First report of 7th State Finance Commission suggests exploration of municipal bonds, devolution of 29% of State Plan to local bodies in 2026-27

Allowing local bodies to explore the potential in ‘municipal bonds,’ devolution of 29% of the State Plan to them in 2026-27 and a hike in the honorarium of elected representatives of local bodies are among the major recommendations and suggestions made by the State Finance Commission (SFC) in its first report.

The report was tabled in the Assembly along with the Budget documents on Thursday (January 29, 2026). Presenting the Budget, Finance Minister K.N. Balagopal had stated that almost all the SFC recommendations on devolution of fund have been accepted by the government.

In his Budget speech, the Finance Minister had announced that municipalities and Corporations would be permitted to issue municipal bonds for implementing major projects that are “profitable as well as beneficial to the public.” Grama panchayats will be permitted to avail themselves of loans with the same objective subject to fixed criteria, he had said.

For resource mobilisation

In its first report which is applicable to the 2026-27 fiscal, the 7th SFC headed by K.N. Harilal has listed municipal bonds as a means for ‘supplementary/external resource mobilisation’ by local bodies. The SFC has recommended the creation of a Board of Finance for Local Governments, so that local bodies are “empowered in all possible ways to realise the revenue potential.” Among other things, the board should also facilitate issue of municipal bonds and borrowings by eligible local bodies, the report notes.

On the municipal bonds, the commission observed that it does not recommend borrowings as a means of financing development or welfare projects in general, given the enhanced availability of development funds. “The window of bonds or borrowings may be opened to the local governments on a project-to-project basis ensuring that the selected projects generate reasonable return for meeting the repayment obligations,” it said.

Members’ honorarium

The State government has also accepted in principle the recommendation of the SFC to increase the honorarium of elected representatives in local bodies. The commission had wanted the honorarium of the main office-bearers such as Mayors and district panchayat presidents to be doubled; that of standing committee chairpersons enhanced by 75% and councillors/members enhanced by 50%.

In its first report, the commission has recommended that 29% of the State Plan be devolved to local bodies in 2026-27. This should be exclusive of the outlay for the Kerala Solid Waste Management Project (KSWMP). The 7th SFC also endorsed the suggestion of the 6th SFC that the allocation be raised by 0.5% of the State Plan every year until it reaches 30% of the annual plan of the State government.