Why in the News?

The 2025 Budget has set up a ₹1 lakh crore Urban Challenge Fund to help cities grow and develop.

What was the allocation for urban India?

• Increased Allocation but Underutilization: The Housing and Urban Affairs Ministry received ₹96,777 crore for FY 2025-26, a 17% increase from the previous year. However, the Revised Estimate for 2024-25 stood at ₹63,669.93 crore, indicating significant underutilization of funds.
• Urban Challenge Fund and PMAY Focus: A ₹1 lakh crore Urban Challenge Fund has been proposed for city redevelopment and water & sanitation projects, with ₹10,000 crore allocated for FY 2025-26. Additionally, ₹78,126 crore has been allocated to both rural and urban PMAY for housing development.
• Support for Urban Workers and Street Vendors: The government aims to uplift urban workers through PM SVANidhi, which has benefited 68 lakh street vendors. The scheme will be revamped with enhanced bank loans, UPI-linked credit cards (₹30,000 limit), and capacity-building support to reduce reliance on informal sector loans.

How has the reduction happened?

• Decline in Direct Transfers to Urban Local Bodies (ULBs): With the abolition of octroi and the implementation of GST, ULBs lost a key revenue source, expecting compensation through central devolution. However, the central share for ULBs declined from ₹26,653 crore (last year) to ₹26,158 crore in 2025-26, increasing financial pressure on local bodies.
• Cuts in Key Centrally Sponsored Schemes (CSS):
  • PMAY (Urban) faced a drastic cut, with its allocation reduced from ₹30,170.61 crore to ₹13,670 crore in the Revised Estimate (RE) for 2024-25.
  • AMRUT and Smart Cities Mission allocations fell below ₹10,400 crore, with almost no new funds for the Smart Cities Mission.
  • Swachh Bharat Mission (Urban) retained ₹5,000 crore, but RE shows only ₹2,159 crore was spent—a 56% underutilization.
• Shift in Priorities Toward Capital-Intensive Metro Projects: While many urban development schemes saw cuts, metro rail projects received increased funding.
  • Metro projects’ allocation rose from ₹21,335.98 crore to ₹24,691.47 crore in RE (2024-25) and is further proposed to increase by 46% to ₹31,239.28 crore in 2025-26.
  • This shift prioritizes large infrastructure over comprehensive urban mobility, employment generation, and local governance funding.

Does the Union Budget focus on capital-intensive projects? 

• Priority to Large Infrastructure Projects: The budget significantly increases funding for metro rail projects (₹31,239.28 crore, up 46%), while allocations for urban schemes like PMAY (Urban), AMRUT, and Smart Cities Mission have been reduced or underutilized.
• Reliance on Private Investment for Urban Development: The ₹1 lakh crore Urban Challenge Fund requires 50% private sector participation, which may slow implementation, shifting focus from government-driven urban welfare programs to capital-intensive projects.

What next?

• Urban Challenge Fund Implementation Risks: The government has introduced a ₹1 lakh crore Urban Challenge Fund, but 50% of the funding is expected from private investments.
  • Given the limited private sector participation in past urban initiatives like the Smart Cities Mission, relying on private funding could slow implementation.
• Balancing Infrastructure with Livability and Sustainability: The budget favors metro expansion but lacks a broader focus on comprehensive urban mobility, employment generation, and sustainable urban planning.
  • Future policies must integrate green jobs, affordable housing, and local governance empowerment to create more inclusive cities.
• Strengthening Financial Autonomy for Urban Local Bodies (ULBs): The decline in direct transfers and devolution post-GST has weakened ULB finances, forcing cities to raise taxes or cut essential services.
  • Strengthening municipal revenue sources, revising property tax frameworks, and ensuring timely fund disbursal can help cities plan better for growth.

Conclusion: Need to Strengthen municipal revenue sources through property tax reforms, land monetization, and timely fund transfers, reducing dependency on central allocations. The government should ensure equitable investment in metro expansion, affordable housing, sanitation, and employment generation, fostering livable, sustainable, and inclusive urban growth.

Mains PYQ:

Q What are ‘Smart Cities’? examine their relevance for urban development in India. Will it increase rural-urban differences? Give arguments for ‘Smart Villages’ in the light of PURA and RURBAN Mission. (UPSC IAS/2018)

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