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UPSC MainsGeneral Studies Paper IIGovernancePractice question

Parastatals, SPVs and the 74th Amendment Mandate

"The proliferation of parastatal agencies, development authorities and special purpose vehicles in Indian cities has hollowed out the mandate of 74th Constitutional Amendment Act". Comment.

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Introduce the mandate of the 74th Constitutional Amendment Act (1992) regarding urban local self-government. Analyse how parastatals, development authorities, and SPVs undermine ULBs functionally, institutionally, and financially. Conclude with structural reforms suggested by the Second Administrative Reforms Commission (2nd ARC).

Model answer

386 words

Introduction

The 74th Constitutional Amendment Act, 1992 introduced Part IXA into the Constitution, envisioning Urban Local Bodies (ULBs) as vibrant, autonomous institutions of local self-government under Article 243W. However, the uncontrolled proliferation of unelected parastatal agencies, single-purpose development authorities, and Special Purpose Vehicles (SPVs) has systematically eroded this constitutional mandate by centralising authority in bureaucratic hands.

Mechanisms of Evolving Institutional Hollowing

The proliferation of state-controlled entities has displaced democratically elected municipalities through several channels:

  • Functional Usurpation of the Twelfth Schedule: Core functions assigned under the Twelfth Schedule—such as town planning, regulation of land use, roads, and water supply—are monopolised by state-level parastatals like Delhi Development Authority (DDA), Bangalore Development Authority (BDA), and state Jal Boards, reducing elected municipalities to mere sanitary contractors.
  • Subversion of Constitutional Planning Architecture: Articles 243ZD and 243ZE mandated the establishment of District Planning Committees (DPCs) and Metropolitan Planning Committees (MPCs) to consolidate spatial and developmental plans. In practice, these bodies remain largely defunct or paper entities, supplanted by state-controlled executive bodies like the Mumbai Metropolitan Region Development Authority (MMRDA).
  • Technocratic Centralisation via SPVs: Under initiatives like the Smart Cities Mission, projects are executed through Special Purpose Vehicles (SPVs) incorporated under the Companies Act, 2013. These SPVs concentrate operational and financial decision-making in state-appointed bureaucrats and private consultants, bypassing municipal councils and nullifying local democratic accountability.
  • Fiscal Deprivation and Revenue Capture: High-yield non-tax revenue sources—such as floor area ratio (FAR) charges, betterment levies, and land monetisation proceeds—are appropriated by parastatal development authorities, leaving ULBs severely underfunded and reliant on conditional state transfers.

Way Forward

To realise the genuine intent of democratic decentralisation, institutional realignment is vital:

  • Subordination to Elected Councils: As recommended by the 2nd Administrative Reforms Commission (ARC), parastatals and SPVs must function as executing arms subordinate to elected municipal corporations rather than parallel power centres.
  • Operationalisation of MPCs and DPCs: State governments must notify and devolve statutory planning powers to functional Metropolitan and District Planning Committees.
  • Empowered Mayor-in-Council System: Implementing a directly elected mayor with a cabinet-style executive council and a fixed tenure will provide the political leadership necessary to oversee city-wide administration.

Conclusion

Realising the vision of the 74th Amendment requires moving away from technocratic bypassing towards genuine democratic subsidiarity. Integrating parastatals under elected local leadership and strengthening urban municipal finance are essential prerequisites for transforming Indian cities into responsive, self-governing entities.

Key facts to remember

definition
Parastatal Agency

A state-owned or state-controlled enterprise, board, or authority operating outside the formal municipal hierarchy, created by state legislation to perform specific urban governance functions such as water supply, housing, or transport.

scheme
74th Constitutional Amendment Act, 1992

Inserted Part IXA and the Twelfth Schedule into the Indian Constitution to decentralise power, empower Urban Local Bodies, and establish mandatory Metropolitan and District Planning Committees.

example
Smart Cities Mission Special Purpose Vehicles

SPVs established under the Companies Act 2013 for the Smart Cities Mission transferred municipal executive and financial powers to state-appointed CEOs, effectively operating parallel to elected municipal councils.

Frequently asked questions

How do Special Purpose Vehicles (SPVs) affect urban local democracy?

SPVs function as corporate entities headed by bureaucrats and corporate nominees, bypassing municipal council debates and accountability to elected ward councillors, thereby diluting the principle of local self-government.

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