Role of ULGs in Economic Development

SIXTEENTH FINANCE COMMISSION AND URBAN LOCAL GOVERNMENTS: FAQs

1. What Is the Role of Urban Local Governments (ULGs) in Economic Development?
• ULGs play a crucial role in India’s economic growth, contributing nearly 60% of the country’s GDP. Urban centers are engines of growth, with each percentage increase in urban population associated with a 2.7% rise in district GDP.

2. What Are the Key Sources of Funds for Urban Local Governments?
• ULGs generate revenue from multiple sources: property taxes, user charges, fees, and rents from municipal assets. However, these own sources of revenue are often insufficient, making ULGs heavily reliant on inter-governmental transfers (IGTs).

3. What Are Inter-Governmental Transfers (IGTs), and Why Are They Important for ULGs?
• IGTs are funds transferred from the central and state governments to ULGs. These transfers are crucial for supporting urban infrastructure and services. In India, IGTs are only 0.5% of GDP, much lower than the 6%-10% seen in developed nations. Increasing IGTs would empower ULGs to meet local needs more effectively.

4. Why Is There a Need for Municipal Bonds as a Source of Funding?
• Municipal bonds are debt securities issued by ULGs to finance public projects like water supply, sanitation, roads, and renewable energy. They provide an alternative to traditional government grants, enabling ULGs to mobilize funds directly from investors. Successful examples include cities like Indore and Ghaziabad, which have raised funds through green bonds.

5. How Can ULGs Enhance Their Own Sources of Revenue?
• ULGs can improve revenue by better collection of property taxes, rationalizing user charges, and tapping into innovative financing mechanisms like land value capture and public-private partnerships (PPPs). Strengthening financial management and accountability systems can also boost investor confidence in municipal bonds.

6. Why Is There a Need for More Untied Funds for ULGs?
• Current transfers to ULGs are often tied to specific government programs, limiting their ability to address local challenges. The Sixteenth Finance Commission is urged to increase the share of untied funds, allowing ULGs the flexibility to prioritize according to local needs, including critical areas like climate adaptation.

7. How Can ULGs Contribute to Climate Resilience?
• ULGs can play a pivotal role in climate mitigation by investing in sustainable urban infrastructure, enhancing drainage systems to reduce flooding, and ensuring water security during droughts. Municipal bonds focused on green projects can help ULGs meet these climate goals while contributing to national commitments.

8. What Challenges Do ULGs Face Post-GST Implementation?
• The introduction of GST has diminished traditional revenue streams like octroi and entry tax for ULGs. Though compensation was promised, it has not been fully realized, affecting their financial autonomy. A renewed focus on enhancing IGTs and exploring new revenue mechanisms like municipal bonds could mitigate this issue.

9. Why Is Strengthening Monitoring Systems Important for ULGs?
• Effective service delivery requires robust monitoring systems. Previous finance commissions emphasized the need for ULGs to report on performance benchmarks regularly. The Sixteenth Finance Commission should continue this approach, supporting technology-driven monitoring to improve transparency and accountability in urban governance.

10. What Strategic Recommendations Can the Sixteenth Finance Commission Consider?
• Increase financial allocations to ULGs, particularly untied grants.

• Promote municipal bonds as a viable funding option for urban projects.

• Strengthen ULGs’ own revenue sources through better tax collection and innovative funding strategies.

• Enhance monitoring and accountability mechanisms to ensure efficient service delivery.

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