How Indian Cities Pay for Themselves

Where Indian city governments get their money, why they are among the weakest-funded in the world, and how they could raise more.

Cities provide many essential services: water, sanitation, roads, streetlights, waste collection and more. Yet Indian city governments, known as urban local bodies, have very limited money compared with cities in many other countries.

How little they collect

Studies, including by the Reserve Bank of India in its 2022 report on municipal finances, have found that the combined revenue of Indian municipal bodies is around 1 percent of GDP, far lower than in countries like Brazil or South Africa. Many cities rely heavily on transfers from state and central governments.

Sources of revenue

Property tax: the main own-source revenue, but collection is weak because properties are undervalued, records are outdated and many owners do not pay.
Fees and user charges for water, sanitation and building permits, often set below cost.
Transfers from state governments and grants recommended by the Finance Commission.
Borrowing, including municipal bonds. A few cities, such as Pune, Ahmedabad and Indore, have issued municipal bonds in recent years.

Why finances are weak

Limited taxing powers: GST, introduced in 2017, absorbed some local taxes, such as octroi and entry tax.
Political reluctance to raise property taxes and user charges.
Weak administration of collections.
Delayed state transfers.

Consequences

With limited resources, cities struggle to maintain infrastructure, expand water supply, manage waste and invest in public transport, even as urban populations grow.

Improving property tax collection

A city uses satellite and drone mapping to identify properties missing from its tax records, updates valuations and allows online payment with reminders. Collections rise substantially without raising tax rates. Several Indian cities have increased revenue this way, showing that better administration can matter as much as higher rates.

Reform ideas

Economists suggest updating property valuations, digitising records, setting user charges closer to costs with support for poor households, ensuring timely state transfers and building cities’ capacity to borrow responsibly.

Thinking cities are funded mainly by their own taxes

Most Indian cities depend heavily on money from state and central governments. Strengthening their own revenue, especially property tax, would give them more reliable funding and accountability to residents.

Key takeaways

Indian municipal revenue is around 1 percent of GDP, low by international standards.
Property tax is the main own-source revenue but is poorly collected.
Cities rely heavily on state and central transfers, and a few issue municipal bonds.
Better property tax administration and fair user charges could strengthen city finances.