Policy Update
Deepankshi Agnihotry
Introduction
India is rapidly urbanizing. From 2011 till 2025, the urban population has been growing significantly: from about 377 million people (31.16%) counted in 2011, it is predicted there will be about 542.7 billion people, or 31.08% urban dweller population recorded in 2025.
Growth of urban settlement can be seen by an increase in Census Towns from 3894 in 2011, along with the increase in Urban Agglomerations, where Class I towns (≥100,000 population) increased to 468, and Million-Plus cities, up to 53 as of 2011. Major cities such as the National Capital Region of Delhi and the Greater Mumbai Region are also expanding.
Urbanization is now shifting towards tier 2 and tier 3 cities with these areas developing through deepening real estate and increasing incoming multinational corporations. Rapid spatial expansion and suburbanization has resulted in mushrooming of new census towns in the vicinity of potential urban agglomerations
For creating a long term economic sustainability and potential decentralization for keeping up with the pace of urbanization the Union Government has declared urban development among the six identified areas slated for transforming in the 2025-26 budget. For urban development, around INR 96,777 crore (nearly 1,000 billion) has been earmarked in the budget, which indicates around a 17% hike over last year’s mark.
Urban Challenge Fund
A new category of fund, Urban Challenge Fund has also been launched, under which an allocation of INR 100 billion has been earmarked. This will focus on three thematic areas: transforming cities into growth hubs; creative redevelopment of urban areas; and modernization of water and sanitation within towns and cities. This will finance up to 25% of the cost of viable projects, with the condition that at least 50% of the fund comes from bonds, bank loans, and public-private partnerships (PPPs). By breaking down these key areas,we can better understand how the government plans to approach urban development moving forward.
Fig 1.-Made With Canva
1.Cities as growth hub
A report on “Cities as Engines of Growth” by NITI Aayog and Asian Development Bank(2022) highlights that as India transitions from predominantly rural to an urban society, focus must be on harnessing the economic potential of cities, regardless of their size. This requires addressing certain major areas as highlighted in the report, shown in Fig 2.
Fig 2. “Cities as Engines of Growth” by NITI Aayog and Asian Development Bank(2022)
The report also marked various suggestions for transforming cities as growth engines which can be effectively implemented through the Urban Challenge Fund(UCF), Fig 3.
Fig 3-Made With Canva
2.Creative redevelopment of city
Redevelopment of cities requires fresh, innovative thinking that blends tradition with modern needs. Instead of following a one size fit all approach, urban development should consider climate change, demographic shift, uniqueness of the place and cultural perspective.A perfect example of this is the Kashi Vishwanath corridor, which has not not restored the religious and historical charm of Varanasi but also boosted tourism and local business by integrating heritage with modernity. Also putting the city in forefront through schemes like one district one product is also a condemnable step.
Urban challenge funds can play a key role in this regard . With supporting such projects especially existing urban spaces (brownfield redevelopment) while keeping the historical and ecological essence intact. The fund can support urban renewal that respects the past while paving the way for a sustainable future.
3.Water and sanitation
The government has taken significant steps towards improving this metric of urban development through initiatives like Swachh Bharat Mission and Jal Jeevan Abhiyan. However, challenges like Inefficient sewage systems, overflowing landfills, poor waste segregation and uneven access to clean drinking water continue to affect urban sustainability.
Here Urban Challenge Fund can play a crucial role by addressing these bottlenecks through empowering the local self government with resources and flexibility to implement city specific solution such as-
- Upgrading sewage and wastewater treatment
- Sustainable waste management by promoting waste to energy plants , composing and smart garbage segregation.
- Expanding clean water access by investing more on rainwater harvesting methods, smart water grids and other innovative projects
- Promoting a circular economy by encouraging reuse and recycling of materials to reduce waste generation.
Issues
Urban Challenge Fund no doubt is going to be a critical stride towards decentralized governance providing more financial autonomy to local governments, a longstanding recommendation of various committees and commissions including the 2nd ARC report on local governance. However, it is not the remedy for all urban development issues.
One of the major concerns lies in the fund structure and the financial capacity of the Indian cities to leverage market-based instruments, which is a primary pre-requirement for utilization of these funds. Out of 470 municipal corporations, only 36 cities hold an investment-grade credit rating; therefore, raising the funds becomes immensely challenging.
The experience of the Smart Cities Mission (SCM) presents some of similar challenges. While SCM asked for public-private partnerships (PPP) for urban projects, private participation attracted very little interest. Similarly, attempts to raise municipal bonds under SCM have had little success: only six cities have been able to raise funds under this route.
Besides, such focus on bankable projects makes it tougher for the fund to be optimally used in Tier 2 and Tier 3 cities, where such type of financial instruments is actually needed for sustainable urban growth.
Another persistent challenge is fund utilization. For instance, the Swachh Bharat Mission (SBM) had a budget estimate of ₹5,000 crore for 2024–2025; however, the revised estimate decreased drastically to ₹2,159 crore. Similarly, trend analysis shows a tendency of considerable underutilization of funds, even though AMRUT was given ₹10,000 crore in the 2025–26 Budget Estimate (BE), a 25% increase from the previous year.
Way forward
National urban policy framework envisions.‘urban areas with distinct identity providing ease of living, responsive governance, sustainable environment, rapid economic growth and livelihood opportunities for citizens’.By encouraging inclusive, resilient, and sustainable cities, the Urban Challenge Fund is a crucial step in accomplishing SDG-11 and fulfilling the vision of the national policy. It allows local governments to break free from the Iron Cage of bureaucracy by giving them an option to think creatively and independently.
For proper implementation of the fund certain conditions must be taken into account-
- A “One size fits all “approach should be avoided.The funding model must distinguish between Tier1, Tier2 and tTer3 cities, so that each receives targeted support according to their unique urban needs.
- The fund can be further strengthened by promoting pooled municipal bonds(like the US model), performance linked grants( EU-style), or a Municipal Credit Enhancement Facility model to improve creditworthiness and attract private investments.
- Execution can be advanced through knowledge-sharing platforms and local government capacity building.
For the Urban Challenge Fund (UCF) to truly drive change, it must go beyond financing projects and push for deeper governance reforms. This means using smart technology in municipal systems, ensuring transparency in land use, and adopting innovative, flexible funding models that can evolve with urban needs.
Real impact will come from collaboration—between governments, businesses, and global partners—and by addressing the lack of capacity in smaller cities. UCF should invest not just in infrastructure, but in people, through structured training for municipal officials in finance, planning, and sustainability.
By focusing on both systems and people, UCF can help shape cities that are inclusive, resilient, and ready for the future.
References
- Amitabh Kant. (n.d.). Urbanization as a driver of jobs and growth. Link
- Government of India. (2021). Urban planning capacity in India. NITI Aayog. Link
- Government of India. (2022). Modern CEO governance: Executive summary. NITI Aayog. Link
- Indian Institute of Corporate Affairs. (2020). National urban policy framework (NUPF). Link
- Ministry of Housing and Urban Affairs. (2025). Greater budget allocations for urban development. ORF. Link
- National Institute of Urban Affairs. (n.d.). Urban governance and planning. Link
- Observer Research Foundation. (2025). Revitalizing Indian cities. Link
- Press Information Bureau. (2025). Government’s urban development initiatives. Link
About the Contributor
Deepankshi Agnihotry is a research intern at IMPRI and holds a postgraduate degree in Electronics, is curious and passionate about sustainability and impactful policy solutions.
Acknowledgement
The author would like to express sincere gratitude to Dr Arjun Kumar, Dr Vaishali Singh, Ms Aasthaba Jadeja, Mr Shivchaitanya Mahajan and the IMPRI team for giving the opportunity for writing the article.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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