Context: In 2015, the government emphasized urban development as a critical part of India's growth strategy, as cities contribute nearly 67% of the country’s GDP. However, despite its importance, cities seem to be left out of the government’s broader vision for a “Viksit Bharat” (Developed India).  

• The Union Budget 2025’s allocations reveal the government's focus and the challenges facing urban development.

Budget Allocation for Urban India

• The total allocation for urban development in FY 2024-25 is Rs.96,777 crore, which is an increase compared to last year’s Rs.82,576 crore.

• However, this increase doesn’t account for inflation, and when adjusted, it represents a decrease in real terms. Additionally, the Revised Estimate (RE) suggests that only Rs.63,669 crore will be spent by the end of FY 2024-25, reflecting an underutilization of around 22.9%.

• A key shortfall is in the Pradhan Mantri Awas Yojana (Urban) [PMAY(U)], where the original allocation of Rs.30,170 crore was significantly reduced to Rs.13,670 crore in the RE, indicating a gap between policy goals and actual execution.

Reduction in Urban Development Funding

• Urban India primarily receives funds through three channels. The government’s budgetary approach this year shows a reduction in funding across these channels:

• Direct Transfers to ULBs: With the abolition of octroi, a key revenue source for cities, and the introduction of GST, ULBs have experienced a 21% fall in revenue. Despite this, the budget allocation for ULBs has only slightly reduced from Rs.26,653 crore to Rs.26,158 crore, which is insufficient to meet growing urban needs, forcing cities to rely more on local taxes.

• Centrally Sponsored Schemes (CSS): These schemes, which involve cost-sharing between the Union, States, and local governments, include major urban development initiatives like PMAY, Swachh Bharat Mission (SBM), AMRUT (Atal Mission for Rejuvenation and Urban Transformation), and Smart Cities Mission. However, these programs have seen cuts:

• PMAY (Urban): Allocation for the CSS component was reduced by 30% compared to last year.

• AMRUT & Smart Cities Mission: The combined allocation of Rs.10,400 crore last year has been reduced significantly this year, with almost no funds remaining for the Smart Cities Mission.

• SBM (Urban): Despite the same allocation of Rs.5,000 crore as last year, the RE indicates only Rs.2,159 crore will be spent, which is a 56% reduction in spending.

• Central Sector Schemes: These schemes are directly managed by the Union government and typically focus on large-scale infrastructure projects, such as metro rail expansions. Metro projects have seen significant increases in funding:

• Mass Rapid Transit Systems: The budget allocation for metro projects in FY 2024-25 was Rs.21,336 crore, rising to Rs.24,691 crore in the RE, and the 2025-26 budget proposes a 46% increase, bringing it to Rs.31,239 crore.

• This prioritization of metro projects over more inclusive urban mobility options raises concerns about the long-term sustainability and inclusivity of urban development.

Challenges faced in Urban Regions

• Unplanned urbanisation: Unplanned urbanisation is one of the major challenges faced, this leads to the slum proliferation in the urban regions. (17.5% of urban population in India resides in the slum as of 2022).

• Infrastructure and basic facility access: The urban population faces the challenges in the access to basic facilities like drinking water and sanitation. (71% of drinking water in India is contaminated and only 54% have access to operational sanitation facilities.)

• Quality of life: Cities like New Delhi have been declared the most polluted city globally with the poor Air Quality Index.

• Social inequality and marginalisation: About 13.7% of India's urban population lives below the national poverty line.

• Lack of social security: Urban areas are facing in-formalization of the labour force leading to the lack of social security like pension and medical benefits enhancing the vulnerability.

• Lack of Livelihood security: The unorganised labour in India is rising especially in the construction sector which have lack of job security and uniform income.

The New Urban Challenge Fund

• To address some of these challenges, the government has introduced a new Urban Challenge Fund of Rs.10,000 crore. This fund is part of an ambitious target to raise Rs.1 lakh crore for urban redevelopment projects. 

• However, the government expects half of this amount to come from private investments, which seems overly optimistic given the sector's poor track record in attracting private funding for projects like the Smart Cities Mission.

Key Issues with the Budget Approach

• The budget’s focus on capital-intensive infrastructure projects, such as metro systems, overlooks the broader needs of urban India, including:

• Employment Generation: There is little emphasis on creating green jobs or generating employment in the urban development sector.

• Sustainable Economic Policies: The emphasis on large-scale infrastructure projects may ignore the need for sustainable development, potentially widening existing social and economic disparities in cities.

• Social and Economic Equity: The growing focus on infrastructure over inclusivity and equitable development could worsen inequalities in urban areas, particularly for marginalized communities.

Urbanisation

• India is urbanizing rapidly.

• By 2036, its towns and cities will be home to 600 million people, or 40 percent of the population, up from 31 percent in 2011, with urban areas contributing almost 70 percent to GDP.

Benefits of the proposed initiatives

• Reducing slums: The SWAMIH 2.0 fund for affordable housing will lead to the reduction in the count of slum dwellers in urban areas and promote the quality of life in urban areas.

• Promoting social security: Proposed initiatives like cards for GiG workers and extension to healthcare under PM Jan Arogya Yojana will enhance social security and will promote Universal Healthcare for the vulnerable section.

• Better planning: National Geospatial Mission will promote prompt urban planning, reducing unplanned and uncontrolled urbanisation.

Conclusion

• Urban development is a key pillar of India’s growth strategy as cities contribute nearly 67% to the GDP. The proposed initiatives along with strong urban infrastructure under AMRUT 2.0 scheme can help India to achieve the SDG 11 i.e., sustainable cities. The need of the hour is rational fiscal devolution and flexible funding mechanisms to ensure sustainable development.