Why in the News?

The 16th Finance Commission has increased the urban local bodies’ share of grants to 45% for 2026-31 and recommended ₹3.56 lakh crore, more than double the 15th FC allocation. This marks the highest-ever urban share since structured third-tier devolution began, reflecting rising urbanisation and fiscal stress in cities.

How has the 16th Finance Commission altered the pattern of local body devolution?

1. Urban Share Expansion: Increases allocation to 45% for 2026-31 compared to 36% (15th FC) and 26% (13th FC).
2. Absolute Allocation Growth: Recommends ₹3.56 lakh crore, compared to ₹1.55 lakh crore under the 15th FC.
3. Historical Contrast: Urban share was 19% under the 10th FC (1995-2000).
4. Rural-Urban Rebalancing: Adjusts distribution in favour of urban bodies as urban population rises.
5. Trend Continuity: Shows gradual rise: 10th (19%), 11th (20%), 12th (20%), 13th (26%), 14th (30%), 15th (36%), 16th (45%).

What do demographic trends indicate about India’s urban transition?

1. Population Projection: Urban population projected at 41% by 2031.
2. Census Baseline: Census 2011 recorded 31% urban population.
3. Global Comparison: China (45%), Indonesia (54%), Brazil (87%) exceed India’s 2011 urban share.
4. Cluster Measurement Gap: 2015 World Bank report estimated 54% urban population plus 24% in urban clusters (total 78%).
5. Migration Dynamics: Rapid annual migration not fully captured in official statistics.

What challenges arise from inadequate urban data?

1. Outdated Census: Fiscal allocation relies on 2011 population figures.
2. Urban Definition Variability: Distinction between statutory towns and census towns affects allocation.
3. Planning Uncertainty: Inaccurate data limits infrastructure forecasting.
4. Resource Targeting Gaps: Underestimation of urban clusters leads to fiscal under-provisioning.
5. Policy Lag: Urban expansion outpaces fiscal recalibration cycles.

How do municipal finances constrain urban governance?

1. Weak Own-Source Revenue: Municipal revenues remain below 1% of GDP.
2. Grant Dependence: ULBs rely heavily on intergovernmental transfers.
3. Property Tax Inefficiency: Low collection efficiency reduces fiscal autonomy.
4. Limited Capital Market Access: Municipal bond penetration remains limited.
5. Capacity Constraints: Administrative shortages limit absorption of funds.
6. Long-Term Urban Strategy: Signals transition toward structured urban fiscal planning.

What broader implications does this shift hold for India’s growth model?

1. Urban-Led Growth Recognition: Aligns fiscal policy with cities as economic engines.
2. Infrastructure Financing Support: Enhances capacity for water, sanitation, and mobility investment.
3. Decentralisation Reinforcement: Strengthens third-tier role under constitutional design.
4. Future Census Sensitivity: Post-2027 adjustments may further alter allocation formulas.

Conclusion

The 16th Finance Commission’s enhanced allocation to Urban Local Bodies marks a structural recalibration of fiscal federalism in response to India’s accelerating urban transition. By increasing the urban share to 45%, it aligns financial devolution with demographic and economic realities. However, sustainable urban governance will depend not only on higher transfers but also on strengthening municipal capacity, improving data reliability, and deepening fiscal autonomy.

PYQ Relevance

[UPSC 2023] “The states in India seem reluctant to empower urban local bodies both functionally as well as financially.” Comment.

Linkage: This question directly examines financial and functional devolution to Urban Local Bodies. This is core to the 16th Finance Commission’s enhanced urban allocation and the broader debate on decentralisation and fiscal empowerment.

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