Finance Commission triples grants to urban local governments

On February 1, Finance Minister Nirmala Sitharaman tabled the 16th Finance Commission report in the Lok Sabha, setting the framework for tax devolution between the Centre and the States. The Commission also recommended an allocation of ₹3.5 lakh crore to urban local governments (ULGs) for the next five years.

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Generally, funds are devolved to ULGs through transfer by the Central and State governments in the form of grants. According to an analysis by Janaagraha, a non-profit organisation, the Commission’s allocation for the coming five years matches the spending of centrally sponsored schemes through the Centre’s share over the last 13 years combined.

The chart below shows allocations to local governments across various Finance Commissions (In Rs)

The report expands on how this could improve first-mile infrastructure and services for smaller towns and cities. It also notes the allocation of ₹10,000 crore to the urbanisation premium grant, which could incentivise the process of rural-urban transition. The Commission has also allocated 45% of local government grants to ULGs, which is a noted increase from its previous share of 36%.

The chart below shows the allocations to Rural and Urban Local Governments in % across various Finance Commissions

The 15th Finance Commission allocated ₹1.5 lakh crore to ULGs for the years 2021-26. The 16th Finance Commission recommended increasing the allocation by 230%. The chart below shows allocations to Urban Local Governments across Finance Commissions.

Among the major States, Kerala received the highest increase in allocation of more than 400%, while Himachal Pradesh saw a near 50% decline in such funds. The chart below shows state-wise allocations to Urban Local Governments across Finance Commissions.

More than 60% of the grants to ULGs were basic grants, of which “tied” grants can be used for basic services such as sanitation and water supply, while “untied” grants can be used by for location-specific felt needs, excluding salary and establishment expenses. The chart below shows omponent-wise breakdown of the 16th Finance Commission’s allocations to Urban Local Governments in %