Urban Challenge Fund
India’s urban landscape is evolving rapidly. The 2027 Census is expected to show over 60 per cent of the population living in urban areas, up from 31 per cent in 2011. Kerala’s urbanisation alone is projected to reach 96 per cent by 2036. This surge marks the urgent need to modernise city infrastructure and funding models. The Union Budget 2025 introduced the Urban Challenge Fund (UCF) with ₹1 lakh crore to drive this change. The UCF marks a shift from entitlement grants to competitive, performance-linked funding. It focuses on sustainable growth, innovation, and private sector participation.
India’s Urban Growth and Challenges
India’s urban areas are expanding fast due to population growth and economic shifts. The Census defines urban areas by population, density, and workforce in non-agriculture. Many cities face urban creep, where rural areas gradually urbanise. Existing infrastructure is overburdened. Capital expenditure on urban utilities has been low at 0.6 per cent of GDP between 2011 and 2018, far below needs. Outdated funding and poor municipal capacity impede progress. The 74th Constitutional Amendment aimed to empower cities but has not fully succeeded.
A New Funding Model
The UCF introduces a ₹1 lakh crore fund to support projects in growth hubs, city redevelopment, and water and sanitation. It offers 25 per cent central funding. Cities must raise at least 50 per cent of project costs through bonds, loans, or public-private partnerships (PPP). The fund rewards ambitious, innovative projects with clear revenue models. This approach aims to crowd in private investment and improve financial sustainability. The UCF avoids overlap with other schemes by focusing on high-impact projects like transit hubs and smart water systems.
Lessons from Past Urban Initiatives
Previous programmes like the Smart Cities Mission showed limited private sector involvement. Only 6 per cent of projects used PPPs, and financial closure was achieved in just 12 per cent of cases by 2023. Viability gap funding for social infrastructure had bureaucratic delays and poor oversight. Municipal bonds remain underused due to weak creditworthiness of urban local bodies (ULBs). These challenges tell the need for a fresh approach that encourages transparency, efficiency, and innovation.
Recommendations for Effective UCF Implementation
Seven key recommendations guide the UCF’s success:
- Embed lifecycle management with operations and citizen satisfaction as core elements.
- De-risk investments using credit guarantees and revenue protection.
- Improve cities’ own resource mobilisation, especially property tax and user fees.
- Build capacity in Tier 2 and Tier 3 cities with technical and financial support.
- Incentivise innovation through targeted challenges like water security and zero waste.
- Focus on projects with strong revenue models and avoid duplicating other schemes.
- Ensure institutional clarity with a lean, agile governance body that encourages competition and autonomy.
Urban Infrastructure Financing and Private Participation
The UCF’s design encourages cities to leverage bonds, loans, and PPPs. This model aims to make urban infrastructure bankable and attractive to investors. The proposed partial credit guarantee fund by NaBFID will support municipal debt markets. Transparent revenue management and political will to implement user-pay charges are crucial. Strengthening municipal creditworthiness is essential for future investment.
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