In states like Maharashtra, TN etc the towns having similar urbanization are municipalities. And then there are Nagar Panchayats (in Maharashtra) and Town Panchayats in TN. Most of the panchayats in TN or Maharashtra have an area of 2-10 sq km.Riva, I think it may not be ideal to elevate most panchayaths to municipal status unless it is imperative and they feel they cannot survive without miniicipal status. Let there be a special fund for those panchayaths that can be considered as town panchayaths rather than having municipal towns every 5Kms.
In Kerala there are many panchayats having area 100-700 sq km. Such panchayats should be divided into 3-7. Some examples of such panchayats are Kuttampuzha, Ayyampuzha (Ernakulam), Athirapally, Kodassery (Thrissur), Nelliyampathy (Palakkad), Seethathode, Thannithode, Aruvappulam, Vadasserikkara (Pathanamthitta), Kulathuppuzha, Thenmala, Aryankavu Kollam), Peringammala (TVM), Munnar, Devikulam, Kumily, Vandiperiyar, Adimali (Idukki), Chakkittappara (Kozhikode).
The most of the panchayats I mentioned here are more urbanized than municipalities like Anthoor, Sreekandapuram, Sulthan Bathery, Mananthavady, etc.