Urban Local Bodies in India — 74th Amendment, Finances & UPSC Notes

India is urbanising faster than at any other point in its history. By the 2030s, more than 600 million Indians will live in cities. Yet, the Urban Local Bodies (ULBs) that are meant to govern these cities remain among the weakest tier of Indian government — financially starved, institutionally understaffed and politically marginalised. The ambition of the 74th Constitutional Amendment Act, 1992 was to change this. Three decades later, the progress is uneven.

For UPSC aspirants, ULBs are central GS II content on urbanisation, local governance and fiscal federalism.

Constitutional basis

• 74th Constitutional Amendment Act, 1992 inserted Part IXA (Articles 243P to 243ZG) on municipalities.
• Recommendations of the National Commission on Urbanisation (1985) under Charles Correa were largely incorporated.
• 12th Schedule lists 18 functions that state legislatures should devolve to ULBs.

Unlike PRIs, there is no fixed hierarchy in urban government comparable to the three-tier panchayat system. Instead, ULBs are categorised by population and urban character.

Three types of Urban Local Bodies

Nagar Panchayat — requires utmost care to set up because:

• Cost of administration of a Nagar Panchayat is higher than a Gram Panchayat.
• Taxes increase in municipal areas.
• No Gram Sabha — the direct democracy element is lost.
• Denial of benefits of rural development programmes like MGNREGA.

Hence the decision to constitute a Nagar Panchayat in a transitional area must be carefully considered.

Problems of ULBs

• Increasing urbanisation — urban sprawl, slums, rising crime against women, poor infrastructure, juvenile delinquency, poverty, urban unemployment.
• Urban villages — growth of peri-urban settlements without formal governance.
• Inadequate planning — unauthorised colonies, congestion, environmental degradation.
• Municipal service deficits — water, sanitation, solid waste, transport.
• Financial weakness (discussed below).
• Administrative bottlenecks — state-appointed municipal commissioners often override elected mayors.

2nd ARC recommendations on ULBs

• New national commission to deal with evolving urban issues.
• Three-tier local self-government — Municipal Council/Corporation + Indirect elections + Ward Committees + Area Sabhas (all residents).
• Ward Committees should be properly devolved functions.
• Mayor through direct election with appointed cabinet from elected councillors (US City-Manager model).
• Municipal Commissioner's appointment to be respected by the Corporation.
• Local Body Ombudsman for grievance redress.

ULB finances

Revenue sources

Expenditure heads

• Administration (salaries, pensions).
• Education — primary schools.
• Public health — vaccination, clinics.
• Water supply, sanitation, sewage management.
• Municipal works — roads, street lighting, parks.
• Public safety — fire services in some cities.

State government control over ULBs

The state retains extensive control:

• Taxation: SG can exempt property or declare unfair tax invalid.
• Expenditure: SG can fix upper limits.
• Budget: SG prescribes form and manner.
• Loans: SG fixes mode and period of repayment.
• Accounts and audit: Manner fixed by SG; audit by SG-appointed agency.
• Suspension/abolition: Requires SG approval with statutory procedure.

Reasons for weak ULB finances

• Leakages, tax evasion, poor collection.
• Poor capacity building in finance.
• Own revenue streams under-tapped — despite real estate boom, property tax base is narrow and poorly assessed.
• Ineffective post-mortem audit — no real-time controls.
• Reluctance to tax — political economy constraints.
• Inadequate and tied grants — earmarked for specific schemes, not flexible local needs.
• Article 285 prohibits state governments from taxing Union properties — a significant loss in cities with large Central government presence.

2nd ARC reforms on ULB finance

• Property Tax: Move from annual rental value to annual capital value assessment.
• Cost of tax collection — reduce by enabling GIS-based assessment.
• Property tax review — 12th FC suggested that collections should grow from Rs 2,500 crore to Rs 12,000 crore nationally (this target has been far exceeded, but potential remains).
• Fines on offences like encroachment.
• Adopt Citizens' Charters for service delivery.

Further reforms required

• Apply fiscal federalism principles to State-ULB relations — predictable, rule-based devolution.
• Incentivise prompt tax payment — e.g., Delhi's property tax rebates.
• Set up Municipal Finance Corporations in each state for long-term lending.
• Strengthen State Finance Commission role; Local Body Ombudsman.
• Explore congestion tax — examples from London and Singapore.
• Urban Infrastructure Development Fund (like RIDF for rural); tax-free municipal bonds (which some cities like Pune, Ahmedabad, Hyderabad have issued).

12th Schedule — 18 functions

The 74th Amendment's 12th Schedule lists functions that states should devolve to ULBs. Major categories:

• Urban planning including town planning.
• Regulation of land-use and construction of buildings.
• Planning for economic and social development.
• Roads and bridges.
• Water supply for domestic, industrial and commercial purposes.
• Public health, sanitation, conservancy and solid waste management.
• Fire services.
• Urban forestry, protection of environment and ecology.
• Safeguarding the interests of weaker sections including the handicapped and mentally retarded.
• Slum improvement and upgradation.
• Urban poverty alleviation.
• Provision of urban amenities (parks, gardens, playgrounds).
• Cultural, educational and aesthetic aspects.
• Burials and cremations.
• Cattle pounds; prevention of cruelty to animals.
• Vital statistics including registration of births and deaths.
• Public amenities including street lighting, parking lots, bus stops, public conveniences.
• Regulation of slaughter houses and tanneries.

Schemes related to urban governance

• AMRUT — water supply, sewerage, green spaces.
• Smart Cities Mission — technology-led urban upgradation.
• PMAY-U — housing for all in urban areas.
• Swachh Bharat Mission (Urban) — sanitation and solid waste.
• National Heritage City Development and Augmentation Yojana (HRIDAY).

Latest developments (2024-26)

• 15th Finance Commission recommended a significant grant package for urban local bodies — around Rs 1.2 lakh crore for million-plus cities and Rs 82,000 crore for non-million plus cities, conditional on tax effort and specific outcomes.
• Smart Cities Mission closed its project delivery phase; evaluation is ongoing.
• PMAY-U 2.0 launched in 2024 with additional allocation.
• Updated context: Several states including Karnataka, Maharashtra and Tamil Nadu have revised property tax laws using GIS and satellite-based assessment. Municipal bond issuances have accelerated post-SEBI regulatory clarity; major cities like Pune, Ghaziabad and Hyderabad have successfully issued municipal bonds.

UPSC relevance

For Prelims, remember:

• Part IXA (Articles 243P to 243ZG) — Municipalities.
• 12th Schedule — 18 functions of ULBs.
• Article 243Q — three types of municipalities.
• Article 243Y — State Finance Commission.
• 74th Amendment, 1992.

For Mains (GS II):

• Critically examine the implementation of the 74th Amendment.
• Discuss the fiscal challenges of ULBs and suggest reforms.
• Evaluate the 2nd ARC recommendations on urban governance.

In essays, ULBs connect to the urbanisation challenge, fiscal federalism, and the right to the city — forward-looking UPSC themes with growing policy significance.