India is undergoing unprecedented urbanisation at a very fast pace. Over one-third of the country’s population now resides in urban areas, and urban centers account for more than 60 per cent of India’s GDP. The institutions responsible for managing this urban transition, the Urban Local Bodies (ULBs), however, remain financially dependent, have limited revenue sources, and are heavily dependent on higher levels of government. This is the paradox of the urban governance crisis in India.
Municipalities remain constrained by their finances, despite the 74th Constitutional Amendment, which aimed to institutionalise urban self-governance, being passed 30 years ago. Roads wear out, drainage systems are insufficient during the monsoons, and public infrastructure fails to keep up with the needs of a growing population. The problem is not only administrative inefficiency; it’s also a financial one. India’s cities will be providing more services than ever before, but they don’t have the resources or authority to do so.
The Numbers Behind the Crisis
The Report on Municipal Finances (2024) by RBI for 232 municipal corporations is the most glaring example of this. In 2023-24, municipal revenue receipts were 0.6 percent of GDP, not much different from the previous five years. The Central government’s revenue receipts were 9.2 percent of GDP, while state governments’ were 14.6 percent of GDP. The municipalities are under a heavy burden of service delivery, but they have much less revenue than other levels of government.
Property tax is the most important source of own revenue for municipalities, but it contributes only 0.15 percent of India’s GDP, while the average in advanced market economies is 1.7 percent. In 2023-24, only 30 percent of municipal revenue came from own-source taxes (including property tax, water tax, and other local taxes), while the remaining 70 percent came from government transfers and other sources. Over 50% of the municipal corporations in India have less than 50% of their revenue from their own sources.
These are not only numbers of a financial deficit but also a democratic deficit. When municipalities can’t afford it, the responsibility shifts from citizens to the governments that control the grants.
The Unfinished Promise of the 74th Amendment
In 1992, the 74th Constitutional Amendment was passed, which granted municipalities the status of institutions of local self-government and extensive powers in urban planning, sanitation, water supply, and infrastructure development. However, the transfer of functions did not go hand in hand with the transfer of funds.
The 15th Finance Commission (2021-26) has granted local bodies a total of ₹4.36 lakh crore over five years, which is a huge amount in absolute terms but equivalent to only about 0.12-0.13 percent of GDP per year for urban local bodies. Worse, only about ₹90,000-95,000 crore of these grants were used, of which ₹30,000-35,000 crore was allocated to urban local bodies. The inability to spend money is not a measure of profligacy but rather a sign of poor institutional capacity, the result of decades of underfunding and staffing deficiencies.
The deliberations of the 16th Finance Commission (2026-31) are ongoing, and continue this trend of fiscal transfers, but with a focus on improving Own Source Revenue through local taxation, raising questions about the level of support as urban infrastructure needs grow.
Three Cities, Three Lessons
Individual cities are the most obvious indicators of the financial crisis of Indian municipalities.
Bengaluru is India’s technology hub and accounts for a higher share of India’s IT exports. However, BBMP has been struggling to provide basic urban services. This is because BBMP was unable to collect sufficient revenue, and its expenditure of ₹9,602 crore in 2023-24 was below the budgeted amount of ₹11,885 crore. The corporation collected ₹4,930 crore in property tax in 2024-25, which is lower than the target of ₹5,210 crore, despite aggressive reforms such as one-time settlement schemes and door-to-door collection drives. A study has found that BBMP can collect six times more revenue than it collects today by utilizing underutilized property taxes.
The contrast is more favorable in Indore. Indore Municipal Corporation has been ranked the cleanest city in India for 7 years and is a leader in alternative financing. Indore became the first city in India to issue a green bond, which was open to retail investors in 2018 and again in 2023, with the issuance of a green bond of ₹244 crore, the highest single municipal bond issue by a non-metro city in India. This eagerness to tap capital markets is indicative of better financial management and clearer accounting, which most Indian municipalities are not yet equipped to provide. The experience of Indore shows that cities can reduce their reliance on grants by building institutional capacity and governance credibility.
The Varanasi case study is a good example of the complex governance issues in heritage and temple cities. According to a 2025 study, the municipal corporation in Varanasi is not sufficiently independent to make decisions or raise funds. Interference with State organizations, such as Uttar Pradesh Jal Nigam, and various agencies, affects service delivery and accountability. During the capacity-building workshops with the councilors of Varanavi Nagar Nigam, including those from the Solid Waste Management Rules under the Swachh Bharat Mission, it was noted that the elected representatives are not aware of the fiscal rules and the conditions of the scheme applicable to their body. Financial empowerment needs to go hand in hand with a financial investment in local institutional literacy.
The Limits of Scheme-Based Financing
Cities have received significant funding from flagship urban programs such as the Smart Cities Mission, AMRUT, and Swachh Bharat Mission. However, this project financing approach to cities has structural constraints.
Local priorities are often not met because municipalities are allocated funds for specific schemes rather than for general purposes. A city can raise money to install smart infrastructure or beautify the city, but may struggle to fix drains or maintain local roads. After a project is completed, local governments are responsible for maintenance costs, even though they lack sufficient revenue sources. Infrastructure assets, which are costly to produce, fall into disrepair if they are not financed to sustain them.
This means the cities are periodically injected with capital but remain structurally underfunded. The 16th Finance Commission is putting in place tougher performance-based criteria for urban grants, with some 20 percent contingent on meeting governance benchmarks that many smaller municipalities may not be able to meet, potentially depriving them of urgently needed funds.
Reimagining the Fiscal Architecture
The new fiscal compact should address three interrelated issues: the limited size of municipal revenue bases, the volatility of intergovernmental transfers, and the underdevelopment of alternative financing options.
The most significant intervention is in revenue, specifically, property tax reform. More than one-third of the 232 municipal corporations surveyed by RBI still have paper-based billing systems to collect property tax. New GIS-based assessments, digital property records, and geospatial mapping provide the tools to modernize this system without new legislation. The solutions adopted by the city of Bengaluru to plug leakages and the systematic approach adopted by Indore for revenue management are replicable. The user charges for water, solid waste, and parking should also be rationalized, at cost-recovery rates, with targeted exemptions for vulnerable households.
State Finance Commissions, which are the constitutional bodies responsible for deciding fiscal devolution from States to local bodies, are underutilized in the context of intergovernmental transfers. Many SFCs are established with delays, their recommendations are not binding, and state governments often ignore them. The 15th Finance Commission laid down the condition for the release of local body grants to states to establish SFCs before March 2024, which was a positive step. Still, it lacked an enforcement mechanism and political will. Predictable, rule-based transfers are necessary for municipalities to plan beyond the annual budget cycle rather than rely on discretionary transfers.
So far, 23 municipal bond issues have been completed under SEBI’s framework, totaling more than ₹3,300 crore, with cities such as Agra, Prayagraj, Varanasi, Chennai, and Gandhinagar issuing bonds recently. While this is good news, municipal bond financing is still a small market. It is not accessible to the majority of India’s 4,800-plus urban local bodies, which lack the financial management systems, audited accounts, and investment-grade credit ratings to participate in the market. The governance changes that make borrowing credible must go hand in hand with the architecture of municipal borrowing.
Building Cities Through Local Democracy
Mega infrastructure projects and national missions will not be the only factors that shape India’s urban future. It will rely on local governments’ ability to govern effectively over the long term, which will be determined by their capacity, authority, and resources.
Fiscal empowerment is therefore not a technical solution, but a democratic promise, the next step in urban reform. True decentralization is more than the devolution of functions to municipalities; it also involves the devolution of finances, authority, and trust, allowing local governments to make decisions without having to seek permission at every turn.
The RBI has made it abundantly clear that the lack of own-source revenue generation, a rule-based system of transfers at the state level, and regular, functional State Finance Commissions is essential for credible urban governance, given the poor development of municipal corporations’ own-source revenue generation.
The situation is the same in Bengaluru, Indore, and Varanasi. Strengthening revenue systems, empowering institutions, and localizing accountability are all good for cities. Even the best will of the central investment will not bear fruit if the dependency continues.
In the next few decades, India’s cities will be expected to provide services to hundreds of millions of people, absorb migration, and drive economic growth. The first step is to recognize a fundamental truth: Good cities depend on good local governments, and good local governments depend on sustainable finances.
A new fiscal compact is not only desirable but also necessary. It’s long overdue and constitutionally.
Ayush Kumar Upadhyay is an Advocate and Master’s student in Public Policy and Governance & LLM in Social Policy at Tata Institute of Social Sciences (TISS), Hyderabad.