Urban India generates nearly two-thirds of the GDP but commands less than one per cent of tax revenue, reflecting a fiscal architecture that has systematically eroded municipal autonomy rather than administrative efficiency.

Erosion of Urban Revenue Sources

• Impact of GST Introduction: After the rollout of the Goods and Services Tax (GST), cities lost around 19% of their own revenue as octroi, entry tax, and local surcharges were subsumed under the GST framework.
• Unfulfilled Compensation: Promised compensation mechanisms largely bypassed municipal bodies, leaving them dependent on State and Central transfers for even basic functions.
• Resulting Fiscal Dependence: Municipalities today lack predictable revenue streams and fiscal autonomy, leading to an inversion of democracy — power is centralised, but responsibility decentralised.

Challenges with Municipal Bonds

• Policy Push vs. Ground Reality: While NITI Aayog and other institutions promote municipal bonds as a solution, the credibility of Indian municipal bonds remains low due to weak revenue bases and flawed assessment frameworks.
• Skewed Credibility Metrics: Credit rating agencies and the RBI judge city creditworthiness only by “own revenue,” ignoring regular intergovernmental transfers — an ideological error that treats grants as charity instead of constitutional entitlements.
• Unjust Revenue Logic: Institutions like the World Bank and ADB promote “self-reliance” via property taxes and user fees.
  • However, property tax contributes only 20–25% of total potential revenue and disproportionately burdens lower-income residents, converting public goods into private commodities.

Lessons from Global Models

• Scandinavian Fiscal Autonomy: In Denmark, Sweden, and Norway, municipalities have the right to levy local income taxes, establishing direct fiscal accountability between citizens and local governments.
• Efficiency and Transparency: This model ensures both efficiency and equity — citizens know where their money goes, and local bodies can plan long-term development with stable resources.

Way Forward

• Reimagined Fiscal Federalism: India must democratise its fiscal contract, ensuring predictable, adequate, and untied revenues for municipalities through constitutionally mandated transfers and local sources.
• Reforming Municipal Bond Framework: Recognise grants and shared taxes as legitimate income for municipal balance sheets.
  • Revise credit rating systems to include governance indicators — transparency, audits, citizen participation.
  • Allow cities to use part of their GST compensation or State share as collateral for borrowing.
• Strengthening Cooperative Federalism: Empowering cities financially will uphold the constitutional spirit of cooperative and competitive federalism, essential for balanced urban development.

Conclusion

India’s cities, as engines of national prosperity, require fiscal autonomy, predictable revenues, and equitable resource allocation. Strengthening municipal finance is both a moral and political imperative for efficient, accountable, and inclusive urban governance.

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