Urban Mirror

the local governments would need to live up to their USP – that of being best placed to provide transparent, accountable and citizen-centric governance. Elected representatives would need to stop working as ‘intermediaries’ between citizens and the ULG bureaucracy, and would have to assume a leadership role. The quality of basic service delivery would need to improve and so also the functioning of democratic institutions in local governments, writes former IAS officer Sunil Kumar

The report of the 16^th Finance Commission (FC) has been accepted by the union government and tabled in the Parliament. This article focuses upon the recommendations of the 16^th FC relating to the urban local governments (ULG) and what needs to be done in the short, medium and long term by various stakeholders.

The 16^th FC has recommended devolution of Rs. 3,56,257 crore for ULG over   2026-31 period. This includes: (a) provision of Rs.56,100 crore for ‘special urban infrastructure’ (for revamping sewerage systems in 22 Tier 2 cities), and (b) Rs,10,000 crore for ‘urbanisation premium’.

The balance Rs.2,90,157 crore has been divided into: (a) ‘basic’ grant (Rs.2,32,125 crore) and (b) ‘performance’ grant (Rs.58,032 crore). These are equally divided between ULG and state government. In absolute terms, the allocation for ULG has increased by 129 percent, from Rs.1,55,626 crore (2021-26) to Rs.3,56, 257 crore (2026-31), which is substantial.

The States are required to give 90 percent weightage to the proportionate share of population of ULG in the total urban population and 10 per cent to the own source revenue (OSR)‑based criterion while determining the share of ULG in the state. Most of the funds is likely to go to the 268 Municipal Corporations followed by 1874 Municipal Councils and the least to 2458 Nagar Panchayats. Municipal Corporations and Municipal Councils are home to 50 and 36 percent of urban population as per census 2011 and their share in OSR collection is 80 percent and 16 percent respectively. Thus, the Nagar Panchayats (14% population and 4% OSR) are not likely to gain much despite the huge increase in allocation for ULG.

Conditions for Basic Grants

The three conditions laid down by the 16^th FC for availing of ‘basic grants’ relate to:

• the presence of ‘duly constituted’ local governments;
• public availability of provisional accounts and audited accounts on the web;
• notification of the State Finance Commission (SFC) on the expiry of five years from the formation of the previous SFC and tabling of the ATR in the State legislature within 6 months of submission of the SFC report.

These three conditions should incentivise timely holding of elections and deter ‘rule by administrators’ in local governments. Likewise, the challenge now is more about the quality and reliability of accounts and audit data rather than merely their availability and, monitoring of the implementation of the SFC recommendations.

Conditions for Performance Grants

For availing of the performance grants, the 16^th FC has recommended that ULG raise their OSR at 5 per cent per annum compounded growth applied over OSR of 2025‑26. This should spur the Municipal Councils and Nagar Panchayats to improve their OSR mobilisation effort from current levels of just 16 and 4 percent of OSR of ULG respectively.

Release of the state component of performance grant for ULG is dependent upon transferring to local governments grants amounting to 20 percent or more of the basic FC grant recommended by the 16^th FC for the base year from state’s own resources. Revenue assigned and shared statutorily with the local governments by the state such as portion of stamp and registration duty or land revenue would be included in the calculation of these transfers.

Unlike the basic grants of which 50 percent have been recommended by the 16^th FC to be ‘tied’ for ‘sanitation and solid waste management’ and/or ‘water management’, the entire performance grant is ‘untied’.

Hike in Grants for ULG

The steep hike in allocation for ULG by 16^th FC is justifed as over 37 percent of the country’s population (555 million) is estimated to be residing in urban areas in 2026 and this figure is likely to touch 40 percent by 2030. The accelerated pace of urbanisation and internal migration from rural to urban areas is a hard reality. Different studies show that official urbanisation figures may be grossly underestimated and allocation of resources to ULG on per capita basis remain low. States showing rapid urbanisation under the revised formula adopted by the 16^th FC have received higher allocations. Thus, Maharashtra is slated to receive the largest share (16.13 per cent), followed by Uttar Pradesh (11.56 per cent), Tamil Nadu (8.64 per cent), and Gujarat (8.19 per cent). This is a break from the past.

Successive FC have taken note of growing urbanisation. The share of ULG has consistently increased from 10 percent recommended by the 10^th FC to 20 percent by 12^th FC, 30 percent by 14^th FC and 45 percent by 16^th FC. The share of ULG could cross 50 percent by 2031 when the report of 17^th FC comes in.

Special Infrastructure Component

The need to extend, upgrade and replace the old and dilapidated drinking water pipelines, sewerage system and storm water drains in the towns and cities in almost all states is being widely felt. The recent unfortunate incident in Indore, supposedly the cleanest city of India (and showcased by the 16^th FC in it’s report), has only served to underline the urgency to take up works relating to their revamp. Thus, special allocation of Rs.56,100 crore for comprehensive waste water management in 22 urban growth centres (select tier-II cities) seems to be perfectly justified. But the unanswered question is what about the other ULG?

Urbanisation Premium

The need to put in place a suitable mechanism for facilitating smooth rural to urban transition is increasingly being felt. The rural-urban transition policy announced by Odisha in June 2023 has been hailed by the 16^th FC. The focus on timely and rule-based identification of urban areas and each state putting in place a clear transition policy from rural to urban administrative units (in place of ad hoc manner of creating new Nagar Panchayats) is welcome. The allocation of Rs.10,000 crore for this purpose is both timely and a very positive step. However, the stipulation that this could be claimed by the State on merger of peri‑urban villages into adjoining larger ULG with existing population of not less than one lakh could have been left to the state’s rural-urban transition policy as inclusion in urban area, by itself, does not guarantee citizen  access to better civic facilities.

Other Recommendations

Other recommendations relate to the revamping of property tax collection system, adherence to service level benchmarks by all ULG, continuation and strengthening of the arrangements for technical guidance and supervision of the audit process by the CAG and augmentation of the capabilities of Local Fund Audit Departments (LFAD) by investing in skill development and addressing manpower shortages in all states. It has also stressed the need for all states to report all transfers transparently, including those from the Consolidated Fund of India on the recommendation of the FC, transfers under centrally sponsored schemes, SFC grants and other grants from the state government, separately for ULG and rural local government (RLG) in their budgets. It has also recommended that these transfers, with full details, must also be reported in Appendix III of the State Finance Accounts. Additionally, it has suggested dropping the constitutional directive that the FC make its recommendations on RLG and ULG ‘on the basis of the recommendations made by the Finance Commission of the State’.

In the light of the above, what needs to be done by the ULG, state government and union government in the short, medium and long term must be clearly understood.

1. Short term (0 to 1 year)

In the short term, the state government and ULG need to undertake the following on priority:

1. Ensure that all ULG are duly constituted. States and UTs where municipal elections have been delayed (Karnataka, Telangana) should be held without any further delay. Any delay in holding elections of ULGs before the expiry of their five-year term is likely to adversely affect release of 16^th FC funds. The almost 30 percent expected shortfall in release of funds during the 15^th FC period is largely due to delay in holding elections and failure to comply with the conditions relating to increase in property tax collection.
2. All States need to prepare an action plan for strengthening the Local Fund Audit Department by filling up existing vacancies and organizing intensive training of the audit personnel on the digital audit platforms developed by the Ministry.
3. Since only 66 percent of ULG use accrual-based accounting, 21 percent cash based and 13 percent a mix of both accrual and cash-based accounting system, all ULG need to quickly switch to accrual-based accounting system. States need to provide support to such ULG and fill up all vacancies of accounts personnel in ULGs.
4. States must ensure that the accounts of all Municipalities reflect the full details of all their receipts and expenditure from all sources and audit of all ULG are completed and reports uploaded on the portal and available in the public domain as stipulated by 16^th FC.
5. State need to regularly monitor OSR collection by all ULG, and especially in smaller ULG, as the share of OSR in total revenue of ULG is 61 percent in ULG with population larger than 40 lakh, 55 percent in those with population between 5 to 40 lakh and just 32 percent in ULG with population less than 5 lakh. This has an adverse impact on their ability to provide even basic services.
6. The property tax collection regime would need to be revamped in almost all the ULGs and suggestions given by the 16^th FC seem sensible and feasible.
7. State government should ensure that SFCs submit their reports in time and the same is tabled in the State legislature with action taken report (ATR) without delay (within six months). The tendency to centrally deduct funds for payment of electricity and water dues of ULG by the state government foster financial indiscipline.
8. The concerned union Ministry would need to put in place a strong digital infrastructure to ensure regular compliance to the conditions stipulated by 16^th FC for release of basic and performance grant. All ULG would need to immediately strengthen their digital cell.

1. Medium Term ( 1 to 3 years)

1. States could think of establishing an independent State Delimitation Commission for Local Governments on the pattern of Delimitation Commission provided in Article 82 of the constitution after every census for recommending reorganization of local government constituencies. Necessary provision can be incorporated in the state panchayat and municipal laws. The rotation of seats could also be undertaken only after delimitation exercise is completed. This could facilitate timely holding of elections.
2. Transfer of all 18 functions and functionaries from the line departments in adequate number to the ULG; filling up of all existing vacancies on priority and giving ULG the authority to create posts and fill them without seeking approval of the state government provided they raised their OSR need to be undertaken on priority.
3. Get the Finance Department to examine the Budget, Accounts and Audit Manual prepared for their state by the Institute of Public Auditors of India (IPAI) in 2019 and formally issue them after obtaining the concurrence of the state Accountant General. This is necessary for ensuring financial discipline.
4. States may consider setting up an institution patterned on the basis of the Public Accounts Committee of the State legislature in each district under the District Panchayat to examine in detail the audit reports pertaining to all local governments in the district. This would lead to higher accountability.
5. Activation of the Area Sabha proposed in the Model Nagar Swaraj Bill as well as the Ward Committee provided in the constitution could improve citizen-local government interface. Use of appropriate digital tools could be helpful.
6. Compulsory adherence to the Rural Area Development and Plan Formulation & Implementation (RADPFI) guidelines issued by the Ministry of Panchayati Raj in the transitioning Gram Panchayats with suitable governance structures may be included in the rural-urban transition policy of the state.
7. Focusing on development of infrastructure, tackling environmental concerns like air quality and strengthening citizen-centric governance in smaller ULGs like the Nagar Panchayats and Municipal Councils. This may yield better and quicker results than focusing on million plus cities alone where the sheer size of the ULG tend to complicate matters.

1. Long term (3 to 10 years)

1. The existing design and organization of local governments in the country vide the 73^rd and 74^th CAA may need to be looked afresh. In the 21^st century, the rural-urban binary is not the best way to organize local governments. The focus should shift towards providing services to citizens as per accepted service level benchmarks and set up institutions which facilitate enhanced engagement of citizens with local governments on a regular basis no matter where citizens reside. Seen thus, the only differentiating feature among various types of local governments would be their relative size. States would need to deliberate on the optimal size of even Municipal Corporations from the point of view of providing citizen-centric governance.
2. It is time to take a hard look at the 18 subjects enlisted in the Twelfth Schedule. Subjects relating to checking and monitoring air and water pollution, food safety standards, managing traffic and natural disaster management among others need to be entrusted to the ULG.
3. There is need to examine and build consensus around the idea of District Government as suggested by the second Administrative Reforms Commission. This could involve extending the area of operations of the District and Block Panchayats to urban areas as well. This would become possible if their members represent both rural and urban constituencies. Similarly, placing the District Collector under the District Panchayat could also be thought of. Experience suggests that the institution of District Collector has served to weaken rather than strengthen both rural and urban local governments.
4. Giving the local governments one-sixth share in both CGST and SGST^[i] is estimated to provide sufficient funds to them on a regular basis for shouldering their constitutional mandate and ensuring quality delivery of basic services to citizens. It would also reduce their financial dependency on the union and state governments.
5. Lifting the monetary ceiling on levy of profession tax (Article 276(2)), allowing local governments to levy and collect service charges on union and state government properties and giving them a share in mining royalties as suggested by the 13^th FC would also strengthen local governments.
6. To ensure timely release of funds and improve the budgeting and accounting processes, the proposal to set up a Consolidated Fund of Local Government needs serious consideration.

As all these would entail constitution amendments, it is essential that bipartisan support is garnered for the aforesaid proposals among all stakeholders.

Conclusion

Fulfilling the conditions laid down for availing of basic and performance grants and securing full release of the 16^th FC allocation would pave the way for local governments getting a percentage share of the net divisible pool (just like the states) instead of a fixed sum as is the case now. This would truly strengthen their position in the federal multi-level governance structure.

However, in the final analysis, the local governments would need to live up to their USP – that of being best placed to provide transparent, accountable and citizen-centric governance. Elected representatives would need to stop working as ‘intermediaries’ between citizens and the ULG bureaucracy, and would have to assume a leadership role. The quality of basic service delivery would need to improve and so also the functioning of democratic institutions in local governments. Accountability and adherence to rule of law are sine qua non for good governance. There can be no Viksit Bharat without strong local governments.

(Sunil Kumar is a visiting Senior Fellow associated with the Centre for Cooperative Federalism and Multilevel Governance in Pune International Centre and a former civil servant. Views expressed are personal.)

^[i] Second BPR Vithal Memorial Lecture by Dr. Vijay Kelkar, Hyderabad, December 1, 2023; https://cess.ac.in/bpr-vithal-memorial-lectures/