Evaluating the Effectiveness of Urban Local Governance Post 74th Amendment

Urban India is changing fast. By 2031, more than 600 million people are projected to live in cities – a scale of urbanisation that demands more than just infrastructure; it demands governance that works at the ground level. The 74th Constitutional Amendment Act of 1992 was Parliament’s answer to that demand. It sought to transform urban local bodies from peripheral administrative units into genuine pillars of democratic self-governance. More than three decades later, the question worth asking is: how well has that vision held up?

What the 74th Amendment set out to do 🔗

The 74th Amendment came into force on 1 June 1993, built on a foundational democratic premise – that power in a democracy rightfully belongs to the people. It mandated the creation of urban local bodies (ULBs), specifically Municipal Corporations, Municipal Councils, and Nagar Panchayats, to serve as the lowest unit of governance in cities and towns. These bodies were to be populated by elected representatives who would have a decisive role in planning and service delivery.

The amendment added Part IXA to the Constitution, covering Articles 243P to 243ZG – a dedicated constitutional chapter for urban governance. It also introduced the 12th Schedule, listing 18 functions – from urban planning and regulation of land use to public health and slum improvement – that could be devolved to municipalities. Alongside this, it mandated regular elections every five years, provided reservations for Scheduled Castes, Scheduled Tribes, and women, and required states to set up State Election Commissions and State Finance Commissions (SFCs).

The amendment also envisaged institutional mechanisms for participatory governance: Ward Committees for cities with populations above three lakh, District Planning Committees, and Metropolitan Planning Committees for areas with populations exceeding ten lakh. On paper, it was a comprehensive framework for decentralised urban democracy.

Where the amendment has delivered 🔗

Constitutional legitimacy for local governance 🔗

Before 1993, urban local bodies had no constitutional standing – they existed at the pleasure of state governments, which could dissolve them without much accountability. The 74th Amendment changed this fundamentally. It constitutionally mandated the establishment of democratic local bodies, making them accountable, transparent, and efficient. Municipalities now fall under the protection of justiciable constitutional provisions – meaning their rights and existence can be legally defended, not simply overridden by state executive action.

Regularising elections and representation 🔗

One of the amendment’s clearest successes is that it institutionalised the electoral process at the municipal level. Regular five-year elections have become the norm across most states, a significant departure from the earlier era when local body elections were frequently delayed or bypassed. Reservation of seats for women – at least one-third of total seats – has also opened up a space for political participation that was largely absent before 1993. While the quality of representation varies, the structure of inclusion is now constitutionally guaranteed.

State-level success stories 🔗

Some states have gone beyond mere constitutional compliance. Kerala, for instance, implemented a People’s Planning Campaign that transferred approximately 35-40% of state plan funds to local bodies. Karnataka devolved significant functions to ULBs and pioneered Ward Committee initiatives. West Bengal established a relatively more integrated system of urban governance with stronger links to state planning processes. These examples demonstrate that effective decentralisation is achievable when political will aligns with constitutional intent.

The persistent challenges 🔗

Inadequate financial resources 🔗

Despite being constitutionally empowered, most ULBs across the country remain financially weak. The total revenue of all ULBs in India amounts to approximately 1 percent of the country’s GDP – a figure that stands in stark contrast to 5 percent in Brazil and 6 percent in South Africa. Cities contribute nearly two-thirds of India’s GDP and around 90 percent of total government revenues, yet the fiscal transfers they receive remain disproportionately small.

The 15th Finance Commission allocated approximately ₹1.2-1.3 lakh crore to ULBs over five years – just about 0.12-0.13 percent of GDP during that period. The 16th Finance Commission has proposed a more than doubling of this figure to ₹3.56 lakh crore for 2026-31, and has raised urban local bodies’ share of local government grants to 45 percent – the highest ever. However, even this enhanced allocation remains modest relative to the scale of urban need.

Own-source revenue generation remains a critical weakness. Property tax realisation stands at just 56 percent of assessed demand, contributing barely 10-11 percent of municipal revenues in many states. The introduction of GST compounded this problem: octroi, which once met nearly 55 percent of the total revenue expenditure of urban centres, was effectively abolished, leaving a significant fiscal gap that has yet to be adequately plugged.

A large share of the grants that ULBs do receive are tied – earmarked for specific sectors like water supply and sanitation. These tied grants restrict the fiscal autonomy of cities, compelling them to follow state and central priorities rather than locally identified needs. Unspent tied funds worth ₹30,000-35,000 crore are indicative of this mismatch between conditionality and local capacity.

Limited functional autonomy 🔗

The 12th Schedule lists 18 functions to be transferred to ULBs – from urban planning to poverty alleviation programmes. But the transfer has largely remained on paper. Studies show that only four of these 18 functions are fully devolved in practice across most states. The rest continue to be exercised by state departments or parastatal agencies that operate parallel to elected local bodies, fragmenting accountability and creating significant overlaps in jurisdiction.

This problem is compounded by what the Drishti IAS analysis calls the “adjunct” approach – states continuing to treat local governments as extensions of state administration rather than autonomous self-governing institutions. The COVID-19 pandemic made this starkly visible: decisions about urban disaster management were made at the national, state, and district levels, with heads of municipal corporations largely excluded from the decision-making table.

Excessive state control 🔗

The 74th Amendment is structurally permissive rather than prescriptive in key areas. Many of its provisions use the word “may” rather than “shall” – leaving devolution to the discretion of state legislatures. This has enabled states to maintain supervisory control over ULBs through various legislative mechanisms, even while nominally complying with the amendment’s framework. Ward Committees, which were meant to facilitate citizen participation at the neighbourhood level, have largely remained non-functional. Where they exist, they often lack real powers, adequate representation, or the resources to operate meaningfully.

The creation of parastatal bodies – special purpose agencies for water, housing, transport, and infrastructure – has further diluted the authority of elected municipalities. In many cities, these agencies exercise control over large budgets and critical urban functions without any direct accountability to the municipal body or its elected councillors.

The State Finance Commission problem 🔗

Article 243Y of the Constitution requires every state to establish a State Finance Commission every five years to define principles for fiscal devolution to local governments. In practice, many states have seen significant delays in constituting SFCs, submitting reports, and acting on their recommendations. The parliamentary standing committee on rural development and panchayati raj noted that as of the mid-2020s, only nine states had constituted the 6th SFC – which should cover 2021-22 to 2026-27 – and of those, only two were active.

The SFCs themselves face structural limitations. Most of their members and chairpersons are bureaucrats and politicians, which puts limits on their ability to function as truly autonomous recommending bodies. Former National Institute of Public Finance and Policy professor Tapas Sen has observed that three decades after the constitutional amendments, progress on meaningful decentralisation is negligible compared to what was originally envisioned – and that there is clear resistance to genuinely devolving power to local bodies.

Capacity and human resource deficits 🔗

Even when functions and funds are devolved, ULBs often lack the personnel and institutional capacity to use them effectively. The average staff vacancy rate in urban local bodies stands at 35-37 percent nationwide, and in 16 states, municipalities do not have independent recruitment powers. Without adequate trained personnel, even well-designed programmes remain poorly executed. Financial management capacities – budgeting, audit, accounting – are similarly underdeveloped in a large number of smaller ULBs.

The road ahead: strengthening the third tier 🔗

The challenges facing ULBs are not insurmountable, but addressing them requires coordinated action on several fronts.

Making devolution mandatory: A significant reform would be to amend the discretionary language of the 74th Amendment – replacing “may” with “shall” in key provisions – so that the transfer of functions and finances to ULBs becomes a constitutional obligation rather than a political choice. Detailed activity mapping for the 18 scheduled functions would reduce ambiguity and overlap with state departments.

Strengthening own-source revenues: Property tax administration – the single most important source of municipal own-source revenue – needs comprehensive reform. Greater digitisation and integration of land records with municipal tax databases, as achieved in Surat, can improve both assessment accuracy and collection efficiency. Expanding the range of permissible municipal revenue instruments and allowing ULBs greater autonomy in determining tax rates are equally important steps.

Reforming the SFC process: State Finance Commissions need to be constituted on time, staffed with financial expertise, and given sufficient authority for their recommendations to carry real weight. The gap between SFC recommendations and actual fund transfers must be monitored and reported transparently, with clear accountability mechanisms for states that fail to implement recommendations.

Reviving Ward Committees and planning bodies: Ward Committees and Metropolitan Planning Committees remain the most underutilised provisions of the 74th Amendment. Strengthening them with real powers, dedicated budgets, and genuine citizen participation would restore the participatory planning architecture that the amendment originally envisioned.

Reducing tied grants: The 16th Finance Commission has already made a move in this direction – 52 percent of urban grants under its framework are now untied, up from 40 percent under the previous commission. This flexibility allows municipalities to prioritise locally relevant needs and is likely to improve fund utilisation. Continuing this shift from scheme-driven spending to formula-based, flexible transfers is a step in the right direction.

Building institutional capacity: Long-term urban governance reform must invest in training municipal staff, filling vacancies in sanctioned posts, and granting ULBs independent recruitment authority. Technical capacity in urban planning, financial management, and service delivery needs systematic upgrading – not just as a one-time exercise but as an ongoing institutional commitment.

A balanced assessment 🔗

The 74th Constitutional Amendment is undeniably a landmark in the story of Indian democracy. It gave urban local bodies constitutional legitimacy, institutionalised regular elections, introduced meaningful representation for marginalised groups, and created an architectural framework for decentralised urban governance. These are not small achievements. The amendment set a direction that was right, and in states like Kerala and Karnataka, it has demonstrably improved the quality of local governance.

Yet the gap between the amendment’s intent and its ground-level reality remains wide. Fiscal soundness of local bodies is the necessary precondition for reaping the real benefits of decentralisation. Without financial independence, functional autonomy is hollow. Without functional autonomy, elected representatives cannot truly serve their constituents. Without timely SFC recommendations and genuine state cooperation, the constitutional architecture of urban decentralisation operates in a vacuum.

India’s cities are too important to be governed poorly. They generate the economic activity that drives national growth, and they are absorbing millions of new residents every year. The 74th Amendment gave these cities the possibility of good governance. Making that possibility a reality will require political will at the state level, institutional reform at the municipal level, and sustained engagement from citizens at the ward level – all working together toward the vision the amendment originally promised.

What do you think? Three decades after the 74th Amendment, the balance of power between state governments and urban local bodies remains a point of tension – should the Constitution be amended to make functional and financial devolution mandatory rather than discretionary? And given that cities generate most of the country’s economic output, do you think the current level of fiscal transfer to urban local bodies is justifiable?

References

1. https://iaspoint.com/urban-finance-and-governance-challenges-in-india-2026/
2. https://en.wikipedia.org/wiki/Seventy-fourth_Amendment_of_the_Constitution_of_India
3. https://mahadma.maharashtra.gov.in/en/74th-constitutional-amendment-and-urban-local-bodies-in-india/
4. https://secforuts.mha.gov.in/74th-amendment-and-municipalities-in-india/
5. https://www.cppr.in/articles/urban-local-bodies-need-financial-autonomy
6. https://www.drishtiias.com/daily-updates/daily-news-analysis/issue-of-urban-finance-and-16th-finance-commission
7. https://www.shankariasparliament.com/current-affairs/gs-ii/gs-ii-bodies-constitutional-statutory-regulatory/finance-commission-grants-to-cities-the-issue-of-limited-allocation
8. https://laex.in/daily-mains-question/16th-finance-commission-urban-local-bodies/
9. https://sociology.institute/india-democracy-development/limitations-73rd-74th-amendments-india/
10. https://india.mongabay.com/2023/03/state-finance-commissions-in-poor-shape/
11. https://www.business-standard.com/opinion/columns/india-s-urban-reset-what-16th-fc-report-budget-2026-27-mean-for-cities-126030901350_1.html