Relevance: GS II (Devolution of Powers and Finances) & GS III (Urbanization) | Source: 16th Finance Commission Report

1. The Context: Empowering Cities

Recognizing that India is urbanizing fast, the 16th Finance Commission (FC-16) has recommended a record funding boost for cities for the period 2026–31.

  • The Jump: The allocation for Urban Local Governments (ULGs) has more than tripled—rising by 230% to ₹3.56 lakh crore (up from ₹1.55 lakh crore).
  • The Shift: Cities now get a larger slice of the local government pie (45%, up from 36%), reflecting a policy shift towards “Urban-led Growth.”

2. Where will the Money Go? (The Formula)

The Commission has split the grants into three smart buckets to ensure money is used well:

  • Basic Grants (65%): The largest chunk.
    • Tied (Half): Money that must be spent only on Sanitation, Waste Management, and Water.
    • Untied (Half): Money for local needs like road repairs (flexibility for Mayors).
  • Performance Grants (16%): This is the “carrot.” Cities get this extra money only if they increase their Own-Source Revenue (property tax, fees) by at least 5% annually. This pushes them to stop relying solely on the Centre.
  • Urbanisation Premium (3%): A brand new ₹10,000 Crore fund to help manage the chaos of new towns emerging from rural areas (managing the transition).

3. Winners and Losers

  • Top Gainer: Kerala saw a massive 415% increase in funds.
  • The Decline: Hilly states like Himachal Pradesh and Arunachal Pradesh saw their allocations drop by nearly half, likely due to lower urbanization rates compared to the plains.

UPSC Value Box

Concept / Term Relevance for Prelims
Urbanisation Premium A specific grant introduced by the 16th FC to incentivize states to effectively manage the transition of “Census Towns” into statutory Urban Local Bodies.
Tied vs. Untied Grants Tied Grants have conditions attached (e.g., must be used for water). Untied Grants can be used by the local body for any priority sector (salary payment is usually excluded).
Own Source Revenue (OSR) Revenue generated by the municipality itself (Property Tax, Parking Fees). Increasing OSR is crucial for cities to issue Municipal Bonds.

Q. With reference to the recommendations of the Sixteenth Finance Commission regarding local governments, consider the following statements:

  1. The Commission has recommended a separate “Urbanisation Premium” grant to manage rural-to-urban transition.
  2. Performance Grants for Urban Local Bodies are linked to an annual increase in their Own-Source Revenue.
  3. The share of grants allocated to Urban Local Bodies (ULGs) has decreased compared to the 15th Finance Commission to focus more on rural development.

Which of the statements given above is/are correct?

(a) 1 only

(b) 1 and 2 only

(c) 2 and 3 only

(d) 1, 2 and 3

Correct Answer: (b)

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