Shaping the Urban Challenge Fund: Steps to Strengthen Delivery

Syllabus: GS2/Governance; GS3/Infrastructure

Context

• Nearly one-third of the population in India living in urban areas, with a projection of 40% by 2036 and over 800 million urban population by 2050 presents both a challenge and an opportunity.

Scale of the Urban Challenge

• According to a World Bank estimate, India aims to require nearly ₹70 lakh crore by 2036 to meet its urban infrastructure needs.
• However, current annual investments hover around ₹1.3 lakh crore — barely a quarter of the required ₹4.6 lakh crore per year. This shortfall is compounded by:
  • Stagnant municipal finances, which remain at just 1% of GDP;
  • Low tax collection efficiency among Urban Local Bodies (ULBs);
  • Underutilization of central schemes, such as Smart Cities Mission and AMRUT;
• Untapped Potential of Indian Cities: Capital expenditure on urban utilities infrastructure (excluding real estate) averaged just 0.6% of GDP between 2011 and 2018.
• India’s Urbanisation Challenge: The 2027 Census is expected to reveal that over 60% of India’s population will live in urban areas, up from 31% in 2011.
  • States like Kerala exemplify this shift, with projections indicating an urbanisation rate of 96% by 2036.
• Other challenges that Indian cities are facing are inadequate spatial planning, climate vulnerability, social inequality and segregation, weak urban governance, and economic distress-driven migration.

Government Response: Urban Challenge Fund

• The Union Budget 2025–26 introduced the ₹1 lakh crore Urban Challenge Fund (UCF) to address these issues. It aims to:
  • Finance up to 25% of bankable urban projects; with the remaining 75% expected from bonds, bank loans, and Public-Private Partnerships (PPPs)
  • Promote initiatives like Cities as Growth Hubs, Creative Redevelopment, and Water & Sanitation;
• The fund reflects a strategic shift toward performance-linked, competitive urban development, with an initial allocation of ₹10,000 crore for FY 2025–26.

Planning Reforms and Capacity Building

• NITI Aayog is piloting a new framework based on land use and economic activity in four regions — Mumbai, Varanasi, Surat, and Visakhapatnam. Key recommendations include:
  • Increasing demand for qualified urban planners in both public and private sectors;
  • Adopting spatial planning tools to guide sustainable development;
  • Reimagining urban governance to empower local bodies and improve accountability.
• India risks a ‘silent crisis in motion’ where unplanned urbanization undermines economic and social progress, without these reforms.

Financing Innovations and Global Partnerships

• The Asian Development Bank (ADB) has pledged up to $10 billion over five years to support India’s urban infrastructure, including metro expansions, RRTS corridors, and capacity-building initiatives. It includes:
  • Sovereign loans and private sector financing;
  • Technical assistance for project preparation;
  • Support for rooftop solar and transit-oriented development;
• ADB’s involvement underscores the importance of international capital and expertise in scaling urban solutions.

Recommendations for Strengthening the Urban Challenge Fund (UCF)

• Embed Lifecycle Thinking: Projects must integrate operations, maintenance, and citizen satisfaction into planning, shifting the paradigm from “infrastructure as product” to ‘infrastructure as service’.
• De-Risk Private Investment: Tools such as first-loss guarantees, credit enhancements, and revenue shortfall protection should be blended with UCF grants to attract private investors.
• Empower Cities to Raise Resources: Urban local bodies (ULBs) must improve financial independence by expanding property tax collection and introducing transparent user-pay charges. Without this, private investors will remain reluctant.
• Build Institutional Capacity: Tier 2 and Tier 3 cities need dedicated project preparation cells, technical mentorship, and streamlined approvals to manage complex projects effectively.
• Incentivise Innovation: UCF should introduce targeted challenge windows (e.g., water-secure or zero-waste cities) with outcome-linked funding to foster scalable innovation.
• Focus on High-Impact Projects: Priority should be given to projects with clear revenue models such as waste-to-energy plants, smart water systems, and transit-oriented development hubs, while avoiding overlaps with existing schemes.
• Ensure Institutional Clarity: A lean, agile governing body must oversee the UCF, ensuring autonomy, competition, and innovation at every stage—from selection to monitoring.

Towards Viksit Bharat 2047

• For India to achieve its vision of Viksit Bharat by 2047, its cities need to become bankable, liveable, and resilient. The Urban Challenge Fund represents a timely and catalytic opportunity to reshape urban development.
• It could spark the transformation needed to unlock the full potential of India’s urban future, if designed and executed effectively.

Source: BS