India’s cities are broadly recognised as engines of financial development. They generate over half of the GDP. Yet, there may be a persistent paradox: India has wealthy cities, however metropolis governments are chronically underfunded.
The introduction of the Goods and Services Tax in 2017, whereas a landmark reform for the nationwide financial system, has additional strained municipal funds. It raises the problem of how India shares its tax revenues – notably GST – with the third tier of authorities.
The mismatch between the financial significance of cities and their capacity to boost funds is a structural drawback that threatens India’s improvement ambitions. Cities can not ship high quality infrastructure, dependable providers, or construct local weather resilience in the event that they lack predictable, ample assets.
Shrinking fiscal house
An evaluation of union budgets over the previous three years exhibits that the Ministry of Housing and Urban Affairs has spent, on common, about Rs 0.5 lakh crore yearly, which is lower than one-fifth of the estimated minimal funding required by cities for city infrastructure.
This insufficient funding has led to insufficient transportation techniques, unreliable water provides, poor sanitation, elevated visitors congestion and heightened vulnerability to floods and climate-related shocks.
Municipal revenues have additionally weakened. Traditionally, cities worldwide levy taxes on enterprise exercise to finance native providers. Indian cities had been no exception.
Various taxes on items coming into town and providers had been necessary sources of municipal revenue: like octroi and entry tax, which had been levied on items coming into civic limits, native physique tax, which changed octroi in Maharashtra, and taxes on commercials and leisure. The rollout of GST subsumed many of these native taxes, considerably eroding municipal income autonomy.
Mumbai illustrates this loss of native income. Before GST, octroi alone contributed to just about 35% of the Municipal Corporation of Greater Mumbai’s complete income.The abolition of octroi had created a main fiscal gap.
Although Maharashtra promised a compensatory share of GST revenues to city native our bodies, transfers have been irregular and inadequate – cities like Nagpur, Pune, and Nashik haven’t obtained their due share of compensation. For instance, Pune had a shortfall of Rs 500 crores, and Nashik and Nagpur’s compensations are caught up in dispute.
Inter-governmental transfers
Globally, inter-governmental transfers are a key pillar of city finance. These are grants from the central and state governments to native governments.
Compared to different international locations, India performs poorly on this entrance. Inter-governmental transfers to native governments in India quantity to solely about 0.45%-0.5% of gross home product. This is way under international locations similar to Mexico (1.6%), South Africa and the Philippines (2.5%), and Brazil (over 5%).
The Philippines presents a notably instructive instance. The Local Government Code mandates that 40% of nationwide inside income collections be transferred to native governments. These transfers are formula-based, predictable and accompanied by borrowing powers for native governments. As a consequence, cities within the Philippines get pleasure from considerably larger fiscal capability and autonomy.
In India, city native our bodies obtained an estimated Rs 1.3 lakh crore as inter-governmental transfers in 2024-’25. These estimates are based mostly on the authors’ projections from the report tabled throughout the interim funds in February 2024 and a March 2019 report of the Indian Council for Research on International Economic Relations.
Nearly a quarter of this got here by way of centrally-sponsored schemes similar to AMRUT, Swachh Bharat Mission, and Smart Cities. However, a lot of this funding is routed by way of state parastatals – businesses like Maharashtra’s Jal Pradhikaran, which develops water and sewage infrastructure – or particular objective autos, such because the Metro Rail Authorities in cities. Of the 1.3 lakh crore, about one lakh crore was transferred to cities by way of the central and state finance commissions.
Despite these transfers, the general degree of help to city native our bodies has remained stagnant relative to GDP because the introduction of GST.
Fixed share of GST for cities
To appropriate this imbalance, there may be a rising consensus amongst policymakers and students that city native governments must receive a direct, mounted share of GST revenues.
The High Powered Expert Committee on Indian Urban Infrastructure and Services, chaired by Dr Isher Judge Ahluwalia and established in May 2008 by the Ministry of Urban Development, had argued that GST ought to have been shared throughout all three tiers of authorities from the outset. Similarly, former city improvement minister Venkaiah Naidu advocated for an assured share for municipalities within the GST.
In its 2019 report, the Indian Council for Research on International Economic Relations described municipal funds because the “worst hit” by the GST reform. Similarly, in a analysis paper revealed that 12 months, economist Vijay Kelkar highlighted the vertical fiscal imbalance in India and proposed allocating one-sixth of GST revenues to the third tier of authorities. This share might then be divided equally between rural and concrete native our bodies.
In 2024-’25, India’s internet GST assortment stood at about Rs 19.5 lakh crore. One-sixth of this can be roughly Rs 3.25 lakh crore. Even if solely half of this – round Rs 1.6 lakh crore – is allotted to city native our bodies, it could almost double present transfers. It would nonetheless increase IGTs to cities solely modestly in GDP phrases, underscoring how underfunded Indian cities at present are.
A predictable GST share wouldn’t solely strengthen municipal funds but in addition incentivise cities to help financial development, enhance compliance and put money into productivity-enhancing infrastructure.
Constitutional standing of native funds
Beyond elevated transfers, there may be a deeper constitutional subject at play. The 74th Constitutional Amendment assigned features to city native our bodies by way of the twelfth Schedule but it surely didn’t present a corresponding listing of income sources. Municipalities stay depending on state governments for monetary devolution.
State Finance Commissions, tasked with addressing this hole, have largely underperformed. The Fifteenth Finance Commission famous that State Finance Commissions stay the weakest hyperlink in India’s fiscal federal construction, resulting in insufficient and delayed transfers.
As early as 2009, the High Powered Expert Committee on Urban Infrastructure really helpful creating a separate “Local Bodies Finance List” within the Constitution, just like the Union and State Lists. This advice has gained renewed urgency within the post-GST period, the place native income powers have been additional curtailed.
If India’s cities are anticipated to drive development, innovation, and local weather resilience, their governments must be financially empowered. Providing cities with a mounted share of GST, alongside constitutional recognition of their income powers, is important. Strengthening metropolis funds is about securing India’s financial future.
Meera Mehta and Dinesh Mehta are Senior Advisers, Professor Emeritus Dhruv Bhavsar is Head, and Saubiya Sareshwala is a Senior Research Associate on the Centre for Water and Sanitation, CRDF, CEPT University, Ahmedabad.
