Revamping Urban Local Bodies: Addressing financial and governance challenges

Studies show urban local bodies have failed to predict the evolving needs of metropolitan regions.

RBI’s recent report on municipal corporation finances is alarming. The country’s largest urban local bodies (ULBs) heavily depend on state and central grants for more than 25% of their finances. However, this is a symptom of a bigger problem. Inadequate infrastructure, delayed elections, low voter turnout, and an increasing population share are also signs of underlying issues. The main problem is that ULBs are unempowered and seemingly becoming irrelevant to the people. Municipal corporations are the backbone of urban governance in India, tasked with managing essential services such as water supply, waste management, and infrastructure development. Their financial health is precarious, and their governance structures are often weak. A paradigm shift is needed to improve the situation.

Why should we care

In 2024, urban areas accounted for 36% of India’s population and 70% of GDP. Local governments play an essential role in city governance. They help bring democracy to the grassroots and are essential for federalism. ULBs provide many essential services, such as water, sewage, health, and education. Consequently, the average citizen has much more access to local officials and tends to to interact with them more frequently, given that they address day-to-day issues. ULBs also offer better public services and infrastructure than higher levels to attract investments and talent, improving resource allocation efficiency. However, to do so, local governments need to be able to ‘respond’ to local demand and have accountability systems to deliver good quality services. Considering their domains of responsibility, we also need local governments to fulfil SDGs.

The Financial Landscape

The RBI’s annual report shows that revenue receipts from 232 municipal corporations account for a mere 0.6% of GDP. This has remained stagnant since 2019-20. Property taxes are important sources of revenue for ULBs, but property tax revenues contribute just 0.12% of GDP—significantly lower than countries like the United States, where property taxes make up 11.4% of total tax revenues, or the United Kingdom, at 4%. One study shows that they have been low for a few years, even compared to BRICS and G20 countries.

Moreover, the own-source revenue (OSR) for Indian municipal corporations covers less than 30% of their total expenditure. 25% of all revenue receipts come from state and central grants, indicating a heavy reliance on external funding rather than self-generated income. This financial imbalance highlights a critical issue: municipal corporations cannot raise sufficient funds to cover essential services, let alone invest in infrastructure development. For instance, while the capital outlay for all 232 corporations was approximately $18 billion last year, the World Bank estimates India needs to invest about $55 billion annually until 2047 to meet its infrastructure demands.

The Borrowing Dilemma

Another significant issue is the low level of borrowing by municipal corporations. Municipal borrowings constitute a negligible 0.05% of GDP. Municipal bonds were touted as a solution but failed to take off. Liquidity, regulatory, guarantees and rating challenges are a problem. Municipal bonds only raise a few hundred crores through borrowings each year. This limited borrowing capacity inhibits municipalities' ability to finance essential projects and infrastructure improvements.

The RBI’s report suggests municipalities should explore innovative financing options, such as municipal bonds or partnerships with development financial institutions (DFIs), to gain better access to capital. These avenues could provide much-needed capital for self-financing projects like mass transit systems and waste management facilities. Currently, borrowings from financing institutions account for only 5.2% of total receipts. Four states—Odisha, Maharashtra, Telangana, and Tamil Nadu—comprise the lion’s share of borrowing.

Governance Challenges

The governance framework surrounding municipal corporations further exacerbates their financial woes. A staggering 61% of ULBs in central states have experienced delayed elections, undermining democratic representation and accountability. A report showed that more than 1400 cities or towns didn’t have elected mayors or councils in 2023—low voter turnouts, averaging around 45%, reflecting public apathy towards local governance. Many municipalities are controlled by state-appointed commissioners, relegating elected mayors to largely ceremonial roles with little legislative power. This lack of authority hampers effective decision-making and stifles local initiatives that could drive economic growth and service delivery. A 2015 NITI Aayog report said that in ULBs, there is ‘discord between elected and appointed officials, as the former do not have the real power in the affairs of the cities’. It also said that ULBs are understaffed, a situation that hasn’t improved since. A report last year said there is a 35% staff shortage in all types of local government across the country, and the ratio of population/municipal workers is very low. The vacancy progressively worsens, with 41% of posts being vacant among municipalities and 58% being vacant in town panchayats. Poor capacity also results in poor record and bookkeeping, which hinders borrowing ambitions for the ULBs.

One study showed how the 18 functions given to ULBs by the 74th CAA overlap with state functions, 4 in which the ULBs are just implementation bodies and 2 in which they have an insignificant role. This also extends into planning. A government report in 2021 found that many municipalities had not updated their draft plan in more than 10 years.

A total overhaul is required

Addressing these challenges requires a drastic change at the national level. India’s real experiment with local governments began in 1993 with the 73rd and 74th Amendments. However, their functioning has fallen short of expectations. Studies show ULBs have failed to predict the evolving needs of metropolitan regions, especially those with multiple municipalities and large land areas. They have also failed to co-ordinate different bodies, land planning, and effective governance.

The Union government acknowledges that municipal corporations need more autonomy. State governments hold massive control over their functioning, which hinders their ability to provide services. Overlapping jurisdictions such as metropolitan authorities, district development authorities, and municipal corporations have led to fragmented governance.

Local governments need more political and fiscal autonomy. They also need better planning, capacity, and adequate staff to carry this out—and they need it now.