The 16th Finance Commission (FC) has recommended a massive boost to India’s urban infrastructure, more than doubling the grant for Urban Local Bodies (ULBs) to ₹3,56,257 crore for the 2026-31 period. This marks a significant jump from the ₹1.55 lakh crore allocated by its predecessor for the previous five-year term.
The report, prepared by the panel headed by former NITI Aayog vice-chairman Arvind Panagariya, was tabled in Parliament on Sunday.
The funds have been divided into four categories — basic ( ₹ 2,32,125 crore), performance ( ₹ 54,032 crore), special infrastructure ( ₹56,100 crore) and urbanisation premium ( ₹10,000 crore).
The commission has increased the urban share within local government grants to 45% (up from 36% under the 15th FC).
A Janaagraha analysis released on Friday said 52% of these grants are “untied,” meaning city authorities can use the money for non-specified purposes, a sharp increase from the 21% seen previously. It said these grants over the last decade ( ₹1,76,373 crore) are more than the budget of ministry of housing and urban affairs ( ₹1,69,429 crore) when allocation for PMAY(U) and Metro rail are excluded.
Srikanth Viswanathan, chief executive officer of Janaagraha, said, “The 16th FC’s outlay represents a historic 45% share in local government grants, a 230% increase over 15th FC grants to urban local governments, and a 455% increase in untied grants to ₹1.84 lakh crores. This could be a pivotal transition towards substantive improvement in first-mile infrastructure and services for citizens, particularly in smaller cities and towns.”
He said state governments would now need to build with urgency capabilities at state and city levels to identify and tender out high-quality projects, and oversee high-quality execution.
To claim this “urban premium”, states must formulate a transparent rural-to-urban transition policy to ensure rule-based identification and planning for areas that attain urban characteristics, the Finance Commission said in its report. The funds will be used to upgrade basic infrastructure in newly included areas or to increase capacity to provide civic services.
Sudeshna Chatterjee, program director of sustainable cities programme at WRI India, said the 16th Finance Commission deserves credit for finally naming an ‘urbanisation premium’ and linking it to rural-to-urban transition policies.
“But the design is inadequate for the scale and nature of India’s urbanisation. The total envelope of ₹10,000 crore, with an eligibility of ₹2,000 per person, is based on the 2011 Census urban populations, even though administrative data indicate that at least 1,000 new statutory towns have been notified since then, and even though invisible in official statistics, many thousands of villages have effectively become economically urban.”
She said in 2022, the World Bank estimated that India would need USD 840 billion in capital investment in urban infrastructure and municipal services till 2036 to meet the needs of its growing urban population. “Against that requirement, this premium may only be a modest nudge,” he added.
The 16th FC is also pushing for a digital overhaul of municipal finances. It has recommended the adoption of GIS-based digital property tax registers linked to city master plans for automatic updates whenever the master plan is revised.
“Utilising unique property IDs for the creation and maintenance of property databases facilitates efficient property tax billing and collections. This property database may be appropriately linked with other databases, like water, sewerage, electricity, trade license and building permissions for automatic verification of property attributes and assessment records,” the report said.
The report also said property tax, which is a major contributor to the own-source revenue of municipal bodies, remained underutilised due to incomplete records, undervaluation, and weak enforcement. To this end, a performance incentive has been announced for cities that show annual revenue growth of 5% or more.
The recommendations and grants assume significance, as over the last decade, the amount of funding has grown substantially.
In continuity with the reforms pushed by the previous panel, the 16th FC too pressed on duly elected municipal council, transparent accounting, financial independence of urban local bodies, State Finance Commission (SFC) Compliance, and service level benchmarks.
The 15th FC had introduced performance-linked grants for urban local bodies (ULBs), including specific incentives tied to air quality improvements, primarily through the Million Cities Challenge Fund (MCF) for cities over 1 million.
“One major failure was the air pollution grant ( ₹12,139 crore) itself, which was a performance grant. It is considered a failure because, despite measurement protocols, results have not been seen,” a sectoral expert working closely with the government on condition of anonymity said. Similarly, a fund for health amenities in urban local bodies saw limited implementation.
Among many other recommendations, the 15th FC also proposed eight new greenfield cities to relieve existing cities. But there has been no progress on that front. The idea was shelved by the government, which instead considered a scheme to redevelop peri-urban areas that have grown organically.
