Expert Speak Urban Futures
Published on May 30, 2018
Devolution of financial resources and tax handles a must for better city management

Indian cities and towns reflect chaos that are almost universal because of bad governance and management. One of the important reasons for this is clearly the lack of decentralisation of governance, which was constitutionally promised through the 74th Constitutional Amendment, but has been farcical in practise in most States.

Decentralisation essentially comprises of three components: (i) delegation, (ii) decongestion and (iii) devolution. Given the complex and complicated character of the huge problems that face cities, the first two are, in a sense, managerial tactics in the nature of delegation with overall supervision. The third aspect, however, is qualitatively different since it involves passing down of resources in an untied manner with no strings attached or questions asked. This intrinsically involves expenditure autonomy with the underlying presumption by higher levels of governments that, the city indeed has the capacity towards fulfilling what is in its own best interests.

India, since the times of Mahatma Gandhi, has been a strong votary of Panchayat Raj Institutions (PRIs) with the underlying principle of power to the people and thinking of villages as independent communes. Historically, India has also been seen to live in her villages and, as a consequence, her cities have been somewhat ignored.

Yet, some of the Indian States, for long, have had different legislative arrangements to manage their own cities and towns. Whilst they laid down the organisational design for such local bodies somewhat differently, the commonality in all of them was that they were all seen as the creatures of the State which held an overpowering sway in their decisions. This legacy overhang has stifled the attempts made via the 74th constitutional amendment to bring in uniform and meaningful decentralisation within the Indian urban space.

The decentralisation envisioned was to be accompanied by three ‘Fs’, viz. functions, finances and functionaries. As far as the functions were concerned, they were clearly delineated. As far the functionaries were concerned – this delineation, too, was okay, although some State governments did deputise their own employees to act as functionaries of the Urban Local Bodies (ULBs), thus messing them up a bit. The real problem was with finances.


Indian urban spaces are the engines of economic growth and, hence, development. They are spaces (as cities or towns) that provide both liveable conditions to the relevant citizenry as well provide livelihoods by creating an infrastructure ambience that attracts investment, hence, growth and jobs. Now, here is the rub. Cities and towns in India are starved of resources not only to attract investment, but also to provide basic local goods and services to the citizens. This leads to city governments being unable to satisfy the functions that they are supposed to perform, thereby leading to unfunded mandates.

There are only two ways in which this situation can be remedied. One, devolution of resources from the higher levels of governments and two, devolution of revenue handles. As far as the first of these is concerned, there is the instrumentality of State Finance Commission (SFC), which, among other things, is supposed to recommend devolution of adequate resources to take care of horizontal and vertical imbalances between the ULBs and PRIs within a State. This is much like what the Central Finance Commissions do for and between the States of India. Unfortunately, almost all States ignore and do not accept the awards of their SFCs. Thus, there is no formulaic devolution of resources from the State to the local bodies. It is not as if there is no fund flow downwards from the States, but it is largely of the type of inflexible ‘agency transfer’ not necessarily catering to the felt needs of the local bodies or indeed, riddled with pure political pork barrelling. The standard argument made – not completely without merit – is that, given the design of tax structure in India, the discretionary fiscal space with the States is low, and hence, they cannot devolve already scarce resources.

When it comes to the matter of revenue handles, it needs to be noted that in most States, the so called local taxes are usurped by the States completely or to a very great extent. At any rate, now with the onset of GST, they would be subsumed under it. Although it may be mentioned, as an aside, that at least some cities must strive to get the user charges and other prices right – not because that will solve their problem of resource crunch, but with their house in order in this regard, they will be in a better position to access and take exposure to financial markets.

However, given the performance of Central and State governments with regard to non-tax revenues, it is foolhardy to expect that the ULBs with their embedded informality and inequality, will generally have the capability to out-perform higher levels of governments.


The only real tax revenue handle left, thus, is the property tax. In the best reformed State, the world over, property tax contributes less than 30 percent of the total expenditure of a city. No city anywhere with our kind of tax system will ever be self-sufficient. It is obvious that true decentralisation brought with the implementation of the 74th constitutional amendment in letter and spirit, complete with formulaic devolution, is the only way for cities and towns in India – and by extension, for India to go forward.

Even at a pinch, perhaps the higher levels of governments should realise that this is a win-win situation for them. After all, as engines of growth for India, urban spaces provide buoyant tax dividends to all the higher levels of governments. They represent the veritable golden geese for them and it is in their enlightened self-interest to nurture them by investing in them.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Mary Martin

Mary Martin

Mary Martin Director UN Business and Human Security Initiative LSE IDEAS

Read More +