The 16th Finance Commission (16th FC) and Urban Local Governments
The 16th Finance Commission has made significant improvements in fiscal devolution to urban local governments (ULGs), reflecting the growing recognition of rapid urbanization and its economic impact.
Increased Grants and Share
- Overall Grants: Increased by 230% from ₹1.55 trillion (15th FC) to ₹3.56 trillion for 2026-31.
- ULG Share: Raised to 45% of local-body grants, up from 36% previously, marking the highest urban share in FC history.
Differentiated Structure for Urban Grants
- Basic Grants: ₹2.32 trillion.
- Performance Grants: ₹54,032 crore.
- Special Infrastructure Grants: ₹56,100 crore.
- Urbanisation Premium: ₹10,000 crore.
Design Changes and Flexibility
- Untied Funds: 52% of grants are untied, compared to 21% under the 15th FC, allowing ULGs flexibility in spending.
- Tied Grants: Focus on sanitation, solid-waste management, water supply, and wastewater management.
- Performance Grants: Reward good governance.
- Special Infrastructure and Urbanisation Premiums: Aim to bridge city-specific infrastructure gaps.
Complementary Union Budget Allocation
The Union Budget allocates ₹5,000 crore per City Economic Region over five years to Tier-II and -III cities, but effectiveness depends on funds flowing through empowered municipal institutions.
Challenges in Municipal Finances
- India's urban capital investment requirement (2021-36) is 1.18% of GDP annually, but municipal revenues are only 0.6% of GDP.
- Countries like South Africa and Brazil mobilise 6% and 7.4% of GDP, respectively, from their own sources.
Governance Issues and Recommendations
- Eligibility Conditions: Reforms include timely ULG elections, publishing audited accounts, constituting State Finance Commissions (SFCs), and tabling action taken reports.
- Delayed Elections: Examples include Brihanmumbai Municipal Corporation polls (4 years late) and Bengaluru (no civic elections since 2015).
- Financial Autonomy: ULGs depend on state transfers, reducing operational freedom and subjecting them to political control.
- Institutional Strengthening Needed: Larger grants may not lead to effective service delivery without strengthening local governance foundations.
