Addressing Financial Challenges in Urban Local Bodies

India’s cities generate roughly 60% of the national GDP, yet the municipal bodies running them often operate on shoestring budgets. From potholed roads to irregular water supply, the gap between urban aspirations and ground-level service delivery usually traces back to one core issue: money. Urban Local Bodies (ULBs) remain chronically underfunded, overly dependent on higher tiers of government, and constrained in their ability to raise their own revenue. Understanding this financial squeeze-and the reforms that can fix it-is essential for anyone trying to make sense of how Indian cities are actually governed.

Why ULB finances matter more than ever 🔗

Municipal corporations, municipal councils, and nagar panchayats are the closest link between citizens and the state. They manage water, sanitation, roads, street lighting, solid waste, primary health, and a host of other services listed in the Twelfth Schedule of the Constitution. Yet a recent Reserve Bank of India report analysing 232 municipal corporations found that total municipal expenditure amounted to just 1.3% of GDP in 2023-24, a fraction of what comparable emerging economies spend on their cities.

The scale of the mismatch becomes starker when you look at the revenue side. A Comptroller and Auditor General (CAG) performance audit covering 393 ULBs across 18 states revealed that only 32% of the total revenue of ULBs came from their own sources, while the rest arrived as grants from state and central governments. The same audit flagged a 42% gap between revenue resources and actual expenditure-a fiscal hole that explains why so many civic projects stall mid-way.

The promise and shortfall of the 74th Amendment 🔗

The Constitution (74th Amendment) Act, 1992 was meant to end exactly this kind of fiscal fragility. It gave ULBs constitutional status, mandated regular elections, and-crucially-introduced Article 243Y, which requires State Finance Commissions to review the financial position of municipalities and recommend measures to the Governor. The amendment also empowered state legislatures to decide which taxes, duties, fees, and grants would flow to ULBs.

Three decades on, implementation has been patchy. The CAG audit found that while 17 of 18 functions were technically devolved across the sampled states, just four functions had been devolved with complete autonomy-and those four were relatively minor items like burial grounds and slaughterhouse regulation. Core urban functions such as town planning, fire services, and slum rehabilitation continue to be held back or shared with parastatal bodies, leaving ULBs with responsibility but no real control over financing or execution.

Why financial autonomy remains elusive 🔗

Several structural issues keep ULBs financially weak. First, state governments have been slow to transfer meaningful tax handles. Second, parallel agencies-development authorities, water boards, housing corporations-often handle high-revenue functions, bypassing the municipality altogether. Third, the subsuming of buoyant local levies like octroi and local body tax into GST stripped away what used to be a major revenue pillar for cities in states like Maharashtra and Gujarat.

The revenue problem: too little, too concentrated 🔗

When you dig into how ULBs earn money, the pattern is striking. According to the RBI’s analysis of municipal corporation finances, property tax contributes roughly 16% of total revenue receipts but accounts for over 60% of municipalities’ own tax revenue. In 2023-24, property tax collections were budgeted at around Rs 32,450 crore-a significant sum, yet one that is heavily skewed toward a handful of states.

Delhi’s municipal corporations, for instance, reported a revenue-to-state-revenue ratio of 34.5%, followed by Maharashtra at 14.1% and Gujarat at 7.8%. Most other states trail far behind. This concentration means that the financial health of “Indian ULBs” is really the story of a dozen or so well-performing corporations, while hundreds of smaller municipalities remain fiscally anaemic.

Property tax: the underperforming workhorse 🔗

Property tax is supposed to be the backbone of municipal revenue, and for good reason. It captures part of the value that public infrastructure creates in private property, and it tends to be progressive-bigger, higher-value buildings pay more. But in practice, Indian ULBs struggle to collect even a fraction of what they are owed. A working paper by the Centre for Water and Sanitation notes that poor billing efficiency is often caused by the inability of ULBs to fully cover all taxable properties in the tax net, especially as cities expand rapidly into peri-urban areas that haven’t been surveyed or assessed.

The collection side is equally weak. Many ULBs still rely on manual records, outdated ward-level valuations, and legacy rebates that erode the tax base. Technology-driven reforms-GIS mapping of properties, online payment portals, automated billing, and regular revaluation-are gradually being adopted, but the pace varies enormously from one city to the next.

State Finance Commissions: the missing link 🔗

Article 243Y envisaged the State Finance Commission (SFC) as the institutional mechanism that would rationalise transfers from state governments to local bodies. Every five years, an SFC is supposed to review municipal finances and recommend how state revenues should be shared, which taxes should be assigned to ULBs, and what grants-in-aid should flow from the consolidated fund of the state.

In practice, SFCs have been one of the weakest links in the chain. The RBI has pointed out that state governments often fail to constitute SFCs on time, their recommendations are frequently accepted only partially, and action-taken reports are sometimes not tabled in the legislature. The consequence is that inter-governmental transfers to ULBs remain ad hoc and politically driven rather than rule-based. The RBI report explicitly stresses the need for regular SFCs to recommend timely and equitable transfers, creating the kind of predictable fiscal framework that cities need for long-term planning.

The role of the Central Finance Commission 🔗

The Central Finance Commission (CFC) has tried to fill some of the gap. The 14th Finance Commission, for example, recommended grants to ULBs in two parts-a Basic Grant and a Performance Grant in an 80:20 ratio-and tied the performance portion to conditions like audited annual accounts and a 5% annual increase in own revenue. Subsequent commissions have continued this conditional-grant approach, nudging cities toward financial discipline.

Innovative financing: beyond grants and property tax 🔗

Given the limits of traditional revenue sources, cities are increasingly looking at innovative financing mechanisms to bridge the infrastructure gap. Three avenues have gained real traction.

Municipal bonds 🔗

Municipal bonds allow a financially sound ULB to borrow directly from the capital market, bypassing state and central channels. After a lull, India revived this route in 2017 with amended SEBI regulations. Pune Municipal Corporation became the first Indian city to list its bonds on the BSE under the new regulations in 2017, followed by Indore on the NSE in 2018. Today, cities including Ahmedabad, Hyderabad, Surat, Vadodara, and Visakhapatnam have successfully tapped the bond market for water, transport, and housing projects.

Vadodara offers a particularly instructive case. In 2022, its municipal corporation issued a Rs 100 crore bond that was oversubscribed ten times, with the effective coupon falling to 4.55% after AMRUT incentives-a rate that beat even AAA-rated corporate issuers. The success was built on strong governance, clean audited accounts, and a credible credit rating.

Public-Private Partnerships (PPPs) 🔗

Public-Private Partnerships have become an important instrument for delivering capital-intensive urban services. Water supply, solid waste processing, bus rapid transit, and parking systems have all been structured as PPPs in different Indian cities. One of the earliest examples was the Tiruppur Area Development project, which pioneered India’s first water supply and sewerage project with private sector participation structured along commercial lines as a Special Purpose Vehicle. Done well, PPPs bring in private capital, technical expertise, and performance accountability; done poorly, they create long-term contingent liabilities for the municipality.

User charges and land-based financing 🔗

User charges for water, sewerage, and solid waste collection remain underutilised in most Indian cities, partly due to political reluctance to charge for services that citizens consider entitlements. Land-based instruments-development charges, betterment levies, charges on additional floor space index (FSI), and monetisation of municipal land-are another largely untapped source. Central government schemes now explicitly encourage cities to ring-fence user charges on urban infrastructure to improve creditworthiness for bond financing.

Lessons from Ahmedabad and Pune 🔗

Two cities consistently appear in any conversation about successful ULB resource mobilisation. Ahmedabad Municipal Corporation is widely regarded as a pioneer. It issued India’s first municipal bond without a government guarantee in 1998, reformed its property tax system to establish what is often called a “zero litigation” record, and levies an automatic annual increase of 2% in property tax to keep collections in step with inflation. These measures together built a fiscally resilient corporation that could fund ambitious projects like the Sabarmati Riverfront and BRTS without waiting for state grants.

Pune has followed a similar trajectory. Its property tax base now covers more than 14 lakh properties, making it one of the largest sources of revenue for the city. Pune was also the first city to list bonds on the BSE under the revamped 2017 regulations, using the proceeds to fund a 24×7 water supply project. Other cities like Surat, Indore, Bhopal, and Hyderabad are now emulating these models with varying degrees of success.

The road ahead: what needs to change 🔗

Fixing ULB finances will require simultaneous action on several fronts. Strengthening own-source revenue is the foundation: GIS-based property mapping, regular revaluation cycles, rational user charges, and better billing and collection systems. Institutionalising State Finance Commissions with timely constitution, predictable transfer formulas, and legislative acceptance of recommendations will give cities the fiscal certainty they need. Deepening the municipal bond market-through better credit ratings, a stronger secondary market, and pooled-finance mechanisms for smaller cities-can unlock private capital at scale.

Equally important is capacity building. Many ULBs lack trained finance officers, modern accounting systems, and the ability to even prepare audited financial statements on time. Without these basics, no reform package-no matter how well-designed-will translate into actual outcomes on the ground. The experience of Ahmedabad and Pune shows that where political leadership, administrative competence, and citizen engagement come together, Indian cities can absolutely finance their own futures. The challenge is making this the norm rather than the exception.

What do you think? Should Indian cities be given constitutionally guaranteed revenue handles-much like states have under the Finance Commission framework-so that their financial health does not depend on the goodwill of state governments? And how can smaller municipalities, which lack the scale of an Ahmedabad or a Pune, access innovative financing without getting trapped in unsustainable debt?

References

1. https://swarajyamag.com/economy/what-this-latest-rbi-report-says-about-fiscal-health-of-indias-municipal-corporations
2. https://theprint.in/india/governance/over-30-yrs-after-74th-amendment-cag-flags-weak-compliance-with-law-empowering-urban-local-bodies/2357067/
3. https://secforuts.mha.gov.in/74th-amendment-and-municipalities-in-india/
4. https://cwas.org.in/resources/file_manager/Strengthening%20Municipal%20Property%20Tax.pdf
5. https://cdma.ap.gov.in/en/xiv-finance-commission-0
6. https://www.ccilindia.com/documents/d/ccil/Exploring%20the%20Indian%20Municipal%20Bond%20Market-pdf
7. https://www.nism.ac.in/blog/reimagining-urban-finance-why-municipal-bonds-matter-more-than-ever/
8. https://propertytax.punecorporation.org/