Strengthening local bodies: Increasing grants will not be enough

The 16th Finance Commission (16th FC) has improved fiscal devolution to urban local governments (ULGs). It has increased overall grants to ULGs by 230 per cent, from about ₹1.55 trillion under 15th FC to ₹3.56 trillion for the 2026-31 period, and raised the ULG share to a record 45 per cent of local-body grants, up from 36 per cent previously. This is the highest urban share in FC history, reflecting growing recognition of rapid urbanisation and its economic contribution. Further, it has introduced a differentiated structure for urban grants, consisting of basic grants (₹2.32 trillion), performance grants (₹54,032 crore), special infrastructure grants (₹56,100 crore), and an urbanisation premium (₹10,000 crore). 

A significant design change is the increase in untied funds. The untied component across these four grants is about 52 per cent compared with only 21 per cent under the 15th FC. This higher proportion of untied transfers is intended to give ULGs the flexibility to spend on locally identified priorities, rather than being restricted to predetermined sectoral schemes. The remaining grants are tied to critical sectors such as sanitation, solid-waste management, water supply, and wastewater management. Performance grants reward good governance, while special infrastructure and urbanisation premiums help bridge city-specific infrastructure gaps, adding outcome-based incentives. 

This year’s Union Budget’s allocation of ₹5,000 crore per City Economic Region over five years in Tier-II and -III cities can complement this shift, but only if such funding flows through empowered municipal institutions rather than creating another layer of centralised, scheme-driven urban intervention. Based on a World Bank report, India’s required urban capital investment for 2021-36 is worth about 1.18 per cent of gross domestic product (GDP) annually. However, municipal revenues in India are barely 0.6 per cent of GDP, while ULGs in countries like South Africa and Brazil mobilise 6 per cent and 7.4 per cent, respectively, of GDP from their own sources alone. Weak municipal finances are compounded by chronic governance issues. 

The 16th FC retains eligibility conditions tied to reforms. They include conducting timely ULG elections, publishing audited accounts, constituting State Finance Commissions (SFCs), and tabling “action taken reports”. But democratic decentralisation remains incomplete. Municipal elections are routinely delayed. The Brihanmumbai Municipal Corporation polls were held nearly four years late, and Bengaluru has not had civic elections since 2015. Reports by the Comptroller and Auditor General show an average delay of 22 months in municipal polling, undermining accountability, legitimacy, and the responsiveness of local governments. Financial autonomy is equally constrained. Since municipal corporations generate modest revenues, they depend on state transfers, which reduce operational freedom and subject them to political and administrative control. The combination of inadequate own revenues, delayed elections, and weak administrative capacity means that larger grants may not translate into effective service delivery or infrastructure development. While the 16th FC’s recommendations are meaningful, efforts must be made to strengthen the institutional foundations of local governance.