With India’s urban hubs struggling with creaking infrastructure and weak service delivery for bulging populations, the central government is drawing up a blueprint to give municipal administrators greater autonomy over finances and service delivery, while reducing reliance on state and central grants.
The blueprint—expected to be unveiled at the upcoming Union budget—will focus on strengthening urban local bodies’ (ULBs’) own-revenue sources such as property tax and user charges, two government officials directly involved in the process said, requesting anonymity.
It will also encourage ULBs—including municipal corporations, municipalities and nagar panchayats—to tap market-based instruments including municipal and green bonds to fund long-term urban investment. For instance, cities such as Surat, Ghaziabad, Indore, Vadodara, Ahmedabad and Pimpri-Chinchwad have already issued municipal green bonds.
Further, to strengthen their financial independence, the budget will outline a roadmap allowing municipalities to launch services such as project consultancy and implementation training.
A specific mention is expected for peer-to-peer mentoring, under which weaker municipal bodies will be brought under the aegis of better-performing municipal corporations and guided to replicate proven financial and governance practices, the officials said.
“The budget speech may also highlight case studies from such cities to showcase how civic bodies can expand their financial base through better governance, innovation and market-linked instruments,” one of the officials cited above said.
“A meeting was also held in December at the finance ministry with commissioners of some of the best-performing municipal corporations, who submitted their key takeaways and best practices for adoption by other urban local bodies,” this person added.
Queries emailed to a finance ministry spokesperson remained unanswered till press time.
Weak revenue structure
Municipalities remain heavily dependent on government transfers. The Reserve Bank of India (RBI) in its Report on Municipal Finances noted that municipal revenues and expenditure in India have stagnated at around 1% of GDP, far below levels seen in OECD economies and even several emerging peers.
Data from the ministry of housing and urban affairs showed that India has 4,500 ULBs, most of which are small, with limited financial powers and revenue bases.
Only 550 are municipal corporations, of which only 25 can be considered largely self-reliant, as they generate a significant share of revenue from their own sources such as property tax and user charges, said the first of the two people mentioned above.
According to an analysis by the National Institute of Urban Affairs (NIUA) of 25 municipal corporations, own revenues made up only about 48% of total revenues on average.
Rating agency Icra in its report in March 2025 said grants accounted for about 38% of municipal revenues in FY24 (budget estimate). While borrowings from financial institutions have risen to over ₹13,000 crore, overall municipal indebtedness remains below 0.05% of GDP, reflecting limited market-based borrowing.
Property tax remains the single largest source of municipal income, contributing around 42% of own revenues on average, data from the NIUA report showed.
Lifting municipal revenues
Experts suggest several measures to improve revenue generation of ULBs.
“Municipal corporations typically face inefficient operations, low customer charges and a weak interface with state and central governments. The manpower employed in municipal corporations requires significant capacity building and training to improve operational efficiency,” said Kuljit Singh, partner and national infrastructure leader at EY India, adding that governments need to reduce interference in day-to-day functioning—such as by allowing cost-reflective user charges.
“Improving property tax efficiency and rationalizing user charges are critical if cities are to become financially sustainable,” said Abhash Kumar, assistant professor of economics at Delhi University.
Suprio Banerjee, vice president & co-group head at Icra Ltd., said municipal bonds have emerged as an alternative funding option for cities beyond state support and bank loans, aided by government incentives that lower issuance costs and improve viability. “For smaller ULBs, the Centre is encouraging pooled municipal bond issuances through state support,” he said.
Building a municipal bond market
In recent years, Union budgets and policy measures have promoted green and pooled municipal bonds and created the Urban Infrastructure Development Fund (UIDF) for tier-II and tier-III.
To revive market-based financing, the government also notified the Sebi (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, providing a formal framework for municipal bond issuances.
In 2018, the Centre introduced a financial incentive scheme to encourage ULBs to raise funds through bonds, followed by the launch of the National Municipal Finance Portal to improve transparency and disclosures.
“Apart from offering financial incentives of up to ₹2 billion ( ₹200 crore) for municipal bond issuances, the Centre has been promoting municipal bonds through regulator-led awareness programmes across the country. Initiatives such as the Urban Challenge Fund also nudge urban local bodies to tap market financing, with the scheme funding up to 25% of project costs provided at least half is raised through bonds, bank loans or PPPs,” said Banerjee.
According to an Icra report in March, since FY18, 17 municipal bond issuances amounting to nearly ₹2,600 crore have taken place, with an average issue size of around ₹150 crore, largely driven by fiscal incentives offered by the Centre rather than the standalone credit strength of ULBs, said the Icra report.
The report further noted that all municipal bonds issued since FY18 have been backed by structured payment mechanisms, including escrow of property tax or own revenues and the creation of debt servicing reserve, interest payment and sinking fund accounts, enabling AA-category ratings despite weak and varied ULB finances.
Measures taken to strengthen municipalities
The government has undertaken a series of measures over the past three decades to strengthen the finances of ULBs.
The 74th Constitutional Amendment Act, 1992, granted municipalities constitutional status and assigned them responsibilities along with powers to raise revenues through local taxes, fees and user charges.
This was followed by the first phase of municipal bond issuances in the late 1990s, beginning with the Bangalore Municipal Corporation’s bond issue in 1997, which marked India’s entry into market-based municipal financing.
While centrally sponsored schemes help channel funds to municipal bodies through multiple routes, the primary responsibility for financing municipalities continues to rest with state governments.
The Centre supports urban local bodies through schemes such as the Urban Challenge Fund and higher outlays for AMRUT and PMAY-U, which are largely aimed at strengthening urban infrastructure and improving service delivery rather than meeting routine municipal expenditure.
Municipal bodies also fall under the administrative oversight of the ministry of housing and urban affairs, which was allocated a budget of ₹96,777 crore—52% higher than the revised estimates—for FY25. However, only a portion of this allocation flows directly to municipal bodies as transfers or financial support, with a significant share spent on centrally implemented infrastructure programmes.
To support smaller cities, the Centre launched the Pooled Finance Development Fund (PFDF) Scheme in 2006, aimed at enabling pooled municipal borrowings through credit enhancement and interest support.
From the mid-2000s, urban infrastructure financing relied heavily on central grant-based programmes such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which linked funding to governance and financial reforms.