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India’s urban population is large and steadily increasing. According to projections, it is expected to reach about 500 million in 2025 and 600 million within the next decade. The spatial distribution of the urban populace in the country varies greatly, with some urban centres heavily populated while others face stagnation. Of the total 4,000 plus statutory towns in the country, over 50 have a population exceeding a million.
To meet the diverse needs of a growing population and ensure conditions essential for urban development, the Government of India has launched several initiatives, with their benefits now readily reaching a diverse demographic. However, challenges continue to persist. Some of these issues pertain to the lack of accessibility to various public services as well as the overall quality of life. For instance, many urban dwellers live in substandard conditions, facing a stark depletion of natural resources alongside worsening environmental conditions. Multiple indicators, such as housing conditions, the quality of drinking water and sanitation, mobility, employment, air quality, and safety, point to the efficacy of this analysis, aiding the prompt understanding of present-day challenges of urbanisation in India.
Many urban dwellers live in substandard conditions, facing a stark depletion of natural resources alongside worsening environmental conditions.
The Government of India views urbanisation as an opportunity for growth, progress, and development, with relative attempts being made to improve the conditions prevailing in urban areas. One such indicator in this context is the increased allocation of funds.
In the Union Budget for 2025-26, an amount of INR 96,777 crore (nearly 1,000 billion) is allocated for urban development. This is a 17 percent hike over the previous year’s budgeted amount of INR 82,576 crore (or INR 825.7 billion).
Out of the total allocation for the 2025-26 budget, about 36 percent of it will be available for projects on transport, which also include the development of Mass Rapid Transit Systems (or MRTS), such as metro rails. The other important identified funding sectors/initiatives are housing (24 percent), Urban Rejuvenation Mission (AMRUT, 10 percent), and sanitation (5 percent). Some proportion of the funding will also be earmarked for electric buses (1.35 percent), the National Urban Digital Mission (NUDM, 1.29 percent), and the CITIIS scheme (City Investment to Innovate, Integrate and Sustain) (0.26 percent).
A new category included in the budget for 2025-26 is the Urban Challenge Fund of INR 100 billion. This amount will be spent on three activities: the development of cities as growth hubs, the creative redevelopment of cities, and enhanced provisions for safe water and sanitation. The fund will support up to 25 percent of the cost of bankable projects, with its access contingent on the fact that at least 50 percent of the cost is funded from bonds, bank loans, and public-private partnerships.
Despite funding for activities available under the Urban Livelihood Mission until last year, the current budget has no amount allocated under this head. Nonetheless, ample allocations under the street vendors’ scheme (SVANIDHI) continue. The INR 3.7 billion is meant to build their capacity and assist them in obtaining loans and credit cards. As per government records, over 6.8 million street vendors have benefitted from this scheme. The government is also inclined towards supporting about 10 million gig workers engaged in online activities by arranging their identity cards and registering them on the e-Shram portal (a national database of unorganised workers), alongside additional healthcare services. In addition to this, the government also intends to launch an exclusive scheme for the socioeconomic improvement of poor and vulnerable groups.
The fund will support up to 25 percent of the cost of bankable projects, with its access contingent on the fact that at least 50 percent of the cost is funded from bonds, bank loans, and public-private partnerships.
Furthermore, while the funding for the Smart Cities Mission (SCM) is no longer available owing to the culmination of its mission period, another ongoing initiative, namely CITIIS (a sub-component of India’s SCM), is helping in improving city conditions. However, the allocation for CITIIS is significantly lower (INR 2.5 billion) compared to the previous allocation for SCM in the 2024-25 budget (INR 24 billion).
A comparison of the allocation trends between the current (2025-26) and the previous year (2024-25) reveals that funding for activities related to metro rail, e-buses, AMRUT, CITIIS, and NUDM has evidently surged. This serves as a reflection of the government’s current priorities for socio-economic development. At the same time, a corresponding decrease has been observed in the funding for housing provisions. A part of it could be attributed to the progress achieved under the Pradhan Mantri Awas Yojana (PMAY) housing programme. Lastly, the allocation for sanitation has remained constant at INR 50 billion.
In summation, a review of the 2025-26 Union Budget and Finance Minister Nirmala Sitharaman’s speech highlights the following inferences:
- Urban development is identified as one of the six domains that will transform in the next five years. The other domains are taxation, power, mining, finance, and regulation.
- The increase in allocation for urban development by 17 percent will help in addressing various challenges of urbanisation.
- The proposals for rural development, micro, small and medium enterprises (MSME), tourism, geospatial data, and research grants, as well as collaborative efforts of Ministry of Housing and Urban Affairs, Ministry of New and Renewable Energy, Ministry of Power, Ministry of Environment, Forest and Climate Change, Ministry of Road Transport and Highways, will also help in overcoming urban challenges.
- The government has given priority to metro rail, e-buses, AMRUT, CITIIS, and NUDM, which is noted from an increase in allocated funds. Funds will also be available for improving the lives of street vendors and gig workers engaged in online activities.
The lessons learnt from the Smart Cities Mission will help in better-conducting activities to be considered for implementation under the Urban Challenge Fund.
The success of the proposed Urban Challenge Fund depends on the ability of state and local agencies to generate funds from bonds, bank loans, and public-private partnerships. The initiative will help in developing professionalism at the local level and in reducing the dependence of local-level agencies on higher levels of government. The lessons learnt from the Smart Cities Mission will help in better-conducting activities to be considered for implementation under the Urban Challenge Fund. The proper utilisation of allocated funds and improving existing cities in India rely on the quality of governance prevailing at the state and local levels. This requires ensuring institutional accountability and building the capacity of municipal functionaries. The Union Budget allocations for urban development in 2025-26 are encouraging. With the availability of more funds, urban residents can be provided an improved quality of life. The study of sector-wise allocations reveals the thrust laid on socio-economic upliftment, clean transport modes and digital technologies. In the process of urban transformation, the role of state and local governments is important. Enhancing their financial and administrative capabilities will be useful in the achievement of the goal.
Rumi Aijaz is a Senior Fellow with the Urban Policy Research Initiative at the Observer Research Foundation
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