Despite the efforts of five commissions since the 11th Finance Commission, financial devolution to cities remain inadequate.
The fiscal health of municipalities is poor, affecting both city productivity and quality of life.
Rapid urbanisation without appropriate fiscal action has adverse effects on development.
How do other countries devolve funds to their local governments?
Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs) in India are about 0.5% of GDP, much lower than the 2-5% typical of other developing nations.
For instance, South Africa allocates 2.6%, Mexico 1.6%, the Philippines 2.5%, and Brazil 5.1% of their GDPs to their cities.
Although IGTs make up about 40% of ULBs’ total revenue, issues persist regarding their predictability, earmarking for vulnerable groups, and horizontal equity.
IGTs are crucial for ULBs, given their financial state and the need for stable support until their own revenues improve.
Why is the Census significant?
In the absence of the 2021 Census, reliance on 2011 data is inadequate for evidence-based fiscal devolution.
India has approximately 4,000 statutory towns and an equal number of Census towns, with an estimated 23,000 villages, all of which are effectively urban.
These figures must be captured by the 16th FC, including the significant migration to Tier-2 and 3 cities.
Thus, the 15th FC’s nine guiding principles require a revisit.
The 16th FC must consider India’s urbanisation dynamism and ensure IGTs to urban areas are at least doubled.
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