India is experiencing an accelerated pace of urbanisation. The populations in Brazilian cities are projected to increase to over 60% of the total population by 2027, in comparison to 31% of the total population as recently as 2011. This exponential expansion, as experienced by states such as Kerala which is set to be 96% urbanised by 2036, has put serious strain on existing infrastructure and revealed the failure of funding models. Mirroring this challenge, the Union Budget 2025 announced the radical Urban Challenge Fund (UCF) for urban India, a ₹1 trillion competition-based, innovative and private capital-led effort to modernise cities.
Time for A New Approach
"Urban creep" in India is a common feature of urban expansion which is defined as a continuum developmentally during which land is no longer rural nor urban; hence, however, without urban-style infrastructure and services. This, along with minimal capital expenditure (only 0.6% of GDP in 2011-2018), has left cities overwhelmed. Notwithstanding the objective of the 74th Constitutional Amendment to empower Urban Local Bodies (ULBs) the desired progress has been stalled because of outdated systems of funding and under-developed municipal capacity.
How the Urban Challenge Fund operates
the UCF represents a shift from entitlement-based grants to a competitive performance-based approach. Its core principles are:
Competitive Funding: Cities will compete for resources by nominating high-impact projects in sectors for growth hubs, city revitalization and water & sanitation.
Private Capital is Key: Centre to invest 25% of project cost. The winning cities are required to mobilize a minimum of 50% from the market through municipal bonds, loans, or through Private-Public Partnership (PPP).
Sustainable focus: Projects should be ambitious and innovative and have a clear revenue model to ensure future financial sustainability, backed by the private sector.
Learning from Past Experiences
The UCF design is inspired by the shortcomings of the previous protocols. Private participation in the Smart Cities Mission was limited (6%). Bureaucracy stultified viability gap funding and local body municipal bonds fell on stony ground because ULBs were not creditworthy. The UCF is seeking to address these challenges through an emphasis on transparency, efficiency and bankable projects.
Key Recommendations for Success
Effective delivery is important for the UCF to fulfil its potential. Key recommendations include:
- Lifecycling: Align project running and long-term upkeep will citizen contentment as a central measure.
- De-risking Investments: Setting up credit guarantee funds and revenue protection systems to lure private investment.
- Increase Municipal Revenues: Enhance cities’ own resource mobilization by improving collection of property tax and user charges.
- Bootstrapping: Financial and technical assistance to Tier 2-3 cities so they can compete realistically.
- Incentivizing Innovation: Create challenges that address problems, such as clean water security and zero waste management.
- Revenue Sustainability: Target projects where revenues are strong and do not compete with existing programmes.
- Build Agile Governance: Structure a lean institutional governance for the UCF, which should have competition, autonomy, and fast decisions.
- Conclusion: The Future of Urban Financing
The Urban Challenge Fund is a new mode of urban governance. By linking funding to competition and performance, it encourages cities to get their financial house in order, embrace innovation, and form partnerships with the private sector. The key to its
Month: Current Affairs - August 22, 2025
Category: current affairs daily