Centre plans Budget blueprint to give cities greater financial autonomy: Report

The proposed framework, likely to be announced in the upcoming Union Budget, will focus on enabling urban local bodies to generate more resources through mechanisms such as property tax reforms and rationalised user charges

• Centre plans to boost municipal autonomy and revenue in upcoming Union Budget
• Municipalities may gain more authority to increase funds through property tax and fees.
• Municipal and green bonds promoted for long-term urban infrastructure investment

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India's cities, grappling with strained infrastructure and uneven service delivery amid rapid population growth, could soon get greater financial and administrative autonomy. Mint has learnt that the Centre is preparing a blueprint aimed at empowering municipal bodies by reducing their dependence on state and central grants while strengthening their own revenue capabilities.

Mint reports that the proposed framework, likely to be announced in the upcoming Union Budget, will focus on enabling urban local bodies (ULBs) to generate more resources through mechanisms such as property tax reforms and rationalised user charges. Two government officials involved in drafting the plan told Mint that the goal is to make cities more self-reliant in funding and managing urban services.

The plan will also encourage municipalities-including municipal corporations, municipalities and nagar panchayats-to access market-based financing tools such as municipal bonds and green bonds for long-term infrastructure investment, Mint has learnt. Cities like Surat, Ghaziabad, Indore, Vadodara, Ahmedabad and Pimpri-Chinchwad have already tapped municipal green bonds to fund urban projects.

Mint understands that the Budget may also outline steps to help municipalities expand revenue streams by offering services such as project consultancy, advisory support and implementation training, thereby strengthening their financial independence.

Peer-to-peer mentoring is expected to be another key feature of the proposal. Mint reports that weaker municipal bodies could be paired with better-performing corporations, allowing them to replicate proven governance and financial practices. Officials involved in the discussions told Mint that successful city-level case studies may be highlighted in the Budget speech to demonstrate how innovation, governance reforms and market-linked instruments can widen municipal revenue bases.

Mint has also learnt that a meeting was held in December at the finance ministry with commissioners from some of the best-performing municipal corporations. These officials shared best practices and operational insights that could be scaled across other urban local bodies. Queries sent by Mint to the finance ministry remained unanswered at the time of publication.

Weak revenue base remains a challenge

Despite repeated reforms, municipal finances in India remain fragile. Mint notes that the Reserve Bank of India, in its Report on Municipal Finances, highlighted that municipal revenues and expenditure have stagnated at around 1% of GDP-well below levels seen in OECD countries and even several emerging economies.

Data reviewed by Mint from the ministry of housing and urban affairs shows India has nearly 4,500 urban local bodies, most of them small and constrained by limited financial powers. Only about 550 are municipal corporations, and of these, just 25 can be considered largely self-reliant, officials told Mint, as they generate a substantial share of income from sources such as property tax and user charges.

Mint further reports that an analysis by the National Institute of Urban Affairs (NIUA) covering 25 municipal corporations found that own-source revenues accounted for only about 48% of total revenues on average.

A March 2025 report by rating agency Icra, cited by Mint, showed that government grants made up around 38% of municipal revenues in FY24 (budget estimates). While borrowings from financial institutions have crossed Rs 13,000 crore, overall municipal debt remains below 0.05% of GDP, indicating limited use of market-based funding.

Property tax continues to be the largest single source of municipal income, contributing roughly 42% of own revenues on average, Mint notes, citing NIUA data.

Measures to boost municipal revenues

Experts quoted by Mint argue that structural reforms are needed to strengthen city finances. Municipal corporations often suffer from inefficient operations, low user charges and excessive interference from higher levels of government, said Kuljit Singh, partner and national infrastructure leader at EY India, in comments to Mint. He added that capacity building and training of municipal staff, along with cost-reflective user charges, are essential to improving efficiency.

Abhash Kumar, assistant professor of economics at Delhi University, told Mint that improving property tax administration and rationalising service charges are critical for long-term municipal sustainability.

Mint also reports that municipal bonds are increasingly being seen as an alternative funding source. Suprio Banerjee, vice president and co-group head at Icra Ltd., told Mint that government incentives have helped lower issuance costs and improve viability. For smaller urban bodies, pooled municipal bond issuances backed by state support are being encouraged.

Municipal bond market gains momentum

Mint notes that recent Union Budgets and policy initiatives have promoted green bonds and pooled municipal bonds, alongside the creation of the Urban Infrastructure Development Fund (UIDF) for tier-II and tier-III cities.

To support market-based financing, the Centre notified the Sebi (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, providing a formal framework for bond issuance. Mint recalls that a financial incentive scheme was introduced in 2018 to encourage municipalities to raise funds through bonds, followed by the launch of the National Municipal Finance Portal to improve transparency and disclosures.

Banerjee told Mint that the Centre offers financial incentives of up to Rs 200 crore for municipal bond issuances and promotes awareness through regulator-led programmes. Schemes such as the Urban Challenge Fund encourage cities to tap market financing, with the fund covering up to 25% of project costs if at least half is raised through bonds, bank loans or public-private partnerships.

Mint reports that since FY18, 17 municipal bond issuances amounting to nearly Rs 2,600 crore have taken place, with an average issue size of about Rs 150 crore. Icra's analysis, cited by Mint, shows these issuances have largely been driven by central incentives rather than the standalone credit strength of urban local bodies.

The report also noted that all municipal bonds issued since FY18 have relied on structured payment mechanisms, such as escrow accounts backed by property tax or own revenues, along with debt servicing and sinking fund reserves. These structures have enabled AA-category ratings despite uneven municipal finances.

Long road to financial autonomy

Mint notes that efforts to strengthen municipal finances date back several decades. The 74th Constitutional Amendment Act of 1992 granted municipalities constitutional status and the authority to raise revenues through local taxes, fees and user charges. This was followed by the first wave of municipal bond issuances in the late 1990s, beginning with Bengaluru's landmark bond issue in 1997.

While centrally sponsored schemes continue to channel funds to urban bodies, Mint points out that the primary responsibility for municipal financing still lies with state governments. The Centre supports cities through programmes such as the Urban Challenge Fund and increased allocations for AMRUT and PMAY-U, which focus mainly on infrastructure development and service delivery rather than routine expenses.

Urban local bodies also fall under the administrative oversight of the ministry of housing and urban affairs, which received a budget allocation of Rs 96,777 crore for FY25-52% higher than revised estimates. Mint notes that only a portion of this allocation is transferred directly to municipalities, with a large share spent on centrally implemented infrastructure projects.