Urbanisation in India is progressing at an unprecedented pace, creating an urgent need to address the challenges that accompany it. The cities are growing, infrastructure is inadequate, and public services are under immense stress. At the heart of these challenges lies an elite-influenced urban growth pattern, represented by the disproportionate expansion of larger cities compared to the small cities and towns.

This also leads to over-congestion and strained resources for overall urban development. Addressing this issue necessitates a closer look at our urban development strategies, with a particular focus on small and medium towns and cities wherein fiscal decentralisation is also significant. Here, it is important to shed light on the imperative of recalibrating our approach to urban development, emphasizing the potential of smaller urban centres in fostering balanced growth and sustainable futures.

The current urban landscape is of stark imbalance. Larger cities, home to millions, are growing at an exponential rate, attracting a huge pool of poor migrants in search of better economic opportunities. For the past few decades, the population in class I cities has been consistently increasing, intensifying the pressure on these urban agglomerations. On the flip side, smaller towns, and cities, despite housing nearly 43 per cent of the urban population, remain underlooked in terms of investment and development.

This top-heavy growth pattern not only misses the challenges faced by larger cities but also limits the potential for small and medium size urban centres to contribute to the country’s economic growth and sustainability. Fiscal decentralisation stands out as a crucial strategy in addressing the challenges posed by rapid urbanisation. At its core, fiscal decentralisation empowers local governments with the authority and resources to make decisions and raise revenue locally.

Transferring financial powers, functions, and resources from the central and state government to the local bodies can empower small and medium sized towns and cities, enable them to attract greater investment, create jobs, and support balanced regional growth. This can further allow smaller urban units to address their specific needs and experiment with innovative approaches and solutions tailored to their priorities.

The shift is vital in alleviating the mounting pressure on larger cities, and ensuring sustainable urban development even outside them. However, the journey towards effective fiscal decentralisation is riddled with challenges. Smaller towns and cities often suffer from limited financial autonomy, outdated revenue-generating mechanisms, and a lack of administrative as well as human capacities.

A report by the World Bank in 2019 highlighted that many small and medium-sized urban centres in India face issues related to inadequate service delivery, and infrastructural deficit. For instance, property tax, which is a significant source of revenue for local bodies, is under-utilised in smaller towns, contributing to just 0.2 per cent of India’s GDP, compared to the global average of around 0.6 per cent. Furthermore, these urban centres often have limited access to capital markets, which restricts their ability to raise funds independently.

A multi-faceted strategy is essential to overcome these challenges. It is also to be noted that while GST is collected across the country, the share of the same is going only to two of the tiers of government, leaving out all local bodies from this revenue stream. Investing in infrastructure and service delivery emerges as a primary area of focus. Small and medium towns and cities require substantial financial support to enhance their quality of life and economic vitality.

This is where fiscal decentralisation steps in, ensuring that these towns and cities receive adequate financial support from higher levels of government. Revising tax systems, exploring alternative financing options, and investing in capacity-building initiatives and institutions are crucial steps in this direction. Additionally, promoting transparency and accountability in fiscal management is imperative.

Implementing robust financial management systems, conducting regular audits, and engaging citizens in the decisionmaking and accountability process can ensure that funds are utilised effectively, fostering trust and participation among the local population. The central and state governments have to play a pivotal role in driving fiscal decentralisation, acting as regulators and facilitators. Providing the necessary policy framework, legal support, and financial assistance and provisions for adequate human resources are vital to empower local bodies to take charge of their development trajectories.

Engaging the private sector through private-public partnerships, particularly in a subsidised model, can also help bridge funding gaps and spur economic growth in smaller urban centres. Leveraging private investment in a respected as well as a regulated manner will not only enhance the financial capabilities of these towns and cities but also drive innovation and efficiency in public service delivery, although an additional task of minimising the conflict of interest arises here. As we observed World Cities Day on October 31, with a focus on ‘financing a sustainable urban future for all’, it becomes imperative to reflect on our urban development strategies.

This emphasis aligns seamlessly with the aspiration of achieving Sustainable Development Goals having a particular focus on inclusivity and matches well with the recent attention on ‘financing the cities of tomorrow’ during the recent G20 summit held in the country. Fiscal decentralisation, combined with systematic urban planning focusing on neglected urban settings, appears central to achieving inclusive and sustainable urban growth.

Engaging all stakeholders, from government bodies to local communities, in the urban development process is crucial for fostering collaborative and effective city management and planning. Fiscal decentralisation as told earlier, emerges as a critical tool in addressing the challenges of rapid urbanisation in India. It is not just a technical policy term but represents a transformative force that can directly impact the capacity of these neglected urban areas to gain prosperity.

By providing them with the necessary resources and autonomy, fiscal decentralisation can empower these towns and cities to become selfreliant contributors to regional development, and tap into their economic potential. While finding the right balance between the central and local control remains a complex task, the time to act is now, and a collaborative, transparent, and inclusive approach stands as the key to unlocking a sustainable urban future for India.

(The writer is Policy Analyst, Centre for Budget and Governance Accountability, New Delhi. The views expressed are personal.)