Finance Commission triples grants to urban local governments

A record allocation of ₹3.5 lakh crore and a higher share of local grants signal a policy shift towards India’s rapidly urbanising towns and cities

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