the municipal level. 

V. The provision of discretionary powers to the states on funds and functions has developed a go-slow approach with regard to the devolution of land, town planning, and water supply. 

VI. ULGs’ weak revenue base (property tax, advertising tax, etc.) with inadequate coverage, poor assessment, and low recovery, along with failure to apply a double-entry accounting system, asset management, timely auditing, and performance budgeting. 

VII. Inadequate sharing of intergovernmental resources (i) GST inclusion in the pool of divisible funds for NFCs/SFCs, (ii) municipal ability to meet salary budget from own sources

VIII. Untapped potential of city GDP covering Value Capture Finance (VCF)/monetisation of land.

IX. Weak institutional capacity is missing in the job training for revenue mobilisation, circular economy (waste management), and better upkeep of municipal assets (O&M).

X. Lack of uniform formats for better and comparable financial management and assessment.

XI. Low incidence of PPP/outsourcing to enhance municipal service coverage. 

XII. Municipal inability to tap local elasticity for mobilising local resources in cash, kind (labour), management responsibility, and CSR funds. Best practices already in place require assessment, recognition, and formatting for wider dissemination.

XIII. Nonexistence or poor functioning of MPC and DPC leading to ad hoc assessment for devolution from higher levels of government.

XIV. Finally, given the above, there is a need to revisit the 74th CAA to make due corrections/amendments at the central level and follow up by the states.