Context:

India’s local bodies continue to suffer from poor performance and limited effectiveness. Quoting Jawaharlal Nehru’s 1925 criticism of municipal governance, analysts suggest that little has changed over time.

They highlight that the third tier of government—rural and urban local bodies—remains largely ignored in debates on Indian federalism, which focus mainly on the Centre and states.

They describe local governments as the “stepchild” of Indian federalism, with state governments acting as controlling intermediaries that restrict their autonomy and functioning.

What’s in Today’s Article?

• Dependence of Local Governments on States
• Land Monetisation and the Weakness of Local Governments
• The Way Forward for Empowering Local Governments

Dependence of Local Governments on States

• Weak Administrative Capacity - India’s urban local bodies (ULBs) suffer from severe neglect in terms of manpower and institutional capacity.
• Low Share of Government Employees - In countries such as the United States and China, nearly two-thirds of government employees work under local governments, enabling them to deliver most public services directly.
  • In contrast, in India, just over 10% of government employees work for local governments, significantly weakening their service delivery capacity.
• Poor Financial Autonomy - Financial independence is essential for effective governance, but India’s urban local bodies remain heavily constrained.
• Stagnant Revenue Generation
  • While the Centre and states have significantly increased their self-generated revenues over the past six decades:
    • Centre: around 2 times increase
    • States: around 2.5 times increase
  • The urban third tier’s own tax revenue has stagnated at just 0.3% of GDP.
  • Due to weak revenue generation, expenditure by local governments remains extremely low.
    • ULB expenditure is less than 1% of GDP
    • State governments spend roughly 15 times more
    • The Centre spends nearly 20 times more
• Dependence on State Governments
• Because local bodies generate very little of their own revenue, even their limited spending depends heavily on external transfers, primarily from state governments.
• This dependence undermines their autonomy, decision-making power, and governance effectiveness.
• Missed Opportunity Despite Constitutional Status
  • This continued weakness is particularly striking given:
    • Rapid urbanisation in India
    • The 73rd and 74th Constitutional Amendments (1993), which granted constitutional status to local governments with the aim of strengthening decentralised governance.

Land Monetisation and the Weakness of Local Governments

• The weaknesses of India’s local governments are linked to a deeper structural issue: the inability to effectively monetise land, despite rapid economic growth increasing land and property values.
• In land-scarce economies, rising land values can become a major source of public revenue.
• India vs China: A Sharp Contrast
  • China successfully converted rising land values into public revenue, largely through land sales and taxation.
    • Land revenue rose from less than 1% of GDP to over 10% at its peak
    • Per urban resident, China’s land revenue was:
    • 15 times higher than India’s in 1999
    • 225 times higher at its 2020 peak
  • This significantly expanded China’s fiscal capacity for urban development.
  • India’s land-related revenues remained stagnant at around 1% of GDP, despite similar economic growth and rising urban land values.
• Reasons for India’s Failure
  • Legacy of Socialist Policies - Socialist-era laws such as the Urban Land Ceiling Act, 1976 fragmented land ownership without meaningfully enabling public land acquisition or monetisation.
  • Failure to Monetise Public Land - Large tracts of land held by: Public sector enterprises; Ports; Defence establishments; State-managed temples. It remained vacant, encroached upon, or underutilised, without being monetised.
  • Distorted Land Markets and Black Money - Restrictive land use regulations, building by-laws, and flawed policies created severe distortions in land and rental markets. This contributed to - Rent-seeking; Informal transactions; Massive generation of black money, especially in the real estate sector.
• Low-Equilibrium Trap for Urban Local Bodies
  • Urban Local Bodies (ULBs) are stuck in a weak political economy cycle:
    • Higher tiers (Centre and states) control fiscal devolution
    • Local bodies lack independent revenue sources
    • They are reluctant or unable to tax local citizens
    • This creates chronic resource shortages and dependency
  • Administrative Dependence on States
    • The problem is worsened by weak institutional autonomy.
    • City governments often lack authority over:
      • Appointment of municipal commissioners
      • Senior administrative staff
      • Promotions, transfers, and disciplinary control
    • Even when functions are formally transferred to local bodies, the personnel remain accountable to state governments, severely limiting local autonomy and governance effectiveness.

The Way Forward for Empowering Local Governments

• Beyond competitive federalism between Centre and states, competition among cities and local governments (competitive sub-federalism) could become a major driver of reform, efficiency, and innovation.
• Growing urban populations may strengthen local governance politically.
• The upcoming Census and intra-state delimitation could increase the electoral weight of urban voters, creating stronger incentives for better urban governance.

Conclusion

Debates on Indian federalism must move beyond Centre-state relations to include the third tier of governance.

Empowering cities with greater autonomy, accountability, and resources is essential for India’s future growth, innovation, and livability—as reflected in chronic urban crises such as Delhi’s pollution and Bengaluru’s congestion.