Diverse Revenue Sources and Resource Mobilisation Strategies for Urban Local Bodies

India’s cities are growing faster than their wallets. With over 600 million people projected to live in urban areas by 2036 and cities already contributing more than 63% of the country’s GDP, the pressure on Urban Local Bodies (ULBs) to deliver quality infrastructure and services has never been greater. Yet the financial muscle to meet this demand remains woefully thin. Understanding how municipalities raise money, where the gaps lie, and what innovative avenues exist for resource mobilisation is essential for anyone studying urban governance today.

The financial architecture of urban local bodies 🔗

ULBs operate on what can best be described as a three-pillar financial structure. The first pillar is own-source revenue, raised directly by the municipality through taxes and user charges. The second comprises transfers and assigned revenues from state governments. The third consists of grants-in-aid from both central and state authorities. Remove one pillar and the stool wobbles – which is precisely why most Indian cities struggle financially.

According to research on municipal financing, under the Municipal Act, local bodies are technically allowed to levy around 25 taxes, but only a handful are actually imposed and collected across different ULBs. This gap between what municipalities could do and what they actually do lies at the heart of India’s urban finance crisis.

Own-source revenue: The bedrock of municipal finances 🔗

Own-source revenue is the most sustainable form of funding because it gives municipalities autonomy. When a city raises its own money, it answers to its own citizens rather than waiting for cheques from higher governments. These funds are broadly divided into tax revenue and non-tax revenue.

Property tax: The backbone of municipal finance 🔗

Property tax remains the single most important source of own-source revenue for ULBs. It is levied annually on land and buildings within municipal limits, and most cities use either the Annual Rental Value system or the Capital Value system to calculate liabilities. The Second Administrative Reforms Commission and the Thirteenth Finance Commission both recommended switching to the capital value method to ensure better buoyancy in property tax revenue.

The reality, however, is grim. Despite its importance, property tax in India collects just about 0.2% of GDP – roughly one-sixth of what OECD countries manage. The World Bank has identified several reasons for this underperformance: undervaluation of properties, incomplete registers, policy inadequacy, and ineffective administration. Many cities collect less than 50% of the potential tax demand, with Pune reportedly collecting over seven times more per capita than Ghaziabad.

Other local taxes 🔗

Beyond property tax, ULBs levy a range of other taxes including entertainment tax on cinemas, concerts, and amusement parks; advertisement tax on hoardings and public displays; professional tax on salaried individuals and professionals; and various vehicle-related taxes and fees. In states where professional tax is implemented, it can contribute 5-10% of own revenue. Octroi, once a major source, has largely been subsumed under the Goods and Services Tax regime, with state governments compensating municipalities for the loss.

User charges: Pay for what you use 🔗

Non-tax revenue flows largely from user charges – the pay-for-what-you-use model of municipal finance. These include water supply charges, sewerage fees, solid waste management charges, parking fees, building permit fees, and rent from municipal markets and community halls. The logic is straightforward: those who consume a service should pay for its maintenance and improvement.

In practice, collection is often inefficient. Many cities still use flat-rate systems for water rather than metered consumption, and political sensitivities make it difficult to revise user charges in line with rising service delivery costs. A Reserve Bank of India report noted that municipal revenue in India hovers at about 1% of GDP, compared with 7.4% in Brazil and 6% in South Africa – a stark indicator of how underdeveloped the user charges regime remains.

Assigned revenue and intergovernmental transfers 🔗

The second pillar consists of funds that flow to ULBs from higher levels of government. Assigned revenue refers to taxes that state governments collect but share with municipalities, such as stamp duty surcharges, entertainment taxes in some states, and motor vehicle tax shares. These are not grants – they are shares of specific taxes that the state earmarks for urban bodies.

State Finance Commission devolutions are statutory transfers based on formulas recommended by each state’s Finance Commission. The quantum varies widely: some states devolve up to 15% of their revenues to local bodies, while others transfer far less. This creates significant disparities across the country.

Grants-in-aid from the centre and states 🔗

The third pillar – grants-in-aid – includes untied grants for general use and tied grants earmarked for specific schemes like AMRUT, the Smart Cities Mission, or Swachh Bharat. Central Finance Commission grants are particularly significant; the 15th Finance Commission, for example, allocated substantial resources to ULBs linked to performance indicators and reform milestones such as publishing audited annual accounts and notifying floor rates for property tax.

Borrowings: Tapping credit markets responsibly 🔗

Urban local bodies can raise loans from state governments, financial institutions, and the capital markets to meet capital expenditure needs – though typically only with state government approval. Traditionally, this has meant borrowing from banks, HUDCO, and the state-level Urban Infrastructure Development Funds. More recently, capital markets have opened up as a serious option.

Innovative avenues for resource mobilisation 🔗

The gap between traditional revenue and the actual financing needs of Indian cities is enormous. The World Bank estimates that Indian cities will need around USD 840 billion between 2021 and 2036 to build out the infrastructure required for the burgeoning urban population – mainly for water supply, sewage, solid waste, and mass transit projects. Traditional sources cannot fill this gap. This is where innovative financing comes in.

Municipal bonds and access to capital markets 🔗

Municipal bonds allow ULBs to raise long-term debt directly from investors. Bengaluru issued India’s first municipal bond back in 1997, but the market remained largely dormant for nearly two decades. A revival began after 2015, when SEBI notified its Issue and Listing of Municipal Debt Securities Regulations. Combined with reform-oriented programmes like AMRUT and the Smart Cities Mission, this regulatory foundation began drawing municipalities back to the market.

Pune Municipal Corporation was the first to issue bonds under SEBI’s revised framework in 2017, raising ₹200 crore. Since then, cities like Ahmedabad, Indore, Hyderabad, Lucknow, Bhopal, Surat, Ghaziabad, and Vadodara have followed suit. Vadodara raised ₹1 billion at a coupon rate of 7.15% – the lowest in the history of Indian municipal bond issues. Indore’s green bond to finance a solar plant was oversubscribed 5.9 times, raising ₹7.2 billion.

The Ministry of Housing and Urban Affairs has further strengthened the ecosystem through AMRUT 2.0 incentives – ULBs can receive ₹13 crore per ₹100 crore raised (up to ₹26 crore) as grant support, with additional incentives for certified green bonds. Despite this momentum, most ULBs remain below investment grade, and the secondary market for municipal debt remains shallow.

GIS-based property tax reform 🔗

Technology is transforming how cities collect the taxes they already have on the books. Geographic Information System (GIS) mapping helps municipalities identify every property in their jurisdiction, tag it with a unique identifier, and link it to tax records. The Bangalore Mahanagar Palike launched a GIS-based property tax reform in 2002 combined with a Self-Assessment Scheme; collection increased by over 100% in the first year primarily because of the shift of properties from lower to higher tax zones.

Kanpur, Hyderabad, and numerous Tier II and Tier III cities like Burhanpur, Dewas, and Khandwa have since adopted GIS-based property tax systems. The approach typically involves digitising base maps from satellite imagery, conducting door-to-door surveys, using drones where feasible, and integrating spatial data with management information systems. The results are not just higher revenue but also better accountability, since bill collectors and revenue officials can be monitored independently of manual entries.

Land-based financing instruments 🔗

Value capture financing (VCF) is based on a simple idea: when public investment raises the value of private land, the municipality should capture a share of that gain. Common VCF instruments include development charges on new construction, betterment levies on properties that gain value from infrastructure projects, premium FSI charges for additional floor space, impact fees, and land pooling schemes used in cities like Amaravati and Delhi. When a new metro line is built, properties around the stations appreciate – land-based instruments let cities recover some of that windfall to fund the project itself.

Public-Private Partnerships 🔗

Public-Private Partnerships bring private capital, efficiency, and expertise into urban service delivery. PPP models have been used for solid waste management, urban transport (including metro systems and bus services), water supply, parking management, and affordable housing. Structures range from Build-Operate-Transfer arrangements to annuity-based models and Hybrid Annuity Models. Well-structured PPPs with transparent contracts and clear performance metrics reduce corruption risks and strengthen accountability. Poorly structured ones, however, have been known to prioritise commercially profitable projects over essential public services.

Green and ESG-linked bonds 🔗

The latest frontier in municipal financing is green bonds – debt instruments whose proceeds are earmarked for climate-aligned projects like renewable energy, water recycling, and urban resilience. Indore, Ghaziabad, and Pimpri-Chinchwad have all tapped this market, and several issuances have been oversubscribed. MoHUA’s AMRUT 2.0 offers an additional ₹10 crore per ₹100 crore raised (up to ₹20 crore) for bonds that qualify as green under SEBI’s Non-Convertible Securities framework.

The structural challenges that remain 🔗

Despite the bouquet of revenue sources available on paper, most Indian ULBs remain financially fragile. Studies show that only 41% of ULB revenues come from internal sources, with over 54% reliant on government transfers. Constitutional and statutory provisions restrict municipal taxing powers to a limited set of relatively inelastic tax bases. State governments exercise elaborate controls over rate-setting, exemptions, and even the timing of intergovernmental transfers.

Administrative capacity is another chronic weakness. Many ULBs lack accrual-based accounting, modern asset registers, and the financial expertise needed to manage complex instruments like bonds or PPPs. Only 25-30 ULBs qualify as investment-grade under SEBI rules, which means market-based financing remains concentrated in a handful of large cities. The result is a two-tier urban system where financially strong cities grow stronger while smaller municipalities stay dependent on uncertain grants.

The road ahead for municipal finance 🔗

Strengthening ULB finances requires a combination of reforms: rationalising property tax through updated assessments and GIS mapping, diversifying revenue through user charges and land-based instruments, building credit profiles to access bond markets, aggregating smaller cities through pooled finance vehicles, and creating a professional municipal cadre at the state level. Digital platforms like CityFinance.in and the NSE Municipal Bond portal are improving transparency, and performance-linked transfers are beginning to incentivise better governance. The financial future of India’s cities depends on how well these reforms are sequenced and sustained.

What do you think? If your city had to double its own-source revenue over the next five years without raising existing tax rates, which reform would you prioritise first – GIS-based property tax mapping, rationalised user charges, or a municipal bond issuance? And do you think smaller cities should be allowed to aggregate their borrowing through pooled finance vehicles even if it means giving up some local autonomy?

References

1. https://accountabilityindia.in/blog/urbanisation-in-india-urban-local-bodies/
2. https://cag.gov.in/uploads/download_audit_report/2021/9%20CHAPTER%20V-0630766296f7663.79210231.pdf
3. https://openknowledge.worldbank.org/server/api/core/bitstreams/c5df42d0-1f82-54b3-b856-fb90511016f2/content
4. https://indianinfrastructure.com/2023/12/05/funding-urban-growth-innovative-mechanisms-for-municipal-financing/
5. https://www.nism.ac.in/urban-infrastructure-financing-in-india-challenges-and-solutions-for-a-deeper-municipal-bond-market
6. https://www.nism.ac.in/blog/reimagining-urban-finance-why-municipal-bonds-matter-more-than-ever/
7. https://icrier.org/Urbanisation/events/Tanushree_paper_August_%2030.pdf