Empowering Urban Local Bodies (ULBs) in India: Challenges, 74th Amendment & Way Forward

Context

India’s accelerating urbanization has once again drawn attention to the fragile condition of Urban Local Bodies (ULBs)

Constitutional Status of Urban Local Bodies

Urban local governance received constitutional recognition through the 74th Constitutional Amendment Act, 1992.

Key Constitutional Features

• Part IX-A (Articles 243P–243ZG): Provides the constitutional foundation for municipalities and urban local governance.
• Three-Tier Urban Framework establishes:
  • Municipal Corporations for larger cities,
  • Municipal Councils for smaller urban areas,
  • Nagar Panchayats for transitional regions moving from rural to urban status.
• Twelfth Schedule: Entrusts Urban Local Bodies with 18 functions, including urban planning, sanitation, roads, water supply, public health, slum redevelopment, and land-use management.
• State Finance Commission (SFC): Recommends fiscal devolution and financial distribution to local bodies at regular intervals.
• State Election Commission (SEC): Conducts periodic municipal elections to ensure continuity of democratic governance.
• Core Constitutional Vision: Aims to deepen democratic decentralisation through the transfer of the three essential components of governance: Funds, Functions, and Functionaries (3Fs).

Limitations of 74th Constitutional Amendment in empowering Urban Local Bodies

• Incomplete Devolution of Powers: The constitutional transfer of Funds, Functions, and Functionaries (3Fs) under Part IX-A has remained partial and uneven across states.
• Limited Transfer of Municipal Functions: States have devolved only about 9 of the 18 functions listed in the Twelfth Schedule. Core sectors such as water supply, urban planning, and slum redevelopment often remain under state control.
  • Eg: A 2022 report by CAG found that municipalities in many states exercised complete authority over only four functions, partial authority over several others, and negligible control over the rest.
• Dominance of Parastatal Agencies: State governments frequently assign critical urban responsibilities to specialised agencies such as development authorities, housing boards, and water boards instead of elected municipal bodies.
• Bureaucratic Control through SPVs: Urban initiatives like the Smart Cities Mission are often implemented through Special Purpose Vehicles (SPVs) led by bureaucrats rather than elected representatives, bypassing municipal institutions and reducing democratic accountability.
• Weak Financial Autonomy: Municipalities remain financially dependent on higher levels of government due to inadequate revenue-generating capacity.
• Poor Own-Source Revenue Generation: Urban local bodies generate only a limited share of their own income.
  • Eg: A 2022–23 report by the RBI highlighted the heavy dependence of municipalities on grants and transfers, alongside weak local tax mobilisation.
• Ineffective State Finance Commissions: Although the Constitution mandates State Finance Commissions (SFCs) to recommend fiscal devolution, states frequently delay their constitution and often ignore their recommendations, limiting financial empowerment of ULBs.
• Dependence on State Cadre Officials: Most municipal employees are deputed from state services and remain accountable primarily to state bureaucracies instead of elected municipal authorities.
• Political Centralisation of Urban Governance: State governments continue to retain substantial authority over municipal administration, limiting genuine democratic decentralisation.
• Weak and Symbolic Mayoral System: In many states, mayors either lack executive authority or are indirectly elected, reducing the office to a ceremonial role rather than a powerful urban leadership position.
• Neglect of Ward Committees: Although ward committees were envisaged to deepen citizen participation, they function effectively in only a few states, weakening grassroots urban democracy.

Read Also: UPSC Daily Current Affairs 2026

Reasons why India fails to monetize urban land, unlike China

• China’s Land-Based Revenue Model: China systematically monetised urban land through long-term leasing rather than outright sale. This enabled local governments to significantly expand revenues from land transactions and land-related taxes.
• Rapid Growth in Chinese Land Revenues: Chinese local government revenues from land taxes and sales remained around 1–2% of GDP in the early 2000s, accelerated sharply after 2009, and expanded rapidly during the 2010s.
• Peak Revenue Expansion in China: By 2020, China’s land-related revenues had crossed 10% of GDP before beginning to decline gradually after 2021.
• India’s Stagnant Land Revenue Base: In contrast, India’s revenue from land taxes remained broadly stagnant at nearly 1% of GDP between 1999 and 2021, despite a major real estate and urbanisation boom.
• Impact of the Urban Land Ceiling Act (ULCRA): The Urban Land Ceiling and Regulation Act (ULCRA), 1976 aimed to curb land concentration but instead fragmented urban land markets and trapped large portions of land in prolonged legal disputes.
• Contrast with China’s State-Controlled Land System: Unlike India, China maintained extensive state control over land resources, allowing local governments to use land monetisation as a major instrument for financing infrastructure and urban development.
• Weak Property Tax Administration: Poor property valuation systems, weak assessment mechanisms, and inefficient tax collection practices continue to limit municipal revenue mobilisation.

Way Forward

• Genuine Transfer of the 3Fs: States should ensure meaningful devolution of Funds, Functions, and Functionaries to Urban Local Bodies in accordance with the constitutional mandate of the 74th Constitutional Amendment.
• Strengthening Municipal Revenue Systems: Urban local bodies need stronger financial foundations through property tax reforms, rational user charges, and effective land value capture mechanisms, so that dependence on state grants can be reduced.
• Enhancing Administrative Independence: Municipalities should be provided greater authority over recruitment, staffing, and personnel administration to improve efficiency, accountability, and institutional capacity.
• Reforming Urban Land Monetisation: Governments must unlock the economic potential of underutilised public land and adopt scientific land valuation practices to generate stable and sustainable municipal revenues.
• Promoting Competitive Sub-Federalism: Tier-II and Tier-III cities should be empowered through decentralised governance, infrastructure investment, and localised economic planning to emerge as new centres of growth and innovation.

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