Local bodies are constitutionally mandated institutions under the 73rd and 74th Constitutional Amendments, yet they continue to face severe fiscal constraints. Recognising the need for empowered grassroots governance, the 16th Finance Commission has recommended a total grant of about ₹7.9 lakh crore to Rural Local Bodies (RLBs) and Urban Local Bodies (ULBs) for the period FY 2026-27 to 2030-31, along with key structural reforms to improve their financial autonomy and accountability.
Challenges in Financing of Local Bodies
- Structural Revenue Gaps
- Poor property tax performance due to incomplete and outdated property records, low coverage, undervaluation, and weak enforcement.
- User charges often remain politically constrained and below cost-recovery levels.
- Overdependence on Union and State Governments
- Panchayats derive over 90% of their revenues from grants, undermining fiscal autonomy and local accountability.
- Limited Access to Debt and Capital Markets
- Municipal borrowings are less than 0.05% of GDP, reflecting weak creditworthiness and shallow municipal bond markets.
- Institutional and Governance Issues
- Delays and irregularities in constitution of State Finance Commissions (SFCs).
- Data gaps, weak accounting standards, and limited financial transparency.
- Underdeveloped bond markets and lack of pooled financing mechanisms for small ULBs.
Key Recommendations of the 16th Finance Commission
- Substantial Grant Support
- Total grants of ~₹7.9 lakh crore to local bodies for five years (2026-31).
- Rural–Urban split of 60:40 between RLBs and ULBs.
- Strengthening Property Tax Systems
- States to develop citizen-friendly, GIS-based property tax IT systems to enhance coverage, valuation accuracy, and collections.
- Urbanisation Premium
- ₹10,000 crore earmarked to incentivise the merger of peri-urban villages into adjoining large ULBs (population >1 lakh), promoting planned urban expansion.
- Reforming Centre–State Fiscal Federalism
- Recommendation for a constitutional amendment to remove the requirement under Articles 280(3)(bb) and (c) that binds the Central FC to make recommendations “on the basis of” SFC recommendations, addressing chronic delays and quality issues of SFCs.
- Improving SFC Functioning
- NITI Aayog to study SFC processes across States and publish a compendium of best practices, fostering standardisation and timely devolution.
Sources of Revenue of Local Bodies
- Own Tax Revenue
- Empowered under Article 243X.
- Includes property tax, profession tax, advertisement tax, entertainment tax (local level), etc.
- Non-Tax Revenue
- User charges, licence fees, permit fees, parking charges, rent from municipal assets, etc.
- Inter-Governmental Transfers
- Finance Commission grants, State government devolution, and scheme-specific transfers (Centrally Sponsored Schemes).
- Borrowings and Innovative Financing
- Municipal bonds (including green bonds), general obligation bonds.
- Pooled financing mechanisms for smaller ULBs.
- Land monetisation, PPPs, and value capture financing.
Way Forward
- Strengthen Own Revenues: Universal GIS-based property tax, realistic valuation, and cost-recovering user charges.
- Fix Devolution Framework: Timely, standardised SFCs and performance-linked transfers; reduce grant dependency.
- Unlock Market Finance: Municipal bonds, pooled financing for small ULBs, credit enhancement mechanisms.
- Build Capacity & Data Systems: Robust accounting, transparent audits, skilled municipal cadres, digital governance.
Conclusion
The 16th Finance Commission marks a shift from mere grant-based support to structural fiscal empowerment of local bodies. By strengthening property taxation, incentivising urban consolidation, reforming SFC-FC linkages, and expanding access to market-based finance, its recommendations can transform local governments into self-reliant engines of grassroots development, aligned with the vision of cooperative and competitive federalism.
Question: How do the recommendations of the 16th Finance Commission attempt to address the structural weaknesses in local body financing in India?
