Unlocking the potential of Indian cities as engines of growth hubs

Business Standard

06-06-2025

Earlier this year, the Union Budget announced an Urban Challenge Fund spotlighting 'Cities as Growth Hubs', the 'Creative Redevelopment of Cities', and 'Water and Sanitation'. This move, along with the launch of NITI Aayog's Economic Master Plan for the Surat Economic Region in September 2024, signals a decisive shift in India's urban discourse – from managing urbanisation to unlocking its economic power. Ambition, however, must be matched by a delivery architecture that is scalable, adaptive and rooted in local realities, or it could run the risk of becoming a missed opportunity in India's urban growth trajectory.
Cities are complex, decentralised systems where economic, ecological and social dynamics interface. Urban transformations cannot be achieved by simply scripting outcomes for these interactions. For a city to thrive, it requires enabling frameworks that accommodate local knowledge, adapt to lived realities and iterate through feedback loops. We must recognise and work within the boundaries of human knowledge – in a dynamic environment – taking into account finite resources, distributed knowledge and unintended consequences.
Broadly, there are two contrasting approaches. First, economic strategies that bet heavily on a sector, backed by industrial policies and enabling business regulations, with the underlying assumption that multiplier effects will ensue. Second, focusing on the creation of enabling conditions for innovation, competitiveness and liveability, and allowing market forces to take their course.
Both these approaches carry cautionary tales from instances where they failed.
The development of industrial clusters is often at the cost of investing in foundational systems like mobility, housing and environment. While these clusters attract investments initially, they expose cities to long-term risks arising from demand volatility, technological disruption and path dependency. Conversely, places where the private sector was allowed to flourish, without adequate regulation and public oversight, often witness speculative growth, low levels of investment in public amenities, rising inequality and environmental degradation. These market-driven models, while initially promising, faltered in delivering inclusive, sustainable development.
We need a calibrated middle path that leverages sectoral strengths but roots them in strong public infrastructure, local capacity and robust planning and governance institutions. Successful models like Shenzhen and Dubai stand out for investing in infrastructure, governance and liveability — all in addition to sectoral strategies that attract global talent and create a cosmopolitan ethos. Sectoral gains must align with a citywide vision, and for Indian cities this means pursuing four interlinked priorities:
1. Diversifying Competitiveness
While sectoral anchors help, over-emphasis impacts resilience. Urban economies thrive when they are flexible and resilient, and not just when they are specialised. Top-down attempts to create "smart specialisations" should avoid crowding out innovation and local entrepreneurship. Instead of picking 'winners', cities should invest in public goods — integrated infrastructure, land use planning and service delivery — that allow multiple sectors to emerge and scale.
2. Investing in Human Capital
Cities are labour markets, and for cities to be growth engines, residents must be productive and healthy. This is critical for smaller cities that act as economic spokes to large metros. Locally aligned investments in human capital through skilling centres, affordable healthcare, quality education and developing robust R&D ecosystems can enable upward mobility for millions — especially crucial, given that a large part of our workforce is informal. Vietnam's Da Nang is illustrative — it combines industrial investment with training hubs and higher education to establish itself as an emerging tech and logistics hub.
3. Building Climate Resilience
Climate change could slash a quarter of India's potential GDP by 2070 under a high-emissions scenario. Without urgent adaptation, 75 per cent of the labour force, mostly engaged in informal and outdoor work, is at risk. Resilient cities anticipate these risks. They invest in nature-based solutions, efficient public transport, robust waste and water systems, and enforce green building codes. These measures not only cut emissions and reduce health burdens but also create jobs. A climate-resilient city is safer, more liveable and more investible.
4. Enabling Institutional Coordination and Robust Governance
India's urban governance is hampered by fragmentation, underfunding and unclear mandates. Economic success requires empowered urban bodies, strong local institutions with clear accountability, functional coordination systems, participatory and evidence-based planning, and financial decentralisation. Even the best plans will falter in the absence of coordination across departments, levels of government and jurisdictions.
Consider New York City's OneNYC strategic framework (2015) that integrates housing, transportation, climate resilience, economic development and neighbourhood-level action plans. The framework ensures that targets are set citywide and then devolves implementation across 70+ city agencies, borough-level offices and community boards.
While central schemes can provide catalytic funding and policy direction, real work happens at the city level. Local governments need the autonomy, tools and talent to build contextual and people-centric solutions. This is particularly crucial because heat stress, water scarcity, informal housing and mobility challenges vary significantly across Indian cities.
In addition, local and regional institutions must get spatial planning right. Plans for city development must account for industrial activity and integrate the same with the surrounding context. Manufacturing sites should not remain isolated clusters but must be organically connected to the rest of the city.
A Generational Opportunity
India is at an inflection point. With more than 600 million urban residents projected by 2036, and global industrial supply chains shifting, the window of opportunity is narrow. The true potential of Indian cities will only be unlocked by adopting agile frameworks and strengthening the underlying software of urban systems — governance, resilience, human capital and inclusivity. In this context, the Urban Challenge Fund must not serve merely as an investment blueprint but as a robust instrument for long-term institutional reform and ecosystem building.