Vol. 6, Issue 11, Part G (2020)

Abstract
Urbanization is sine quo non of economic development. Rapid urbanization coupled with increasing population throws up enormous challenges to local governments in India. One of the key concerns for the local governments is providing basic infrastructure facilities and quality services as well as improving living standards for the citizens. This situation requires the Urban Local Bodies (ULBs) to find innovative ideas for solving the infrastructure and service delivery problems and for creating a larger pool of funds for strengthening the ULBs. With the help of the available literature, the paper attempts to assess critically the main problems of municipal finances in India and to bring out the challenges that the municipalities face with respect to revenue generation and expenditure management. The main findings suggest that the urban local bodies in India are confronted with lack of proper decentralization of functions and finances, inadequate revenue generation, expenditure shortfalls leading to poor service delivery. ULBs have become increasingly dependent on transfers from higher levels of government and have shown a persistent decline in their own revenues. GST has been a blow to the fiscal autonomy of the urban local governments since it has subsumed the most local taxes such as octroi, entry tax, advertisement tax and local body tax. The GST Council has to address this challenge to municipal finances urgently. The 15th Finance Commission recommend that state transfers to urban local governments increase at the rate of 25 per cent per annum over the devolution period of the 15th Finance Commission. State transfers to urban local governments are proposed to be increased from 0.33 per cent of GDP in 2017-18 to 0.70 per cent of GDP by 2024-25. It also analyses the suggestions and recommendations that have been offered in the literature to cope with these critical challenges relating to urban finance.