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— Jacob Baby
(The Indian Express has launched a new series of articles for UPSC aspirants written by seasoned writers and scholars on issues and concepts spanning History, Polity, International Relations, Art, Culture and Heritage, Environment, Geography, Science and Technology, and so on. Read and reflect with subject experts and boost your chance of cracking the much-coveted UPSC CSE. In the following article, Jacob Baby, an urban planner with experience in teaching and research, analyses how the budget aims to strengthen Indian cities as engines of economic growth.)
The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, emphasised urban development as one of the six domains for transformative reforms. This renewed focus on urban areas in the budget points to the government’s commitment to empowering cities as a vital component of India’s economic and social development.
Let’s unpack what the budget means for urban areas and how urban local bodies (ULBs) finance urban infrastructure projects in Indian cities.
In the 2025-26 budget, the Ministry of Housing and Urban Affairs (MoHUA), the nodal ministry at the union level for housing and urban affairs, has been allocated Rs. 96,777 crore, accounting for 1.91% of the total estimated expenditure.
In recent years, budgetary allocation for urban development has seen a steady rise — from 50,000 crore in 2021 to 79,000 crore in 2024 and 96,777 crore in 2025. This steady increase in budgetary allocation is remarkable as it provides much impetus for urban development.
Several key schemes, such as Pradhan Mantri Awas Yojana (PMAY-Urban), which focuses on affordable urban housing; the Smart Cities Mission, which focuses on creating smart cities; and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), which focuses on water and sanitation infrastructure, are recipients of these budgetary allocations.
In recent years, allocations have also gone to urban transport projects, particularly Metro rail and Mass Rapid Transit projects, with the objective of transitioning to sustainable mobility. Moreover, to boost incomes for the urban poor, a revamp of the Prime Minister Street Vendors AtmaNirbhar Nidhi (PM SVANidhi) – the scheme that focuses on improving street vendor livelihoods by providing them with low-cost loans and interest subsidies – was also announced.
The budget also introduced the establishment of an “Urban Challenge Fund” that will mobilise Rs. 1 lakh crore to transform cities. Under this fund, proposals shall be evaluated along three categories: “Cities as growth hubs, creative redevelopment of cities, and water and sanitation projects.” The fund will finance up to 25% of the cost of bankable projects, with a stipulation that at least 50% of the project cost is sourced from bonds, bank loans, or Public-Private Partnerships (PPPs).
The fund aligns closely with the flagship missions of the Ministry, such as Smart Cities and AMRUT, and focuses on promoting innovative urban redevelopment projects and improving urban infrastructure in major cities.
Through the Urban Challenge Fund, the budget also points to a creative partnership between Urban Local Bodies and private enterprises to participate in urban development projects. A similar framework was also explored in the Smart Cities Mission, wherein private enterprises were invited to partially finance citywide or area-specific projects.
Structuring the Urban Challenge Fund to include private enterprise participation is a signal to empower and improve the financial autonomy and capacities of Urban Local Bodies to raise their own sources of finance to fund urban development projects. As the analysis by PRS Legislative Research points out, the majority of ULBs’ revenue comes from central and state government grants.
With several limitations in terms of their urban governance (such as complete autonomy and devolution of responsibilities from state governments), ULBs lack resources and capacity to generate their own revenue. This means that there is an increased dependency on central and state government funds to finance their urban development projects or even improve existing urban infrastructure.
The main revenue sources of ULBs can be primarily categorised as tax and non-tax revenues. Tax revenues mainly include property tax, professional tax, and entertainment tax, while non-tax revenues include user fees such as parking fees, water supply fees, license fees, and rental income from municipal property.
For example, in the 2021-22 financial year, the Brihanmumbai Municipal Corporation (BMC) had 19% of its revenue from tax, 54% from fees and user charges, and the remaining from other sources of income. In comparison, the Greater Chennai Corporation (GCC) generated 80% of its income from tax sources and the remaining 20% from other sources of income.
These percentage mixes can vary from city to city depending on multiple factors such as the capacity to collect taxes in a timely and efficient manner, pricing urban infrastructure services rationally (in return achieving improved service delivery), and the ability to generate income from other sources such as parking fees, advertisements, rental income, and interest income.
While large cities have a wider tax base and capacity to generate revenues, smaller cities have to rely on grants from central and state governments. For example, in 2021-22, 57% of Kochi Municipal Corporation’s revenue came from revenue grants, contributions, and subsidies. The Central Finance Commission (CFC)’s Performance Fund is an example of a grant received by the Kochi Municipal Corporation in the year 2022-23.
There are several market mechanisms through which ULBs can raise finance. The most prominent example of this is municipal bonds, where ULBs issue bonds to finance their infrastructure projects. Ahmedabad Municipal Corporation was one of the first ULBs in India to issue a municipal bond to service its water and sanitation projects.
Following suit, many such cities have floated similar bonds, and in previous years, the municipalities of Indore, Pune, Rajkot, Greater Hyderabad, Ahmedabad, and Lucknow have all issued bonds for financing their infrastructure projects. ULBs can also raise loans from financial institutions such as HUDCO, the World Bank, etc., for specific projects.
The Urban Challenge Fund points to the mechanism of public-private partnerships (PPPs) to finance urban development projects. A cursory glance at the database of public-private partnership projects in India shows that at least 5-10% of the total projects are urban projects in the fields of water-sanitation and transport. These projects not only bring private finance onboard, but also facilitate expertise and capabilities from the private sector, thereby improving infrastructure and service delivery in urban areas.
Thus, the urban focus in the Union Budget 2025-26 marks a significant step towards strengthening India’s cities as engines of economic growth and social transformation. By prioritising infrastructure investment, encouraging ULBs to diversify their revenue streams, and fostering public-private partnerships, the budget lays the groundwork for greater financial autonomy and sustainable urban development. As India continues its rapid urbanisation, these measures will be crucial in transforming cities into more livable, inclusive, and vibrant spaces for their citizens.
What is the significance of the urban focus in the Union Budget 2025-26?
How does the budget aim to strengthen Indian cities as engines of economic growth and social transformation?
What measures does the budget propose to enhance infrastructure investment in urban areas?
Is it important for Urban Local Bodies to diversify their revenue streams? Why?
(Jacob Baby is a doctoral researcher in Concordia University, Canada, and explores matters related to urban planning in India.)
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