OPINION | Finance Commission paves the way for sustainable urbanisation

The promise of the 16th FC grants for smaller cities and towns is that they can urbanise well.

On 1 February this year, Ms Nirmala Sitharaman, the Finance Minister of India, did not just present the Union Budget for 2026–27. She also tabled the XVI Finance Commission’s report for 2026-27 to 2030-31 and the Government’s explanatory memoranda on the same. The Finance Commission of India (FC), one of India’s most remarkable institutions, is a constitutional body constituted by the Union Government every five years to determine the distribution of tax revenues between the Union Government, State Governments and local governments.

The timely constitution of the FCs; their stellar leadership and membership; their travel and consultations across each of our 28 States; their timely submission of reports; the near-total acceptance of their recommendations by the Union Government; and the high-fidelity implementation of those recommendations, taken together, constitute a shining example of Indian democracy at work. The XVI FC has acquitted itself creditably in this regard.

Historic Allocation to Urban Local Governments

One of the highlights of the XVI FC’s recommendations is its award of ₹7.9 lakh crore to local governments (LGs), i.e. the three tiers of Panchayati Raj Institutions — Gram Panchayats, Block Panchayats and Zilla Panchayats — and urban local governments (ULGs), by whatever name called (generally Municipal Corporations, Municipalities or Town Panchayats). Of this, a 45% share of ₹3.56 lakh crore (approximately $39 billion) over five years to ULGs is historic and unprecedented in both percentages share and quantum. This is potentially transformative for India’s smaller cities and towns.

India has approximately 4,900 ULGs. Their population, as per Census 2011, is estimated at around 340 million. Forty-five ULGs with a population exceeding one million — referred to as metropolitan areas under the Constitution of India — constitute one-third of the total urban population, but generate 74% of the total own-source revenues of ULGs in India. The remaining 4,800-odd ULGs, comprising two-thirds of the urban population, generate only 26% of own-source revenues.

Opportunities for Smaller Cities and Towns

It is for this long tail of small cities and towns with very low revenue potential that the XVI FC recommendations have come as a bonanza. They can now access what could be as much as ₹1.8 lakh crore of grants (₹80,000 crores under the XV FC, less than half of the XVI FC allocation), of which up to ₹1 lakh crore (₹33,000 crores under the XV FC, about one-third of the XVI FC allocation) could be untied. Untied grants come with no conditions on how they may be used. ULGs can spend them as they deem fit, based on the needs and priorities of their elected councillors and citizens. At present, these ULGs receive significantly less funding than they require, and what they do receive is largely tied to conditions mandating expenditure on water supply, drainage and sanitation. Global evidence suggests that first-mile infrastructure and service delivery are stronger, and leakages and corruption lower, when public expenditure takes place closer to the people it seeks to serve and in consultation with them.

The promise of the XVI FC grants for smaller cities and towns is that they can urbanise well, unlike some of our larger cities such as Mumbai, Delhi NCR and Bengaluru. As smaller cities and towns are not yet fully built up, they now have the opportunity to use these grants to ensure that public infrastructure is well planned and future-ready. Combined with a special grant for rural–urban transition, a new paradigm for planned and sustainable urbanisation can indeed become a reality.

Role of State Governments in Enabling ULGs

This requires State Governments to undertake three specific measures. First, they must ensure that City Action Plans are mandatorily drawn up as participatory, five-year city strategies, on the lines of Gram Panchayat Development Plans. Early pilots in nine ULGs in Assam demonstrate that State, district and city administrations can work together without infringing the autonomy of ULGs, and that citizens can be engaged at the neighbourhood level. City Action Plans are envisaged to lead to a shelf of projects and a City Investment Plan.

Second, State Governments need to build a backbone of municipal shared services at the State and district levels for project development, procurement and execution. ULGs require support in identifying projects, designing them well, selecting the appropriate mode of financing, ensuring that tenders attract the best contractors, and supervising project execution to high standards of quality.

Third, State Governments need to fully digitalise the lifecycle of public finances from origin to outcome and implement first-mile transparency in project execution.

Empowering Urban Local Governments

City Finance Portal, India’s national municipal finance portal, which hosts the audited annual accounts of over 4,300 ULGs and serves as the digital grant management system for XV FC grants, is testament to the political and administrative will for digitalisation and transparency. State Governments must now extend the same approach to city- and neighbourhood-level project expenditure.

The XVI FC has created the right conditions for ULGs. State Governments now need to release ULGs from excessive control and enable them to deliver.

(Srikanth Viswanathan, CEO, Janaagraha.)

Views are personal, and do not represent the stand of this publication.