Urban Local Bodies and Finance Commissions
Overview
Cities are pivotal in capital accumulation, contributing immensely to government revenue and GDP. However, the 16th Finance Commission (FC) suggests that cities need to expand their own revenue sources amidst limited fund allocation.
Funding Allocations
- 15th FC:
- Urban local bodies received ₹1.2-1.3 lakh crore over five years.
- Equivalent to approximately 0.12-0.13% of India’s GDP.
- 16th FC:
- Allocation of ₹3.56 lakh crore between 2026 and 2031.
- Annual allocation around ₹75,000 crore, maintaining the GDP ratio at about 0.13%.
Challenges
- Defining 'Urban': Different data sources estimate an urban population of around 41% by 2031, with little change in per capita devolution.
- Per Capita Figures: Urban population growth (470 million in 2020 to over 600 million) leads to stagnating or declining per capita transfers.
- Fund Utilization: Underutilization noted with ₹90,000-95,000 crore pending, including ₹30,000-35,000 crore for urban bodies.
Tied and Performance-Based Grants
- Tied Grants: Fund allocation for specific areas like water and sanitation limits fiscal autonomy.
- Performance-Based Grants: Released upon meeting criteria like fiscal discipline and regular elections, with 20% funds linked to conditions such as increasing own source revenue (OSR).
Incentive Issues
- Peri-Urban Merger Incentive: ₹10,000 crore as a one-time incentive for merging peri-urban villages raises concerns.
- Federal Intervention: Urban development is a State matter, and merging may cause uneven urban integration and administrative issues.
Overlooked Aspects
- Climate Change: The 16th FC does not adequately address climate change concerns.
- Cess Revenues: Significant cess collections (2.2% of GDP) are not included in OSR despite being generated largely from urban areas.
Conclusion
The 16th FC misses a crucial point that cities should plan their own futures with the Centre facilitating rather than controlling financial utilization.
Tikender Singh Panwar, a former Deputy Mayor of Shimla, provides insights into the challenges faced by urban local bodies and the implications of the 16th Finance Commission's recommendations.
