AMRUT 2.0 Reforms: Linking Urban Infrastructure Funding with Municipal Performance: The Potential of Performance-Based Financing to Transform Urban Governance in India

Policy Update
Tanvi Nerurkar

Introduction

India’s rapid urbanisation is reshaping its economy and governance landscape. According to the 2011 Census, around 31% of the population lived in urban areas, contributing over 60% of the country’s GDP. NITI Aayog (2021) and the United Nations Department of Economic and Social Affairs (2019; updated 2024) project that nearly 40% of Indians will reside in cities by 2036, with urban areas expected to contribute almost 75% of GDP (World Bank, 2022). This growing urban footprint demands stronger municipal institutions capable of delivering reliable infrastructure and services.

However, urban growth has outpaced the financial and institutional capacity of Urban Local Bodies (ULBs). Municipal corporations generate revenues equivalent to only 0.6% of GDP, while property tax collections remain at just 0.12–0.15% of GDP, far below OECD averages. Municipalities continue to rely heavily on intergovernmental transfers, and municipal borrowing remains negligible (RBI, 2022, 2024). Evaluations of programmes such as JNNURM, the Smart Cities Mission, and AMRUT 1.0 found that although infrastructure expanded, weak finances, limited technical capacity, and inadequate governance constrained the operation and maintenance of assets.

Recognising these shortcomings, the MoHUA launched AMRUT 2.0 in October 2021. Unlike its predecessor, the mission links central funding with reforms in property taxation, user charges, municipal accounting, digital governance, and service performance, signalling a shift from financing infrastructure alone to strengthening municipal institutions.

Against this backdrop, this article examines whether AMRUT 2.0 has fundamentally transformed urban infrastructure financing by making municipal reform and performance prerequisites for funding, or whether persistent fiscal and institutional constraints continue to limit its potential to improve urban governance.

Background: AMRUT 2.0 at a Glance

AMRUT 2.0 covers all statutory towns in India and carries a total indicative outlay of ₹2,99,000 crore over five years (2021–22 to 2025–26), including a central share of ₹76,760 crore (MoHUA, 2021; PIB, 2024). Implementation has progressed substantially but remains incomplete. As of November 2024, projects worth ₹1,89,458.55 crore had been approved under the Mission. Of the ₹66,750 crore of central assistance earmarked for projects, ₹63,976.77 crore (about 96%) had been approved to States and Union Territories, while only ₹11,756.13 crore had actually been released.

States reported utilisation of ₹6,539.45 crore of the central share, with cumulative expenditure of ₹17,089 crore (including State contributions), and projects worth ₹23,016.30 crore had been physically completed. These figures indicate that although project approvals have advanced rapidly, fund disbursement and on-ground execution continue to lag behind approvals, underscoring the importance of strengthening implementation capacity alongside reform incentives.

Table 1. Sources: MoHUA (2021), AMRUT 2.0 Operational Guidelines; PIB (2024).

Rather than treating these targets solely as engineering objectives, the guidelines articulate a broader aim. Cities are expected to become “self-reliant” and “water-secure” by both developing physical assets and strengthening municipal institutions to ensure sustained service delivery beyond the funding period (MoHUA, 2021).

Functioning: The Reform-Based Funding Model 

The most significant innovation in AMRUT 2.0 is its shift from project-based to reform-linked funding, directly addressing whether urban infrastructure financing can incentivise stronger municipal governance. While AMRUT 1.0 included a reform agenda, fund releases were largely tied to project sanction and physical progress. In contrast, AMRUT 2.0 embeds reform compliance within its funding mechanism.

Central Assistance is released in a 20:40:40 sequence: 20% on project sanction, 40% on physical progress and reform initiation, and the final 40% only after Urban Local Bodies meet key reform milestones, particularly on property tax and user charges (MoHUA, 2021; PIB, 2021). Thus, continued funding depends not only on project execution but also on demonstrable improvements in municipal fiscal governance, marking a clear shift towards performance-based urban financing.

Figure 1. AMRUT 2.0’s 20:40:40 funding structure links the release of the final 40% of Central Assistance to demonstrate compliance with municipal reforms, particularly property tax and user-charge reforms, thereby shifting urban infrastructure financing from project-based disbursement to performance-based governance. 

Municipal Finance Reforms

Since water and sewerage systems require ongoing maintenance, AMRUT 2.0 focuses on ensuring costs are recovered. Reforms include updating property tax using GIS surveys, adjusting user charges to cover costs, switching to double-entry accounting, publishing audited annual accounts, and improving municipal credit ratings for borrowing (MoHUA, 2021).

These reforms echo the conditions attached by the 15th Finance Commission (2021–26), which made local-body grants to million-plus cities fully conditional, and grants to smaller ULBs half-conditional, on notifying minimum property-tax floor rates and thereafter growing collections in line with state GSDP growth (15th Finance Commission, 2021; PRS, 2022).

Property Tax and User Charge Reform

Property tax remains India’s most under-exploited municipal revenue instrument. A Janaagraha analysis covering 3,895 ULBs (81% of all ULBs) found that against a total property-tax demand of roughly ₹6,993 crore in 2022–23, only about ₹3,666 crore, just over half, was collected, and the growth in collections has since plateaued (16th Finance Commission, 2026).

The consequence is visible in Finance Commission compliance data: the number of states able to satisfy the mandatory property-tax growth condition for local-body grants fell from 22 in 2023–24 to just 16 in 2024–25, with most of the shortfall concentrated among smaller cities (16th Finance Commission, 2026).

Figure 2. A shrinking, not growing, number of states are meeting reform conditions attached to Finance Commission grants, a caution against assuming reform-linked funding is self-sustaining 

Digital Governance and Municipal Modernisation

AMRUT 2.0 dovetails with the National Urban Digital Mission (NUDM), encouraging GIS-based asset mapping, online building approvals, digital grievance redressal, integrated municipal financial management systems and real-time water accounting. Cities such as Indore have paired GIS-based property surveys (the ‘Naksha’ project) with digital payment adoption, crossing ₹1,000 crore in municipal tax collection for the first time in FY 2024-25, a 27.5% year-on-year increase (Times of India 2025).

Service Level Benchmarks (SLBs)

MoHUA’s Service Level Benchmarks shift the unit of assessment from completed projects to delivered services: household water coverage, continuity of supply, Non-Revenue Water (NRW), sewerage coverage, wastewater treatment and reuse, water quality compliance, and grievance redressal. The explicit AMRUT 2.0 reform targets include reducing NRW below 20% and recycling treated water to meet at least 20% of a city’s total water demand (40% for industrial demand at the state level) (MoHUA, 2021).

Municipal Performance as a Funding Criterion

What, in practice, does “good performance” mean under AMRUT 2.0? The framework assesses ULBs across four broad dimensions.

Table 2. Compiled from MoHUA Service Level Benchmarks and AMRUT 2.0 Operational Guidelines (2021); RBI (2022, 2024). 

RBI data show why financial performance is so important. Municipalities with higher own-source revenues are more financially stable. The ten largest municipal corporations collect more than half of all municipal revenue in India, which means most Urban Local Bodies remain financially weak (RBI, 2024).

Figure 3. India’s municipal revenue base is only about one-tenth the size of Brazil’s or South Africa’s when compared to GDP. This is a major structural challenge for reform-linked funding.

Emerging Issues Limiting Transformative Potential

The reform-linked model faces several structural constraints that limit the effectiveness of funding conditionality as a standalone strategy, and these limitations are further complicated by the interplay of local political contexts, competing administrative priorities, and uneven implementation across states. While conditional funding can incentivise reforms in environments with adequate fiscal and administrative capacity, it may also exacerbate disparities by accrediting cities unable to meet compliance thresholds due to factors beyond their control, raising important questions about the policy’s inclusiveness and long-term sustainability.

• Persistent fiscal weakness: With property tax collection efficiency below 55% nationally and own tax revenue under a third of total receipts, many ULBs cannot meet reform milestones within mission timelines (16th Finance Commission, 2026; RBI, 2022).
• Institutional capacity gaps: Shortages of engineers, urban planners, GIS specialists and financial staff are acute in smaller ULBs, which are precisely the cities least able to absorb reform-linked conditions.
• Uneven state-level implementation: Because ULBs function under state legislation, the pace and depth of reform vary widely; some states have taken away municipalities’ own powers to fix property tax rates, undercutting the very autonomy reforms assume (CWAS, 2022).
• Declining compliance trend: The fall in states meeting the Finance Commission’s property-tax growth condition, from 22 to 16 between 2023-24 and 2024-25, suggests reform fatigue rather than momentum, particularly among non-million-plus cities (16th Finance Commission, 2026)
• Digital and data-quality gaps: GIS mapping and online accounting depend on data standards and connectivity that remain inconsistent across ULBs, risking unreliable performance assessments.
• Risk of indicator-driven governance: Cities may optimise for measurable, reportable metrics (connections given, tax notices issued) rather than the harder, longer-term work of maintenance, inclusive planning and citizen engagement.

Case Studies: Emerging Reform Experience

National comparisons

Table 3. Compiled from MoHUA press releases, Asia Pathways (2018), and IJNRD (2023).

International Comparisons

Performance-linked municipal financing is not unique to India. Singapore, Australia, and the United Kingdom are used as benchmark examples of mature performance-based funding systems, although countries such as Brazil and South Africa share institutional contexts closer to India. Singapore integrates long-term infrastructure planning with digital performance monitoring, while Australia and the UK link intergovernmental transfers to measurable service outcomes, financial management, and accountability.

However, these models operate under conditions that differ significantly from India’s. Singapore’s centralised governance, and the greater fiscal autonomy enjoyed by Australian and UK local governments, contrast with India’s federal structure, uneven municipal capacity, and limited own-source revenues. Consequently, while these experiences offer valuable design lessons, their effectiveness depends on institutional conditions not yet fully present in India. Across all three countries, performance-based funding succeeds because it is supported by fiscal autonomy, independent oversight, and sustained capacity building—areas where Indian Urban Local Bodies continue to face significant constraints.

Way Forward: Policy Recommendations

• Deepen fiscal decentralisation: Expand ULB taxation powers, protect their authority to set property tax rates, and use GIS-based valuation to widen the tax base without over-burdening compliant taxpayers.
• Institutionalise capacity building: Build dedicated municipal cadres in finance, urban planning, GIS and project management, rather than relying on mission-period consultants.
• Introduce independent performance audits: Third-party evaluation of both quantitative outcomes and governance quality can reduce incentives for data manipulation and box-ticking compliance.
• Expand open municipal data and public dashboards: Transparent, city-level SLB reporting can convert performance monitoring into a citizen accountability tool, not just a funding gate.
• Adopt outcome-based municipal budgeting: Link ULB expenditure planning to service outcomes rather than input targets, drawing on the Australian model.
• Calibrate conditionality to capacity: Reform milestones should be differentiated between million-plus cities and smaller ULBs, given the sharp decline in compliance among smaller cities under the 15th Finance Commission’s uniform conditions.
• Incentivise innovation: Allow municipalities to pilot new financing instruments, technologies and citizen-engagement mechanisms, with successful models shared and scaled across states.

Thus, AMRUT 2.0 moves beyond infrastructure creation by linking funding to reforms such as property tax, user charges, digital governance, and service benchmarks, signalling a shift towards institutional strengthening.

References & Bibliography

NITI Aayog. (2021). Reforms in Urban Planning Capacity in India. Government of India. https://www.niti.gov.in/sites/default/files/2021-09/UrbanPlanningCapacity-in-India-16092021.pdf 

United Nations, Department of Economic and Social Affairs (UN DESA). (2024). World Urbanization Prospects 2024. https://population.un.org/wup/ 

Centre for Water and Sanitation. (2022). Strengthening municipal property tax. CRDF, CEPT University.

Fifteenth Finance Commission. (2021). Report of the Fifteenth Finance Commission for 2021–26. Government of India. https://fincomindia.nic.in/

Grokipedia. (2026). Indore Municipal Corporation. https://grokipedia.com/page/Indore_Municipal_Corporation

Gulzar, N. (2024). Addressing the low baseline of property tax revenues of Indian cities. Urbanomics. https://gulzar05.blogspot.com/

International Journal of Novel Research and Development. (2023). Assessing the credit risk of municipal bonds in India (Vol. 8, Issue 4). https://www.ijnrd.org/

Kumar, K., Kalaskar, U., Mandwale, K., & Thakur, P. (2018). Pune’s pathbreaking success in the municipal bond market: A case study. Pune Municipal Corporation.

Ministry of Housing and Urban Affairs. (2021). Atal Mission for Rejuvenation and Urban Transformation (AMRUT) 2.0: Operational guidelines. Government of India. https://amrut.mohua.gov.in/uploads/AMRUT_2.0_Operational_Guidelines.pdf

Ministry of Housing and Urban Affairs. (2023). Gender equality and social inclusion (GESI) guidelines for AMRUT 2.0. Government of India. https://mohua.gov.in/

NITI Aayog. (n.d.). Reports on urbanisation in India. Government of India. https://www.niti.gov.in/

Press Information Bureau. (2021, October 27). The Urban Affairs Ministry launches operational guidelines for SBM-U 2.0 and AMRUT 2.0. Government of India. https://pib.gov.in/PressReleasePage.aspx?PRID=1767727

Press Information Bureau. (2024). AMRUT 2.0: Progress update. Ministry of Housing and Urban Affairs, Government of India. https://pib.gov.in/

PRS Legislative Research. (2022). Report summary: Fifteenth Finance Commission for 2021–26. https://prsindia.org/policy/report-summaries/report-15th-finance-commission-2021-26

Reserve Bank of India. (2022). Report on municipal finances. https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1218

Reserve Bank of India. (2024). Report on municipal finances. https://www.rbi.org.in/

Sixteenth Finance Commission. (2026). Report of the Sixteenth Finance Commission for 2026–31 (Vol. I: Main report). Government of India. https://16financecommission.gov.in/

Times of India. (2025, March 27). The IDA budget focuses on infrastructure, comprehensive growth. https://timesofindia.indiatimes.com/city/indore/ida-budget-focuses-on-infrastructure-comprehensive-growth/articleshow/119553429.cms 

The Asia Pathways. (2018). Municipal bonds: Innovative mechanisms to finance smart cities in India. Asian Development Bank Institute. https://www.asiapathways-adbi.org/2018/02/municipal-bonds-innovative-mechanisms-to-finance-smart-cities-in-india/

About the Contributor

Tanvi Nerurkar is currently working as a Research & Editorial Intern at IMPRI. She holds a Bachelor’s degree in Architecture from VESCOA, University of Mumbai. She is presently pursuing a Master’s in Urban Management at CEPT University, where she explores cities through research-driven policy approaches, adaptive governance frameworks, and sustainable development initiatives. Her objective is to contribute implementation-oriented policy research that supports the efficient functioning of cities and creates meaningful value for society at large.

Acknowledgement 

The author extends her sincere gratitude to the IMPRI team for their invaluable guidance throughout the process.

Reviewers: Sruti Halder and Madhuritha D

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

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