Understanding the Interface Between State and Urban Local Government in India

Cities are where India’s economic, demographic, and political energies collide most intensely. Yet the question of who actually runs a city, a state government sitting in the capital or an elected municipal council on the ground, is one of the most contested puzzles in Indian governance. The interface between State governments and Urban Local Bodies (ULBs) shapes everything from how your garbage is collected to whether your city can build a metro line. Understanding this relationship is essential to making sense of why some cities thrive while others struggle under the weight of rapid urbanisation.

Why the State-ULB relationship matters 🔗

Local Government is listed as Entry 5 in the State List of the Seventh Schedule of the Constitution. In simple terms, local government is a State subject, which means the Union Government cannot directly legislate on municipal matters. The State sets the rules of the game, and ULBs play within them. This constitutional design places every municipality, municipal council, and nagar panchayat in a dependent relationship with its State government, making the interface between the two tiers the single most important determinant of urban governance outcomes.

This matters more today than ever before. The urban population crossed 530 million in 2024, making India the world’s second-most populous urban nation after China. By 2036, nearly 40 per cent of Indians are expected to live in cities, and urban areas are projected to contribute close to 70 per cent of national GDP. The scale of service delivery, planning, and infrastructure development demanded by this transition simply cannot be managed from State capitals alone. The effectiveness of the State-ULB interface determines whether cities can keep pace.

The constitutional backbone: the 74th Amendment 🔗

Before 1992, municipal bodies in India were creatures of ordinary State law. They could be superseded at will, their elections postponed indefinitely, and their powers diluted by State action. The Constitution (74th Amendment) Act came into force on 1 June 1993, and State Governments were expected to bring their municipal laws into conformity with its provisions. This was the moment ULBs acquired constitutional status and the State’s discretion was formally fenced in.

The Amendment inserted Part IX-A into the Constitution, covering Articles 243-P to 243-ZG, and added the Twelfth Schedule. The Twelfth Schedule lists 18 functional items that States may entrust to municipalities, ranging from urban planning and regulation of land use to public health, water supply, slum improvement, and solid waste management. The Amendment also made periodic elections mandatory, created State Election Commissions to conduct them, and required the setting up of State Finance Commissions to review municipal finances.

Three types of municipalities 🔗

Article 243-Q provides for three categories of urban bodies: Nagar Panchayats for areas transitioning from rural to urban; Municipal Councils for smaller urban areas; and Municipal Corporations for larger urban areas. The Governor, through a public notification, decides the classification based on population, density, revenue, and the proportion of non-agricultural employment. This classification itself is a State decision, and it determines the size, structure, and financial powers of the local body.

The legislative interface 🔗

The legislative relationship is perhaps the most lopsided. State legislatures write the municipal laws under which every ULB functions, be it the Haryana Municipal Corporation Act, the Maharashtra Municipalities Act, or the Bombay Municipal Corporation Act. They decide what functions to devolve, how taxes are levied, how the chairperson is elected, and how internal committees are constituted. While full compliance has been achieved in setting up three types of ULBs, reserving seats, and constituting State Finance Commissions, constitution of Ward Committees, District Planning Committees, and Metropolitan Planning Committees has been patchy, and many States have not transferred functions, funds, and functionaries to ULBs.

The 74th Amendment used the word “may” rather than “shall” when listing the functions States could entrust to municipalities. This drafting choice has proved consequential. No State has devolved all 18 functions of the Twelfth Schedule, and critical responsibilities like urban planning, water supply, and sanitation often remain with State departments or parastatal agencies.

The Model Municipal Law 🔗

Recognising that State laws varied wildly in quality and coverage, the Government of India prepared a Model Municipal Law (MML) to serve as a template for States. The MML was developed in 2003 to guide States in enacting municipal legislation, with the objective of implementing the provisions of the 74th CAA in totality and providing the legislative framework for the Ministry’s urban sector reform agenda. The MML addressed issues like accounting reforms, resource mobilisation, and private sector participation, and some States have used it as a reference while drafting or amending their own laws.

The administrative interface 🔗

Administratively, the State’s hand is visible everywhere in a municipality. Senior officials like the Municipal Commissioner are usually State cadre officers on deputation. The Director of Municipal Administration in each State supervises ULBs, issues notifications, approves budgets beyond certain thresholds, and can inspect, audit, and in some cases supersede a ULB. The State government decides staffing patterns, approves recruitment, and often controls transfers.

The problem of parastatals 🔗

A major complication in the administrative interface is the existence of parastatal bodies, specialised State-level agencies that deliver urban services parallel to, or instead of, municipalities. Development authorities handle town planning, water boards handle water supply, housing boards handle housing, and pollution control boards handle environmental regulation. Functions such as urban and town planning, regulation of land use, water supply, sanitation, and slum development continue to be delivered by parastatals that are directly accountable to the State Government rather than to ULBs.

This creates what urban governance scholars call “accountability gaps”. When a resident faces a water supply problem, it is often unclear whether the municipal corporation, the State water board, or a district-level authority is responsible. The result is delayed projects, coordination failures, and a democratic deficit, because these parastatals are typically headed by bureaucrats appointed by the State rather than by elected representatives.

The financial interface 🔗

The financial relationship is where the State-ULB interface is at its most strained. Article 243-Y mandates a State Finance Commission (SFC) once every five years to review the financial position of municipalities and recommend the distribution of taxes, duties, tolls, and fees between the State and its ULBs. Article 243-X allows the State legislature to decide which taxes a ULB can levy, which taxes the State will collect and share, and what grants-in-aid will be provided.

The reality on the ground is that Indian municipalities are chronically under-resourced. Municipal revenues in India stand at around 0.75 per cent of GDP, which is very low by international standards. Property tax collections are weak, user charges are rarely cost-reflective, and most ULBs depend heavily on transfers from the State and Central governments. This dependence makes them vulnerable to political pressures from above and erodes their functional autonomy.

The National Municipal Accounting Manual 🔗

To address the poor state of municipal finances and accounting, the Central Government, through the Comptroller and Auditor General, developed the National Municipal Accounts Manual (NMAM). The NMAM is applicable to all urban local bodies, with accounting principles focussed on accrual basis accounting, and States can develop State-level manuals based on it to suit their requirements while complying with its principles. The NMAM was a response to the legacy cash-based accounting systems that made it nearly impossible for municipalities to assess their true financial position, manage assets, or raise market-based finance.

Moving to a double-entry accrual system has been slow. The Central government developed guidelines for moving to a double entry accrual-based accounting system through the introduction of a National Municipal Accounts Manual, but because local government institutions form part of the State List, it is the State governments that must initiate the reform process in ULBs. Progress has been uneven: Tamil Nadu was among the first to adopt accrual-based accounting, while many other States are still in transition.

Planning committees and intergovernmental coordination 🔗

The 74th Amendment also tried to bridge the State-ULB interface through planning institutions. Article 243-ZD provides for a District Planning Committee (DPC) in every district to consolidate plans prepared by panchayats and municipalities. Article 243-ZE mandates a Metropolitan Planning Committee (MPC) for every metropolitan area, defined as an area with a population above ten lakh. These bodies were designed to prevent the State from dictating plans top-down and to enable integrated planning that reflects local priorities.

In practice, the constitution of DPCs and MPCs has been uneven across States, and even where they exist, their plans are often overridden by State-level master plans or parastatal projects. The Central Finance Commissions, especially the 14th and 15th, have allocated substantial resources directly to local bodies to partially bypass State gatekeeping. The 15th Finance Commission recommended Rs 1,21,000 crores for ULBs as against Rs 87,000 crore by the 14th Finance Commission, along with an additional Rs 24,000 crore for health services.

Rapid urbanisation and the stakes ahead 🔗

The pressures of urbanisation are now forcing a reassessment of the State-ULB interface. Urban areas generate over two-thirds of the country’s GDP and account for 90 per cent of government revenues, even though less than one-third of Indians live in them. The arithmetic is stark: cities that cannot plan, finance, or deliver services will become drags on growth rather than engines of it.

Several reforms are being debated. One is replacing “may” with “shall” in Article 243-W, so that core functions in the Twelfth Schedule become mandatorily devolved to ULBs. Another is the creation of a “municipal finance list” in the Constitution to match ULB functions with guaranteed revenue sources. A third is strengthening the SFC process, ensuring timely constitution and the adoption of common formats so that Central Finance Commissions can act on robust State-level data.

The Union’s indirect influence 🔗

Even though the Union cannot legislate on ULBs directly, it exerts substantial indirect influence through tied grants and flagship missions. Programmes like the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), the Smart Cities Mission, and the Swachh Bharat Mission (Urban) come with reform conditionalities that States must meet to access funds. These conditionalities have included property tax reforms, accrual accounting, public disclosure laws, and community participation laws, effectively pushing States to strengthen their ULBs from the outside in.

A work in progress 🔗

The interface between the State and Urban Local Government in India is best understood as a work in progress rather than a settled arrangement. The 74th Amendment laid down a constitutional floor, but the ceiling, how much power, how much money, and how much autonomy ULBs actually enjoy, is still being negotiated State by State, city by city, and programme by programme. For students and practitioners of public administration, this interface is where theory meets politics: where principles of decentralisation collide with the realities of State control, parastatal entrenchment, and fiscal dependence.

What do you think? Should core functions in the Twelfth Schedule be made mandatorily devolved to ULBs, even if that means reducing State governments’ discretion? And how can Indian cities balance the technical expertise of parastatal bodies with the democratic legitimacy of elected municipal councils?

References

1. https://secforuts.mha.gov.in/74th-amendment-and-municipalities-in-india/
2. https://mohua.gov.in/upload/uploadfiles/files/74th_CAA13.pdf
3. https://byjus.com/free-ias-prep/municipalities-74-amendment-act-1992/
4. https://www.impriindia.com/insights/urban-governance-in-india/
5. https://cag.gov.in/uploads/download_audit_report/2023/06–Chapter-4-0651ff798ae7fc9.22225671.pdf
6. https://egyankosh.ac.in/bitstream/123456789/78337/3/Unit-12.pdf
7. https://sfcassam.nic.in/13thFC/13thFC-ManualGOIULB.pdf
8. https://www.adb.org/sites/default/files/publication/31149/south-asia-wp-020.pdf
9. https://www.worldbank.org/en/news/feature/2011/07/04/indias-urban-challenges