Experts Explain | How empowering India's local governments can kickstart innovation and growth

📌 Summary:

• The third tier of government — rural and urban local bodies — is the "stepchild" of Indian federalism, largely absent from federalism debates that focus only on the Centre and states; the article notes Jawaharlal Nehru, as Allahabad municipality chairman, lamented weak local bodies as far back as 1925

• Personnel gap: in the US and China nearly two-thirds of government employees work for local governments; in India just over 10% do — so very few public services are actually delivered by the third tier

• Finance gap: urban local bodies' (ULBs') share in tax generation has stagnated at a measly 0.3% of GDP, and their expenditure is below 1% of GDP — the states and Centre spend roughly 15 and 20 times more; even this small spending is funded from outside, eroding ULB autonomy

• The land-monetisation failure: with rapid growth, land values rise faster than GDP, making land a buoyant revenue source — China fiscalised this (land revenue rose from under 1% to over 10% of GDP), but India's stayed stuck near 1%; per-urban-resident land revenue made China's 15 times India's in 1999 and 225 times by 2020

• Root causes: socialist-era laws (e.g. the Urban Land Ceiling Act, 1976) that fragmented land, vested interests, distorted land/rental markets that fuelled black money in real estate, and a controlling second tier (states) that keeps the third tier dependent

• The result is a "low-equilibrium political economy trap" — ULBs are both unable and unwilling to tax their own citizens, leaving them chronically resource-starved despite the 73rd and 74th Constitutional Amendments (in effect since 1993) and rapid urbanisation

🎯 UPSC Relevance: GS2 — federalism and the neglected third tier, the 73rd/74th Amendments, fiscal devolution, urban governance and municipal finance reform.

📝 Prelims Facts:

• The 73rd and 74th Constitutional Amendments gave constitutional status to rural and urban local bodies respectively, coming into effect in 1993

• Urban local bodies generate only about 0.3% of GDP in taxes and spend under 1% of GDP

• The Urban Land Ceiling Act was enacted in 1976

🔑 Key Term: Fiscalisation of land — converting rising urban land values into public revenue (through taxing or selling land) to finance local government services and infrastructure.