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The scale of municipal finances is inadequate

GS Paper 2

Syllabus: Local bodies(Municipalities and Panchayats), 73rd and 74th constitutional amendment Act etc


Source: The Hindu



  • The health of municipal finances is a critical element of municipal governance which will determine whether India realizes its economic and developmental promise.
  • Revenue losses after the implementation of the Goods and Services Tax (GST) and the pandemic have exacerbated the situation.
  • The Indian Institute for Human Settlements (IIHS) analyzed data from 80 ULBs across 24 States between 2012-13 and 2016-17 to understand ULB finance and spending.



  • The 74th Constitution Amendment Act was passed in 1992 mandating the setting up and devolution of powers to urban local bodies (ULBs) as the lowest unit of governance in cities and towns.
  • Constitutional provisions were made for ULBs’ fiscal empowerment.


Key Findings:

  • Share of own revenue:



    • ULBs’ own sources of revenue were less than half of their total revenue, with large untapped potential.
    • The ULBs’ key revenue sources are taxes, fees, fines and charges, and transfers from Central and State governments, which are known as intergovernmental transfers (IGTs).
  • Dependent on IGTs:


Current Affairs


    • Many ULBs are highly dependent on IGTs. Transfers from the Central government are as stipulated by the Central Finance Commissions and through grants towards specific reforms, while State government transfers are as grants-in-aid and devolution of the State’s collection of local taxes.


  • Difference in revenue sources:



    • Tax revenue is the largest revenue source for larger cities, while smaller cities are more dependent on grants. There are considerable differences in the composition of revenue sources across cities of different sizes


  • Operations and maintenance:  

Current Affairs


    • Operations and maintenance (O&M) expenses are on the increase but still inadequate.
    • O&M expenses are crucial for the upkeep of infrastructure and for maintaining the quality of service delivery.
    • The share of O&M expenses in ULBs’ total revenue expenditure increased from about 30% in 2012-13 to about 35% in 2016-17. While the expenses were on the rise.




Current Affairs 

Insta Links:

74th Constitutional Amendment Act


Practice Questions:

Q. The local self-government system in India has not proved to be an effective instrument of governance”.Critically examine the statement and give your views to improve the situation. (UPSC 2017)


Q. With reference to the 74th constitutional amendment Act, consider the following statements:

  1. All members of the municipality should be elected directly by the people.
  2. The Parliament is empowered to provide for the manner of election of the chairperson of a municipality.

Which of the statements given above is/are correct?

a. 1 only

b. 2 only

c. Both 1 and 2

d. Neither 1 nor 2

Ans: (a)


  • All members of the municipality should be elected directly by the people.
  • For this purpose, each municipal area shall be divided into territorial constituencies known as the ward
  • The state legislature is empowered to provide for the manner of election of the chairperson of a municipality
  • The state legislature can also provide for representation of- persons having special knowledge who will not have the right to vote in the meeting, members of LS, RS, state legislature and council from the municipal area.