Strengthening local governments: Urban fiscal decentralization in India

Municipal governments in India have encountered increasing demographic and social pressures in recent years. The pace of urbanization, albeit modest in nature in the recent years, has been creating serious problems for the provision of urban infrastructure in general and urban basic services in particular. The scenario has worsened in the context of growth of slums and squatter settlements in various cities. Moreover, these urban areas appear to be the cynosure for investment – domestic as well as international – as a result of the adoption of the New Economic Policy that focuses on liberalization, fiscal adjustment, and financial sector reform. To reap the benefits of these trends, it is essential to achieve a world-class urban system, which – in turn – depends on attaining efficiency and equity in the delivery and financing of urban infrastructure. The states’ decrepit financial positions as well as the institutional fabric of most municipal governments exacerbate the problem. To overcome these constraints and challenges, various institutional, fiscal, and financial reforms have been initiated. Among them, the 74th Constitutional Amendment Act, 1992, recognizes the principle of local self-government and offers constitutional recognition to urban local governments. But, the critical question is how far this Constitutional Amendment is successful. This paper is an attempt in this direction.