Urban India makes almost two-thirds of national output, yet most municipalities control less than one per cent of total tax revenues. This is not because cities are inefficient; it is because the fiscal design gives them tiny, uncertain revenue streams.

What went wrong

• After the Goods and Services Tax, cities lost buoyant local levies such as octroi, entry tax and several surcharges. Compensation flows bypass many urban local bodies, deepening dependence on State and Union grants.
• The 74th Constitutional Amendment created urban self-government but did not ensure a predictable share of taxes. State Finance Commissions (SFCs) are irregular; recommendations are often under-implemented.
• Rating agencies judge cities mainly on own revenues (property tax, fees), discounting regular grants—so credit looks weak even when transfers are assured.
• An over-use of the “user pays” idea risks turning public goods—water, sanitation, street lighting, mobility—into private commodities for already stressed households.

What works today (but too little)

• Property tax gives only ~20–25% of a city’s budget in most States and is administratively constrained.
• Municipal bonds exist (backed by SEBI’s 2015 municipal debt regulations, pooled-finance models, and 15th Finance Commission incentives), but volumes are small because city balance sheets lack assured, untied revenues.

The way forward: a fair fiscal contract

• Democratise devolution: Time-bound SFCs; formula-based, untied transfers to cities; publish city-wise ledgers of grants and releases.
• Earmark State shares: Allow cities to escrow a modest, rule-based portion of GST compensation/State taxes as collateral for borrowing.
• Repair own-revenue engines: GIS-linked valuation, realistic base and rates, vacancy and land-value capture, service charges on government properties; ring-fence user charges for water and waste to operations and maintenance.
• Make bonds credible: Rate governance capacity—audits, transparency, citizen participation—besides finances; expand pooled bonds with partial credit guarantees and escrow of predictable transfers.
• Plan for inclusion & climate: Tie grants to green and pro-poor outcomes—universal sanitation, flood resilience, clean buses—under AMRUT 2.0 and Swachh Bharat Mission-Urban 2.0.

Key terms

• Own revenue
• Assigned taxes
• Intergovernmental transfers
• Municipal bonds
• Fiscal autonomy
• State Finance Commission

Exam hook

Use the 74th Amendment + SFCs + Finance Commission grants to argue that cities need predictable, adequate and untied revenues; bonds are a bonus, not a substitute.

UPSC Prelims question

With reference to municipal finance in India, consider the following statements:

1. The 74th Constitutional Amendment mandates constitution of State Finance Commissions to recommend devolution to urban local bodies.
2. Property tax is a Union list subject administered by the central government.
3. The Securities and Exchange Board of India has regulations enabling listing of municipal debt securities.
4. Finance Commission grants to cities can include both tied and untied components.

Answer: 1, 3 and 4 only.

One-line wrap

Cities deliver national growth, but without money power they cannot deliver services—fix devolution first, then scale bonds and reforms.