A view of Bengaluru city.
Credit: DH Photo
The 2025-26 Union Budget’s announcement of a Rs 1 lakh-crore investment as part of the Urban Challenge Fund has made headlines. The fund aims to support initiatives to transform cities into growth hubs, promote creative redevelopment of cities and improve water and sanitation. Under this scheme, the government will finance 25% of the project cost, provided that at least 50% of the funding comes from bonds, bank loans, and Public Private Partnerships (PPPs).
While this initiative signals a commitment to urban development, it also places a significant financial burden on urban local bodies (ULBs), many of which already struggle to generate revenue and effectively implement large-scale projects. Past experiences with centrally sponsored schemes like AMRUT and Smart Cities Mission (SCM) have revealed significant institutional and individual capacity gaps within ULBs. The new budget plan could exacerbate these challenges, as it requires these already overburdened local bodies to secure additional funding from external sources, despite their existing limitations in effectively implementing such proposals.
Cities are complex systems that offer both opportunities and challenges, often regarded as sites of trade-offs. While they are the engines of economic growth, they are also sites of concentrated inequality, informality, and ecological risks. Mumbai, for instance, occupies just 0.2% of Maharashtra’s total land area but contributes nearly 50% of the state’s GDP. At the same time, it houses the highest number of ultra-high net worth individuals while approximately 55% of its population lives in slums, highlighting the stark disparities that coexist within urban areas. The United Nations Sustainable Development Goal 11 emphasises the need to make cities inclusive, safe, resilient, and sustainable. However, achieving this goal requires more than just financial injections from the central government; it necessitates a fundamental shift in how urban governance is structured and how institutions are designed to deliver better services and infrastructure.
The principle of subsidiarity states that the decisions and responsibilities should be handled at the most immediate or local level of government that can address them effectively. The 74th Constitutional Amendment Act of 1992 sought to decentralise power and empower ULBs by creating a third tier of government. The Act sought to devolve functions, finances and functionaries to enable local bodies to manage urban issues more effectively. However, many ULBs still lack autonomy and fiscal powers. This is largely due to the federal structure of the constitution, which grants the central government more revenue-raising powers while states and local governments bear the bulk of expenditure responsibilities.
Gaps in institutional capacity
Moreover, the budget expects ULBs to raise around 50% of funds through municipal bonds, bank loans, and PPPs. However, India’s municipal bond market remains underdeveloped, and most ULBs lack the financial expertise and creditworthiness to issue bonds. According to a World Bank report, only a handful of large cities have accessed institutional/bank loans, with cities from only seven states accounting for all municipal bond issuances in India.
The central government’s focus on large infrastructure projects often overlooks critical local infrastructure needs. Data shows that ULBs executed only about one-fifth of the cumulative cost of approved projects under Smart Cities and AMRUT between FY 2015-16 and FY 2020-21.
For example, the total cost of projects approved under these missions is Rs 2.35 lakh crore for Smart Cities and Rs 87,000 crore for AMRUT. But ULBs have only been able to execute 22% of the SCM projects and 18% of the AMRUT projects in their first six years. NITI Aayog’s report on urban planning capacity highlights that despite significant investments, cities still face efficiency and sustainability challenges due to inadequate institutional capacities. While these centrally sponsored schemes have allocated funding for city-level infrastructure, they have not been able to adequately strengthen institutional capacities or implement structural reforms that would help sustainable urban development.
For India to achieve a truly federal urban governance structure, the state and local governments must have the freedom to design their own urban development programmes tailored to their specific contexts. The central and state governments should create enabling environments that encourage private financing while empowering ULBs to take on greater responsibilities in service delivery and providing them with fiscal autonomy to manage these functions. This will help ULBs improve their own-source revenue, improve their creditworthiness and ability to attract private investment. Intergovernmental transfers through centrally sponsored schemes should focus on incrementally strengthening the capacity of state and local institutions and decentralising governance through urban reforms. The question is: Are we ready to rethink how we govern our cities?
(The writer is with Indian Institute for Human Settlements and works in
areas such as urban planning, mobility, and housing)