Despite constitutional recognition under the 74th Amendment, urban local bodies remain fiscally emaciated. Critically examine the structural reasons for the limited Finance Commission grants to cities and suggest reforms.

Q. Despite constitutional recognition under the 74th Amendment, urban local bodies remain fiscally emaciated. Critically examine the structural reasons for the limited Finance Commission grants to cities and suggest reforms. (15 marks, 250-350 words)

The 74th Amendment inserted Part IX-A and Article 243W, but constitutional status did not translate into fiscal capacity. Urban local bodies (ULBs) received ₹1.21 lakh crore under the 15th Finance Commission (FC) and ₹3.56 lakh crore under the 16th [2][3] — sums that remain a fraction of a percent of GDP against the demands of rapid urbanisation.

Structural reasons for limited grants - Discretionary devolution: the Twelfth Schedule's 18 functions may be assigned by States, not must be; parastatals (DDA, BDA, water boards) retain planning and land functions, shrinking the expenditure case ULBs can make. - No direct Centre–ULB channel: Article 280(3)(bb) empowers the FC only to augment the State's Consolidated Fund, so every rupee routes through States, creating a principal–agent gap. - Weak own-source revenue: unreformed property tax and low user charges make cities look fiscally undeserving, inviting conditionalities rather than larger untied transfers. - Institutional vacuum: chronic delay in constituting State Finance Commissions under Article 243Y has long been cited to restrict flows [2]. - Autonomy-limiting design: only 50% of the basic grant is untied, the rest tied to sanitation, solid waste and water management [3] — crowding out local priorities like housing or mobility.

A balanced view FCs have not been passive. The 16th FC added a ₹56,100 crore Special Infrastructure Component and a ₹10,000 crore Urbanisation Premium, and made timely SFC constitution an entry-level eligibility condition [3]; vertical devolution was retained at 41%, with ₹1.4 lakh crore released to States as FC grants in FY 2026-27 [1]. The binding constraint is State-level intent, not FC intent alone.

Sustainable urban finance therefore requires enforcing SFC timelines, mandatory devolution of Twelfth Schedule functions with matching taxation powers under Article 243X, buoyant property-tax and GIS-based assessment reform, and deepening municipal bond markets. Empowering cities fiscally is the unfinished task of the 74th Amendment — and the precondition for delivering SDG-11's inclusive, sustainable urbanisation.

(~320 words)

Sources: 1. Government Accepts 16th Finance Commission's Recommendation to Retain Vertical Share of Devolution at 41 Percent, PIB (2026) — 41% vertical share retained; ₹1.4 lakh crore FC grants to States in FY 2026-27 2. Report of the 15th Finance Commission for 2021-26 — Summary, PRS Legislative Research — ₹1.21 lakh crore ULB grants; property tax and SFC-constitution conditions 3. Report of the 16th Finance Commission for 2026-31 — Summary, PRS Legislative Research — ₹3.56 lakh crore ULB grants; 50% untied basic grant; ₹56,100 crore Special Infrastructure Component; ₹10,000 crore Urbanisation Premium; SFC entry-level criterion