Empowering Local Governments: Key to Addressing India's Federalism Deficit

Indian Express - Explained · 20 May 2026 · 2 min read
Prelims · Polity Mains · GS2 Governance High relevance

The article highlights the chronic underperformance of India's local governments (third tier) due to financial and administrative dependence on state governments, contrasting with China's successful fiscalisation of land revenues to empower local bodies.

Key points

Constitutional Status: The 73rd and 74th Amendments granted constitutional status to local governments in 1993, but their potential remains unrealized due to state-level control over finances and personnel.

Financial Dependency: Urban Local Bodies (ULBs) generate only 0.3% of GDP in taxes, compared to 15-20 times higher expenditures by states and the Centre, making them dependent on external funding.

Personnel Shortage: Only 10% of government employees work for local bodies in India, versus two-thirds in China and the US, severely limiting service delivery capacity.

Land Monetisation Failure: China successfully fiscalised rising land values during its growth phase, reaching 10% of GDP in revenues, while India stagnated at 1%, missing a key revenue opportunity.

Urban Land Ceiling Act: The 1976 socialist-era law fragmented land ownership, preventing effective monetisation and contributing to black money in real estate.

Governance Structure: State governments control appointments of municipal commissioners and senior staff, undermining local autonomy and accountability.

[GS3-Economy] The inability to monetise land assets represents a significant fiscal policy failure, costing India potential revenues equivalent to 9% of GDP (based on China's peak performance).

Way Forward: India should amend the Urban Land Ceiling Act to enable efficient land monetisation, grant ULBs direct hiring authority over municipal staff, and implement a guaranteed share of GST revenues for local bodies to enhance fiscal autonomy.

Key terms

Urban Land Ceiling Act, 1976

A socialist-era law that limited individual land holdings in urban areas, intended to promote equitable distribution but ultimately led to fragmentation, black money generation, and stifled urban development until its repeal in most states.

Third Tier of Government

Refers to local self-governing bodies (Panchayats and Municipalities) established under Part IX and IXA of the Constitution. Despite constitutional status, they remain the weakest link in India's federal structure due to financial and administrative constraints.

73rd and 74th Amendments

Constitutional amendments passed in 1992 that established Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs) as the third tier of government, mandating regular elections and devolution of powers, though implementation remains uneven across states.

Fiscal Federalism

The division of financial powers and responsibilities among different levels of government, crucial for effective governance. In India, it's imbalanced with local bodies receiving only 0.3% of GDP in taxing powers versus 15-20% for states/Centre.