16th Finance Commission (FC): Push to Urban Local Governments

Syllabus: GS2/Governance; GS3/Economy

Context

• Recently, the 16th Finance Commission (FC) report, tabled in Parliament, has significantly enhanced the share of grants to Urban Local Bodies (ULBs), signalling a structural shift in India’s fiscal federalism in favour of urban governance.

Key Highlights of the 16th FC For ULBs

• Increased Share for Urban Local Bodies: Share of grants to ULBs increased to 45%; (36% in 15th FC, & 26% in 13th FC).
• Sharp Rise in Absolute Allocation: Recommended grants to ULBs: ₹3.56 lakh crore;

• More than double the 15th FC’s ₹1.55 lakh crore;
• Nearly 15 times higher than the 13th FC allocation;
• It marks the largest ever fiscal support to urban governance in India.

Rationale Behind Increasing Share in 16th FC

• Cities As Growth Pole: Cities contribute nearly two-thirds of India’s GDP, making them engines of economic growth.
  • India adds millions to its urban population annually due to migration and natural growth.
• Rising Urbanisation & Growing Urban Population: Urbanisation in India is steadily increasing, demanding higher fiscal capacity at the city level.
  • Census 2011: 31% population urban;
  • Projected urbanisation by 2031: 41%
  • Global comparison: China (45%); Indonesia (54%); and Brazil (87%)
• Data Gaps in Urbanisation: A World Bank report (2015) suggested up to 78% of the population living in cities and urban clusters.
  • Lack of credible and updated data (next Census awaited) affects policy planning and fiscal allocations.
  • The 16th FC’s higher allocation pre-emptively addresses future urban growth, even if Census 2027 shows urbanisation at higher levels (e.g., 48%).

Major Urban Challenges & Concerns

• Uneven Distribution Across States: The grants are distributed based on a population-based formula, leading to significant inter-state variation.
  • Major Gainers: Kerala (Over 400% increase); and Maharashtra (Over 300% increase);
  • Limited Gains / Reductions: Odisha (13% increase); Bihar (8% decrease);
  • It reflects demographic changes and formula-based allocation rather than uniform distribution.

• Water Supply & Sanitation: Intermittent water supply in most cities; high Non-Revenue Water (NRW) losses; and sewage treatment gaps.
• Urban Housing & Slums: ~65 million people living in slums (2011 Census); rapid expansion of informal settlements; and inadequate affordable housing.
• Urban Transport & Congestion: Traffic congestion in Tier-1 & Tier-2 cities; rising air pollution; and weak public transport integration.
• Weak Finances of ULBs: Limited own-source revenue, heavy dependence on state transfers, poor property tax coverage, and weak municipal bond market.
• Weak Implementation of 74th Constitutional Amendment: Many States have not fully devolved the 18 functions listed in the Twelfth Schedule.
  • State governments retain control over urban planning, water supply boards, and development authorities.
  • Capacity Deficit: Shortage of trained urban planners, limited digital governance integration, and poor data systems.
• Climate Vulnerability: Urban flooding (e.g., Chennai, Bengaluru), heat waves, and coastal vulnerability.

Implications For Urban Governance

• Strengthening the Third Tier: Enhances fiscal autonomy of ULBs, and improves ability to provide basic services (water, sanitation, waste management); urban infrastructure; and public health and mobility.
• Reduced Fiscal Stress Post-Census: ULBs will not face sudden resource gaps due to already enhanced allocation, if future Census data shows higher urbanisation.
• Deepening Fiscal Federalism: It reflects shift towards recognising urban India as a key growth driver. It aligns with goals of Atmanirbhar Bharat, and Urban reforms under AMRUT, Smart Cities Mission.

Urban Reforms and Flagship Missions

• Smart Cities Mission (2015): Key objectives are area-based development, ICT-enabled governance, and sustainable infrastructure.
• AMRUT: Key focus areas are water supply, sewerage, and urban green spaces.
• Swachh Bharat Mission (Urban): Key achievements are Open Defecation Free (ODF) certification, and solid waste management reforms.
• PM SVANidhi: It supports street vendors with micro-credit, and demonstrates integration of urban governance with social protection frameworks.

Citizen Participation and Digital Governance

• Recent reforms emphasize e-governance portals, online grievance redressal, GIS-based property tax systems, and participatory budgeting (Pune model).
• MoHUA promotes digital dashboards and open data platforms.

Source: IE