Cities Without Money — The Third Tier and the Capacity It Lacks

Pritiraj BrahmaFounding Partner, Pritiraj & Partners · 7 May 2026

India's cities produce roughly 60% of GDP and raise 0.6% of it. The Sixteenth Commission has now sent them ₹3.6 lakh crore against conditions most cannot yet meet.

India's urban fiscal problem is usually described as too little money. The harder truth is that the money now arriving is conditional on an administrative capacity our cities have never been required to build.

The Reserve Bank of India's Report on Municipal Finances, covering 232 municipal corporations from 2019-20 to 2023-24, contains a single comparison that should govern any serious conversation about Indian urbanisation. Municipal corporations generate revenue equal to about 0.6 per cent of GDP. State governments generate 14.6 per cent. The Union generates 9.2 per cent. Those cities produce, on NITI Aayog's estimate, roughly 60 per cent of national output.

India runs its economic engine on a fiscal base one twenty-fourth the size of its states'.

Five findings anchor this analysis:

1. The property tax base is close to unused. Property tax revenue across the 232 corporations was ₹32,450 crore in 2023-24 — about 0.12 per cent of GDP, and no more than 0.15 per cent including all municipalities, against roughly 1.7 per cent in advanced economies. It remains the workhorse of urban finance: over 60 per cent of own tax revenue and more than 16 per cent of total revenue. Collection efficiency compounds the problem — the CAG has found that corporations across eighteen states collect only 56 per cent of the property tax they themselves have demanded.
2. Revenue is concentrated in a handful of cities. The top ten municipal corporations account for 58 per cent of all revenue receipts. India does not have a municipal finance system; it has ten cities with finances and several hundred without.
3. The transfer channel is small by any comparison. Financial transfers to municipal governments amount to about 0.45 per cent of GDP, against 1.6 to 5.4 per cent in Brazil, Indonesia, the Philippines and Mexico, and higher still across much of Europe. Tax revenue is 30 per cent of municipal receipts, grants and transfers 24.9 per cent, and fees and user charges 20.2 per cent.
4. Borrowing has grown fast from a negligible base. Municipal borrowing rose from ₹2,886 crore in 2019-20 to ₹13,364 crore in 2023-24 — from 1.9 to 5.2 per cent of total receipts, but still around 0.05 per cent of GDP. The municipal bond market remains marginal: ₹4,204 crore outstanding as at 31 March 2024, most of it privately placed.
5. The absorption problem is as binding as the allocation problem. The CAG has found that urban local bodies in eleven of eighteen states utilised only 61 per cent of the funds allocated to them. Meanwhile establishment expenses — salaries, pensions, administration — consume more than half of revenue expenditure, while capital spending has risen to 61.5 per cent of total municipal expenditure.

Why the Sixteenth Commission's award changes the question

Against this backdrop, the Sixteenth Finance Commission has made the largest single commitment to India's third tier in its constitutional history: ₹7.91 lakh crore in local body grants for 2026-31, about 116 per cent higher than the Fifteenth Commission's award, of which ₹3.56 lakh crore is for urban local bodies. The urban share within local body grants rises from 36 to 45 per cent, in explicit recognition of a projected 41 per cent urbanisation by 2031.

The structure matters more than the sum. Eighty per cent is basic and twenty per cent performance-linked. Release is conditioned on local bodies being properly constituted, on audited accounts being published, and on State Finance Commissions being formed on time. Performance grants require demonstrated improvement in own-source revenue. The Commission was also explicit that Union grants are meant to supplement, not substitute, what states transfer on the recommendation of their own State Finance Commissions.

Read plainly, the award says: the money is available, and it is gated on exactly the capacities Indian municipal government has historically not maintained — elected bodies in place, accounts audited and published, a functioning state-level commission, and a rising own-revenue effort.

The three failures that gate the money

Elections not held. The 74th Amendment requires municipal elections every five years. In practice, elections are deferred, corporations run under administrators, and State Election Commissions lack the institutional strength to compel the timetable. An unconstituted body is now also an ineligible one.

Accounts not audited. Municipal accounting in much of India remains cash-based, unaudited, or audited years in arrears. This is not a transparency inconvenience; it is the reason municipal bonds have not scaled. No investor prices an issuer whose accounts arrive three years late, which is why ₹4,204 crore outstanding is the ceiling rather than the floor of what Indian cities could borrow.

Powers not devolved. Despite the 74th Amendment, many states have not devolved the functions the Twelfth Schedule contemplates — particularly urban planning and land use regulation. A city that cannot control land use cannot capture the value that land use creates, which is the single largest municipal revenue opportunity India is declining to take.

What we would do

1. Fix collection before touching rates. Collecting 56 per cent of an existing demand is a machinery problem, not a taxation-policy problem. Moving collection efficiency from 56 to 80 per cent raises more revenue than any politically feasible rate increase, and requires no legislation — only a current property register, GIS-verified, with enforcement follow-through on the largest defaulters first.
2. Make valuation elastic. The RBI's central recommendation on property tax is that formulae should track actual property values. Most Indian cities use unit-area or fixed-slab methods revised at political intervals, which guarantees that the tax base falls behind the economy it sits on. Automatic periodic revaluation is unpopular once and beneficial permanently.
3. Get the accounts audited, on a deadline, as a financing strategy. Audited accounts unlock the performance tranche, and independently unlock the bond market. This is the highest-return administrative reform available to an Indian city, and it is dull enough that no mayor has ever campaigned on it.
4. Rationalise user charges deliberately. Fees and user charges are already 20.2 per cent of municipal receipts, and are the least politically explosive lever available — provided the charge is visibly tied to a service that improves. Charges raised without a corresponding service improvement fail, and deserve to.
5. Constitute the State Finance Commission and act on its report. States have treated SFCs as procedural. They are now the mechanism through which the Union's largest-ever local body award is validated, and the instrument through which a state can put its own transfers on a rule-based footing instead of an annual negotiation.

India will add the population of a large country to its cities over the next decade. The Sixteenth Commission has, for the first time, put money behind that fact. Whether it arrives depends on whether a few hundred municipal corporations can do three unglamorous things — hold elections, publish audited accounts, and collect the tax they have already levied. That is the whole of the urban question this year.