Finance Commission triples grants to urban local governments
Context
The Sixteenth Finance Commission report was tabled in Lok Sabha on 1 February by Nirmala Sitharaman.
It sets the framework for tax devolution and grants between the Centre, States, and local governments for the next five years.
Key recommendations for urban local governments (ULGs)
1. Record allocation
₹3.5 lakh crore allocated to ULGs for the next five years.
This equals the Centre’s share of spending on centrally sponsored urban schemes over the last 13 years combined.
Indicates a major fiscal shift in favour of urban India.
2. Higher share in local government grants
45% of total local government grants earmarked for ULGs.
Increased from 36% under the 15th Finance Commission.
Reflects:
Rapid urbanisation
Rising demand for urban services
Greater role of cities in economic growth
Comparison with 15th Finance Commission
Parameter | 15th FC (2021–26) | 16th FC |
Allocation to ULGs | ₹1.5 lakh crore | ₹3.5 lakh crore |
Increase | — | ~230% |
Share of LG grants | 36% | 45% |
State-wise trends
Kerala
Highest increase in ULG allocation
More than 400% rise
Himachal Pradesh
Nearly 50% decline in allocation
Shows uneven urbanisation and fiscal capacity across States.
Nature of grants to ULGs
More than 60% are basic grants
Two types:
Tied grants
For essential services
Water supply
Sanitation
Untied grants
For location-specific felt needs
Cannot be used for salaries or establishment expenses
Urbanisation premium grant
₹10,000 crore urbanisation premium grant
Objective:
Incentivise rural–urban transition
Support emerging towns and census towns
Focus on:
First-mile urban infrastructure
Basic service delivery in smaller cities
Prelims Practice MCQs
Q. With reference to the recommendations of the Sixteenth Finance Commission, consider the following statements:
It recommended ₹3.5 lakh crore as grants to urban local governments for the next five years.
The allocation to urban local governments is equivalent to the Centre’s spending on centrally sponsored urban schemes over the last 13 years combined.
Urban local governments receive funds only through direct transfers from the Union Government.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct answer: (a)
Explanation:
Statement 1 is correct: ₹3.5 lakh crore is the recommended allocation.
Statement 2 is correct: The allocation matches the Centre’s share of centrally sponsored urban schemes over 13 years.
Statement 3 is incorrect: Funds reach ULGs through both Central and State governments, not only direct Union transfers.
Q. Consider the following statements regarding the share of local government grants:
The Sixteenth Finance Commission allocated 45% of local government grants to urban local governments.
The Fifteenth Finance Commission had allocated less than 40% of local government grants to urban local governments.
Which of the statements given above are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Correct answer: (c)
Explanation:
Statement 1 is correct: The share was increased to 45%.
Statement 2 is correct: The Fifteenth Finance Commission allocated 36%.
Q. With reference to grants recommended to urban local governments, consider the following statements:
More than 60% of the grants are basic grants.
Tied grants can be used for sanitation and water supply.
Untied grants can be used for salary and establishment expenditure.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 only
(d) 1, 2 and 3
Correct answer: (a)
Explanation:
Statement 1 is correct: Over 60% are basic grants.
Statement 2 is correct: Tied grants are meant for core services like water and sanitation.
Statement 3 is incorrect: Untied grants cannot be used for salary or establishment expenses.
Q. The ‘Urbanisation Premium Grant’ recommended by the Sixteenth Finance Commission aims to:
Incentivise rural-to-urban transition
Support first-mile urban infrastructure in smaller towns
Replace centrally sponsored urban schemes
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 only
(d) 1, 2 and 3
Correct answer: (a)
Explanation:
Statements 1 and 2 are correct.
Statement 3 is incorrect: The grant does not replace centrally sponsored schemes.