The Kerala government is in the process of sorting out an urban-rural mismatch in fund allocation recommended by the 16th Union Finance Commission (UFC) which has left rural local governments in Kerala with disproportionately lesser funds, Chief Minister V.D. Satheesan has said.

The State government has contacted the Centre to point out a flaw in the 16th Finance Commission’s definition of rural and urban areas in Kerala which has led to this issue, Mr. Satheesan said on Wednesday after the weekly Cabinet meeting. The 16th Union Finance Commission, headed by Arvind Panagariya, had assessed the Census Towns in the State as urban areas, whereas, in reality, many of them were panchayats.

“This has left urban areas with more funds, whereas many of the Census Towns on the urban list are under panchayats. Central funds have one problem in that they are tied funds and come with many conditions,” the Chief Minister said, indicating that they cannot be re-routed arbitrarily to the rural areas.

The urban-rural allocation mismatch was first flagged by the 7th State Finance Commission (SFC) headed by K.N. Harilal in early June. The SFC, in a Supplementary Report for 2026-27 submitted to Governor Rajendra Arlekar, had warned that the situation may necessitate a total overhaul of the local body plans.

In its report, the SFC drew attention to the UFC’s split-up of local government grants between rural and urban local bodies on the basis of population projections for 2026.

It showed a marked increase in the share of grants earmarked for the urban sector and a corresponding sharp decline in the case of the rural sector. Urban sector allocation had shot up from 39.92% under the 15th UFC to 83.45% under the 16th. On the other hand, the share of rural sector recorded a sharp fall from 60.07% to 16.55%.

Published - July 29, 2026 07:33 pm IST