Introduction
With urbanization accelerating sharply, India’s 15th Finance Commission (FFC) (2021–26) ushered in transformative fiscal reforms for cities. It markedly increased grants to ULBs, tied funding to performance, and imposed key financial governance conditions. As the 16th Finance Commission prepares its recommendations (covering 2026–31), timing demands reflection on achievements, gaps, and future pathways.
Overview of 15th FC's Financial Reforms for ULBs
Increased Fiscal Transfers to Urban Bodies
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Grants to ULBs rose from ~ 3.5% under the 14th FC to 4.3% of the divisible pool under the 15th FCThe Times of India+15Citizen Matters+15ForumIAS+15. Within that, the footprint of urban bodies climbed from 30% to 40% across five yearsForumIAS+1Citizen Matters+1.
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Out of ₹4.36 lakh crore allocated to all local bodies, ₹1.2 lakh crore went to ULBs, along with ₹70,000 crore earmarked for health-related local grantsForumIAS+3Unacademy+3The Indian Express+3.
Million‑Plus Cities Challenge Fund
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Large cities (population over one million) were placed on a 100% performance-linked funding regime, tied to measurable improvements in air quality, water supply, sanitation, and waste management under the Million‑Plus Cities Challenge Fund (approx. ₹38,196 crore)The Times of India+15The Indian Express+15Drishti IAS+15.
Entry-Level Conditions for Grant Access
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ULBs had to meet three key criteria:
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Publish audited accounts online (entry-level condition)The Times of India+5Citizen Matters+5The Indian Express+5The Times of India+7ForumIAS+7Forbes India+7.
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Notify and enforce minimum floor rates for property tax, with improving tax revenue year-on-yearThe Times of India+14ForumIAS+14Forbes India+14.
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Establish State Finance Commissions (SFCs) and implement their recommendations by March 2024—84% of grants were conditional on thisWikipedia+15CivilsDaily+15CivilsDaily+15.
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Impact & Emerging Trends
Fiscal Empowerment vs Constraints
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The grants brought much-needed resources, but tie-ins limited flexibility—especially for million-plus cities bound by strict performance benchmarksReddit+9The Indian Express+9Citizen Matters+9.
Reform Incentives
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Linking grants to reforms pushed municipal accounting discipline and incentivized revenue mobilization via property tax, but states lagged in full compliance with deadlinesForbes IndiaCitizen MattersCivilsDaily.
Gaps in Implementation
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Many ULBs failed to spend funds effectively. For instance, Thiruvananthapuram Corporation utilised only 4% of its Challenge Fund allocation by February 2025The Times of India+2Reddit+2Citizen Matters+2.
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In Karnataka, Nagpur lost over ₹270 crore due to missing conditions like holding elections and raising property taxThe Times of India+1The Times of India+1.
State-Level Adjustments
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Haryana empowered municipal commissioners with greater autonomy in spending budgets up to ₹2.5 crore, sidelining elected mayors and raising concerns over democratic accountabilityThe Times of India.
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Andhra Pradesh capped inter-departmental deputations into municipal departments to 10%, aiming to reinforce domain expertise and governance qualityMoneycontrol+14Reddit+14The Times of India+14.
Drive towards Governmental Oversight
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Karnataka's CM demanded 50% central tax share and cap on cesses, seeking longer-term fiscal stability for Bengaluru and other municipalitiesWikipedia+2Reddit+2economictimes.indiatimes.com+2.
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In Mysuru, administrators urged full and timely utilisation of 15th FC and state finance commission funds for urban development agendasCivilsDaily+13Forbes India+13The Times of India+13.
Charting the Way Forward: Post‑2026 & Beyond
1. Harmonised Accounting Framework
The upcoming 16th Finance Commission is expected to push for a common chart of accounts across ULBs and Centre, possibly integrating PFMS for real-time tracking and standardised reportingReddit+5Moneycontrol+5Citizen Matters+5.
2. Deeper Fiscal Autonomy
16th FC may recommend direct central allocations to ULBs, bypassing state governments in selective cases—boosting predictability and reducing inter-governmental delaysMoneycontrol.
3. Borrowing Access via PFDF
Continued leverage of the Pooled Finance Development Fund Scheme could enable ULBs to issue bonds backed by central credit enhancement—reducing reliance on discretionary grantsWikipedia.
4. Capacity Building & Financial Planning
Further efforts needed statewide to institutionalize SFCs, train ULB staff in fiscal management, and deepen municipal bond frameworks as seen in Kerala’s exploration of municipal bondsReddit.
Conclusion
The 15th Finance Commission laid the groundwork for improved urban governance by boosting resources, tightening fiscal accountability, and incentivizing performance. Yet, execution deficiencies, conditional rigidity, and political bottlenecks weakened full realization. As India prepares for its next fiscal roadmap, the focus must shift to empowering ULBs with financial autonomy, standardized accounting systems, and institutional capacity—ensuring cities can fund, implement, and sustain development without dependency or delay.
True urban transformation hinges not only on funding, but also on governance reform. The upcoming cycle must learn from challenges, deepen reform links, and place urban local bodies at the center of India’s development journey.