Cities, which are empowered with resources, can become effective vehicles for competitive federalism and competitive sub - federalism, according to India's Economic Survey released on Tuesday.
The survey urged the state governments to empower cities to "levy all feasible taxes".
"Competition between states is becoming a powerful dynamic of change and progress, and that dynamic must extend to competition between states and cities and between cities, " the ES said.
"Cities that are entrusted with responsibilities, empowered with resources, and encumbered by accountability can become effective vehicles for competitive federalism and, indeed, competitive sub - federalism to be unleashed, " it added.
The Survey observed that urbanisation will pose considerable challenges for municipalities over the coming decades.
But these challenges have to be overcome.
"The first task is empowering urban local bodies (ULBs) financially.
The analysis shows that municipalities that have generated more resources have been able to deliver more basic services.
The states should, therefore, empower cities to levy all feasible taxes, " the Survey noted.
However, the Survey also dwelt upon the dilemma of respecting sovereignty of the states versus Finance Commissions allocating more resources to ULBs.
"The ULBs need to be empowered but the political economy challenges - - higher level bodies (state governments) needing to cede power and sharing resources - - are daunting.
"The big question here is whether Finance Commissions should take cognizance of this political economy challenge and allocate even more resources to ULBs or whether to respect the sovereignty of states and hope that they will themselves be forthcoming in decentralising down - - fiscally and governance - wise - - commensurate with the needs of urbanisation, " it said.
It said municipalities also "need to make the most of their existing tax bases" and should fully utilise property tax potential to generate additional revenue at the city level.
"There is a need to adopt the latest satellite based techniques to map urban properties.
The government should leverage the Indian Space Research Organisation/National Remote Sensing Agency to assist ULBs in implementing GIS mapping of all properties in the area
of a ULB, " the Survey said.
The Economic Survey also suggested that NITI Aayog should "compile comparative indices of municipalities' performance annually" based on the "actual accountability and administrative capacity" to deliver the core public services.
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