Knowledge Nugget: Why is Urban Challenge Fund important for your UPSC exam?

Indian Express

30-05-2025

What is the Urban Challenge Fund? Take a look at the essential concepts, terms, quotes, or phenomena every day and brush up your knowledge. Here's your knowledge nugget for today.
(Relevance: Government initiatives and schemes are important for your exam. Questions have been asked around themes related to urbanisation in both Prelims and Mains, making it an important topic for your preparation.)
While presenting the Budget 2025-26, Nirmala Sitharaman announced that the government will set up the Urban Challenge Fund of Rs 1 lakh crore to implement the proposals for 'Cities as Growth Hubs', 'Creative Redevelopment of Cities', and 'Water and Sanitation.'
1. The Urban Challenge Fund is designed to address three aspects. First, to make cities productive and efficient centres of economic growth (cities as growth hubs); second, to develop and redevelop them in a creative way (creative redevelopment of cities ), and third, to improve infrastructure. (Water and sanitation).
2. The fund will provide 25 per cent financing for bankable projects, with a stipulation that at least 50 per cent of the cost will be raised through bonds, bank loans, and Public-Private Partnerships (PPP).
3. Under the fund, while the government plans to give Rs 10,000 crore, cities are expected to get the remaining Rs 40,000 crore from floating municipal bonds, entering into private-public partnerships, and taking loans, according to a Ministry of Housing and Urban Affairs source.
4. Under 'creative redevelopment of cities', existing cities with high levels of congestion could be refurbished. This fund would encourage cities to raise market finances, as opposed to the Rs 10,000 crore Urban Infrastructure Development Fund (UIDF) announced in the Budget 2023-2024.
What is urbanisation?
Urbanisation is the process of transformation that occurs as a society evolves from predominantly rural to predominantly urban areas. It involves the increase in the proportion of a country's population residing in urban areas, leading to the expansion and growth of cities and towns. Additionally, it encompasses not only the physical expansion of cities but also their social, economic, and cultural transformations.
The Indian Census identifies two categories of 'urban' areas:
1. Statutory towns — those which have urban local bodies like municipal corporation, municipality or municipal committee.
2. Census towns — All those places satisfying the following 3 criteria:
a) Population of atleast 5000 persons.
b) Minimum population density of 400 persons per sq. km. and
c) 75 per cent of the male workforce is employed in non-agricultural activities
📍Megacities are cities with exceptionally large populations, often exceeding ten million inhabitants. These cities face unique challenges due to their scale, such as traffic congestion, inadequate housing, and strained infrastructure.
📍Gentrification refers to the transformation of a space or region with the displacement of people belonging to a certain class due to the influx of investment and affluent classes into that area.
📍Urban Sprawl refers to the unplanned and uncontrolled expansion of cities and towns, often resulting in the encroachment of urban areas into surrounding rural or undeveloped areas.
Challenges of urban expansion
1. The major concerns in cities like Delhi, Mumbai, and Kolkata are overcrowding, inadequate infrastructure, housing shortages, and traffic congestion. The demand for water, sanitation, transportation, and healthcare is outpacing the capacity of urban systems, leading to inefficient service delivery and environmental degradation.
2. Millions live in slums without access to basic amenities. Social inequality remains a critical issue, with marginalised groups often excluded from growth opportunities.
3. The lack of private investment has been a major concern for the government. At present, the central and state governments finance over 75 per cent of city infrastructure, while ULBs finance 15 per cent through their own surplus revenues. Only 5 per cent of the infrastructure needs of Indian cities are currently being financed through private sources.
1. As per the latest report on municipal finances by the RBI (November 2024), municipal corporations (MCs) generate feeble revenue collection, adding up to merely 0.6 per cent of GDP for FY24. The revenue receipts are not just puny when compared with the receipts of the Centre (9.2 per cent) and state governments (14.6 per cent) but are also heavily dependent on property tax as the prime source of revenue.
2. The report also highlighted the undue overreliance on the central and state governments for transfers. For FY23, cumulative grants from the Centre and the states increased by 24.9 per cent and 20.4 per cent, respectively, with central transfers accounting for 2.5 per cent of the MCs' total revenue receipts.
3. According to the World Bank report, over 600 million people are expected to live in Indian cities by 2036, signalling an extensive urban expansion. A World Bank report estimates that India will need to invest $840 billion (Rs 70 lakh crore) over the next 15 years — or an average of $55 billion (Rs 4.6 lakh crore) per annum — into urban infrastructure if it is to effectively meet the needs of its fast-growing urban population.
Municipal Bonds
Muni bonds are seen as one of the ways for MCs to raise funds. These are debt securities issued by local governments and MCs to raise funds to fulfil their financial obligations. Investors facilitate the working of a muni bond by lending money to the local government in return for interest for a specific period of time. The creation of the Urban Challenge fund recognizes the potential of Muni bonds.
5. The Bangalore Municipal Corporation issued the first muni bond in 1997 to raise Rs 125 crore. As per SEBI, since 2017, merely 17 muni bonds have been issued, with an amount hovering around approximately Rs 2,800 crore. To render these bonds safe for investors, SEBI came up with guidelines for the issuance of municipal bonds in 2015.
Post read question
Consider the following statements:
1. Gentrification is the uncontrolled expansion of cities and towns, often resulting in the encroachment of urban areas into surrounding rural or undeveloped areas.
2. The Mumbai Municipal Corporation issued the first municipal bond.
Which of the following statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) None
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Khushboo Kumari is a Deputy Copy Editor with The Indian Express. She has done her graduation and post-graduation in History from the University of Delhi. At The Indian Express, she writes for the UPSC section. She holds experience in UPSC-related content development. You can contact her via email: [e-mail] ... Read More