Tracking the shift: Urban local govts see a 230% rise in grant allocations

While the 16th FC has set a new record in allotting funds for ULGs, its counterparts in states continue to struggle. Archis Mohan writes

The 16th Finance Commission (FC) has allocated a historic 230 per cent increase in urban local government (ULG) grants to ₹3.56 trillion from ₹1.55 trillion allocated by the 15th FC, for the 2026-31 award period. 

Further, the share of grants for ULGs has risen to a record 45 per cent, up from 36 per cent under the 15th FC. 

The Janaagraha Centre for Citizenship and Democracy, a Bengaluru-based not-for-profit organisation, which works with the Comptroller and Auditor General (CAG) of India on ULG finances, said in an analysis that the increased allocation reflects the “growing recognition of rapid urbanisation and its contribution to the economy.” 

The 16th FC has introduced four types of grants: Basic (₹2.32 trillion), performance (₹54,032 crore), special infrastructure (₹56,100 crore) and urbanisation premium (₹10,000 crore). It has also substantially increased the untied component of ULG grants, which will empower these bodies with more autonomy to spend on locally identified needs. A total of 52 per cent of the four grants (₹1.84 trillion) are untied, as against 21 per cent (₹33,143 crore) in the 15th FC, Janaagraha said. The remaining grant is tied to sanitation, solid waste management, water and wastewater management. 

The 16th FC has also recommended continuity in reforms to improve fiscal accountability and governance by retaining eligibility conditions of elections to ULGs, publication of audited accounts, timely constitution of state FCs (SFCs) and mandatory tabling of action taken reports (ATRs) in state legislatures within six months of submission of the SFC report. 

“This could be a pivotal transition towards substantive improvement in first-mile infrastructure and services for citizens, particularly in smaller cities and towns,” said Srikanth Viswanathan, chief executive officer, Janaagraha, adding that state governments would now need to build with urgency capabilities at state and city levels to identify and tender out high-quality projects and oversee their execution. 

“It is heartening to see the 16th FC continue the emphasis on publication of audited annual accounts on www.cityfinance.in, besides timely ULG elections and constitution of SFCs,” Vishwanathan said. 

Long way to go 

Despite their critical role, SFCs do not enjoy the same level of empowerment as the Union FC, the Janaagraha study noted. Successive UFCs have persistently flagged structural weaknesses in SFCs’ functioning. 

Janaagraha had studied SFC reports of 20 states, and ATRs on SFC recommendations for 18 states — both for at least one SFC term. It found that delays in setting up SFCs are the starting point of their disempowerment. Only 13 out of 20 states had constituted their first SFCs as prescribed — within a year of the 73rd and 74th Constitutional Amendment Acts coming into force on June 1, 1993 . As of now, only seven states have constituted all seven SFCs. 

The study noted that none of the state Acts provide a timeline for the establishment of SFCs. The interval between the expiry of an SFC’s award period and the constitution of the next ranges from 1 month to 36 months. 

India’s ULGs are severely under-resourced, relative to global benchmarks and their own needs, the study noted. It assessed that the required investment for 2021-36 is ₹61.4 trillion, or 1.2 per cent of gross domestic product (GDP) per annum, based on a World Bank report. According to the study, the total ULG revenue as percentage of GDP in India is 1 per cent, while that of South Africa is 6 per cent, and for Brazil 7.4 per cent. 

The study observed that the investment by cities is tremendously low with own-source revenues covering about 60-70 per cent of ULGs’ recurrent expenditure, let alone their capital investment needs. 

Total ULG revenues are significantly lower compared to international standards, it said.